UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 28 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13 - 2641992
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
155 N. Lake Avenue Pasadena California 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (818) 304-8400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $.05 Par Value New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and, (2) has been subject to
such filing requirements for the past
90 days. Yes X No__________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 6, 1994, there were 91,135,752 shares of Countrywide Credit
Industries, Inc. Common Stock, $.05 par value outstanding. Based on the closing
price for shares of Common Stock on that date, the aggregate
market value of Common Stock held by non-affiliates of the registrant was
approximately $1,378,428,000. For the purposes of the foregoing calculation
only, all directors and executive officers of the registrant have been deemed
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1994 Annual Meeting - Part III
PART I
ITEM 1. BUSINESS
A. General
Countrywide Credit Industries, Inc. (the "Company") is a holding company
which, through its principal subsidiary Countrywide Funding Corporation ("CFC"),
is engaged primarily in the mortgage banking business, and as such originates,
purchases, sells and services mortgage loans. The Company's mortgage loans are
principally first-lien mortgage loans secured by single- (one to four) family
residences. The Company, through its other wholly-owned subsidiaries, offers
products and services complementary to its mortgage banking business. A
subsidiary of the Company sells to other broker-dealers mortgage-backed
securities, including agency mortgage-backed securities and agency-issued
collateralized mortgage obligation ("CMO") classes, primarily on an odd-lot
basis (i.e., in denominations between $25,000 and $1,000,000) and to
institutional investors, subordinate structures of whole loan CMOs. In
addition, a subsidiary of the Company receives fee income for managing the
operations of Countrywide Mortgage Investments, Inc. ("CMI"), a real estate
investment trust whose shares are traded on the New York Stock Exchange. In
1993, CMI adopted a new operating plan and established Countrywide Mortgage
Conduit, Inc. ("CMC") as a taxable subsidiary that principally operates as a
jumbo and non-conforming mortgage loan conduit. CMI has also commenced
warehouse lending operations which provide short-term revolving financing to
small- and medium-size mortgage bankers. See "Business--Countrywide Asset
Management Corporation." The Company also has a subsidiary which acts as an
agent in the sale of homeowners, fire, flood, mortgage life and disability
insurance to CFC's mortgagors in connection with CFC's mortgage banking
operations. Another subsidiary of the Company earns fee income by brokering
servicing contracts owned by other mortgage lenders and loan servicers. While
no longer engaged in the business of originating mobile home installment
contracts, a subsidiary of the Company operates mobile home parks and rents and
sells mobile home coaches. References to the "Company" herein shall be deemed
to refer to the Company and its consolidated subsidiaries, unless the context
requires otherwise.
B. Mortgage Banking Operations
The principal sources of revenue from the Company's mortgage banking
business are: (i) loan origination fees; (ii) gains from the sale of loans;
(iii) interest earned on mortgage loans during the period that they are held by
the Company pending sale, net of interest paid on funds borrowed to finance such
mortgage loans and (iv) loan servicing fees.
Loan Production
The Company originates and purchases mortgage loans insured by the Federal
Housing Administration ("FHA"), mortgage loans partially guaranteed by the
Veterans Administration ("VA") and conventional mortgage loans. A majority of
the conventional loans are conforming loans which qualify for inclusion in
guarantee programs sponsored by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The remainder
of the conventional loans are non-conforming loans (i.e., jumbo loans with an
original balance in excess of $203,150 or other loans that do not meet FNMA or
FHLMC guidelines). As part of its mortgage banking activities, the Company
makes conventional loans generally with original balances of up to $1 million.
The following table sets forth the number and dollar amount of the
Company's mortgage loan production for the periods indicated.
(Dollar amounts in
millions, except
average loan amount) Summary of the Company's Mortgage Loan Production
Year Ended February 28(29),
1994 1993 1992 1991 1990
Conventional Loans
Number of Loans 315,699 192,385 63,919 23,130 19,237
Volume of Loans $46,473.4 $28,669.9 $9,986.6 $3,140.9 $2,492.5
Percent of Total
Volume 88.6% 88.5% 82.2% 68.6% 68.5%
FHA/VA Loans
Number of Loans 67,154 42,022 24,329 17,328 16,183
Volume of Loans $5,985.5 $3,717.9 $2,169.7 $1,435.8 $1,147.6
Percent of Total
Volume 11.4% 11.5% 17.8% 31.4% 31.5%
Total Loans
Number of Loans 382,853 234,407 88,248 40,458 35,420
Volume of Loans $52,458.9 $32,387.8 $12,156.3 $4,576.7 $3,640.1
Average Loan Amount $137,000 $138,000 $138,000 $113,000 $103,000
For the years ended February 28(29), 1994, 1993 and 1992, jumbo loans
represented 30%, 27% and 31%, respectively, of the Company's total volume of
mortgage loans produced. For the years ended February 28(29), 1994, 1993 and
1992, adjustable-rate mortgage loans ("ARM"s) comprised approximately 19%, 28%
and 21%, respectively, of the Company's total volume of mortgage loans produced.
The decline in the Company's percentage of ARM production from 1993 to 1994 was
primarily caused by consumer preference for fixed-rate mortgages, which bore
interest at relatively low rates due to the declining interest rate environment
that prevailed through most of the fiscal year ended February 28, 1994. For the
years ended February 28(29), 1994, 1993 and 1992, refinancing activity
represented 75%, 73% and 58%, respectively, of the Company's total volume of
mortgage loans produced. The increase was principally due to the general
decline in average mortgage interest rates which stimulated demand for
refinancing of existing mortgage loans and the Company's ability to capture a
greater share of the home mortgage lending market.
The Company produces mortgage loans through four separate divisions. The
Company maintains a staff of central office quality control personnel that
performs audits of the loan production of the four divisions on a regular basis.
In addition, each division has implemented various procedures to control the
quality of loans produced, as described below. The Company believes that its
use of technology, benefits derived from economies of scale and a
noncommissioned sales force allow it to produce loans at a low cost relative to
its competition.
Retail Division
The Company originates loans through its network of retail branch offices
(the "Retail Division"). As of February 28, 1994, the Company had 176 retail
branch offices, 110 satellite offices (which accept loan applications and
forward them to the host branch for processing) and nine regional support
centers. These various facilities are located in 41 states. The Company
utilizes small branch offices, each staffed typically by four employees and
connected to the Company's central office by a computer network. Business is
solicited through extensive use of direct mailings to real estate brokers,
telemarketing, advertising in various forms of mass media and participation of
branch management in local real estate-related business functions. Retail
Division personnel are not paid a commission on sales; however, they are paid a
bonus based on various factors, including branch profitability. The Company
believes that this approach allows it to originate loans at a competitively low
cost. The Retail Division uses continuous quality control audits by branch
management and quality control personnel of loans originated within each branch
to monitor compliance with the Company's underwriting criteria.
The following table sets forth the number and dollar amount of the Retail
Division's mortgage loan production for the periods indicated.
(Dollar amounts in
millions, except
average loan Summary of the Retail Division's Mortgage Loan
amount) Production
Year Ended February 28(29),
1994 1993 1992 1991 1990
Conventional Loans
Number of Loans 47,862 28,384 16,717 8,297 5,869
Volume of Loans $6,088.0 $3,649.3 $2,213.6 $1,020.6 $717.6
Percent of Total
Volume 79.7% 79.0% 79.9% 65.4% 53.4%
FHA/VA Loans
Number of Loans 16,578 10,436 6,368 6,251 7,836
Volume of Loans $1,550.4 $972.6 $558.2 $540.1 $626.6
Percent of Total
Volume 20.3% 21.0% 20.1% 34.6% 46.6%
Total Loans
Number of Loans 64,440 38,820 23,085 14,548 13,705
Volume of Loans $7,638.4 $4,621.9 $2,771.8 $1,560.7 $1,344.2
Average Loan Amount $119,000 $119,000 $120,000 $107,000 $98,000
Wholesale Division
Through its wholesale division (the "Wholesale Division"), the Company
originates through and purchases loans from mortgage loan brokers. As of
February 28, 1994, the division operated 69 branch offices and 11 regional
support centers in various parts of the country. Loans produced by the
Wholesale Division comply with the Company's general underwriting criteria for
loans originated through the Retail Division, and each such loan is approved by
one of the Company's loan underwriters. In addition, quality control personnel
review loans for compliance with the Company's underwriting criteria. Mortgage
loan brokers qualify to participate in the Wholesale Division's program only
after a review by the Company's management of their reputation and mortgage
lending expertise, including a review of their references and financial
statements.
The following table sets forth the number and dollar amount of the
Wholesale Division's mortgage loan production for the periods indicated.
(Dollar amounts in
millions,except Summary of the Wholesale Division's Mortgage Loan
Average loan Production
amount) Year Ended February 28(29),
1994 1993 1992 1991 1990
Conventional Loans
Number of Loans 130,937 92,922 27,661 8,763 6,917
Volume of Loans $21,271.0 $15,480.1 $5,093.5 $1,392.3 $1,020.7
Percent of Total
Volume 98.9% 100.0% 99.7% 97.0% 95.3%
FHA/VA Loans
Number of Loans 2,700 15 230 611 843
Volume of Loans $244.4 $1.5 $17.4 $43.1 $50.4
Percent of Total
Volume 1.1% 0.0% 0.3% 3.0% 4.7%
Total Loans
Number of Loans 133,637 92,937 27,891 9,374 7,760
Volume of Loans $21,515.4 $15,481.6 $5,110.9 $1,435.4 $1,071.1
Average Loan Amount $161,000 $167,000 $183,000 $153,000 $138,000
Correspondent Division
The Company purchases loans through its network of correspondent offices
(the "Correspondent Division") primarily from other mortgage bankers, savings
and loan associations, commercial banks, credit unions and other financial
intermediaries. The Company's correspondent offices are located in Pasadena,
California; Dallas, Texas; Atlanta, Georgia and Pittsburgh, Pennsylvania. Over
1,700 financial intermediaries serving all 50 states are eligible to participate
in this program. Loans purchased by the Company through the Correspondent
Division comply with the Company's general underwriting criteria for loans that
it originates through the Retail Division, and, except as described in the next
sentence, each loan is accepted only after review either by one of the Company's
loan underwriters or, in the case of FHA or VA loans, by a government-approved
underwriter. The Company accepts loans without such review from an institution
that has met the Company's standards for the granting of delegated underwriting
authority following a review by the Company of the institution's financial
strength, underwriting and quality control procedures, references and prior
experience with the Company. In addition, quality control personnel review
loans purchased from correspondents for compliance with the Company's
underwriting criteria. The purchase agreement used by the Correspondent
Division provides the Company with recourse to the seller in the event of such
occurrences as fraud or misrepresentation in the origination process or a
request by the investor that the Company repurchase the loan. Financial
intermediaries qualify to participate in the Correspondent Division's program
after a review by the Company's management of the reputation and mortgage
lending expertise of such institutions, including a review of their references
and financial statements.
The following table sets forth the number and dollar amount of the
Correspondent Division's mortgage loan production for the periods indicated.
(Dollar amounts in
millions, except Summary of the Correspondent Division's Mortgage
average loan amount) Loan Production
Year Ended February 28(29),
1994 1993 1992 1991 1990
Conventional Loans
Number of Loans 111,513 59,676 16,709 5,034 4,676
Volume of Loans $15,937.6 $8,163.0 $2,340.0 $607.2 $522.3
Percent of Total
Volume 82.2% 75.5% 59.6% 42.0% 53.0%
FHA/VA Loans
Number of Loans 38,036 30,268 17,594 10,228 7,383
Volume of Loans $3,458.8 $2,643.5 $1,585.0 $837.7 $463.6
Percent of Total
Volume 17.8% 24.5% 40.4% 58.0% 47.0%
Total Loans
Number of Loans 149,549 89,944 34,303 15,262 12,059
Volume of Loans $19,396.4 $10,806.5 $3,925.0 $1,444.9 $985.9
Average Loan Amount $130,000 $120,000 $114,000 $95,000 $82,000
Consumer Division
The Company also originates loans through its consumer division (the
"Consumer Division"). The Consumer Division's activities include the
refinancing of loans in the Company's servicing portfolio and the marketing of
loan products directly to consumers. In addition, the Company is exploring
additional technology-based strategies for marketing mortgage loans directly to
consumers or through intermediaries. Quality control personnel review loans
originated by the Consumer Division for compliance with the Company's
underwriting criteria, which are the same as those used for loans originated
through the Retail Division. The Company's Consumer Division currently
maintains offices in Pasadena and Simi Valley, California; Winter Park, Florida;
Nashville, Tennessee; Plano, Texas and Mission, Kansas.
The following table sets forth the number and dollar amount of the Consumer
Division's mortgage loan production for the periods indicated.
(Dollar amounts in
millions, except Summary of the Consumer Division's Mortgage
average loan amount) Loan Production
Year Ended February 28(29),
1994 1993 1992 1991 1990
Conventional Loans
Number of Loans 25,387 11,403 2,832 1,036 1,775
Volume of Loans $3,176.8 $1,377.4 $339.7 $120.8 $231.9
Percent of Total
Volume 81.3% 93.2% 97.4% 89.0% 97.1%
FHA/VA Loans
Number of Loans 9,840 1,303 137 238 121
Volume of Loans $731.9 $100.4 $9.0 $14.9 $7.0
Percent of Total
Volume 18.7% 6.8% 2.6% 11.0% 2.9%
Total Loans
Number of Loans 35,227 12,706 2,969 1,274 1,896
Volume of Loans $3,908.7 $1,477.8 $348.7 $135.7 $238.9
Average Loan Amount $111,000 $116,000 $117,000 $107,000 $126,000
Fair Lending Programs
In conjunction with fair lending initiatives undertaken by both FNMA and
FHLMC and promoted by various government agencies including the Department of
Housing and Urban Development ("HUD"), the Company has established affordable
home loan and fair lending programs for low- and moderate-income and designated
minority borrowers. These programs offer more flexible underwriting guidelines
(consistent with those guidelines adopted by FNMA and FHLMC) than historic
industry standards, thereby enabling more people to qualify for home loans than
had qualified under such historic guidelines. Highlights of these flexible
guidelines include a lower down payment requirement, more liberal guidelines in
areas such as credit and employment history, less income required to qualify and
no cash reserve requirements at the date of funding.
All applications from low- and moderate-income and designated minority
borrowers that are initially recommended for denial by one of the Company's
production divisions are forwarded for an additional review by an underwriter
and senior officer of the Company to insure that denial is appropriate under the
flexible underwriting guidelines. The application of more flexible underwriting
guidelines may carry a risk of increased delinquencies; however, based upon the
Company's experience since the inception of the program, the performance of
loans approved under these more flexible guidelines has been substantially
similar to that of FHA and VA loans in the Company's servicing portfolio.
