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, 1996
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
-----------------------------------------------------------------------
(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 13, 1996
----- -------------------------------
Common Stock $.05 par value 104,468,103
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 30, February 29,
1996 1996
---------------- -----------------
(Dollar amounts in thousands,
except per share data)
ASSETS
<S> <C> <C>
Cash $ 14,835 $ 16,444
Receivables for mortgage loans shipped 1,175,475 2,299,979
Mortgage loans held for sale 2,764,933 2,440,108
Other receivables 1,418,092 912,613
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 189,607 140,963
Capitalized servicing fees receivable 765,626 631,784
Mortgage servicing rights 2,019,666 1,691,881
Other assets 906,197 523,881
---------------- -----------------
Total assets $9,254,431 $8,657,653
================ =================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $1,996,931 $2,548,549
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $6,072,390 $6,097,518
Drafts payable issued in connection with mortgage loan closings 259,740 238,020
Accounts payable and accrued liabilities 783,853 505,148
Deferred income taxes 615,233 497,212
---------------- -----------------
Total liabilities 7,731,216 7,337,898
Commitments and contingencies - -
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $.05 par value; issued and
outstanding, 103,626,031 shares at November 30, 1996
and 102,242,329 shares at February 29, 1996 5,199 5,112
Additional paid-in capital 859,128 820,183
Retained earnings 658,888 494,460
---------------- -----------------
Total shareholders' equity 1,523,215 1,319,755
---------------- -----------------
Total liabilities and shareholders' equity $9,254,431 $8,657,653
================ =================
Borrower and investor custodial accounts $1,996,931 $2,548,549
================ =================
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,
1996 1995 1996 1995
------------------------------ ------------------------------
(Dollar amounts in thousands, except per share data)
Revenues
<S> <C> <C> <C> <C>
Loan origination fees $ 43,922 $ 52,049 $145,468 $146,955
Gain on sale of loans 65,562 23,674 171,053 55,688
------------------------------ ------------------------------
Loan production revenue 109,484 75,723 316,521 202,643
Interest earned 100,113 94,148 300,539 259,762
Interest charges (77,238) (72,093) (230,547) (207,510)
------------------------------ ------------------------------
Net interest income 22,875 22,055 69,992 52,252
Loan servicing income 184,427 148,111 527,301 416,624
Less amortization and impairment of
servicing assets (198,735) (156,284) (185,073) (355,705)
Servicing hedge benefit 140,152 119,365 22,001 254,445
------------------------------ ------------------------------
Net loan administration income 125,844 111,192 364,229 315,364
Commissions, fees and other income 23,327 16,598 64,885 43,582
------------------------------ ------------------------------
Total revenues 281,530 225,568 815,627 613,841
------------------------------ ------------------------------
Expenses
Salaries and related expenses 71,548 57,652 208,537 164,260
Occupancy and other office expenses 33,036 26,800 94,349 77,883
Guarantee fees 40,607 31,675 117,471 85,956
Marketing expenses 7,743 6,848 25,665 19,388
Other operating expenses 20,506 14,336 59,677 36,217
------------------------------ ------------------------------
Total expenses 173,440 137,311 505,699 383,704
------------------------------ ------------------------------
Earnings before income taxes 108,090 88,257 309,928 230,137
Provision for income taxes 42,155 35,303 120,872 92,055
------------------------------ ------------------------------
NET EARNINGS $ 65,935 $ 52,954 $189,056 $138,082
============================== ==============================
Earnings per share
Primary $0.62 $0.51 $1.80 $1.39
Fully diluted $0.62 $0.51 $1.78 $1.39
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,
1996 1995
---------------- -----------------
(Dollar amounts in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 189,056 $ 138,082
Adjustments to reconcile net earnings to net cash
used by operating activities:
Amortization and impairment of mortgage servicing rights 132,415 283,443
Amortization and impairment of capitalized servicing fees
receivable 52,658 72,262
Depreciation and other amortization 29,248 22,086
Deferred income taxes 120,872 92,055
Servicing hedge unrealized benefit (75,842) (188,681)
Origination and purchase of loans held for sale (28,491,353) (24,981,842)
Principal repayments and sale of loans 29,291,032 23,214,329
---------------- -----------------
Increase (decrease) in mortgage loans shipped and held for sale 799,679 (1,767,513)
Increase in other receivables and other assets (822,931) (246,255)
Increase in accounts payable and accrued liabilities 278,705 171,034
---------------- -----------------
Net cash provided (used) by operating activities 703,860 (1,423,487)
---------------- -----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (460,200) (466,017)
Additions to capitalized servicing fees receivable (186,500) (193,207)
Purchase of property, equipment and leasehold
improvements - net (69,765) (11,165)
---------------- -----------------
Net cash used by investing activities (716,465) (670,389)
---------------- -----------------
Cash flows from financing activities:
Net (decrease) increase in warehouse debt and other
short-term borrowings (427,525) 1,703,547
Issuance of long-term debt 537,624 290,000
Repayment of long-term debt (113,507) (96,321)
Issuance of common stock 39,032 208,621
Cash dividends paid (24,628) (22,797)
---------------- -----------------
Net cash provided by financing activities 10,996 2,083,050
---------------- -----------------
Net decrease in cash (1,609) (10,826)
Cash at beginning of period 16,444 17,624
---------------- -----------------
Cash at end of period $ 14,835 $ 6,798
================ =================
Supplemental cash flow information:
Cash used to pay interest $ 212,653 $ 254,631
Cash used to pay income taxes $ 15 $ 25
The accompanying notes are an integral part of these statements.
</TABLE>
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, 1996
are not necessarily indicative of the results that may be expected for the
fiscal year ending February 28, 1997. 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 29, 1996 of Countrywide
Credit Industries, Inc. (the "Company").
Certain amounts reflected in the consolidated financial statements for the
nine-month period ended November 30, 1995 have been reclassified to conform to
the presentation for the nine-month period ended November 30, 1996.
NOTE B - NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable consisted of the following.
------------------------------------------------------------------ ---- --------------- --- -------------- --
(Dollar amounts in thousands) November 30, February 29,
1996 1996
------------------------------------------------------------------ ---- --------------- --- -------------- --
<S> <C> <C>
Commercial paper $3,104,815 $2,847,442
Medium-term notes 2,246,800 1,824,800
Repurchase agreements 342,990 808,353
Subordinated notes 200,000 200,000
Unsecured notes payable, maturing January 15, 1997 175,000 235,000
Pre-sale funding facilities - 181,255
Notes payable 2,785 668
--------------- --------------
$6,072,390 $6,097,518
=============== ==============
------------------------------------------------------------------ ---- --------------- --- -------------- --
</TABLE>
Revolving Credit Facility and Commercial Paper
As of November 30, 1996, Countrywide Home Loans, Inc. ("CHL"), the Company's
mortgage banking subsidiary, had an unsecured credit agreement (revolving credit
facility) with fifty commercial banks permitting CHL to borrow an aggregate
maximum amount of $3.5 billion, less commercial paper backed by the agreement.