House America is the Company's principal affordable home loan program for
low- and moderate-income borrowers. House America personnel work with all of
the Company's production divisions to help properly implement these flexible
underwriting guidelines. In addition, an integral part of the program is the
House America Counseling Center, a free educational service, which can provide
to consumers a home buyers educational program, pre-qualify them for a loan or
provide a customized budget plan to help consumers obtain their goal of home
ownership. To assist a broad spectrum of consumers, counselors are multi-
lingual and work with consumers for up to one year, providing guidance on a
regular basis via phone and mail.
For calendar years 1994 and 1995, the Company has entered into agreements
to sell a total of $5 billion of affordable housing loans to FNMA and FHLMC.
Loan Underwriting
The Company's guidelines for underwriting FHA-insured loans and VA-
guaranteed loans comply with the criteria established by such agencies. The
Company's guidelines for underwriting conventional conforming loans comply with
the underwriting criteria employed by FNMA and/or FHLMC. The Company's
underwriting guidelines and property standards for conventional non-conforming
loans are based on the underwriting standards employed by private mortgage
insurers and private investors for such loans. In addition, conventional loans
originated or purchased by the Company with a loan-to-value ratio greater than
80% at origination are covered by private mortgage insurance.
In conjunction with fair lending initiatives undertaken by both FNMA and
FHLMC, the Company has established affordable home loan programs for low- and
moderate-income and designated minority borrowers offering more flexible
underwriting guidelines than historic industry standards. See "Business--
Mortgage Banking Operations--Fair Lending Programs."
The following describes the general underwriting criteria taken into
consideration by the Company in determining whether to approve a mortgage loan
application. These criteria generally apply to all types of loans.
Employment and Income
Applicants must exhibit the ability to generate income on a regular basis
in order to meet the housing payments relating to the loan as well as any other
debts they may have. Evidence of employment and income is obtained through a
written verification of employment with the current and prior employers or by
obtaining a recent pay stub and W-2 forms. Self-employed applicants are
required to provide tax returns, financial statements or other documentation to
verify income. Sources of income to be considered include salary, bonus,
overtime, commissions, retirement benefits, notes receivable, interest,
dividends, unemployment benefits and rental income.
Debt-to-Income Ratios
Generally, an applicant's monthly income should be three times the amount
of monthly housing expenses (loan payment, real estate taxes, hazard insurance
and homeowner dues, if applicable). Monthly income should generally be two and
one-half times the amount of total fixed monthly obligations (housing expense
plus other obligations such as car loans or credit card payments). Other areas
of financial strength, such as equity in the property, large cash reserves or a
history of meeting prior home mortgage or rental obligations are considered to
be compensating factors and may result in an adjustment of these ratio
limitations.
Credit History
An applicant's credit history is examined for both favorable and
unfavorable occurrences. An applicant who has made payments on outstanding or
previous credit obligations according to the contractual terms may be considered
favorable. Unfavorable items such as slow payment records, suits, judgments,
bankruptcy, liens, foreclosure or garnishment are discussed with the applicant
in order to determine the reasons for the unfavorable rating. In some
instances, the applicant may explain the reasons for these ratings to indicate
that there were extenuating circumstances beyond the applicant's control which
would mitigate the effect of such unfavorable item on the credit decision.
Property
The property's market value and physical condition as compared to the value
of similar properties in the area is assessed to ensure that the property
provides adequate collateral for the loan.
Funds for Closing
Generally, applicants are required to have sufficient funds of their own to
make a minimum five percent down payment. Funds for closing costs may come from
the applicant or may be a gift from a family member. Certain loan programs
require the applicant to have sufficient funds for a down payment of only three
percent and the remaining funds provided by a gift or an unsecured loan from a
municipality or a non-profit organization. Certain programs require the
applicant to have cash reserves after closing.
Maximum Indebtedness to Appraised Value
Generally, the maximum amount the Company will loan is 95% of the appraised
value of the property. For certain types of loans, this percentage may be
increased. Loan amounts in excess of 80% of the appraised value require
mortgage insurance (which is generally paid by the borrower but which may be
paid by the lender) to protect against foreclosure loss. After funding and sale
of the mortgage loans, the Company's exposure to credit loss in the event of non
performance by the mortgagor is limited as described in the section "Mortgage
Banking Operations--Sales of Loans."
Proprietary Data Processing Systems
The Company employs technology wherever applicable and continually searches
for new and better ways of providing services to its customers. The Company has
developed and implemented several new applications specifically designed to
provide support for its business partners. These include DirectLine Plus,
which is targeted to mortgage brokers, and Lender Access, which focuses on
institutional lenders such as other mortgage companies, banks, savings and loans
and credit unions. These applications provide the Company's business partners
with the ability to directly obtain information about specific loans in
progress, to customize reports about all loans in the client's pipeline of loans
in progress with the Company, to lock in an interest rate on certain types of
loans, to view the latest pricing, to review the Company's lending program
guidelines and to send and receive electronic messages to and from the Company's
processing center.
In addition, the Company is currently using CLUES, a proprietary artificial
intelligence system that the Company believes expedites the review of
applications, credit reports and property appraisals. CLUES is able to increase
underwriters' productivity, reduce costs and provide greater consistency to the
underwriting process. The Company is also currently using a system called
"EDGE," which is an advanced automated loan origination system that reduces the
time and cost of the loan application and funding process. This front-end
system was internally developed for the Company's exclusive use and is
integrated with the Company's loan servicing, sales, accounting and other
systems. The Company believes that the EDGE system heightens the quality of the
loan product and customer service by: (i) reducing risks of deficient loans;
(ii) facilitating accurate pricing; (iii) generating and completing loan
documents through laser printers; (iv) providing for electronic communication
with credit bureaus and other vendors and (v) generally minimizing manual data
input. From pre-qualification to funding, EDGE is believed to significantly
reduce origination and processing costs and speed funding time.
Geographic Distribution
The following table sets forth the geographic distribution of the Company's
mortgage loan production for the year ended February 28, 1994.
Geographic Distribution of the Company's
Mortgage Loan Production
Percentage
of
Total
(Dollar amounts Number Principal Dollar
in millions) of Loans Amount Amount
California 136,700 $24,009.6 45.8%
Massachusetts 15,508 2,430.9 4.6
Florida 20,682 2,041.7 3.9
Washington 15,617 1,870.7 3.6
Texas 16,988 1,806.5 3.4
Illinois 12,076 1,620.6 3.1
New York 9,376 1,308.8 2.5
Pennsylvania 10,626 1,211.1 2.3
New Jersey 8,771 1,207.4 2.3
Hawaii 5,754 1,139.9 2.2
Ohio 12,139 1,125.4 2.2
Colorado 10,123 1,102.8 2.1
Others (1) 108,493 11,583.5 22.0
382,853 $52,458.9 100.0%
(1) No other state constitutes more than 2.0% of the total dollar amount
of loan production.
California mortgage loan production as a percentage of total mortgage loan
production (measured by principal balance) for the fiscal years ended February
28(29), 1994, 1993 and 1992 was 46%, 58% and 62%, respectively. Loan production
within California is geographically dispersed, which minimizes dependence on any
individual local economy. The continued decline in the percentage of the
Company's mortgage loan production in California is the result of implementing
its strategy to expand production capacity and market share outside of
California. At February 28, 1994, 77% of the Retail Division branch offices and
the Wholesale Division loan centers were located outside of California compared
to 64% at February 28, 1993. In addition, during the year ended February 28,
1994, the Correspondent Division opened an office in Georgia and the Consumer
Division opened offices in Texas, Tennessee and Kansas.
The following table sets forth the distribution by county of the Company's
California mortgage loan production for the year ended February 28, 1994.
Distribution by County of the Company's California
Mortgage Loan Production
Percentage
of
Total
(Dollar amounts Number Principal Dollar
in millions) of Loans Amount Amount
Los Angeles 33,055 $ 6,644.6 27.7%
Orange 12,879 2,454.9 10.2
Santa Clara 11,230 2,349.1 9.8
San Diego 12,520 2,090.7 8.7
Contra Costa 7,303 1,310.3 5.5
Alameda 6,819 1,207.8 5.0
Others (1) 52,894 7,952.2 33.1
136,700 $24,009.6 100.0%
(1) No other county in California constitutes 5.0% or more of the total
dollar amount of loan production.
Sale of Loans
As a mortgage banker, the Company customarily sells all loans that it
originates or purchases. The Company packages substantially all of its FHA-
insured and VA-guaranteed first mortgage loans into pools of loans. It sells
these pools in the form of modified pass-through mortgage-backed securities
guaranteed by the Government National Mortgage Association ("GNMA") to national
or regional broker-dealers. With respect to loans securitized through GNMA
programs, the Company is insured against foreclosure loss by the FHA or
partially guaranteed against foreclosure loss by the VA (at present, generally
25% to 50% of the loan, up to a maximum amount ranging from $22,500 to $46,000,
depending upon the amount of the loan). Conforming conventional loans may be
pooled by the Company and exchanged for securities guaranteed by FNMA or FHLMC,
which securities are then sold to national or regional broker-dealers. Loans
securitized through FNMA or FHLMC are sold on a non-recourse basis whereby
foreclosure losses are generally the responsibility of FNMA and FHLMC, and not
the Company. Alternatively, the Company may sell FHA-insured and VA-guaranteed
first mortgage loans and conforming conventional loans, and consistently sells
its jumbo loan production, to large buyers in the secondary market (which can
include national or regional broker-dealers) on a non-recourse basis. These
loans can be sold either on a whole-loan basis or in the form of pools backing
securities which are not guaranteed by any governmental instrumentality but
which may have the benefit of some form of external credit enhancement, such as
insurance, letters of credit, payment guarantees or senior/subordinated
structures. CMI, a real estate investment trust managed by a subsidiary of the
Company, may purchase at market prices both conforming and non-conforming
conventional loans from the Company. CMI purchased $300,484,000 and
$130,261,000 of conventional non-conforming loans during the years ended
February 28, 1994 and 1993, respectively. Substantially all loans sold by the
Company are sold without recourse, subject in the case of VA loans to the limits
of the VA guaranty described above. For the fiscal years ended February 28,
1994 and 1993, the aggregate loss experience of the Company on VA loans in
excess of the VA guaranty was approximately $2,096,000 and $993,000,
respectively. The losses increased from the year ended February 28, 1993 to the
year ended February 28, 1994 due to an increase in the size of the VA loan
servicing portfolio and general economic conditions in many parts of the
country.
The Company's data processing systems for processing and recording loan
sales have been integrated with the EDGE system. This increases efficiency and
contributes to a shorter warehousing period.
In order to offset the risk that a change in interest rates will result in
a decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that all of its inventory of conforming and government loans
and the maximum portion of its Committed Pipeline that may close be hedged with
forward contracts for the delivery of MBS. The inventory is then used to form
the MBS that will fill the forward delivery contracts. The Company hedges its
inventory and Committed Pipeline of jumbo mortgage loans by using whole-loan
sale commitments to ultimate buyers or by using temporary "cross hedges" with
sales of MBS since such loans are ultimately sold based on a market spread to
MBS. As such, the Company is not exposed to significant risk nor will it derive
any significant benefit from changes in interest rates on the price of the
inventory net of gains or losses of associated hedge positions. The correlation
between the price performance of the hedge instruments and the inventory being
hedged is very high due to the similarity of the asset and the related hedge
instrument. The Company is exposed to interest-rate risk to the extent that the
portion of loans from the Committed Pipeline that actually closes at the
committed price is less than the portion expected to close in the event of a
decline in rates and such decline in closings is not covered by options to
purchase MBS needed to replace the loans in process that do not close at their
committed price. The Company determines the portion of its Committed Pipeline
that it will hedge based on numerous factors, including the composition of the
Company's Committed Pipeline, the portion of such Committed Pipeline likely to
close, the timing of such closings and anticipated changes in interest rates.
Loan Servicing
Servicing includes collecting and remitting loan payments, making advances
when required, accounting for principal and interest, holding escrow (impound)
funds for payment of property taxes and hazard insurance, making any physical
inspections of the property, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering the loans. The Company receives a fee for servicing
mortgage loans, ranging generally from 1/4% to 1/2% per annum on the declining
principal balances of the loans. The servicing fee is collected by the Company
out of monthly mortgage payments.
The Company services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases. In addition, the Company
purchases bulk servicing contracts, also on a non-recourse basis, to service
single-family residential mortgage loans originated by other lenders. Servicing
contracts acquired through bulk purchases accounted for 7% of the Company's
mortgage servicing portfolio as of February 28, 1994.
At February 28, 1994, the Company's servicing portfolio of single-family
mortgage loans was stratified by interest rate as follows.
(Dollar
amounts in
millions) Total Portfolio at February 28, 1994
Weighted Servicing
Average Assets
Interest Principal Percent Maturity Balance
Rate Balance of Total (Years) (1)
7% and Under $37,250.6 44.0% 26.1 $ 516.0
7.01-8% 30,608.8 36.2 25.6 384.1
8.01-9% 10,730.9 12.7 25.8 153.9
9.01-10% 4,358.6 5.1 24.2 51.6
over 10% 1,676.0 2.0 23.6 20.4
$84,624.9 100.0% 25.8 $1,126.0
(1) Capitalized servicing fees receivable and purchased servicing
rights.
The weighted average interest rate of the single-family mortgage loans in
the Company's servicing portfolio at February 28, 1994 was 7.2% as compared with
8.0% at February 28, 1993. The loans produced and added to the servicing
portfolio in Fiscal 1994 generally bore interest at lower average rates than
those in the portfolio at February 28, 1993. At February 28, 1994, 77% of the
loans in the servicing portfolio bore interest at fixed rates and 23% bore
interest at adjustable rates. The weighted average service fee of the portfolio
was .344% at February 28, 1994.
The following table sets forth certain information regarding the Company's
servicing portfolio of single-family mortgage loans, including loans held for
sale and subserviced for others, for the periods indicated.
(Dollar amounts in
millions) Year Ended February 28(29),
Composition of
Servicing Portfolio
at Period End: 1994 1993 1992 1991 1990
FHA-Insured
Mortgage Loans $ 9,793.7 $ 8,233.8 $ 6,271.2 $ 4,474.1 $ 3,971.3
VA-Guaranteed
Mortgage Loans 3,916.0 3,307.2 2,438.3 1,910.2 1,778.7
Conventional
Mortgage Loans 70,915.2 42,876.8 18,833.5 9,296.3 6,761.5
Total Servicing
Portfolio $84,624.9 $54,417.8 $27,543.0 $15,680.6 $12,511.5
Beginning Servicing
Portfolio $54,417.8 $27,543.0 $15,680.6 $12,511.5 $11,952.7
Add:Loan Production 52,458.9 32,387.8 12,156.3 4,576.7 3,640.1
Bulk Servicing
Acquired 3,514.9 3,083.9 2,932.6 571.9 404.0
Less: Servicing
Transferred (1) (8.1) (12.6) (269.3) (859.5) (2,527.5)
Runoff (2) (25,758.6) (8,584.3) (2,957.2) (1,120.0) (957.8)
Ending Servicing
Portfolio $84,624.9 $54,417.8 $27,543.0 $15,680.6 $12,511.5
Delinquent Mortgage
Loans and Pending
Foreclosures at
Period End (3):
30 days 1.89% 2.08% 2.46% 3.09% 3.10%
60 days 0.29 0.41 0.59 0.61 0.62
90 days or more 0.40 0.60 0.80 0.76 0.78
Total Delinquencies 2.58% 3.09% 3.85% 4.46% 4.50%
Foreclosures
Pending 0.30% 0.38% 0.46% 0.40% 0.46%
(1) Servicing rights sold are deleted from the servicing portfolio at
the time of transfer to the acquirer. The Company generally
subservices such loans from the sales contract date to the transfer
date. Servicing rights transferred in the year ended February 28,
1990 included $1.5 billion of servicing rights sold in the prior
fiscal year and subserviced for the purchaser prior to transfer in
June and August 1989.
(2) Runoff refers to scheduled principal payments on loans and
unscheduled prepayments (partial prepayments or total prepayments due
to refinancing, modifications, sale, condemnation or foreclosure).
(3) As a percentage of the total number of loans serviced.
The following table sets forth the geographic distribution of the Company's
servicing portfolio of single-family mortgage loans, including loans held for
sale and subserviced for others, as of February 28, 1994.
Percentage of
Principal
Balance
Serviced
California 48.5%
Florida 3.8
Texas 3.6
Washington 3.5
Massachusetts 3.2
Illinois 2.7
New Jersey 2.5
New York 2.4
Hawaii 2.2
Arizona 2.1
Pennsylvania 2.1
Other (1) 23.4
100.0%
(1) No other state contains more than 2.0% of the properties securing loans
in the Company's servicing portfolio.
The Company's servicing portfolio is subject to reduction by normal
amortization or by prepayment or foreclosure of outstanding loans. In addition,
the Company has sold in the past and may sell in the future, a portion of its
portfolio of loan servicing rights to other mortgage servicers. In general, the
decision to sell servicing rights or newly originated loans on a servicing-
released basis is based upon management's assessment of the Company's cash
requirements, the Company's debt-to-equity ratio and other significant financial
ratios, the market value of servicing rights and the Company's current and
future earnings objectives.
It is the Company's strategy to build and retain its servicing portfolio.
Loans are serviced from two facilities, one in Simi Valley, California and one
in Plano, Texas (see "Item 2--Properties"). The Company believes that it has
developed systems that enable it to service mortgage loans efficiently and
therefore enhance the returns it can earn from its investments in servicing
rights. For example, data elements pertaining to loans originated or purchased
by the Company are entered into the Company's EDGE system at the time of
origination or purchase and are transferred to the loan servicing system without
manual re-entry. Customer service representatives in both the California and
Texas facilities have access to on-line screens containing all pertinent data
about a customer's account, thus eliminating the need to refer to paper files
and shortening the average length of a customer call. The Company has also
purchased a new telephone system which enables it to control the flow of calls
to both locations. The Company's payment processing equipment can process
10,000 checks per hour, which enables the Company to deposit all cash on the
same day it is received. Many tax and insurance remittances on behalf of
borrowers are processed electronically, thus eliminating the need for printed
documentation and shortening the processing time required.
The Company believes that the earnings from its servicing portfolio may
substantially offset the effect of interest rate fluctuations on loan production
earnings. In general, the value of the Company's servicing portfolio and the
income generated therefrom improve as interest rates increase and decline when
interest rates fall. Generally, in an environment of declining interest rates,
which prevailed through most of the Company's fiscal year ended February 28,
1994, the rate of current and projected future prepayments increases, resulting
in an increased rate of amortization of capitalized servicing fees receivable
and purchased servicing rights. Such amortization, net of servicing hedge gain,
is deducted from loan administration revenue. At the same time, the decline in
interest rates contributes to high levels of loan production (particularly
refinancings). Generally, in an environment of increasing interest rates, which
prevailed at the end of the Company's fiscal year ended February 28, 1994, the
rate of current and projected future prepayments decreases, resulting in a
decreased rate of amortization of capitalized servicing fees receivable and
purchased servicing rights, and a decrease in income from its servicing
portfolio hedging activities. The increase in interest rates also causes loan
production (particularly refinancings) to decline.
During the year ended February 28, 1994, the increased loan production
revenue related to the increase in loan production and the increase in loan
administration income related to the resulting growth in the servicing portfolio
have more than offset the effects of the increased amortization, net servicing
hedge gain, of capitalized servicing fees receivable and purchased servicing
rights. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
Financing of Mortgage Banking Operations
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently relies on sales of commercial paper supported by its unsecured
mortgage warehouse credit facility, medium-term note issuances, pre-sale funding
facilities, mortgage-backed securities and whole loan reverse-repurchase
agreements, subordinated notes and cash flow from operations. The Company
estimates that it has available committed and uncommitted credit facilities
aggregating approximately $12 billion at February 28, 1994. In addition, in the
past the Company has relied on bank borrowings collateralized by mortgage loans
held for sale, servicing-secured bank facilities, privately-placed financings
and public offerings of preferred and common stock. For further information on
the material terms of the borrowings utilized by the Company to finance its
inventory of mortgage loans and mortgage-backed securities and its investment in
servicing rights, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company continues to investigate and pursue alternative and supplementary
methods to finance its operations through the public and private capital
markets. These may include such methods as mortgage loan sale transactions
designed to expand the Company's financial capacity and reduce its cost of
capital and the securitization of servicing income cash flows.
Seasonality
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In recent years, the impact of the typical seasonal pattern was
somewhat offset by strong refinance activity caused by low mortgage interest
rates and by an increase in the Company's market share.
C. Countrywide Asset Management Corporation
The Company, through its subsidiary Countrywide Asset Management
Corporation ("CAMC"), manages the investments and oversees the day-to-day
operations of CMI and its subsidiaries. For performing these services, CAMC
receives a base management fee of 1/8 of 1% per annum of CMI's average invested
assets not pledged to secure CMOs. CAMC also receives a management fee equal to
3/8 of 1% per annum of the average amounts outstanding under CMI's warehouse
lines of credit. In addition, CAMC receives incentive compensation equal to 25%
of the amount by which the CMI annualized return on equity exceeds the ten-year
U.S. treasury rate plus 2%. CAMC waived all fees pursuant to the above for
calendar year 1993. In addition, in 1993 CAMC absorbed $900,000 of operating
expenses incurred in connection with its duties under the Management Agreement.
CMI began paying all expenses of the new operations to CAMC in June 1993. As of
December 31, 1993 and 1992, the consolidated total assets of CMI were $1.4
billion and $714 million, respectively. During the fiscal years ended February
28, 1994 and 1993, CAMC earned $0.1 million and $0.8 million, respectively, in
base management fees from CMI and no incentive compensation. The Company and
CAMC own 1,120,000 shares or approximately 3.50% of the common stock of CMI.
D. Related Activities
Through various other subsidiaries, the Company conducts business in a
number of areas related to the mortgage banking business. The following is a
brief description of the activities of these subsidiaries.
The Company operates a securities broker-dealer, Countrywide Securities
Corporation ("CSC"), which is a member of the National Association of Securities
Dealers, Inc. and the Securities Investor Protection Corporation. CSC sells
mortgage-backed securities on an odd-lot basis at prices higher than those
available in the wholesale, round-lot market and subordinate structures of whole
loan CMOs.
The Company's insurance agency subsidiary, Countrywide Agency, Inc., acts
as an agent for the sale of homeowners, fire, flood, mortgage life and
disability insurance to mortgagors whose loans are serviced by CFC.
Another subsidiary of the Company, Countrywide Title Corporation, serves as
trustee under deeds of trust in connection with the Company's mortgage loan
production in California.
Countrywide Servicing Exchange ("CSE") is a national servicing brokerage
and consulting firm. CSE acts as an agent facilitating transactions between
buyers and sellers of bulk servicing contracts.
While no longer engaged in the business of originating mobile home
installment contracts, a subsidiary of the Company, Countrywide Partnership
Investments, Inc., owns and operates five mobile home parks in Houston and Fort
Worth, Texas and Jacksonville, Florida. The Company's investment in the mobile
home parks and the mobile home coaches was approximately $18 million at
February 28, 1994.
E. Regulation
The Company's mortgage banking business is subject to the rules and
regulations of HUD, FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans. Those rules and regulations,
among other things, prohibit discrimination, provide for inspections and
appraisals, require credit reports on prospective borrowers and fix maximum loan
amounts. Moreover, FHA lenders such as the Company are required annually to
submit to the Federal Housing Commissioner audited financial statements, and
GNMA requires the maintenance of specified net worth levels (which vary
depending on the amount of GNMA securities issued by the Company). The Company's
affairs are also subject to examination by the Federal Housing Commissioner at
all times to assure compliance with the FHA regulations, policies and
procedures. Mortgage origination activities are subject to the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act, Home Mortgage Disclosure Act and
the Real Estate Settlement Procedures Act and the regulations promulgated
thereunder which prohibit discrimination, require the disclosure of certain
basic information to mortgagors concerning credit and settlement costs, limit
payment for settlement services to the reasonable value of the services rendered
and require the maintenance and disclosure of information regarding the
disposition of mortgage applications based on race, gender, geographical
distribution and income level.
Additionally, there are various state laws and regulations affecting the
Company's mortgage banking operations. The Company is licensed as a mortgage
banker or retail installment lender in those states in which such license is
required.
Conventional mortgage operations may also be subject to state usury
statutes. FHA and VA loans are exempt from the effect of such statutes.
Securities broker-dealer operations are subject to federal and state
securities laws, as well as the rules of both the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
Insurance agency operations are subject to insurance laws of each of the
states in which the Company conducts such operations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Prospective Trends" for discussion of current proposed
federal legislation.
F. Competition
The mortgage banking industry is highly competitive and fragmented. The
Company competes with other financial intermediaries (such as mortgage bankers,
state and national banks, savings and loan associations, credit unions and
insurance companies) and mortgage banking subsidiaries or divisions of
diversified companies. The Company competes principally by offering products
with competitive features, by emphasizing the quality of its service and by
pricing its range of products at competitive rates.
In recent years, the aggregate share of the United States market for
residential mortgage loans that is served by mortgage bankers has risen,
principally due to the decline in the savings and loan industry. According to
industry statistics, mortgage bankers' aggregate share of this market increased
from approximately 19% during calendar year 1989 to approximately 52% during
calendar year 1993. The Company believes that it has benefited from this trend.
G. Employees
At February 28, 1994, the Company employed 4,867 persons, 3,908 of whom
were engaged in production activities, 779 were engaged in loan administration
activities, and 180 in other activities. None of the employees was represented
by a bargaining agent.
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company and its
subsidiaries are located in leased space at 155 North Lake Avenue and 35 North
Lake Avenue, Pasadena, California, and consist of approximately 241,000 square
feet. The principal leases covering such space expire in the year 2001. The
Company also owns an office facility of approximately 300,000 square feet
located on 43.5 acres in Simi Valley, California, which is used primarily to
house the Company's loan servicing and data processing operations. The Company
leases or owns office space in several other buildings in the Pasadena area.
On July 26, 1993, the Company purchased a 253,000 square foot office
building situated on eighteen acres in Plano, Texas. The new facility will
house a portion of the Company's loan servicing, loan production and data
processing operations. In addition, this facility provides the Company with a
business recovery site.
CFC leases office space for each of its Retail Division branch and
satellite offices (approximately 210 to 2,400 square feet), Wholesale Division
branch offices (approximately 1,360 to 4,557 square feet), Correspondent
Division offices (approximately 7,416 to 19,584 square feet) and the Consumer
Division offices (approximately 4,609 to 8,856 square feet). The leases vary in
duration and escalation provisions. In general, leases extend through fiscal
year 1999, contain buyout provisions and provide for escalation tied to the
Consumer Price Index or increases in operating costs of the premises.
During fiscal 1987, the Company, through several subsidiaries, purchased 98
acres in Florida and 185 acres in Texas for use as mobile home parks. Of the
283 acres purchased, 215 acres were developed, 34 acres were undeveloped and 34
acres were wetlands. As of February 28, 1994, the acquired properties consisted
of 1,356 completed mobile home pads, occupied by 741 mobile homes owned by the
Company and 408 mobile homes owned by third parties, with 207 vacant pads.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange
("NYSE") and the Pacific Stock Exchange (Symbol: CCR). The following table sets
forth the high and low sales prices (as reported by the NYSE) for the Company's
common stock and the amount of cash dividends declared for the fiscal years
ended February 28, 1994 and 1993, both adjusted to reflect the 3-for-2 stock
split paid May 3, 1994 and the 5% stock dividend paid April 23, 1993.
Cash Dividends
Fiscal 1994 Fiscal 1993 Declared
Fiscal Fiscal
Quarter High Low High Low 1994 1993
First $23.25 $16.92 $16.25 $10.85 $0.07 $0.06
Second 22.17 17.25 19.84 12.28 0.07 0.07
Third 23.33 16.25 18.81 14.45 0.07 0.07
Fourth 19.08 15.25 22.07 14.21 0.08 0.07
The Company has declared and paid cash dividends on its common stock
quarterly since 1979, except that no cash dividend was declared in the fiscal
quarter ended February 28, 1982. For the fiscal years ended February 28, 1994
and 1993, the Company declared quarterly cash dividends aggregating $0.29 per
share and $0.25 per share, respectively. On March 21, 1994, the Company
declared a quarterly cash dividend of $0.08 per common share, paid April 26,
1994. The Company also declared a 3-for-2 stock split paid on May 3, 1994.
The ability of the Company to pay dividends in the future is limited by
various restrictive covenants in the debt agreements of the Company; the
earnings, cash position and capital needs of the Company; general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under certain of its debt agreements,
including its guaranties of CFC's mortgage warehouse credit facility, from
paying dividends on any capital stock (other than the preferred stock so long as
no event of default under the agreements exists at the time) in excess of the
greater of: (i) the after-tax net income of the Company, determined in
accordance with generally accepted accounting principles, for the fiscal year to
the end of the quarter to which the dividends relate; and (ii) the aggregate
amount of dividends paid on common stock during the immediately preceding year.