The amount available under the facility is subject to a borrowing base, which
consists of mortgage loans 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 CHL. The interest rate on direct borrowings is based on a
variety of sources, including the prime rate and the London Interbank Offered
Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies, depending
on CHL's credit ratings. No amount was outstanding on the revolving credit
facility at November 30, 1996. The weighted average borrowing rate on commercial
paper borrowings for the nine months ended November 30, 1996 was 5.39%. The
weighted average borrowing rate on commercial paper outstanding as of November
30, 1996 was 5.42%. 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 on May 14, 2000.
Medium-Term Notes
As of November 30, 1996, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission
were as follows.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
------------------------------------------- ----------- ---------- ------------- -------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A $ - $ 304,800 $ 304,800 6.53% 8.79% Mar 1997 Mar 2002
Series B 11,000 396,000 407,000 5.82% 6.98% Aug 1997 Aug 2005
Series C 303,000 197,000 500,000 5.61% 8.43% Dec 1997 Mar 2004
Series D 115,000 385,000 500,000 5.70% 6.88% Aug 1998 Sep 2005
Series E 210,000 325,000 535,000 5.68% 7.45% Aug 2000 Oct 2008
-------------------------------------------
Total $639,000 $1,607,800 $2,246,800
===========================================
---------------------------------------------------------------------------------------------------------------
</TABLE>
As of November 30, 1996, 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, 1996, including the effect of the interest rate swap
agreements, was 6.13%. As of November 30, 1996, $465 million was available for
future issuances under the Series E shelf registration.
Repurchase Agreements
As of November 30, 1996, 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, 1996 was 5.39%. The weighted average borrowing rate on repurchase
agreements outstanding as of November 30, 1996 was 5.40%. The repurchase
agreements were collateralized by MBS. All MBS underlying repurchase agreements
are held in safekeeping by broker-dealers, and all agreements are to repurchase
the same or substantially identical MBS.
Subordinated Notes
The 8.25% subordinated notes are due July 15, 2002. Interest is payable
semi-annually on each January 15 and July 15. The subordinated notes are not
redeemable prior to maturity and are not subject to any sinking fund
requirements.
Pre-Sale Funding Facilities
As of November 30, 1996, CHL had uncommitted revolving credit facilities
with two government-sponsored entities and an affiliate of an investment banking
firm. The credit facilities are secured by conforming mortgage loans which are
in the process of being pooled into MBS. Interest rates are based on LIBOR,
federal funds and/or the prevailing rates for MBS repurchase agreements. The
weighted average borrowing rate for all three facilities for the nine months
ended November 30, 1996 was 5.57%. As of November 30, 1996, the Company had no
outstanding borrowings under any of these facilities.
<PAGE>
NOTE C - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
<TABLE>
<CAPTION>
The following tables present summarized financial information for
Countrywide Home Loans, Inc.
-- ----------------------------------------- ---- --------------------------------------------------- -------
(Dollar amounts in thousands) November 30, February 29,
1996 1996
-- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
Balance Sheets:
<S> <C> <C>
Mortgage loans shipped and held for sale $3,940,408 $4,740,087
Other assets 4,527,522 3,441,678
-------------- --------------
Total assets $8,467,930 $8,181,765
============== ==============
Short- and long-term debt $6,327,203 $6,335,538
Other liabilities 717,009 588,446
Equity 1,423,718 1,257,781
-------------- --------------
Total liabilities and equity $8,467,930 $8,181,765
============== ==============
-- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
</TABLE>
<TABLE>
<CAPTION>
--- ----------------------------------------- --- -------------------------------------------------- --------
(Dollar amounts in thousands) Nine Months Ended November 30,
--------------- ---------- ---------------
1996 1995
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
Statements of Earnings:
<S> <C> <C>
Revenues $740,193 $577,648
Expenses 468,165 358,687
Provision for income taxes 106,091 87,584
--------------- ---------------
Net earnings $165,937 $ 131,377
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
</TABLE>
NOTE D - SERVICING HEDGE
<TABLE>
<CAPTION>
The following summarizes the notional amounts of servicing hedge derivative
contracts.
- -------------------------------- ----------- ------------ --------------- --------- ------------ ---------- ------------
(Dollar amounts in millions) Long Call
Options on
Interest Long Call Interest Rate Principal Interest
Rate Floors Options Futures Swap - Only Rate
on MBS Caps Swaps Cap Swaptions
- -------------------------------- ----------- ------------ --------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 29, 1996 $15,750 $ 1,500 $ 3,550 $1,000 $268 $ - $ -
Additions 10,000 - 9,690 - - 500 1,750
Dispositions/Expirations (1,000) (1,500) (8,650) - - - -
----------- ------------ --------------- --------- ------------ ---------- ------------
Balance, November 30, 1996 $24,750 $ - $ 4,590 $1,000 $268 $500 $1,750
=========== ============ =============== ========= ============ ========== ============
- -------------------------------- ----------- ------------ --------------- --------- ------------ ---------- ------------
</TABLE>
During the nine months ended November 30, 1996, the Company entered into an
interest rate cap agreement ("Cap") and purchased options on interest rate swaps
("Swaptions") as additional components of its Servicing Hedge. The Cap entitles
the Company to receive payments if the selected market interest rate exceeds the
stated rate. The Cap outstanding will expire on April 26, 2001. Under the terms
of the Swaptions, the Company has the option to enter into a receive-fixed,
pay-floating interest rate swap at a future date or to settle the transaction
for cash. The Swaptions outstanding expire from March 11, 1999 to April 15,
2007.
NOTE E - 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
-----------------------
Balances, February 29, 1996 ($61,634)
Recovery 44,012
-----------------------
Balances, November 30, 1996 ($17,622)
=======================
- -------------------------------------------------------- -----------------------
NOTE F - LEGAL PROCEEDINGS
On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a
purported class action, against CHL and a mortgage broker in the Northern
Division of the United States District Court for the Middle District of Alabama.
The suit claims, among other things, that in connection with residential
mortgage loan closings, CHL made certain payments to mortgage brokers in
violation of the Real Estate Settlement Procedures Act and induced mortgage
brokers to breach their alleged fiduciary duties to their customers. The
plaintiffs seek unspecified compensatory and punitive damages plus, as to
certain claims, treble damages. CHL's management believes that its compensation
programs to mortgage brokers comply with applicable laws and with long-standing
industry practice, and that it has meritorious defenses to the action. CHL
intends to defend vigorously against the action and believes that the ultimate
resolution of such claims will not have a material adverse effect on the
Company's results of operations or financial position.
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position or results of operations
of the Company and its subsidiaries.