The primary source of funds for payments to stockholders by the Company is
dividends received from its subsidiaries. Accordingly, such payments by the
Company in the future also depend on various restrictive covenants in the debt
obligations of its subsidiaries; the earnings, the cash position and the capital
needs of its subsidiaries; as well as laws and regulations applicable to its
subsidiaries. Unless the Company and CFC each maintain specified minimum levels
of net worth and certain other financial ratios, dividends could not be paid by
the Company and CFC in compliance with certain of CFC's debt obligations
(including the mortgage warehouse credit facility). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
The Company has paid stock dividends and declared stock splits since 1978
as follows: 50% in October 1978, 50% in July 1979; 15% in November 1979; 15% in
May 1980; 30% in November 1980; 30% in May 1981; 3% in February 1982; 2% in May
1982; 0.66% in April 1983; 1% in July 1983; 2% in April 1984; 2% in November
1984; 2% in June 1985; 2% in October 1985; 2% in March 1986; 3-for-2 split in
September 1986; 2% in April 1987; 2% in April 1988; 2% in October 1988; 2% in
November 1989; 3-for-2 split in July 1992; 5% in April 1993; and 3-for-2 split
in May 1994.
As of April 27, 1994, there were 1,960 shareholders of record of the
Company's common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years ended February 28(29),
(Dollar amounts in
thousands, except per
share data) 1994 1993 1992 1991 1990
Selected Statement of
Earnings Data:
Revenues:
Loan origination fees $379,533 $241,584 $91,933 $38,317 $31,823
Gain on sale of loans 88,212 67,537 38,847 24,236 10,756
Loan production revenue 467,745 309,121 130,780 62,553 42,579
Interest earned 376,225 211,542 115,213 83,617 78,493
Interest charges (275,906) (148,765) (81,959) (73,428) (74,687)
Net interest income 100,319 62,777 33,254 10,189 3,806
Loan servicing income 307,477 177,291 94,830 66,486 55,283
Less amortization, net
of servicing hedge gain (168,777) (77,287) (36,768) (24,871) (18,732)
Loan administration
income, net 138,700 100,004 58,062 41,615 36,551
Gain on sale of
servicing - - 4,302 6,258 10,674
Commissions, fees and
other income 48,816 33,656 19,714 14,396 10,663
Total revenues 755,580 505,558 246,112 135,011 104,273
Expenses:
Salaries and related
expenses 227,702 140,063 72,654 48,961 42,187
Occupancy and other
office expenses 101,691 64,762 36,645 24,577 22,821
Guarantee fees 57,576 29,410 13,622 9,529 6,918
Marketing expenses 26,030 12,974 5,015 3,117 2,558
Other operating
expenses 43,481 24,894 17,849 11,642 7,982
Total expenses 456,480 272,103 145,785 97,826 82,466
Earnings before income
taxes 299,100 233,455 100,327 37,185 21,807
Provision for income
taxes 119,640 93,382 40,131 14,874 8,722
Net earnings $179,460 $140,073 $60,196 $22,311 $13,085
Per Share Data (1):
Primary - $1.97 $1.65 $0.89 $0.48 $0.31
Fully diluted - $1.94 $1.52 $0.81 $0.43 $0.31
Cash dividends per share $0.29 $0.25 $0.15 $0.12 $0.11
Weighted average shares
outstanding -
Primary 90,501,000 82,514,000 63,800,000 41,576,000 41,540,000
Fully diluted 92,445,000 92,214,000 74,934,000 53,679,000 45,819,000
Selected Balance Sheet
Data at End of Period:
Total assets $5,585,521 $ 3,299,133 $2,409,974 $ 1,121,999 $839,366
Short-term debt $3,111,945 $ 1,579,689 $1,046,289 $ 459,470 $321,598
Long-term debt $1,197,096 $ 734,762 $ 383,065 $ 153,811 $106,005
Convertible preferred
stock - $ 25,800 $ 37,531 $ 38,098 -
Common shareholders'
equity $ 880,137 $ 693,105 $ 558,617 $ 133,460 $117,465
Operating Data (dollar
amounts in millions):
Loan servicing portfolio
(2) $84,678 $54,484 $27,546 $15,684 $12,515
Volume of loans
originated $52,459 $32,388 $12,156 $ 4,577 $ 3,640
(1) Adjusted to reflect subsequent stock dividends and splits.
(2) Includes warehoused loans and loans under subservicing agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's strategy is concentrated on three components of its business:
loan production, loan servicing and businesses ancillary to mortgage lending.
See "Item 1. Business--Mortgage Banking Operations." The Company intends to
continue its efforts to increase its market share of, and realize increased
income from, its loan production. In addition, the Company is engaged in
building its loan servicing portfolio because of the returns it can earn from
such investment and because the Company believes that servicing income
characteristics are countercyclical to the effect of interest rate increases on
loan origination income. Finally, the Company is involved in business
activities complementary to its mortgage banking business, such as acting as
agent in the sale of homeowners, fire, flood, mortgage life and disability
insurance to its mortgagors, brokering servicing rights and selling odd-lot and
other mortgage-backed securities.
The Company's results of operations historically have been primarily
influenced by: (i) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of the
various segments of the economy and the demographics of the Company's lending
markets; (ii) the direction of interest rates and (iii) the relationship between
mortgage interest rates and the cost of funds.
During the fiscal year ended February 29, 1992 ("Fiscal 1992"), the
Company's market share increased to an estimated 2.1% of all mortgage
originations from 1% in Fiscal 1991 due primarily to the continued withdrawal of
savings and loans and other competitors from the market or the curtailment of
their operations due to an inability to access credit. The Company also
experienced growth in its adjustable-rate mortgage ("ARM") production due to the
relative competitiveness of the Company's ARM products and the continued
development of the secondary market for ARMs. The growth in the Company's
servicing portfolio during Fiscal 1992 was the result of increased loan
production volume and the acquisition of bulk servicing rights.
The fiscal year ended February 28, 1993 ("Fiscal 1993") was a then-record
performance year for the Company. The Company became the leader in single-
family mortgage loan originations in calendar year 1992. This performance was
due to: (i) the development of a stronger capital base that supported increased
production; (ii) implementation of an expansion strategy for the production
divisions designed to penetrate new markets and expand in existing markets,
particularly outside California, and to further increase market share in both
the purchase and refinance market segments; (iii) development of state-of-the-
art technologies that expanded the Company's production and servicing
capabilities and capacity and (iv) a decline in average mortgage interest rates.
In Fiscal 1993, the Company's market share increased to approximately 4% of the
single-family mortgage origination market. During the year ended February 28,
1993, the Company's servicing portfolio nearly doubled to $54.5 billion.
The Company's performance during the fiscal year ended February 28, 1994
("Fiscal 1994") set new operating records. In calendar year 1993, the Company
became the nation's largest servicer of single-family mortgages and at February
28, 1994 had a servicing portfolio of $84.7 billion, an increase of 55% over the
portfolio at the end of Fiscal 1993. This servicing portfolio growth was
accomplished through increased loan production volume of low-coupon mortgages.
In addition, the Company acquired bulk servicing rights with an aggregate
principal balance of $3.4 billion. The Company also maintained its position as
the nation's leader in originations of single-family mortgages for the second
consecutive year. This performance was due to: (i) continued implementation of
the Company's production expansion strategy designed to penetrate new markets
and expand in existing markets, particularly outside California, and to further
increase market share; (ii) a continued decline in average mortgage interest
rates that prevailed during most of 1993 and (iii) introduction of new
technologies that improved productivity. In Fiscal 1994, the Company's market
share increased to approximately 5.1% of the estimated $1.0 trillion single-
family mortgage origination market, up from approximately 4% of the estimated
$825 billion market in Fiscal 1993.
RESULTS OF OPERATIONS
Fiscal 1994 Compared with Fiscal 1993
Revenues for Fiscal 1994 increased 49% to $755.6 million from $505.6
million for Fiscal 1993. Net earnings increased 28% to $179.5 million in Fiscal
1994 from $140.1 million in Fiscal 1993. The increase in revenues and net
earnings for Fiscal 1994 reflected increased loan production and continued
growth of the loan servicing portfolio. The increase in revenues was partially
offset by an increase in expenses.
The total volume of loans produced increased 62% to $52.5 billion for
Fiscal 1994 from $32.4 billion for Fiscal 1993. Refinancings totaled $39.2
billion, or 75% of total fundings for Fiscal 1994, as compared to $23.6 billion
or 73% of total fundings for Fiscal 1993. ARM loan production totaled $10.1
billion, or 19% of total fundings for Fiscal 1994, as compared to $9.2 billion
or 28% of total fundings for Fiscal 1993. Production in the Company's Retail
Division increased to $7.7 billion for Fiscal 1994 compared to $4.6 billion for
Fiscal 1993. Production in the Company's Wholesale Division increased to $21.5
billion (which included approximately $10.9 billion of originated loans and
$10.6 billion of purchased loans) for Fiscal 1994 compared to $15.5 billion
(which included approximately $8.7 billion of originated loans and $6.8 billion
of purchased loans) for Fiscal 1993. The Company's Correspondent Division
purchased $19.4 billion in mortgage loans for Fiscal 1994 compared to $10.8
billion for Fiscal 1993. Production in the Company's Consumer Division
increased to $3.9 billion for Fiscal 1994 compared to $1.5 billion for Fiscal
1993. The factors which affect the relative volume of production among the
Company's four divisions include pricing decisions and the relative
competitiveness of such pricing, the level of real estate and mortgage lending
activity in each Division's markets, and the success of each Division's sales
and marketing efforts.
At February 28, 1994 and 1993, the Company's pipeline of loans in process
was $7.6 billion and $5.9 billion, respectively. In addition, at February 28,
1994, the Company has committed to make loans in the amount of $1.6 billion,
subject to property identification and borrower qualification. At February 28,
1993, the amount of loan commitments subject to property identification and
borrower qualification was not material. Historically, approximately 43% to 75%
of the pipeline of loans in process has funded. In Fiscal 1994 and Fiscal 1993,
the Company received 515,104 and 340,242 new loan applications, respectively, at
an average daily rate of $282 million and $191 million, respectively. The
following actions were taken during Fiscal 1994 on the total applications
received during that year: 358,257 loans (70% of total applications received)
were funded and 98,809 applications (19% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The following
actions were taken during Fiscal 1993 on the total applications received during
that year: 212,765 loans (63% of total applications received) were funded and
79,991 applications (24% of total applications received) were either rejected by
the Company or withdrawn by the applicant. 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 and gain on sale of loans benefited from the increase
in loan production. The percentage increase in loan origination fees was less
than the percentage increase in total production primarily because of an
increase in the percentage of production attributable to products that contain
lower origination fees in their pricing structure. In general, loan origination
fees and gain on sale of loans are affected by numerous factors including loan
pricing decisions, volatility, the general direction of interest rates and the
volume of loans produced.
Net interest income (interest earned net of interest charges) increased to
$100.3 million for Fiscal 1994 from $62.8 million for Fiscal 1993. Consolidated
net interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($110.1 million and $59.4 million for
Fiscal 1994 and Fiscal 1993, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($68.0 million and $21.3 million for
Fiscal 1994 and Fiscal 1993, respectively) and (iii) interest income earned from
the escrow balances associated with the Company's servicing portfolio ($58.2
million and $21.8 million for Fiscal 1994 and Fiscal 1993, 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 loan production.
The increase in interest expense on the investment in servicing rights resulted
primarily from an increase in the payments of interest to certain investors
pursuant to customary servicing arrangements with regard to paid-off loans which
payments exceeded the interest earned on these loans through their respective
payoff dates ("Interest Costs Incurred on Payoffs"). The increase in net
interest income earned from the escrow balances was related to larger escrow
account balances (caused by a larger servicing portfolio and an increase in the
prepayment rate of the Company's servicing portfolio), offset somewhat by a
decline in the earnings rate from Fiscal 1993 to Fiscal 1994.
During Fiscal 1994, loan administration income was positively affected by
the continued growth of the loan servicing portfolio. At February 28, 1994, the
Company serviced $84.7 billion of loans (including $0.6 billion of loans
subserviced for others) compared to $54.5 billion (including $0.6 billion of
loans subserviced for others) at February 28, 1993, a 55% increase. The growth
in the Company's servicing portfolio during Fiscal 1994 was the result of loan
production volume and the acquisition of bulk servicing rights, partially offset
by prepayments, partial prepayments and scheduled amortization of mortgage
loans. The weighted average interest rate of the mortgage loans in the
Company's servicing portfolio at February 28, 1994, was 7.2% compared to 8.0% at
February 28, 1993. It is the Company's strategy to build and retain its
servicing portfolio because of the returns the Company can earn from such
investment and because the Company believes that servicing income is
countercyclical to loan origination income. See "Prospective Trends--Market
Factors."
During Fiscal 1994, the prepayment rate of the Company's servicing
portfolio was 35%, as compared to 20% for Fiscal 1993. In general, the
prepayment rate is affected by the relative level of mortgage interest rates,
activity in the home purchase market and the relative level of home prices in a
particular market. The increase in the prepayment rate is primarily
attributable to increased refinance activity caused by generally declining
mortgage interest rates. During most of Fiscal 1994, interest rates continued
their decline to historically low levels although they began to rise toward the
end of the year. Significant unanticipated prepayments in the Company's
servicing portfolio could have a material adverse effect on the Company's future
operating results or liquidity. The primary means used by the Company to reduce
the sensitivity of its earnings to changes in interest rates is through a strong
production capability and a growing servicing portfolio. To further mitigate
the effect on earnings of higher amortization (which is deducted from loan
servicing income) resulting from increased prepayment activity, the Company
purchases call options that increase in value when interest rates decline (the
"Servicing Hedge").
For Fiscal 1994, total amortization amounted to $242.2 million,
representing an annual rate of 28% of average capitalized servicing fees
receivable and purchased servicing rights ("Servicing Assets"). Amortization
for Fiscal 1994 was partially offset by net Servicing Hedge gains which
aggregated $73.4 million. For Fiscal 1993, total amortization was $151.4
million, or an annual rate of 29% of the average Servicing Assets. This
amortization amount was comprised of $101.4 million related to current and
projected prepayment rates and $50.0 million resulting from Servicing Hedge
gains, in accordance with accounting policies described in Notes A7 and A8 to
the Company's Consolidated Financial Statements. Amortization for Fiscal 1993
was offset by Servicing Hedge gains which aggregated $74.1 million. The factors
affecting the rate of amortization recorded in an accounting period include the
level of prepayments during the period, the change in prepayment expectations
and the amount of Servicing Hedge gains in excess of amortization due to
impairment.
The following summarizes the notional amounts of servicing hedge
transactions.
Long Call
Long Options
Call on U.S.
Options Treasury
(Dollar amounts in millions) on MBS Futures
Balance, March 1, 1991 $ - $ -
Additions 560 -
Balance, February 29, 1992 560 -
Additions 2,287 700
Dispositions 2,847 700
Balance, February 28, 1993 - -
Additions 4,700 2,520
Dispositions 2,700 750
Balance, February 28, 1994 $2,000 $1,770
The long call options purchased by the Company protect the value of the
investment in servicing rights from the effects of increased prepayment activity
that generally results from declining interest rates. To the extent that
interest rates increase, as they did toward the end of Fiscal 1994, the value of
the servicing rights increases while the value of the options declines. The
value (i.e., replacement cost) of the options can decline below the remaining
unamortized cost of such options, but the options cannot expose the Company to
loss beyond its initial outlay to acquire them. Although the replacement cost
of the call options tends to decline when interest rates rise, the options
continue to provide protection over their remaining term against a decline in
interest rates below the level implied at purchase by their exercise price.
Accordingly, the Company amortizes option premiums over the lives of the
respective options. Any unamortized premium remaining when an option gain is
realized (through exercise or sale) is deducted from such gain. At February 28,
1994, the call options on mortgage-backed securities, which expire from March
through September 1994, had an unamortized cost of approximately $19 million and
a replacement value of approximately $1 million. At February 28, 1994, the call
options on U.S. treasury futures, which expire in September 1994, had an
unamortized cost of approximately $21 million and a replacement value of
approximately $7 million. To the extent that interest rates remain at the
higher levels to which they rose subsequent to the end of Fiscal 1994, the
Company should be able to replace existing Servicing Hedge positions at a cost
significantly below that previously paid for option premiums providing such
coverage.
During Fiscal 1994, the Company acquired bulk servicing rights for loans
with principal balances aggregating $3.4 billion at a price of $46.6 million or
1.36% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1993, the Company acquired bulk servicing
rights for loans with principal balances aggregating $2.7 billion at a price of
$34.3 million or 1.29% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
Salaries and related expenses are summarized below for Fiscal 1994 and
Fiscal 1993.
(Dollar amounts in
thousands) Fiscal 1994
Loan
Production Administra Other
Activities -tion Activities Total
Base Salaries $123,454 $18,974 $4,730 $147,158
Incentive Bonus 54,460 323 2,663 57,446
Payroll Taxes and
Benefits 18,896 3,544 658 23,098
Total Salaries and
Related Expenses $196,810 $22,841 $8,051 $227,702
Average Number of
Employees 3,351 680 145 4,176
(Dollar amounts in
thousands) Fiscal 1993
Loan
Production Administra Other
Activities -tion Activities Total
Base Salaries $ 73,114 $13,801 $ 4,666 $91,581
Incentive Bonus 32,455 145 2,502 35,102
Payroll Taxes and
Benefits 10,253 2,470 657 13,380
Total Salaries and
Related Expenses $115,822 $16,416 $ 7,825 $140,063
Average Number of
Employees 2,024 490 118 2,632
The amount of salaries increased during Fiscal 1994 primarily due to the
increased number of employees resulting from increased loan production and an
increased servicing portfolio. Incentive bonuses earned during Fiscal 1994
increased primarily due to increased loan production and increases in loan
production personnel.
Occupancy and other office expenses for Fiscal 1994 increased 57% to $101.7
million from $64.8 million for Fiscal 1993. This increase was attributable
primarily to the expansion of the Retail and Wholesale Divisions' branch
networks. As of February 28, 1994, there were 295 Retail Division branch
offices (including 110 satellite offices and nine regional support centers) and
80 Wholesale Division branch offices (including 11 regional support centers).
As of February 28, 1993, there were 167 Retail Division branch offices
(including 45 satellite offices and two regional support centers) and 55
Wholesale Division branch offices (including nine regional support centers). In
addition, the increase in the Company's loan production and loan servicing
portfolio has resulted in an increase in occupancy and other office expenses
related to the Company's central office.
Guarantee fees (fees paid to guarantee timely and full payment of principal
and interest on mortgage-backed securities and whole loans sold to permanent
investors and to transfer the recourse provisions of the loans in the servicing
portfolio) for Fiscal 1994 increased 96% to $57.6 million from $29.4 million for
Fiscal 1993. This increase resulted primarily from an increase in the servicing
portfolio.
Marketing expenses for Fiscal 1994 increased 101% to $26.0 million from
$13.0 million for Fiscal 1993. The increase in marketing expenses reflected the
Company's strategy to expand its market share, particularly in the home purchase
lending market.
Other operating expenses for Fiscal 1994 increased over Fiscal 1993 by
$18.6 million, or 75%. This increase was due primarily to several factors,
including increased loan production, a larger servicing portfolio and expansion
of loan production capabilities.
Profitability of Loan Production and Servicing Activities
In Fiscal 1994, the Company's pre-tax income from its loan production
activities (which include loan origination and purchases, warehousing and sales)
was $250.1 million. In Fiscal 1993, the Company's comparable pre-tax earnings
were $175.8 million. The increase of $74.3 million is primarily attributed to
higher loan production. In Fiscal 1994, the Company's pre-tax income from its
loan servicing activities (which include administering the loans in the
servicing portfolio, selling homeowners and other insurance and acting as tax
payment agent) was $46.6 million as compared to $53.0 million in Fiscal 1993.
The additional loan administration revenues derived from a larger portfolio
during Fiscal 1994 were more than offset by an increase in amortization of the
Servicing Assets, net of gains from the Servicing Hedge, and an increase in
Interest Costs Incurred on Payoffs.
Fiscal 1993 Compared with Fiscal 1992
Revenues for Fiscal 1993 increased 105% to $505.6 million from $246.1
million for Fiscal 1992. Net earnings increased 133% to $140.1 million in
Fiscal 1993 from $60.2 million in Fiscal 1992. The increase in revenues and net
earnings for Fiscal 1993 reflected increased loan production, continued growth
of the loan servicing portfolio and improved performance of certain of the
Company's other operations. The increase in revenues was partially offset by an
increase in expenses.
The total volume of loans produced increased 166% to $32.4 billion for
Fiscal 1993 from $12.2 billion for Fiscal 1992. Refinancings totaled $23.6
billion, or 73% of total fundings for Fiscal 1993, as compared to $7.1 billion
or 58% of total fundings for Fiscal 1992. The Company also experienced growth
in its ARM production due to the competitiveness of the Company's ARM products
and the continued development of the secondary market for ARMs. ARM loan
production totaled $9.2 billion, or 28% of total fundings for Fiscal 1993, as
compared to $2.5 billion or 21% of total fundings for Fiscal 1992. Production
in the Company's Retail Division increased to $4.6 billion for Fiscal 1993
compared to $2.8 billion for Fiscal 1992. Production in the Company's Wholesale
Division increased to $15.5 billion (which included approximately $8.7 billion
of originated loans and $6.8 billion of purchased loans) for Fiscal 1993
compared to $5.1 billion (which included approximately $3.7 billion of
originated loans and $1.4 billion of purchased loans) for Fiscal 1992. The
Company's Correspondent Division purchased $10.8 billion in mortgage loans for
Fiscal 1993 compared to $3.9 billion for Fiscal 1992. Production in the
Company's Consumer Division increased to $1.5 billion for Fiscal 1993 compared
to $0.4 billion for Fiscal 1992.
At February 28(29), 1993 and 1992, the Company's pipeline of loans in
process was $5.9 billion and $4.4 billion, respectively. Historically,
approximately 43% to 75% of the pipeline of loans in process has funded. In
Fiscal 1993 and Fiscal 1992, the Company received 340,242 and 146,410 new loan
applications, respectively, at an average daily rate of $191 million and $82
million, respectively. Of the total applications received for Fiscal 1993,
212,765 loans (63% of total applications received) were funded in Fiscal 1993
and 79,991 applications (24% of total applications received) were either
rejected by the Company or withdrawn by the applicant in Fiscal 1993. For
Fiscal 1992, 71,399 loans (49% of total applications received) were funded in
Fiscal 1992 and 31,307 applications (21% of total applications received) were
either rejected by the Company or withdrawn by the applicant in Fiscal 1992.
The increase from Fiscal 1992 to Fiscal 1993 in the percentage of total
applications that were funded is caused by the decline from Fiscal 1992 to
Fiscal 1993 in the percentage of applications received that were in process at
the respective year-end, which were 13% and 30% at February 28, 1993 and
February 29, 1992, respectively.
Loan origination fees and gain on sale of loans benefited from the increase
in loan production as quantified above. The percentage increase in loan
origination fees was less than the percentage increase in total production
primarily because of the larger increase in production by the divisions that,
because of lower cost structures, charge lower origination fees per dollar
loaned.
Net interest income (interest earned net of interest charges) increased to
$62.8 million for Fiscal 1993 from $33.3 million for Fiscal 1992. Consolidated
net interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($59.4 million and $18.2 million for
Fiscal 1993 and Fiscal 1992, respectively); (ii) interest expense on the debt
financing the Company's investment in servicing rights ($21.3 million and $11.2
million for Fiscal 1993 and Fiscal 1992, respectively); (iii) interest income
earned from the escrow balances associated with the Company's servicing
portfolio ($21.8 million and $13.0 million for Fiscal 1993 and Fiscal 1992,
respectively); and (iv) prior to ceasing operations of Countrywide Thrift and
Loan ("CTL"), the Company's thrift subsidiary, net interest income earned from
finance receivables ($3.4 million and $10.8 million for Fiscal 1993 and Fiscal
1992, 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 loan production and an improvement in spreads between mortgage rates
and short-term borrowing rates. The decline in short-term borrowing rates was
due to market conditions and the availability of lower cost financing resulting
from improvements in the Company's debt ratings. The increase in interest
expense on the investment in servicing rights resulted primarily from an
increase in Interest Costs Incurred on Payoffs. The increase in net interest
income earned from the escrow balances was related to larger escrow account
balances (caused by a larger servicing portfolio), offset somewhat by a decline
in the earnings rate from Fiscal 1992 to Fiscal 1993. The decrease in net
interest income earned from finance receivables was due to the sale of such
receivables by CTL prior to termination of its operations on September 1, 1992.
During Fiscal 1993, loan administration income was positively affected by
the continued growth of the loan servicing portfolio. At February 28, 1993, the
Company serviced $54.5 billion of loans (including $0.6 billion of loans
subserviced for others) compared to $27.5 billion (including $0.4 billion of
loans subserviced for others) at February 29, 1992, a 98% increase. The growth
in the Company's servicing portfolio during Fiscal 1993 was the result of loan
production volume and the acquisition of bulk servicing rights, partially offset
by prepayments of mortgage loans which increased as a result of heightened
refinance activity. The weighted average interest rate of the mortgage loans in
the Company's servicing portfolio at February 28, 1993 was 8.0% compared to 9.2%
at February 29, 1992.
During Fiscal 1993, the prepayment rate of the Company's servicing
portfolio was 20%, as compared to 14% for Fiscal 1992. The increase in the
prepayment rate is primarily attributable to increased refinance activity caused
by a decline in mortgage interest rates.
For Fiscal 1993, total amortization amounted to $151.4 million,
representing an annual rate of 29% of average capitalized servicing fees
receivable and purchased servicing rights ("Servicing Assets"), and 142% of the
portfolio prepayment rate. This amortization amount was comprised of $101.4
million related to current and projected prepayment rates and $50.0 million
resulting from a writedown of the Servicing Assets. Amortization for Fiscal
1993 was offset by Servicing Hedge gains which aggregated $74.1 million. For
Fiscal 1992, total amortization was $53.8 million, or an annual rate of 16% of
the average Servicing Assets, and 121% of the portfolio prepayment rate. During
Fiscal 1992, the Company recognized $17.0 million in Servicing Hedge gains, all
of which was used to offset the increased amortization of the Servicing Assets.
No loans were sold on a servicing-released basis and no servicing rights
were sold by the Company during Fiscal 1993. The Company sold newly originated
loans on a servicing-released basis during Fiscal 1992 resulting in a gain of
$4.3 million. The principal amount of loans sold servicing-released for Fiscal
1992 was $233.3 million. In general, the decision to sell servicing rights or
newly originated loans on a servicing-released basis is based upon management's
assessment of the Company's cash requirements, the Company's debt-to-equity
ratio and other significant financial ratios, the market for and present value
of servicing rights and the Company's current and future earnings objectives.
During Fiscal 1993, the Company acquired bulk servicing rights for loans
with principal balances aggregating $2.7 billion at a price of $34.3 million or
1.29% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1992, the Company acquired bulk servicing
rights for loans with principal balances aggregating $2.9 billion at a price of
$36.7 million or 1.27% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
Salaries and related expenses are summarized below for Fiscal 1993 and
Fiscal 1992.
(Dollar amounts in
thousands) Fiscal 1993
Loan
Production Administra Other
Activities -tion Activities Total
Base Salaries $ 73,114 $ 13,801 $ 4,666 $ 91,581
Incentive Bonus 32,455 145 2,502 35,102
Payroll Taxes and
Benefits 10,253 2,470 657 13,380
Total Salaries and
Related Expenses $ 115,822 $ 16,416 $ 7,825 $140,063
Average Number of
Employees 2,024 490 118 2,632
(Dollar amounts in Fiscal 1992
thousands)
Loan
Production Administra Other
Activities -tion Activities Total
Base Salaries $ 35,940 $ 8,989 $ 4,715 $ 49,644
Incentive Bonus 14,436 115 688 15,239
Payroll Taxes and
Benefits 5,571 1,558 642 7,771
Total Salaries and
Related Expenses $ 55,947 $ 10,662 $ 6,045 $ 72,654
Average Number of
Employees 948 319 118 1,385
The amount of salaries incurred during Fiscal 1993 has increased primarily
due to the increased number of employees resulting from increased loan
production and an increased servicing portfolio. Incentive bonuses earned
during Fiscal 1993 increased primarily due to increased loan production and
production personnel.
Occupancy and other office expenses for Fiscal 1993 increased 77% to $64.8
million from $36.6 million for Fiscal 1992. This increase was attributable
primarily to the expansion of the Retail and Wholesale Divisions' branch
network. As of February 28, 1993, there were 167 Retail Division branch offices
(including 45 satellite offices and two regional support centers) and 55
Wholesale Division branch offices (including nine regional support centers). As
of February 29, 1992, there were 99 Retail Division branch offices and 32
Wholesale Division branch offices (including four regional support centers). In
addition, the increase in the Company's loan production and loan servicing
portfolio has resulted in an increase in occupancy and other office expenses
related to the Company's central office.