NOTE G - SUBSEQUENT EVENTS
On December 17, 1996, the Company declared a cash dividend of $0.08 per
common share payable January 31, 1997 to shareholders of record on January 15,
1997.
On December 11, 1996, Countrywide Capital I issued $300 million of 8% trust
preferred securities. The proceeds were used to purchase subordinated debt
securities from the Company. The Company intends to use the net proceeds from
the sale of the subordinated debt securities for general corporate purposes,
principally for investment in servicing rights.
<PAGE>
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a new
"safe harbor" for certain forward-looking statements. This Quarterly Report on
Form 10-Q contains forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
indicate future events and trends identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of the
various segments of the economy and demographics of the Company's lending
markets; (2) the direction of interest rates; (3) the relationship between
mortgage interest rates and the cost of funds; (4) federal and state regulation
of the Company's mortgage banking operations and (5) competition within the
mortgage banking industry.
RESULTS OF OPERATIONS
Quarter Ended November 30, 1996 Compared to Quarter Ended November 30, 1995
Revenues for the quarter ended November 30, 1996 increased 25% to
$281.5 million from $225.6 million for the quarter ended November 30, 1995. Net
earnings increased 25% to $65.9 million for the quarter ended November 30, 1996
from $53.0 million for the quarter ended November 30, 1995. The increase in
revenues and net earnings for the quarter ended November 30, 1996 compared to
the quarter ended November 30, 1995 was primarily attributable to a larger gain
on sale of loans resulting from the sale of higher-margin home equity and
sub-prime loans in the quarter ended November 30, 1996, improved pricing margins
on prime credit quality first mortgages and an increase in the size of the
Company's servicing portfolio. These positive factors during the quarter ended
November 30, 1996 were partially offset by decreased loan production and
increased expenses in the quarter ended November 30, 1996 over the quarter ended
November 30, 1995.
The total volume of loans produced decreased 11% to $8.3 billion for
the quarter ended November 30, 1996 from $9.3 billion for the quarter ended
November 30, 1995. Refinancings totaled $2.2 billion, or 26% of total fundings,
for the quarter ended November 30, 1996, as compared to $3.4 billion, or 36% of
total fundings, for the quarter ended November 30, 1995. Fixed-rate loan
production totaled $5.9 billion, or 71% of total fundings, for the quarter ended
November 30, 1996, as compared to $7.3 billion, or 79% of total fundings, for
the quarter ended November 30, 1995.
Total loan volume in the Company's production divisions is summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------ --------
Loan Production for the Quarter
(Dollar amounts in millions) Ended November 30,
- -------------------------------------------- ------------------------------------ --------
1996 1995
------------- -------------
<S> <C> <C>
Consumer Markets Division $1,787 $1,927
Wholesale Lending Division 2,096 2,076
Correspondent Lending Division 4,436 5,344
------------- -------------
Total loan volume $8,319 $9,347
============= =============
- -------------------------------------------- ------------- -------- ------------- --------
</TABLE>
The factors which affect the relative volume of production among the Company's
three divisions include the competitiveness of each division's product
offerings, the level of mortgage lending activity in each division's markets,
and the success of each division's sales and marketing efforts.
Included in the Company's total volume of loans produced are $172
million of home equity loans funded in the quarter ended November 30, 1996 and
$67 million funded in the quarter ended November 30, 1995. Sub-prime credit
quality loan activity, which is also included in the Company's total production
volume, was $255 million for the quarter ended November 30, 1996 and $45 million
for the quarter ended November 30, 1995.
At November 30, 1996 and 1995, the Company's pipeline of loans in
process was $4.7 billion and $4.5 billion, respectively. In addition, at
November 30, 1996, the Company had committed to make loans in the amount of $1.7
billion, subject to property identification and borrower qualification ("LOCK 'N
SHOP(R) Pipeline"). At November 30, 1995, the LOCK 'N SHOP (R) Pipeline was $1.2
billion. Historically, approximately 43% to 77% of the pipeline of loans in
process has funded. For the quarters ended November 30, 1996 and 1995, the
Company received 117,821 and 113,280 new loan applications, respectively, at an
average daily rate of $195 million and $193 million, respectively. The following
actions were taken during the quarter ended November 30, 1996 on the total
applications received during that quarter: 60,768 loans (52% of total
applications received) were funded and 19,536 applications (17% 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, 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 factors that affect the percentage of applications received
and funded during a given time period include the movement and direction of
interest rates, the average length of loan commitments issued, the
creditworthiness of applicants, the production divisions' loan processing
efficiency and loan pricing decisions.
Loan origination fees decreased during the quarter ended November 30,
1996 as compared to the quarter ended November 30, 1995 due primarily to lower
loan production. Gain on sale of loans improved during the quarter ended
November 30, 1996 as compared to the quarter ended November 30, 1995 primarily
due to the sale during the quarter ended November 30, 1996 of higher margin home
equity and sub-prime loans and improved pricing margins on prime credit quality
first mortgages. The sale of home equity and sub-prime loans contributed $12.0
million and $23.1 million, respectively, to the gain on sale of loans for the
quarter ended November 30, 1996. There were no home equity or sub-prime loan
sales in the quarter ended November 30, 1995. 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 and mix of loans produced and sold.
Net interest income (interest earned net of interest charges) increased
to $22.9 million for the quarter ended November 30, 1996 from $22.1 million for
the quarter ended November 30, 1995. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($16.2 million and $10.0 million for the quarters ended
November 30, 1996 and 1995, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($21.8 million and $18.4 million for
the quarters ended November 30, 1996 and 1995, respectively) and (iii) interest
income earned from the custodial balances associated with the Company's
servicing portfolio ($28.5 million and $30.5 million for the quarters ended
November 30, 1996 and 1995, respectively). The Company earns interest on, and
incurs interest expense to carry, mortgage loans held in its warehouse. The
increase in net interest income from the mortgage loan warehouse was primarily
attributable to a higher net earnings rate during the quarter ended November 30,
1996 than in the quarter ended November 30, 1995. The increase in interest
expense on the investment in servicing rights resulted primarily from a larger
servicing portfolio, partially offset by a decrease in the payments of interest
to certain investors pursuant to customary servicing arrangements with regard to
paid-off loans in excess of the interest earned on these loans through their
respective payoff dates ("Interest Costs Incurred on Payoffs"). The decrease in
net interest income earned from the custodial balances was related to a decrease
in the average custodial balance and by a decrease in the earnings rate from the
quarter ended November 30, 1995 to the quarter ended November 30, 1996.
During the quarter ended November 30, 1996, loan administration income
was positively affected by the continued growth of the loan servicing portfolio.
At November 30, 1996, the Company serviced $152.9 billion of loans (including
$3.1 billion of loans subserviced for others) compared to $132.8 billion
(including $2.2 billion of loans subserviced for others) at November 30, 1995, a
15% increase. The growth in the Company's servicing portfolio during the quarter
ended November 30, 1996 was the result of loan production, partially offset by
prepayments, partial prepayments and scheduled amortization of mortgage loans.