Guarantee fees (fees paid to guarantee timely and full payment of principal
and interest on mortgage-backed securities and whole loans sold to permanent
investors and to transfer the recourse provisions of the loans in the servicing
portfolio) for Fiscal 1993 increased 116% to $29.4 million from $13.6 million
for Fiscal 1992. This increase was a direct result of the increase in the
servicing portfolio during the year ended February 28, 1993.
Marketing expenses for Fiscal 1993 increased 160% to $13.0 million from
$5.0 million for Fiscal 1992. The increase in marketing expenses reflected the
Company's strategy to expand its market share, particularly in the home purchase
lending market.
Other operating expenses for Fiscal 1993 increased over Fiscal 1992 by $7.0
million, or 39%. This increase was due primarily to several factors including
the following: (i) increased loan production and a larger servicing portfolio;
(ii) expansion of loan production capabilities and other related expenses; and
(iii) the growth of certain of the Company's other subsidiaries' operations,
including the subsidiary that is a registered broker-dealer of securities, the
subsidiary that brokers servicing contracts owned by other mortgage lenders and
loan servicers and the subsidiary that is an independent insurance agent
offering homeowners and mortgage life policies to the Company's mortgage
customers.
Profitability of Loan Production and Servicing Activities
In Fiscal 1993, the Company's pre-tax income from its loan production
activities (which include loan origination and purchases, warehousing and sales)
was $175.8 million. In Fiscal 1992, the Company's comparable pre-tax earnings
were $63.3 million. The increase of $112.5 million is primarily attributed to
higher loan production. In addition, the Company experienced a 0.15% decline in
its production costs per loan due to greater efficiencies and the relative
growth of the Wholesale Division and Correspondent Division which have lower
production costs per loan. In Fiscal 1993, 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 $53.0 million as compared to $31.0 million in Fiscal 1992.
The additional loan administration revenues derived from a larger portfolio
during Fiscal 1993 were partially offset by an increase in amortization of the
Servicing Assets, net of gains from the Servicing Hedge, and an increase in
Interest Costs Incurred on Payoffs.
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 of the Servicing Assets, a decreased rate of interest
earned from the escrow balances, and increased Interest Costs Incurred on
Payoffs. Conversely, as interest rates increase, loan production, particularly
from loan refinancings, decreases, although in an environment of gradual
interest rate increases, purchase activity may actually be stimulated by a more
vibrant economy or anticipation of increasing real estate values. In a higher
interest rate environment, servicing-related earnings are enhanced because
prepayment rates tend to slow down, thereby extending the average life of the
Company's servicing portfolio and reducing Interest Costs Incurred on Payoffs,
and because the rate of interest earned from the escrow balances tends to
increase. This is particularly noteworthy as the Company's servicing portfolio
grows.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In recent years, the impact of the typical seasonal pattern was
somewhat offset by strong refinance activity caused by low mortgage interest
rates and by an increase in the Company's market share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently relies on sales of commercial paper supported by the mortgage
warehouse credit facility, medium-term note issuances, pre-sale funding
facilities, mortgage-backed securities and whole loan reverse-repurchase
agreements, subordinated notes and cash flow from operations. In addition, in
the past the Company has relied on bank borrowings collateralized by mortgage
loans held for sale, servicing-secured bank facilities, privately-placed
financings and public offerings of preferred and common stock. The Company's
cost of financing has been lowered from prior levels due to improvements in the
Company's debt ratings. See Note D to the Company's Consolidated Financial
Statements included herein for more information on the Company's financings.
Certain of the Company's and CFC's debt obligations contain various
provisions that may affect the ability of the Company and CFC to pay dividends
and remain in compliance with such obligations. These provisions include
requirements concerning net worth, current ratio, debt-to-adjusted-net-worth
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.
At times, the Company must meet margin requirements to cover changes in the
market value of its commitments to sell mortgage-backed securities. To the
extent that aggregate commitment prices are less than the current market prices,
the Company must deposit cash or certain government securities or obtain letters
of credit. The Company's credit facility provides a means of obtaining such
letters of credit to meet these margin requirements.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle.
On July 6, 1993, the Company called all of its outstanding Convertible
Preferred Stock, which was represented by depositary convertible shares (each
depositary share represented 1/10 of a share of Convertible Preferred Stock).
Each depositary share was convertible into 6.3 shares of Common Stock or
redeemable for $27.375 in cash. All holders converted their shares into Common
Stock.
Cash Flows
Operating Activities In Fiscal 1994, the Company's operating activities
used cash on a short-term basis to fund the increase of its warehouse of
mortgage loans by approximately $1.4 billion and to fund other asset and working
capital increases of $377 million. The cash used for these activities was
provided primarily by cash flow from financing activities, as discussed below.
The Company's operating activities also generated $557 million of positive cash
flow, which was principally allocated to the long-term investment in servicing
as discussed below under Investing Activities.
Investing Activities Net cash used by investing activities increased to
$765 million for Fiscal 1994 from $362 million for Fiscal 1993. This increase
was primarily the result of an increase in investments in purchased servicing
rights and capitalized servicing fees receivable due to the growth in the
Company's servicing portfolio in Fiscal 1994.
Financing Activities Net cash provided by financing activities increased
to $2.0 billion for Fiscal 1994 from $0.6 billion for Fiscal 1993. This
increase was primarily the result of increased levels of short- and long-term
borrowings by the Company during Fiscal 1994.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During Fiscal 1994, the Company received new loan applications at an
average daily rate of $282 million and at February 28, 1994, the Company's
pipeline of loans in process was $7.6 billion. In addition, the Company has
committed to make loans in the amount of $1.6 billion, subject to property
identification and borrower qualification ("Lock n' Shop Pipeline"). This
compares to a daily application rate in Fiscal 1993 of $191 million and a
pipeline of loans in process at February 28, 1993 of $5.9 billion. At February
28, 1993, the amount of the Lock n' Shop Pipeline was not material. 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.
However, future application levels and loan fundings are dependent on numerous
factors, including the level of demand for mortgage credit, the direction of
interest rates, seasonal factors and general economic conditions. As of March
31, 1994 and April 30, 1994, the Company's pipeline of loans in process was $7.1
billion and $5.6 billion, respectively. The Company's Lock n' Shop Pipeline was
$2.6 billion and $2.5 billion as of March 31, 1994 and April 30, 1994,
respectively. The decline in the pipeline of loans in process from February 28,
1994 to April 30, 1994 was due to the increase in mortgage interest rates which
occurred from February through April 1994.
Market Factors
In general, the Company has benefited from the decline in average mortgage
interest rates that occurred through most of Fiscal 1994. Such decline led to:
(i) new loan production (particularly from refinancings) resulting in an
increase in related income; (ii) growth in the Company's servicing portfolio
resulting in greater loan administration income and (iii) lower interest rate
mortgage loans in the servicing portfolio reducing exposure to future
prepayments. Somewhat offsetting the benefits realized from the decline in
average mortgage interest rates are: (i) faster prepayment activity causing
increased amortization of the Servicing Assets and increased Interest Costs
Incurred on Payoffs and (ii) a lower rate of interest earned from the escrow
balances associated with the Company's servicing portfolio.
More recently, mortgage interest rates have increased. An environment of
rising interest rates has resulted in lower production (particularly from
refinancings) and greater price competition, which may adversely impact earnings
from loan origination activities in the future. The Company has taken steps to
maintain its productivity and efficiency, particularly in the loan production
area, by reducing staff and embarking on a program to reduce production-related
and overhead costs. Through April 30, 1994, the net decline in the Company's
production staff levels (which include both employees and temporary staff
obtained through outside agencies) was 18% from the peak levels of approximately
2,800 at December 31, 1993. The Company has reduced its total staffing levels
from approximately 5,000 at December 31, 1993 to approximately 4,500 at April
30, 1994. However, with rising interest rates, earnings from the Company's loan
servicing portfolio should increase over time as amortization of the Servicing
Assets and Interest Costs Incurred on Payoffs decrease and the rate of interest
earned from the escrow balances associated with the Company's servicing
portfolio increases. The Company has begun a campaign to increase the size of
its servicing portfolio, thereby increasing its servicing revenue base, by
acquiring servicing contracts through bulk purchases. From March 1, 1994
through April 30, 1994, the Company has purchased such servicing contracts with
principal balances amounting to over $2 billion.
In addition to other mortgage bankers, some of whom have raised equity
capital in public markets during the past several years (including initial
public offerings by most of the mortgage bankers now publicly traded), the
Company's primary competitors are commercial banks and savings and loans and
mortgage banking subsidiaries of diversified companies.
Some regions in which the Company operates experienced slower, and in some
cases negative, economic growth, and real estate financing activity in these
regions has been negatively impacted. As a result, home lending activity for
single- (one-to-four) family residences in these regions may also have
experienced slower growth. There can be no assurance that the Company's recent
performance will continue or that the Company's operations and results will not
be negatively impacted by adverse economic conditions such as those discussed
above. The Company's California mortgage loan production (measured by principal
balance) constituted 46% of its total production during Fiscal 1994, down from
58% for Fiscal 1993. The decline in the percentage of California production was
due to the Company's continuing effort to expand its production capacity outside
of California and to slower economic growth in California. Since California's
mortgage loan production constituted a significant portion of the Company's
production during the year, there can be no assurance that the Company's
operations will not be adversely affected to the extent California continues to
experience a period of slower or negative economic growth resulting in decreased
residential real estate lending activity.
As of February 28, 1994, approximately 49% of the principal balance of
mortgage loans in the Company's servicing portfolio were secured by properties
located in California. Because the Company services substantially all
conventional loans on a non-recourse basis, foreclosure losses are generally the
responsibility of the investor or insurer and not the Company. Accordingly, any
increase in foreclosure activity should not result in significant foreclosure
losses to the Company. However, the Company's expenses may be increased
somewhat as a result of the additional staff efforts required to foreclose on a
loan. Similarly, government loans serviced by the Company (16% of the Company's
servicing portfolio at February 28, 1994) are insured or partially guaranteed
against loss by the Federal Housing Administration or the Veterans
Administration. As such, the limited unreimbursed costs incurred by the Company
on government foreclosed loans are not material to the Company's consolidated
financial statements.
Servicing Hedge
As previously discussed, the Company realized a net gain of $73.4 million
from its Servicing Hedge transactions during Fiscal 1994. To the extent that
the amount of options held by the Company during future periods is less than the
amount held during Fiscal 1994, or if interest rates do not decline
significantly in future periods, the Company may not realize Servicing Hedge
gains at the same level, if at all. However, the effect of any reduction in
Servicing Hedge gains may be more than offset by a reduction in the Company's
amortization expense due to reduced current and estimated future prepayments of
the servicing portfolio.
Federal Legislation
In May 1993, hearings were held in the House Banking Committee on H.R. 27
which would revise current escrow regulations. If enacted, with regard to
escrow accounts established one year after the date of the legislation's
enactment, any lender or servicer would be mandated to pay a uniform annual
interest rate to borrowers in all states on the balance in their escrow
accounts. In addition, the legislation would allow a borrower to terminate an
escrow account arrangement if less than 80% of the original principal balance of
the loan remains outstanding. The Company currently pays interest as required
by various state laws at rates specified in the respective statutes. If federal
legislation were to be enacted as proposed, the Company believes that its
earnings would not be materially affected.
In August 1993, a one percent increase in the corporate federal tax rate
was enacted. However, the Company has been diversifying its business activities
outside California, a state which has a corporate tax rate that is higher than
the average tax rate among the states in which the Company does business. This
diversification serves to reduce the Company's average tax rate which offsets
the recently enacted increase in the federal tax rate.
Implementation of New and Proposed Accounting Standards
In May 1993, the Financial Accounting Standards Board ("FASB" or "the
Board") issued Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities, which is
effective for the Company's fiscal year ending February 28, 1995 and requires
companies to carry mortgage-backed securities held for sale at market value with
unrealized holding gains and losses included in periodic earnings. Mortgage
loans held for sale will continue to be carried at the lower of cost or market.
Management believes that this new standard will not have a material effect on
the Company's financial position or results of operations.
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was also
issued in May 1993. Implementation of this standard, which is required for the
Company's fiscal year beginning March 1, 1995, is not expected to have a
material effect on the Company's financial statements.
The FASB has undertaken a project to amend SFAS 65, Accounting for Certain
Mortgage Banking Activities. The Board has tentatively decided, among other
provisions, to require the recognition of originated mortgage servicing rights
("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets.
Presently, the cost of OMSRs is included with the cost of the related loans and
written off against income when the loans are sold, but the cost of PMSRs is
recorded as an asset. All capitalized mortgage servicing rights would be
evaluated for impairment on a discounted, disaggregated basis. Under current
accounting requirements, the impairment evaluation may be made on either a
discounted or an undiscounted basis. The Company uses a disaggregated,
undiscounted method. An Exposure Draft on this proposed amendment is expected
in May 1994, with a final statement by the end of calendar year 1994. The
effect on the Company's financial position and results of operations will be
evaluated when the FASB finalizes its decisions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is hereby incorporated by
reference from the Company's Financial Statements and Auditors' Report beginning
at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The information required by this Item 11 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The information required by this Item 12 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) - Financial Statement Schedules.
The information called for by this section of Item 14 is set forth in the
Financial Statements and Auditors' Report beginning at page F-1 of this Form 10-
K. The index to Financial Statements and Schedules is set forth at page F-2 of
this Form 10-K.
(3) - Exhibits
3.1* Certificate of Amendment of Restated Certificate of
Incorporation of Countrywide Credit Industries, Inc.
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q dated August 31, 1987).
3.2* Restated Certificate of Incorporation of Countrywide
Credit Industries, Inc. (incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
dated August 31, 1987).
3.3* Bylaws of Countrywide Credit Industries, Inc., as amended
and restated (incorporated by reference to Exhibit 3 to
the Company's Current Report on Form 8-K dated February
10, 1988).
4.1* Rights Agreement, dated as of February 10, 1988, between
Countrywide Credit Industries, Inc. and Bank of America NT
& SA, as Rights Agent (incorporated by reference to
Exhibit 4 to the Company's Form 8-A filed pursuant to
Section 12 of the Securities Exchange Act of 1934 on
February 12, 1988).
4.1.1* Amendment No. 1 to Rights Agreement dated as of March 24,
1992 (incorporated by reference to Exhibit 1 to the
Company's Form 8 filed with the SEC on March 27,1992).
4.2* Specimen Certificate of the Company's Common Stock
(incorporated by reference to Exhibit 4.2 to the Company's
Report on Form 8-K dated February 6, 1987).
4.3* Specimen Debenture Certificate (incorporated by reference
to Exhibit 4.3 to the Company's Current Report on Form 8-K
dated February 6, 1987).