The weighted average interest rate of the mortgage loans in the Company's
servicing portfolio at both November 30, 1996 and 1995 was 7.8%. It is the
Company's strategy to build and retain its servicing portfolio because of the
returns the Company can earn from such investment and because the Company
believes that servicing income is countercyclical to loan production income.
During the quarter ended November 30, 1996, the prepayment rate of the
Company's servicing portfolio was 9%, compared to 13% for the quarter ended
November 30, 1995. In general, the prepayment rate is affected by the level of
refinance activity, which in turn is driven by the relative level of mortgage
interest rates, and activity in the home purchase market. The decrease in the
prepayment rate from the quarter ended November 30, 1995 to the quarter ended
November 30, 1996 was primarily attributable to decreased refinance activity
caused by higher interest rates during the quarter ended November 30, 1996 than
during the quarter ended November 30, 1995.
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. In addition, to mitigate the effect on
earnings of higher amortization and impairment (which are deducted from loan
servicing income) that may result from increased current and projected future
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 mortgage-backed securities ("MBS"), interest rate floors,
interest rate swaps (with the Company's maximum payment capped) ("Swap Caps"),
principal-only ("P/O") swaps, options on interest rate swaps ("Swaptions") and
certain tranches of collateralized mortgage obligations ("CMOs").
With the Swap Caps, the Company receives and pays interest on a
specified notional amount. The rate received is fixed; the rate paid is
adjustable, is indexed to the London Interbank Offered Rates for U.S. dollar
deposits ("LIBOR") and has a specified maximum or "cap."
The P/O swaps are derivative contracts, the value of which is
determined by changes in the value of the referenced P/O security. The payments
received by the Company under the P/O swaps relate to the cash flows of the
referenced P/O security. The payments made by the Company are based upon a
notional amount tied to the remaining balance of the referenced P/O security
multiplied by a floating rate indexed to LIBOR.
With the Swaptions, the Company has the option to enter into a
receive-fixed, pay-floating interest rate swap at a future date or to settle the
transaction for cash.
The CMOs, which consist primarily of P/O securities, have been
purchased at deep discounts to their par values. As interest rates decrease,
prepayments on the collateral underlying the CMOs should increase. This should
result in a decline in the average lives of the P/O securities and a
corresponding increase in the present values of their cash flows. Conversely, as
interest rates increase, prepayments on the collateral underlying the CMOs
should decrease. These changes should result in an increase in the average lives
of the P/O securities and a decrease in the present values of their cash flows.
The Servicing Hedge instruments utilized by the Company are designed to
protect the value of the investment in 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. With respect
to the options, cap, swaptions, floors and CMOs, the Company is not exposed to
loss beyond its initial outlay to acquire the hedge instruments. With respect to
the Swap Caps contracts entered into by the Company as of November 30, 1996, the
Company estimates that its maximum exposure to loss over the contractual term is
$45 million. The Company's exposure to loss in the P/O swaps is related to
changes in the market value of the referenced P/O security over the life of the
contract. In the quarter ended November 30, 1996, the Company recognized a net
gain of $140.2 million from its Servicing Hedge. The net gain included
unrealized gains of $164.2 million and realized losses of $24.0 million from the
amortization and sale of various financial instruments that comprise the
Servicing Hedge. In 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 net realized gains of $23.2 million from
the amortization and sale of various financial instruments that comprise the
Servicing Hedge.
The Company recorded amortization and net impairment of its capitalized
servicing fees receivable and mortgage servicing rights ("Servicing Assets") in
the quarter ended November 30, 1996 totaling $198.7 million (consisting of
normal amortization amounting to $55.0 million and net impairment of $143.7
million), compared to $156.3 million of amortization and impairment of its
Servicing Assets in the quarter ended November 30, 1995 (consisting of normal
amortization amounting to $46.4 million and impairment of $109.9 million). The
factors affecting the amount of amortization and impairment or recovery of the
Servicing Assets recorded in an accounting period include the level of
prepayments during the period, the change in estimated future prepayments and
the amount of Servicing Hedge gains or losses.
During the quarter ended November 30, 1996, the Company acquired bulk
servicing rights for loans with principal balances aggregating $60.0 million at
a price of 1.08% of the aggregate outstanding principal balance of the servicing
portfolios acquired. 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.
<TABLE>
<CAPTION>
Salaries and related expenses are summarized below.
-- --------------------------- -- -- --------- ------------------------------------------------- -- -------------
(Dollar amounts in Quarter Ended November 30, 1996
thousands)
-- --------------------------- -- -- --------- ------------------------------------------------- -- -------------
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $23,050 $10,716 $13,994 $3,281 $51,041
Incentive Bonus 7,870 203 3,733 1,892 13,698
Payroll Taxes and Benefits 3,220 1,833 1,302 454 6,809
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $34,140 $12,752 $19,029 $5,627 $71,548
============ ============= ============= ============= =============
Average Number of Employees 2,325 1,593 1,155 250 5,323
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
</TABLE>
<TABLE>
<CAPTION>
-- --------------------------- -- --- -------- ------------------------------------------------- -- -------------
(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 Employees 1,813 1,240 937 198 4,188
-- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- -------------
</TABLE>
The amount of salaries increased during the quarter ended November 30,
1996 from the quarter ended November 30, 1995 primarily due to an increased
number of employees resulting from diversification of loan products, a larger
servicing portfolio and growth in the Company's non-mortgage banking activities.
Occupancy and other office expenses for the quarter ended November 30, 1996
increased to $33.0 million from $26.8 million for the quarter ended November 30,
1995, reflecting the Company's expansion of its retail branch network. In
addition, diversified loan production activity, a larger servicing portfolio and
growth in the Company's non-mortgage banking activities contributed to the
increase.
Guarantee fees represent fees paid to guarantee timely and full payment of
principal and interest on MBS and whole loans sold to permanent investors and to
transfer the credit risk of the loans in the servicing portfolio. For the
quarter ended November 30, 1996, guarantee fees increased 28% to $40.6 million
from $31.7 million for the quarter ended November 30, 1995. The factors which
affect the amount of guarantee fees in a period include the size of the
servicing portfolio, the mix of permanent investors and the terms negotiated at
the time of loan sales.
Marketing expenses for the quarter ended November 30, 1996 increased 13% to
$7.7 million from $6.8 million for the quarter ended November 30, 1995,
reflecting the Company's continued implementation of a marketing plan to
increase brand awareness of the Company in the residential mortgage market.
Other operating expenses for the quarter ended November 30, 1996
increased from the quarter ended November 30, 1995 by $6.2 million, or 43%. This
increase was due primarily to a larger servicing portfolio, increased reserves
for bad debts and increased systems development and operation costs in the
quarter ended November 30, 1996 than in the quarter ended November 30, 1995.
Profitability of Loan Production and Servicing Activities
In the quarter ended November 30, 1996, the Company's pre-tax income
from its loan production activities (which include loan origination and
purchases, warehousing and sales) was $36.7 million. In the quarter ended
November 30, 1995, the Company's comparable pre-tax income was $17.3 million.
The increase of $19.4 million was primarily attributable to a larger gain on
sale of loans resulting from the sale of higher margin home equity and sub-prime
loans, and improved pricing margins on prime credit quality first mortgages.
There were no home equity or sub-prime loan sales in the quarter ended November
30, 1995. These positive results were partially offset by higher production
costs and a change in the internal method of allocating overhead between the
Company's production and servicing activities. In the quarter ended November 30,
1996, the Company's pre-tax income from its loan servicing activities (which
include administering the loans in the servicing portfolio, selling homeowners
and other insurance, acting as tax payment agent, marketing foreclosed
properties and acting as reinsurer) was $64.3 million as compared to $66.3
million in the quarter ended November 30, 1995. The decrease of $2.0 million was
principally due to increased operating expenses and guarantee fees, partially
offset by an increase in the size of the servicing portfolio and the change in
the internal method of allocating overhead expenses. Additionally, in the
quarter ended November 30, 1996, the net total of Servicing Hedge benefit and
Servicing Assets amortization and impairment exceeded the comparable total
expense for the quarter ended November 30, 1995 by $21.7 million.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to the mortgage banking business. These
include title insurance and escrow services, home appraisals, credit cards,
management of a publicly traded real estate investment trust ("REIT"),
securities brokerage and servicing rights brokerage. For the quarter ended
November 30, 1996, these activities contributed $7.1 million to the Company's
pre-tax income compared to $4.6 million for the quarter ended November 30, 1995.
This increase to pre-tax income primarily results from improved performance of
the title insurance and escrow services.
RESULTS OF OPERATIONS
Nine Months Ended November 30, 1996 Compared to Nine Months Ended November
30, 1995
Revenues for the nine months ended November 30, 1996 increased 33% to
$815.6 million from $613.8 million for the nine months ended November 30, 1995.
Net earnings increased 37% to $189.1 million for the nine months ended November
30, 1996 from $138.1 million for the nine months ended November 30, 1995. The
increase in revenues and net earnings for the nine months ended November 30,
1996 compared to the nine months ended November 30, 1995 was primarily
attributable to a larger gain on sale of loans resulting from the sale of
higher-margin home equity and sub-prime loans in the nine months ended November
30, 1996, improved pricing margins on prime credit quality first mortgages, an
increase in the size of the Company's servicing portfolio and higher loan
production volume. These positive factors were partially offset by increased
expenses in the nine months ended November 30, 1996 over the nine months ended
November 30, 1995.
The total volume of loans produced increased 14% to $28.5 billion for
the nine months ended November 30, 1996 from $25.0 billion for the nine months
ended November 30, 1995. Refinancings totaled $8.9 billion, or 31% of total
fundings, for the nine months ended November 30, 1996, as compared to $7.1
billion, or 28% of total fundings, for the nine months ended November 30, 1995.
Fixed-rate loan production totaled $21.4 billion, or 75% of total fundings, for
the nine months ended November 30, 1996, as compared to $18.5 billion, or 74% of
total fundings, for the nine months ended November 30, 1995.
Total loan volume in the Company's production divisions is summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------ --------
Loan Production for the Nine
(Dollar amounts in millions) Months Ended November 30,
- -------------------------------------------- ------------------------------------ --------
1996 1995
------------- -------------
<S> <C> <C>
Consumer Markets Division $ 6,017 $ 5,243
Wholesale Lending Division 6,020 5,936
Correspondent Lending Division 16,454 13,803
------------- -------------
Total loan volume $28,491 $24,982
============= =============
- -------------------------------------------- ------------- -------- ------------- --------
</TABLE>
Included in the Company's total volume of loans produced are $405
million of home equity loans funded in the nine months ended November 30, 1996
and $179 million funded in the nine months ended November 30, 1995. Sub-prime
loan activity, which is also included in the Company's total production volume,
was $634 million for the nine months ended November 30, 1996 and $46 million
during the nine months ended November 30, 1995.
For the nine months ended November 30, 1996 and 1995, the Company received
378,159 and 330,267 new loan applications, respectively, at an average daily
rate of $204 million and $183 million, respectively. The following actions were
taken during the nine months ended November 30, 1996 on the total applications
received during that nine months: 248,406 loans (66% of total applications
received) were funded and 88,845 applications (23% 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, 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.
Loan origination fees decreased slightly during the nine months ended
November 30, 1996 from the nine months ended November 30, 1995 despite higher
production during the nine months ended November 30, 1996 primarily because
production by the Company's Correspondent Lending Division which, due to its
lower cost structure, charges lower origination fees per dollar loaned,
increased. Gain on sale of loans improved during the nine months ended November
30, 1996 as compared to the nine months ended November 30, 1995 primarily due to
the sale during the nine months ended November 30, 1996 of higher margin home
equity and sub-prime loans and improved pricing margins on prime credit quality
first mortgages. The sale of home equity and sub-prime loans contributed $12.0
million and $45.6 million, respectively, to the gain on sale of loans for the
nine months ended November 30, 1996. There were no home equity or sub-prime loan
sales during the nine months ended November 30, 1995.
Net interest income (interest earned net of interest charges) increased to
$70.0 million for the nine months ended November 30, 1996 from $52.3 million for
the nine months ended November 30, 1995. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($47.8 million and $21.6 million for the nine months
ended November 30, 1996 and 1995, respectively); (ii) interest expense related
to the Company's investment in servicing rights ($65.6 million and $42.7 million
for the nine months ended November 30, 1996 and 1995, respectively) and (iii)
interest income earned from the custodial balances associated with the Company's
servicing portfolio ($87.8 million and $73.4 million for the nine months ended
November 30, 1996 and 1995, respectively). The Company earns interest on, and
incurs interest expense to carry, mortgage loans held in its warehouse. The
increase in net interest income from the mortgage loan warehouse was primarily
attributable to an increase in the average amount of the mortgage loan
warehouse. The increase in interest expense on the investment in servicing
rights resulted primarily from a larger servicing portfolio and an increase in
Interest Costs Incurred on Payoffs. The increase in net interest income earned
from the custodial balances was related to an increase in the average custodial
balances (caused by growth of the servicing portfolio), offset somewhat by a
decrease in the earnings rate, from the nine months ended November 30, 1995 to
the nine months ended November 30, 1996.
During the nine months ended November 30, 1996, 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, 1996 was the result of loan production volume and the
acquisition of bulk servicing rights, partially offset by prepayments, partial
prepayments, and scheduled amortization of mortgage loans.