4.5* Indenture dated January 15, 1988 between the Company and
The Chase Manhattan Bank, N.A. relating to Debt Securities
issued by the Company (incorporated by reference to the
Company's Report on Form 10-K dated February 28, 1988).
4.6* Form of Medium-Term Notes, Series A (fixed-rate) of the
Company (incorporated by reference to Exhibit 4.2 to
Amendment No. 1 to the Company's registration statement on
Form S-3 (File No. 33-19708) filed with the SEC on January
26, 1988).
4.7* Form of Medium-Term Notes, Series A (floating-rate) of the
Company (incorporated by reference to Exhibit 4.3 to
Amendment No. 1 to the Company's registration statement on
Form S-3 (File No. 33-19708) filed with the SEC on January
26, 1988).
4.8* Form of Medium-Term Notes, Series B (floating-rate) of the
Company (incorporated by reference to Exhibit 4.3 to the
Company's registration statement on Form S-3 (File No. 33-
29941) filed with the SEC on July 13, 1989.
4.9* Form of Medium-Term Notes, Series B (fixed-rate) of the
Company (incorporated by reference to Exhibit 4.2 to the
Company's registration statement on Form S-3 (File No. 33-
29941) filed with the SEC on July 13, 1989).
4.10* Certificate of Designation of $23.75 Convertible Preferred
Stock and Certificate of Correction thereto (incorporated
by reference to Exhibit 4.10 to the Company's Annual
Report on Form 10-K dated February 28, 1991).
4.11* Specimen Certificate for the $23.75 Convertible Preferred
Stock (incorporated by reference to Exhibit 4.11 to the
Company's Annual Report on Form 10-K dated February 28,
1991).
4.12* Deposit Agreement dated as of July 18, 1990, among the
Company, Manufacturers Hanover Trust Company of California
and the Holders of Depositary Receipts (incorporated by
reference to Exhibit 4.12 to the Company's Annual Report
on Form 10-K dated February 28, 1991).
4.13* Specimen Depositary Receipt for Depositary Convertible
Preferred Shares, each representing one-tenth of a share
of $23.75 Convertible Preferred Stock (incorporated by
reference to Exhibit 4.13 to the Company's Annual Report
on Form 10-K dated February 28, 1991).
4.14* Note Purchase Agreement dated as of December 27, 1990
relating to the 11.76% Senior Notes due on November 30,
1995 issued by Countrywide Funding Corporation ("CFC")
(incorporated by reference to Exhibit 4.14 to the
Company's Annual Report on Form 10-K dated February 28,
1991).
4.15* Form of Medium-Term Notes, Series A (fixed-rate) of the
Company (incorporated by reference to Exhibit 4.2 to the
Company's registration statement on Form S-3 (File No. 33-
44194) filed with the SEC on November 27, 1991.
4.16* Form of Medium-Term Notes, Series A (floating-rate) of the
Company (incorporated by reference to Exhibit 4.3 to the
Company's registration statement on Form S-3 (File No. 33-
44194) filed with the SEC on November 27, 1991).
4.17* Form of Medium-Term Notes, Series B (fixed-rate) of the
Company (incorporated by reference to Exhibit 4.2 to the
Company's registration statement on Form S-3 (File No. 33-
51816) filed with the SEC on September 9, 1992).
4.18* Form of Medium-Term Notes, Series B (floating-rate) of the
Company (incorporated by reference to Exhibit 4.3 to the
Company's registration statement on Form S-3 (File No. 33-
51816) filed with the SEC on September 9, 1992).
4.19* Countrywide Credit Industries, Inc. Dividend Reinvestment
Plan dated October 30, 1992 (incorporated by reference as
set forth in the registration statement on Form S-3 (File
No. 33-53048) filed with the SEC on October 9, 1992).
4.20* Form of Medium-Term Notes, Series C (fixed-rate) of
Countrywide Funding Corporation ("CFC") (incorporated by
reference to Exhibit 4.2 to the registration statement on
Form S-3 of CFC and the Company (File Nos. 33-50661-01)
4.21* filed with the SEC on October 19, 1993).
Form of Medium-Term Notes, Series C (floating rate) of
CFC (incorporated by reference to Exhibit 4.3 to the
registration statement on Form S-3 of CFC and the Company
(File Nos. 33-50661 and 33-50661-01) filed with the SEC on
October 19, 1993).
+10.1* Indemnity Agreements with Directors and Officers of
Countrywide Credit Industries, Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Report on Form
8-K dated February 6, 1987).
+10.2* Restated Employment Agreements for David S. Loeb and
Angelo R. Mozilo dated February 2, 1993 (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K dated February 28, 1993).
+10.3* Countrywide Credit Industries, Inc. Deferred Compensation
Agreement for Non-Employee Directors (incorporated by
reference to Exhibit 5.2 to the Company's Quarterly Report
on Form 10-Q dated August 31, 1987).
+10.3.1* Countrywide Credit Industries, Inc. Deferred Compensation
Plan for Key Management Employees dated April 15, 1992
(incorporated by reference to Exhibit 10.3.1 to the
Company's Annual Report on Form 10-K dated February 28,
1993).
+10.3.2* Countrywide Credit Industries, Inc. Deferred Compensation
Plan effective August 1, 1993 (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q dated August 31, 1993).
10.4* Mortgage Loan Warehousing Agreement: Facility A and
Mortgage Loan Warehousing Agreement: Facility B, both
dated as of November 15, 1993 by and among CFC and various
financial institutions (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-
Q dated November 15, 1993).
+10.5* Severance Plan (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q dated May
31, 1988).
+10.6* Key Executive Equity Plan (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-
Q dated May 31, 1988).
+10.7* 1987 Stock Option Plan, as Amended and Restated on May 15,
1989 (incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K dated February 28,
1989).
+10.8* 1986 Non-Qualified Stock Option Plan as amended
(incorporated by reference to Exhibit 10.11 to Post-
Effective Amendment No. 2 to the Company's registration
statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
+10.9* 1985 Non-Qualified Stock Option Plan as amended
(incorporated by reference to Exhibit 10.9 to Post-
Effective Amendment No. 2 to the Company's registration
statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
+10.10* 1984 Non-Qualified Stock Option Plan as amended
(incorporated by reference to Exhibit 10.7 to Post-
Effective Amendment No. 2 to the Company's registration
statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
+10.11* 1982 Incentive Stock Option Plan as amended (incorporated
by reference to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-
9231) filed with the SEC on December 20, 1988).
+10.12* Amended and Restated Stock Option Financing Plan
(incorporated by reference to Exhibit 10.12 to Post-
Effective Amendment No. 2 to the Company's registration
statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
10.13 1993 Amended and Extended Management Agreement, dated as
of May 15, 1993, between Countrywide Mortgage Investments,
Inc. ("CMI") and Countrywide Asset Management Corporation.
10.14* 1987 Amended and Restated Servicing Agreement, dated as of
May 15,1987, between CMI and CFC (incorporated by
reference to the Company's Annual Report on Form 10-K
dated February 28, 1990).
10.15 1993 Amended and Restated Loan Purchase and Administrative
Services Agreement, dated as of May 15, 1993, between CMI
and CFC.
10.16* Secured Credit Agreement, dated as of June 1, 1990,
between CFC and The Bank of New York and Amendment No. 1
thereto dated as of November 30, 1990 (incorporated by
reference to Exhibit 10.16 to the Company's Annual Report
on Form 10-K dated February 28, 1991).
10.16.1* Amendment No. 2 dated June 1, 1991 to the Secured Credit
Agreement (incorporated by reference to Exhibit 10.16.1 to
the Company's Annual Report on Form 10-K dated February
29, 1992).
10.17* Servicing Secured Credit Agreement dated as of November
30, 1990, between CFC and Bankers Trust Company
(incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K dated February 28,
1991).
10.17.1* Amendment No. 1 dated July 19, 1991 to the Servicing
Secured Credit Agreement (incorporated by reference to
Exhibit 10.17.1 to the Company's Annual Report on Form 10-
K dated February 29, 1992).
10.17.2* Amendment No. 2 dated November 30, 1991 to the Servicing
Secured Credit Agreement (incorporated by reference to
Exhibit 10.17.2 to the Company's Annual Report on Form 10-
K dated February 29, 1992).
10.18* Pre-sale Funding Facility dated March 19, 1991, between
CFC and Lehman Capital Corporation (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report
on Form 10-K dated February 28, 1991).
10.18.1* Amendment to Pre-sale Funding Facility dated December 5,
1991 (incorporated by reference to Exhibit 10.18.1 to the
Company's Annual Report on Form 10-K dated February 29,
1992).
10.18.2* Amendment to Pre-sale Funding Facility dated April 2, 1992
(incorporated by reference to Exhibit 10.18.2 to the
Company's Annual Report on Form 10-K dated February 29,
1992).
+10.19* 1991 Stock Option Plan (incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K
dated February 29, 1992).
+10.19.1* First Amendment to the 1991 Stock Option Plan
(incorporated by reference to the Company's Annual Report
on Form 10-K dated February 28, 1993).
+10.19.2* Second Amendment to the 1991 Stock Option Plan
(incorporated by reference to the Company's Annual Report
on Form 10-K dated February 28, 1993).
+10.19.3* Third Amendment to the 1991 Stock Option Plan
(incorporated by reference to the Company's Annual Report
on Form 10-K dated February 28, 1993).
+10.19.4* Fourth Amendment to the 1991 Stock Option Plan
(incorporated by reference to the Company's Annual Report
on Form 10-K dated February 28, 1993).
+10.19.5* 1992 Stock Option Plan dated as of December 22, 1992
(incorporated by reference to the Company's Annual Report
on Form 10-K dated February 28, 1993).
+10.19.6* 1993 Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-
Q dated August 31, 1993).
10.20* Depositary and Issuing Agreement dated as of November 24,
1991 (incorporated by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K dated February 29,
1992).
10.21* Purchase and Sale Agreement and Joint Escrow Instructions
dated March 25, 1992, between Resolution Trust Company and
CFC and the First Addendum to Purchase and Sale Agreement
and Joint Escrow Instructions dated March 25, 1993
(incorporated by reference to the Company's Annual Report
on Form 10-K dated February 28, 1993).
10.22* Contract of Sale dated June 22, 1993, between The Franklin
Life Insurance Company and the Company (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q dated August 31, 1993).
10.23* Master Repurchase Agreement dated as of June 25, 1993,
between Merrill Lynch Mortgage Capital Inc. and CFC
(incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q dated August 31,
10.23.1* 1993).
Custody Agreement dated as of June 25, 1993, among Merrill
Lynch Mortgage Capital Inc., CFC, and First Chicago
10.23.2* National Processing Corporation (incorporated by reference
to Exhibit 10.4.1 to the Company's Quarterly Report on
Form 10-Q dated August 31, 1993).
11.1 Amendment No. 1 to Master Repurchase Agreement dated as of
July 22, 1993 (incorporated by reference to Exhibit 10.4.2
to the Company's Quarterly Report on Form 10-Q dated
August 31, 1993).
Statement Regarding Computation of Earnings Per Share.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
12.2 Computation of the Ratio of Earnings to Net Fixed Charges.
22.1 List of subsidiaries.
24.1 Consent of Grant Thornton.
*Incorporated by reference.
+Constitutes a management contract or compensatory plan or
arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By: DAVID S. LOEB
David S. Loeb, Chairman and President
Dated: May 24, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signatures Title Date
President and Chairman of
the Board of Directors
(Principal Executive
DAVID S. LOEB Officer) May 24, 1994
David S. Loeb
Executive Vice President and
ANGELO R. MOZILO Director May 24, 1994
Angelo R. Mozilo
Senior Managing Director-
Chief Financial Officer and
Chief Operating Officer
(Principal Financial
STANFORD L. KURLAND Officer) May 24, 1994
Stanford L. Kurland
Managing Director - Chief
Accounting Officer
(Principal Accounting
CARLOS M. GARCIA Officer) May 24, 1994
Carlos M. Garcia
JACK L. BRUCKNER Director May 24, 1994
Jack L. Bruckner
ROBERT J. DONATO Director May 24, 1994
Robert J. Donato
BEN M. ENIS Director May 24, 1994
Ben M. Enis
EDWIN HELLER Director May 24, 1994
Edwin Heller
HARLEY W. SNYDER Director May 24, 1994
Harley W. Snyder
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
February 28, 1994
F-1
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 28, 1994
Page
Report of Independent Certified Public Accountants................ F-3
Financial Statements
Consolidated Balance Sheets.................................... F-4
Consolidated Statements of Earnings............................ F-5
Consolidated Statement of Common Shareholders' Equity.......... F-6
Consolidated Statements of Cash Flows.......................... F-7
Notes to Consolidated Financial Statements..................... F-8
Schedules
Schedule II - Amounts Receivable From Related Parties....... F-30
Schedule III - Condensed Financial Information of Registrant F-31
Schedule VIII - Valuation and Qualifying Accounts............ F-34
Schedule IX - Short-Term Borrowings......................... F-35
Schedule X - Supplementary Income Statement Information.... F-36
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Credit Industries, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 28, 1994 and 1993, and
the related consolidated statements of earnings, common shareholders' equity,
and cash flows for each of the three years in the period ended February 28,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide Credit
Industries, Inc. and Subsidiaries as of February 28, 1994 and 1993, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended February 28, 1994, in conformity
with generally accepted accounting principles.
We also have audited Schedules II, III, VIII, IX and X for each of the three
years in the period ended February 28, 1994. In our opinion, such schedules
present fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON
Los Angeles, California
April 22, 1994
F-3
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28,
(Dollar amounts in thousands, except per share data)
A S S E T S
1994 1993
Cash $ 4,034 $ 12,573
Receivables for mortgage loans shipped - pledged as 1,970,431 1,182,018
collateral for notes payable
Mortgage loans held for sale - pledged as collateral for
notes payable 1,743,830 1,134,279
Other receivables 349,770 112,460
Property, equipment and leasehold improvements, at cost
- - - net of accumulated depreciation 145,625 95,053
Capitalized servicing fees receivable 289,541 211,785
Purchased servicing rights 836,475 456,470
Other assets 245,815 94,495
Total assets $5,585,521 $3,299,133
Escrow and agency premium funds (segregated in special
accounts - excluded from corporate assets) $1,366,643 $ 836,149
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $3,859,227 $1,943,493
Drafts payable issued in connection with mortgage loan
closings 449,814 370,958
Accounts payable and accrued liabilities 87,818 57,597
Deferred income taxes 308,525 208,180
Total liabilities 4,705,384 2,580,228
Commitments and contingencies - -
Redeemable preferred stock - authorized, 184,000 shares
of $.05 par value$23.75 convertible preferred stock - - 25,800
redemption amount $27,092 in 1993; issued and
outstanding, 108,369 shares in 1993
Shareholders' equity
Preferred stock - authorized, 1,316,000 shares of
$.05 par value; issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $.05
par value; issued and outstanding, 91,063,751 shares in
1994 and 83,502,840 shares in 1993 4,553 2,784
Additional paid-in capital 606,031 573,635
Retained earnings 269,553 116,686
Total shareholders' equity
880,137 693,105
Total liabilities and shareholders' equity
$5,585,521 $3,299,133
Escrow and agency premium funds $1,366,643 $ 836,149
The accompanying notes are an integral part of these statements.