The prepayment rate of the Company's servicing portfolio was 11% for
the nine month periods ended both November 30, 1996 and November 30, 1995.
During the nine months ended November 30, 1996, the Company recognized
a net gain of $22.0 million from its Servicing Hedge. The net gain included
unrealized gains of $75.8 million and realized losses of $53.8 million from the
amortization and sale of various financial instruments that comprise the
Servicing Hedge. 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 net realized gains of $65.7
million from the amortization and sale of various financial instruments that
comprise the Servicing Hedge.
The Company recorded amortization and net impairment of its Servicing
Assets in the nine months ended November 30, 1996 totaling $185.1 million
(consisting of normal amortization amounting to $158.8 million and net
impairment of $26.3 million), compared to $355.7 million of amortization and
impairment (consisting of normal amortization amounting to $116.7 million and
impairment of $239.0 million) in the nine months ended November 30, 1995.
During the nine months ended November 30, 1996, the Company acquired
bulk servicing rights for loans with principal balances aggregating $1.2 billion
at a price of approximately 1.69% of the aggregate outstanding principal balance
of the servicing portfolios acquired. During the nine months ended November 30,
1995, bulk servicing rights were acquired for loans with principal balances
aggregating $4.7 billion at a price of approximately 1.32% of the aggregate
outstanding principal balance of the servicing portfolios.
<TABLE>
<CAPTION>
Salaries and related expenses are summarized below.
-- --------------------------- -- ------------ ------------------------------------------------- -- -------------
(Dollar amounts in Nine Months Ended November 30, 1996
thousands)
-- --------------------------- -- ------------ ------------------------------------------------- -- -------------
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $ 66,202 $30,617 $39,436 $9,437 $145,692
Incentive Bonus 24,884 545 10,994 4,681 41,104
Payroll Taxes and Benefits 10,436 5,455 4,602 1,248 21,741
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $101,522 $36,617 $55,032 $15,366 $208,537
============ ============= ============= ============= =============
Average Number of Employees 2,225 1,524 1,083 247 5,079
-- --------------------------- -- ------------ ------------------------------------------------- -- -------------
</TABLE>
<TABLE>
<CAPTION>
-- --------------------------- -- ------------ ------------------------------------------------- -- -------------
(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 Employees 1,670 1,079 872 177 3,798
Employees
-- --------------------------- -- ------------ ------------------------------- -- -------------- -- -------------
</TABLE>
The amount of salaries increased during the nine months ended November
30, 1996 from the nine months ended November 30, 1995 primarily due to an
increased number of employees resulting from higher loan production and
diversification of loan products, a larger servicing portfolio and growth in the
Company's non-mortgage banking activities.
Occupancy and other office expenses for the nine months ended November
30, 1996 increased to $94.3 million from $77.9 million for the nine months ended
November 30, 1995, reflecting the Company's goal of expanding its retail branch
network. In addition, higher loan production, a larger servicing portfolio and
growth in the Company's non-mortgage banking activities also contributed to the
increase.
Guarantee fees for the nine months ended November 30, 1996 increased
37% to $117.5 million from $86.0 million for the nine months ended November 30,
1995. This increase resulted from an increase in the servicing portfolio,
changes in the mix of permanent investors and terms negotiated at the time of
loan sales.
Marketing expenses for the nine months ended November 30, 1996
increased 32% to $25.7 million from $19.4 million for the nine months ended
November 30, 1995, reflecting the Company's continued implementation of a
marketing plan to increase brand awareness of the Company in the residential
mortgage market.
Other operating expenses for the nine months ended November 30, 1996
increased from the nine months ended November 30, 1995 by $23.5 million, or 65%.
This increase was due primarily to higher loan production, a larger servicing
portfolio, increased reserves for bad debts and increased systems development
and operation costs in the nine months ended November 30, 1996 than in the nine
months ended November 30, 1995.
Profitability of Loan Production and Servicing Activities
In the nine months ended November 30, 1996, the Company's pre-tax
income from its loan production activities (which include loan origination and
purchases, warehousing and sales) was $101.4 million. In the nine months ended
November 30, 1995, the Company's comparable pre-tax earnings were $33.8 million.
The increase of $67.6 million was primarily attributable to a larger gain on
sale of loans resulting from the sale of higher margin home equity and sub-prime
loans and improved pricing margins on prime credit quality first mortgages.
There were no home equity or sub-prime loan sales in the nine months ended
November 30, 1995. These positive results were partially offset by higher
production costs and a change in the internal method of allocating overhead
between the Company's production and servicing activities. In the nine months
ended November 30, 1996, the Company's pre-tax income from its loan servicing
activities (which include administering the loans in the servicing portfolio,
selling homeowners and other insurance, acting as tax payment agent, marketing
foreclosed properties and acting as reinsurer) was $190.7 million compared to
$187.2 million in the nine months ended November 30, 1995. The increase of $3.5
million was principally due to an increase in the size of the servicing
portfolio and in the rate of servicing and miscellaneous fees earned. Largely
offsetting these positive factors was that in the nine months ended November 30,
1996, the net total of Servicing Hedge benefit and Servicing Assets amortization
and impairment was greater than the comparable total expense for the nine months
ended November 30, 1995 by $61.8 million.
Profitability of Other Activities
Other ancillary products and services contributed $17.8 million to the
Company's pre-tax income in the nine months ended November 30, 1996, compared to
$9.1 million during the nine months ended November 30, 1995. This increase to
pre-tax income primarily resulted from improved performance of the title
insurance, escrow, and REIT management services.
INFLATION
Inflation affects the Company in the areas of loan production and
servicing. Interest rates normally increase during periods of high inflation and
decrease during periods of low inflation. Historically, as interest rates
decline, loan production, particularly from loan refinancings, increases.
However, during such periods, prepayment rates tend to accelerate (principally
on the portion of the portfolio having a note rate higher than the then-current
interest rates), thereby decreasing the average life of the Company's servicing
portfolio and adversely impacting its servicing-related earnings primarily due
to increased amortization and impairment of the Servicing Assets, a decreased
rate of interest earned from the custodial balances and increased Interest Costs
Incurred on Payoffs. Conversely, as interest rates increase, loan production,
particularly from loan refinancings, decreases, although in an environment of
gradual interest rate increases, purchase activity may actually be stimulated by
an improving economy or the anticipation of increasing real estate values. In
such periods of reduced loan production, production margins may decline due to
increased competition resulting from overcapacity in the market. In a higher
interest rate environment, servicing-related earnings are enhanced because
prepayment rates tend to slow down thereby extending the average life of the
Company's servicing portfolio and reducing both amortization and impairment of
the Servicing Assets and Interest Costs Incurred on Payoffs, and because the
rate of interest earned from the custodial balances tends to increase. The
impacts of changing interest rates on servicing-related earnings are reduced by
performance of the Servicing Hedge, which is designed to mitigate the impact on
earnings of higher amortization and impairment that may result from declining
interest rates.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan
funding activities and the investment in servicing rights. To meet these needs,
the Company currently utilizes commercial paper supported by CHL's revolving
credit facility, medium-term notes, MBS repurchase agreements, subordinated
notes, unsecured notes, an optional cash purchase feature in the dividend
reinvestment plan and cash flow from operations. In addition, in the past the
Company has utilized whole loan repurchase agreements, servicing-secured bank
facilities, direct borrowings from CHL's revolving credit facility,
privately-placed financings, pre-sale funding facilities and public offerings of
preferred stock.
Certain of the debt obligations of the Company and CHL contain various
provisions that may affect the ability of the Company and CHL to pay dividends
and remain in compliance with such obligations. These provisions include
requirements concerning net worth, current ratio and other financial covenants.
These provisions have not had, and are not expected to have, an adverse impact
on the ability of the Company and CHL to pay dividends.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows. In
December 1996, Countrywide Capital I issued $300 million of 8% trust preferred
securities. The proceeds were used to purchase subordinated debt securities from
the Company. The Company intends to use the net proceeds from the sale of the
subordinated debt securities for general corporate purposes, principally for
investment in servicing rights.
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, 1996, the
Company's operating activities provided cash of approximately $0.7 billion on a
short-term basis primarily from the decrease in its warehouse of mortgage loans.
Mortgage loans shipped and held for sale are generally financed with short-term
borrowings; therefore, the operating cash so provided was used to repay
short-term debt as discussed under "Financing Activities."
Investing Activities The primary investing activity for which cash was
used during the nine months ended November 30, 1996 was the investment in
servicing. Net cash used by investing activities was $0.7 billion for the nine
months ended November 30, 1996 and November 30, 1995.
Financing Activities Net cash provided by financing activities amounted
to $11.0 million for the nine months ended November 30, 1996 and $2.1 billion
for the nine months ended November 30, 1995. The decrease in cash provided by
financing activities was primarily the result of net short-term debt repayments
by the Company in the nine months ended November 30, 1996 and net short-term
borrowings during the nine months ended November 30, 1995.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During the nine months ended November 30, 1996, the Company received
new loan applications at an average daily rate of $204 million and at November
30, 1996, the Company's pipeline of loans in process was $4.7 billion. This
compares to a daily application rate during the nine months ended November 30,
1995 of $183 million and a pipeline of loans in process at November 30, 1995 of
$4.5 billion. The size of the pipeline is generally an indication of the level
of future fundings, as historically 43% to 77% of the pipeline of loans in
process has funded. In addition, the Company's LOCK 'N SHOP (R) Pipeline at
November 30, 1996 was $1.7 billion and at November 30, 1995 was $1.2 billion.
For the month ended December 31, 1996, the average daily amount of applications
received was $229 million, and at December 31, 1996, the pipeline of loans in
process was $4.5 billion and the LOCK 'N SHOP (R) pipeline was $1.1 billion.
Interest rates increased slightly during December 1996. Future application
levels and loan fundings are dependent on numerous factors, including the level
of demand for mortgage credit, the extent of price competition in the market,
the direction of interest rates, seasonal factors and general economic
conditions.
Market Factors
During the quarter ended November 30, 1996, interest rates declined
slightly. However, loan production declined from the quarter ended August 31,
1996 to the quarter ended November 30, 1996. This is primarily due to several
factors. First, the pipeline of loans in process at September 1, 1996 was
relatively low due to higher interest rates during the quarter ended August 30,
1996. Second, as discussed in "Seasonality," sales and resales of homes
typically decline to lower levels in the fall and winter months, which
correspond to the Company's third and fourth quarters. Home purchase activity
was $7.1 billion for the quarter ended August 31, 1996 and $6.7 billion for the
quarter ended November 30, 1996. On the other hand, sub-prime and home-equity
loan fundings, which are generally less sensitive to interest rate fluctuations
than prime credit quality first mortgages, increased during the quarter ended
November 30, 1996 from the quarter ended August 31, 1996.
The prepayment rate in the servicing portfolio remained flat during the
quarter ended November 30, 1996. Because interest rates declined at the end of
the quarter, impairment of the Servicing Assets was recognized and the Servicing
Hedge resulted in a gain.
The Company's primary competitors are commercial banks, savings and
loans and mortgage banking subsidiaries of diversified companies, as well as
other mortgage bankers. Certain commercial banks have expanded their mortgage
banking operations through acquisition of formerly independent mortgage banking
companies or through internal growth. The Company believes that these
transactions and activities have not had a material impact on the Company or on
the degree of competitive pricing in the market.
The Company's California mortgage loan production (measured by
principal balance) constituted 25% of its total production during the nine
months ended November 30, 1996, down from 31% for the nine months ended November
30, 1995. The Company is continuing its efforts to expand its production
capacity outside of California. Some regions in which the Company operates have
experienced slower economic growth, and real estate financing activity in these
regions has been negatively impacted. As a result, home lending activity for
single- (one-to-four) family residences in these regions may also have
experienced slower growth. To the extent that any geographic region's mortgage
loan production constitutes a significant portion of the Company's production,
there can be no assurance that the Company's operations will not be adversely
affected to the extent that region experiences slow or negative economic growth
resulting in decreased residential real estate lending activity or market
factors further impact the Company's competitive position in that region.
The delinquency rate in the Company-owned servicing portfolio increased
slightly to 3.23% at November 30, 1996 from 3.20% at November 30, 1995. The
Company believes that this increase was primarily the result of portfolio mix
changes and aging. The proportion of government and high loan-to-value
conventional loans, which tend to experience higher delinquency rates than low
loan-to-value conventional loans, has increased from 44% of the portfolio at
November 30, 1995 to 48% at November 30, 1996. In addition, the weighted average
age of the portfolio was 27 months at November 30, 1996, up from 24 months at
November 30, 1995. Delinquency rates tend to increase as loans age, reaching a
peak at three to five years of age. However, because the loans in the portfolio
are generally serviced on a non-recourse basis, the Company's exposure to credit
loss resulting from increased delinquency rates is substantially limited.
Further, related late charge income has historically been sufficient to offset
incremental servicing expenses resulting from an increased delinquency rate.
The percentage of loans in the Company's owned servicing portfolio that
are in foreclosure increased to 0.62% at November 30, 1996 from 0.37% at
November 30, 1995. Because the Company services substantially all conventional
loans on a non-recourse basis, foreclosure losses are generally the
responsibility of the investor or insurer and not the Company. Accordingly, any
increase in foreclosure activity should not result in significant foreclosure
losses to the Company. However, the Company's expenses may be increased somewhat
as a result of the additional staff efforts required to foreclose on a loan.
Similarly, government loans serviced by the Company (28% of the Company's
servicing portfolio at November 30, 1996) are insured or partially guaranteed
against loss by the Federal Housing Administration or the Veterans
Administration. In the Company's view, the limited unreimbursed costs that may
be incurred by the Company on government foreclosed loans are not material to
the Company's consolidated financial statements.
Servicing Hedge
As previously discussed, the Company's Servicing Hedge is designed to
protect the value of its investment in servicing rights from the effects of
increased prepayment activity that generally results from declining interest
rates. In periods of increasing interest rates, the value of the Servicing Hedge
generally declines and the value of the servicing rights generally increases.
There can be no assurance that, in periods of increasing interest rates, the
increase in value of the Servicing Assets will offset the amount of Servicing
Hedge expense; or in periods of declining interest rates, that the Company's
Servicing Hedge will generate gains or if gains are generated, that they will
fully offset impairment of the Servicing Assets.
Recently Announced Planned Transactions
Countrywide Asset Management Corp. ("CAMC"), a wholly-owned subsidiary
of the Company, currently manages a publicly traded REIT, CWM Mortgage Holdings,
Inc. ("CWM"). All CWM management and other personnel are employed by CAMC, and
CWM pays CAMC base and incentive fees under a management contract. On November
4, 1996, the Company announced that CWM and it had reached a preliminary
understanding on restructuring the business relationship between the two
companies. In substance, CWM will acquire the operations and employees of CAMC,
and in return, the Company will receive a significant equity position in CWM.
The proposed transaction is structured as a merger of CAMC with and into CWM,
with the Company to receive approximately 3.6 million newly issued common shares
of CWM (approximately $75.0 million based on certain recent closing prices of
CWM stock). Although a definitive agreement remains to be negotiated, the
parties anticipate executing such an agreement in the near future. The
transaction will occur after regulatory and shareholder approvals are obtained.
On December 12, 1996, the Company announced an agreement to acquire all
of the outstanding stock of Leshner Financial, Inc., a midwest-based financial
services company, in exchange for newly issued Company common stock. The company
being acquired operates through its subsidiaries as a broker-dealer, an
investment advisor and fund manager and also as a service provider for
unaffiliated mutual funds. The value of Company common stock to be issued in
this transaction is approximately $16 million, subject to an upward adjustment
of up to $2.5 million if certain performance goals are met over the next five
years. The acquisition is based in part on the Company's long-term commitment to
offer mortgage customers a diversified array of financial products and services.
Implementation of New Accounting Standards
In June 1996, the Financial Accounting Standard Board issued Statement
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS No. 125"). Among other provisions, this
Statement uses a "financial components" approach that focuses on control to
determine the proper accounting for financial asset transfers, addresses the
accounting for servicing rights on financial assets in addition to mortgage
loans and extends the disaggregated lower of cost or market approach for
measuring servicing rights (including excess servicing) on all financial assets.
The financial asset transfers provisions of SFAS No. 125 are not expected to
have a material impact on the Company's financial position or results of
operations. Although management does not expect the impact of adopting the new
Statement's servicing rights provisions to be material, such impact is not known
because it is dependent on the fair value of the Company's capitalized servicing
fees receivable (excess servicing) on December 31, 1996, and the necessary
analysis is not yet completed.
<PAGE>
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.
27 Financial Data Schedules (included only with the
electronic filing with the SEC).
(b) Reports on Form 8-K. None
<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: January 14, 1997 /s/ Stanford L. Kurland
-------------------------------------
Senior Managing Director and
Chief Operating Officer
DATE: January 14, 1997 /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
11.1 Statement Regarding Computation of Per Share Earnings.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
27 Financial Data Schedules (included only with the electronic
filing with the SEC).
<TABLE>
<CAPTION>
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine Months
Ended November 30,
1996 1995
---------------- -----------------
(Dollar amounts in thousands,
except per share data)
Primary
<S> <C> <C>
Net earnings applicable to common stock $189,056 $138,082
================ =================
Average shares outstanding 102,666 97,165
Net effect of dilutive stock options --
based on the treasury stock method
using average market price 2,287 1,893
---------------- -----------------
Total average shares 104,953 99,058
================ =================
Per share amount $1.80 $1.39
================ =================
Fully diluted
Net earnings applicable to common stock $189,056 $138,082
================ =================
Average shares outstanding 102,666 97,165
Net effect of dilutive stock options --
based on the treasury stock method using
the closing market price, if higher than
average market price. 3,400 2,095
---------------- -----------------
Total average shares 106,066 99,260
================ =================
Per share amount $1.78 $1.39
================ =================
</TABLE>
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, 1996 and 1995 and for the five
fiscal years ended February 29(28), 1996 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).
<TABLE>
<CAPTION>
Nine Months Ended
November 30, Fiscal Years Ended February 29(28),
------------------------- ------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------------ ------------ ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings $189,056 $138,082 $195,720 $ 88,407 $179,460 $140,073 $ 60,196
Income tax expense 120,872 92,055 130,480 58,938 119,640 93,382 40,131
Interest charges 230,547 207,510 281,573 205,464 219,898 128,612 69,760
Interest portion of rental
expense 5,486 5,002 6,803 7,379 6,372 4,350 2,814
------------ ------------ ------------- ------------ ------------- ------------ ------------
Earnings available to cover
fixed charges $545,961 $442,649 $614,576 $360,188 $525,370 $366,417 $172,901
============ ============ ============= ============ ============= ============ ============
Fixed charges
Interest charges $230,547 $207,510 $281,573 $205,464 $219,898 $128,612 $ 69,760
Interest portion of rental
expense 5,486 5,002 6,803 7,379 6,372 4,350 2,814
------------ ------------ ------------- ------------ ------------- ------------ ------------
Total fixed charges $236,033 $212,512 $288,376 $212,843 $226,270 $132,962 $ 72,574
============ ============ ============= ============ ============= ============ ============
Ratio of earnings to fixed
charges 2.31 2.08 2.13 1.69 2.32 2.76 2.38
============ ============ ============= ============ ============= ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> NOV-30-1996
<CASH> 14,835
<SECURITIES> 0
<RECEIVABLES> 1,418,092
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 283,227
<DEPRECIATION> 93,620
<TOTAL-ASSETS> 9,254,431
<CURRENT-LIABILITIES> 0
<BONDS> 2,446,800
0
0
<COMMON> 5,199
<OTHER-SE> 1,518,016
<TOTAL-LIABILITY-AND-EQUITY> 9,254,431
<SALES> 0
<TOTAL-REVENUES> 815,627
<CGS> 0
<TOTAL-COSTS> 505,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 309,928
<INCOME-TAX> 120,872
<INCOME-CONTINUING> 189,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189,056
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.78
<FN>
Note: Revenues includes $230,547 of interest
expense related to mortgage loan activities.
</FN>
</TABLE>