F-4
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 28(29),
(Dollar amounts in thousands, except per share data)
1994 1993 1992
Revenues
Loan origination fees $379,533 $241,584 $ 91,933
Gain on sale of loans, net of commitment fees 88,212 67,537 38,847
Loan production revenue 467,745 309,121 130,780
Interest earned 376,225 211,542 115,213
Interest charges (275,906) (148,765) (81,959)
Net interest income 100,319 62,777 33,254
Loan servicing income 307,477 177,291 94,830
Less amortization, net of servicing hedge gain (168,777) (77,287) (36,768)
Net loan administration income 138,700 100,004 58,062
Gain on sale of servicing - - 4,302
Commissions, fees and other income 48,816 33,656 19,714
Total revenues 755,580 505,558 246,112
Expenses
Salaries and related expenses 227,702 140,063 72,654
Occupancy and other office expenses 101,691 64,762 36,645
Guarantee fees 57,576 29,410 13,622
Marketing expenses 26,030 12,974 5,015
Other operating expenses 43,481 24,894 17,849
Total expenses 456,480 272,103 145,785
Earnings before income taxes 299,100 233,455 100,327
Provision for income taxes 119,640 93,382 40,131
NET EARNINGS $179,460 $140,073 $60,196
Earnings per share
Primary $1.97 $1.65 $.89
Fully diluted $1.94 $1.52 $.81
The accompanying notes are an integral part of these statements.
F-5
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Three years ended February 28, 1994
(Dollar amounts in thousands)
Additional
Number Common paid-in Retained
of shares stock capital earnings Total
Balance at March 1, 1991 17,306,489 $ 865 $ 86,073 $ 46,522 $ 133,460
Issuance of common stock 13,308,380 665 345,059 - 345,724
Conversion of subordinated
debentures for common stock 1,811,380 91 19,980 - 20,071
Cash dividends paid - preferred - - - (3,800) (3,800)
Cash dividends paid - common - - - (9,289) (9,289)
Stock options exercised 1,118,792 56 6,274 - 6,330
Tax benefit of stock options
exercised - - 4,717 - 4,717
Conversion of preferred stock
for common stock 66,133 3 564 - 567
401(k) Plan contribution 38,572 2 639 - 641
Net earnings for the year - - - 60,196 60,196
Effect of three-for-two stock
split effective subsequent to
year end 16,824,873 841 (841) - -
Balance at February 29, 1992 50,474,619 2,523 462,465 93,629 558,617
Cash dividends paid - preferred - - - (3,482) (3,482)
Cash dividends paid - common - - - (20,090) (20,090)
Stock options exercised 471,288 24 2,252 - 2,276
Tax benefit of stock options
exercised - - 2,808 - 2,808
Conversion of preferred stock
for common stock 1,964,794 98 11,633 - 11,731
Dividend reinvestment plan 1,571 - 38 - 38
401(k) Plan contribution 39,716 2 1,141 - 1,143
Settlement of three-for-two
stock split 65,688 4 (13) - (9)
Net earnings for the year - - - 140,073 140,073
Effect of 5% stock dividend
effective subsequent to year end 2,650,884 133 93,311 (93,444) -
Balance at February 28, 1993 55,668,560 2,784 573,635 116,686 693,105
Cash dividends paid - preferred - - - (732) (732)
Cash dividends paid - common - - - (24,389) (24,389)
Stock options exercised 452,522 22 3,338 - 3,360
Tax benefit of stock options
exercised - - 2,495 - 2,495
Conversion of preferred stock
for common stock 4,511,283 225 25,575 - 25,800
Dividend reinvestment plan 1,994 - 55 - 55
401(k) Plan contribution 33,637 2 1,005 - 1,007
Settlement of 5% stock dividend 41,171 2 1,446 (1,472) (24)
Net earnings for the year - - - 179,460 179,460
Effect of three-for-two stock
split effective subsequent to
year end 30,354,584 1,518 (1,518) - -
Balance at February 28, 1994 91,063,751 $ 4,553 $ 606,031 $ 269,553 $ 880,137
The accompanying notes are an integral part of this statement.
F-6
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Year ended February 28(29),
(Dollar amounts in thousands)
1994 1993 1992
Cash flows from operating activities:
Net earnings $ 179,460 $ 140,073 $ 60,196
Adjustments to reconcile net earnings to
net cash used by operating activities:
Amortization of purchased
servicing rights 141,321 119,878 24,167
Amortization of capitalized
servicing fees receivable 100,856 31,484 29,601
Depreciation and other
amortization 15,737 8,746 6,263
Deferred income taxes 119,640 93,382 38,962
Origination and purchase of loans
held for sale (52,458,879) (32,387,774) (12,156,318)
Principal repayments and sale of
loans 51,060,915 31,725,953 11,080,779
Increase in mortgage loans
shipped and held for sale (1,397,964) (661,821) (1,075,539)
Increase in other receivables and
other assets (407,080) (28,700) (77,704)
Increase in accounts payable and
accrued liabilities 30,221 16,462 24,257
Net cash used by operating
activities (1,217,809) (280,496) (969,797)
Cash flows from investing activities:
Additions to purchased servicing rights (521,326) (280,459) (134,401)
Additions to capitalized servicing fees
receivable (178,611) (148,248) (43,525)
Purchase of property, equipment and
leasehold improvements-net (64,660) (49,401) (15,465)
Proceeds from sale of finance
receivables - 111,897 -
Finance receivables originations - (425) (59,413)
Principal repayments on finance
receivables - 4,254 67,001
Net cash used by investing
activities (764,597) (362,382) (185,803)
Cash flows from financing activities:
Net increase in warehouse debt and other 1,477,593 526,820 813,716
short-term borrowings
Issuance of long-term debt 576,718 462,000 301,491
Repayment of long-term debt (59,721) (103,723) (299,134)
Issuance of common stock 4,398 3,448 350,811
Cash dividends paid (25,121) (23,572) (13,089)
Net (decrease) increase in thrift
investment accounts - (224,036) 9,728
Net cash provided by
financing activities 1,973,867 640,937 1,163,523
Net (decrease) increase in cash (8,539) (1,941) 7,923
Cash at beginning of period 12,573 14,514 6,591
Cash at end of period $ 4,034 $ 12,573 $ 14,514
Supplemental cash flow information:
Cash used to pay interest $ 277,518 $ 143,106 $ 82,576
Cash (refunded from) used to pay
income taxes ($ 1,823) $ 4,567 $ 102
Noncash financing activities -
conversion of preferred stock $ 25,800 $ 11,731 $ 567
The accompanying notes are an integral part of these statements.
F-7
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the parent and
all subsidiaries. All material intercompany accounts and transactions have
been eliminated.
2. Receivables for Mortgage Loans Shipped
Gain or loss on the sale of mortgage loans is recognized at the date the
loans are shipped to investors pursuant to existing sales commitments.
3. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans is adjusted by gains and losses
generated from corresponding closed hedging transactions entered into to
protect the inventory value from increases in interest rates. Hedge positions
are also used to protect the pipeline of loan applications in process from
changes in interest rates. Gains and losses resulting from changes in the
market value of the inventory, pipeline and open hedge positions are netted.
Any net gain that results is deferred; any net loss that results is recognized
when incurred. Hedging gains and losses realized during the commitment and
warehousing period related to the pipeline and mortgage loans held for sale
are deferred. Hedging losses are recognized currently if deferring such losses
would result in mortgage loans held for sale and the pipeline being valued in
excess of their estimated net realizable value.
4. Property, Equipment and Leasehold Improvements
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method. Leasehold improvements are amortized over the lesser of
the life of the lease or service lives of the improvements using the straight-
line method.
5. Capitalized Servicing Fees Receivable
The Company sells substantially all of the mortgage loans it produces and
retains the servicing rights thereto. These servicing rights entitle the
Company to a future stream of cash flows based on the outstanding principal
balance of the mortgage loans and the related contractual service fee. The
sales price of the loans, which is generally at or near par, and the resulting
gain or loss on sale are adjusted to provide for the recognition of a normal
service fee rate over the estimated servicing lives of the loans. The amount
of the adjustment approximates the amount that investors were willing to pay
for the excess servicing fees at the time of the loan sale. The adjustment
results in a receivable that is expected to be realized through receipt of the
excess service fee over time.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6. Purchased Servicing Rights
The Company capitalizes the cost of bulk purchases of servicing rights, as
well as the net cost of servicing rights acquired through the purchase of
loans servicing-released which will be sold servicing-retained. The purchase
price of loans acquired servicing-released is allocated between the servicing
rights and the value of the loans on a servicing-retained basis. The portion
of the purchase price that represents the cost of acquiring the servicing
rights in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 65, Accounting for Certain Mortgage Banking Activities, is capitalized as
purchased servicing. The remainder of the purchase price represents the cost
basis of the loan that will be sold. Purchased mortgage loans include closed
loans acquired from financial institutions and table funded loans meeting all
the criteria set forth in EITF Issue 92-10, "Loan Acquisitions Involving Table
Funding Arrangements," acquired from financial institutions and mortgage
brokers. The amount capitalized does not exceed the present value of future
net servicing income related to the purchased loans.
7. Servicing Portfolio Hedge
To protect the value of the capitalized servicing fees receivable and
purchased servicing rights ("Servicing Assets") from the effects of increased
prepayment activity, the Company purchases options on treasury bonds and/or
mortgage-backed securities that increase in value when interest rates decline.
The cost of the option fees is charged to expense over the contractual life of
the options. Options gains are recognized first as an offset to the
"Incremental Amortization" of the Servicing Assets (i.e., amortization due to
impairment caused by increased projected prepayment speeds). To the extent the
servicing hedge generates gains in excess of Incremental Amortization ("Excess
Hedge Gain"), the Company writes down the Servicing Assets through additional
amortization in an amount equal to the Excess Hedge Gain. The Company
recognized $73 million and $74 million in net gains on these hedge
transactions for the years ended February 28, 1994 and 1993, respectively.
8. Amortization of Purchased Servicing Rights and Capitalized Servicing Fees
Receivable
Amortization of each year's purchased servicing rights is based on the ratio
of net servicing income received in the current period to total net servicing
income projected to be realized from each year's purchased servicing rights.
The Company evaluates the recoverability of each year's purchased servicing
rights separately by type of loan and interest rate stratum. This level of
disaggregation results in pools of loans which have homogeneous credit and
prepayment risk characteristics. The Company records any additional
amortization necessary to adjust the carrying value of each such stratum's
purchased servicing portfolio to its net realizable value. Amortization of
capitalized servicing fees receivable is based on the decline during the
period in the present value of the projected excess servicing fees using the
same discount rate as that which is implied by the price that investors were
willing to pay for the excess servicing fees at the time of the loan sale.
Projected net servicing income and excess servicing fees are in turn
determined on the basis of the estimated future balance of the underlying
mortgage loan portfolio, which declines over time from prepayments and
scheduled loan amortization. The Company estimates future prepayment rates
based on current interest rate levels and other economic conditions, as well
as relevant characteristics of the servicing portfolio, such as loan types,
interest rate stratification and recent prepayment experience.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
9. Deferred Commitment Fees
Deferred commitment fees, included in other assets, primarily consist of fees
paid to permanent investors to ensure the ultimate sale of loans and put and
call option fees paid for the option of selling or buying mortgage-backed
securities. Fees paid to permanent investors are recognized as an adjustment
to the sales price when the loans are shipped to permanent investors or
charged to expense when it becomes evident the commitment will not be used.
Put and call option fees are amortized over the life of the option to reflect
the decline in its time value. Any unamortized option fees are charged to
income when the related option is exercised.
10. Loan Origination Fees
Loan origination fees and discount points are recorded as an adjustment of
the cost of the loan and are included in loan production revenue when the loan
is sold.
11. Interest Rate Swap Agreements
The differential to be received or paid under the agreements is accrued and
is recognized as an adjustment to net interest income.
12. Sale of Servicing Rights
The Company recognizes gain or loss on the sale of servicing rights when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
13. Income Taxes
In March 1993, the Company adopted SFAS No. 109, Accounting for Income Taxes.
The adoption of SFAS 109 changes the Company's method of accounting from the
deferred method to an asset and liability approach. Previously, the Company
deferred the past tax effects of timing differences between financial
reporting and taxable income. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax bases of other assets and liabilities. Adoption of SFAS
109 did not result in a material adjustment to previously recorded deferred
income tax liabilities. Prior years' financial statements were not restated.
14. Earnings Per Share
Primary earnings per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding during the
respective periods after giving retroactive effect to stock dividends and
stock splits. Fully diluted earnings per share is based on the assumption
that all dilutive convertible debentures, convertible preferred stock and
stock options were converted at the beginning of the reporting period. The
computations assume that net earnings have been adjusted for the dividends on
the convertible preferred stock and interest expense (net of tax) on the
convertible subordinated debentures.
The weighted average shares outstanding for computing primary and fully
diluted earnings per share were 90,501,000 and 92,445,000, respectively, for
the year ended February 28, 1994, 82,514,000 and 92,214,000, respectively, for
the year ended February 28, 1993 and 63,800,000 and 74,934,000, respectively,
for the year ended February 29, 1992.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
15. Financial Statement Reclassifications and Restatement
Certain amounts reflected in the consolidated financial statements for the
years ended February 28(29), 1993 and 1992 have been reclassified to conform
to the presentation for the year ended February 28, 1994.
On July 17, 1992, a 3-for-2 split of the Company's $0.05 par value common
stock was accomplished. On April 23, 1993, a 5% stock dividend was paid. On
March 21, 1994, the Company's Board of Directors declared a 3-for-2 split of
the Company's $0.05 par value common stock, payable on May 3, 1994 to
shareholders of record on April 11, 1994. See Note O.
All references in the accompanying consolidated balance sheets, consolidated
statements of earnings and notes to consolidated financial statements to the
number of common shares and share amounts have been restated to reflect the
stock splits and the stock dividend.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
February 28,
(Dollar amounts in thousands) 1994 1993
Buildings $35,305 $17,431
Office equipment 95,976 58,882
Leasehold improvements 23,656 16,624
Mobile homes 8,829 10,997
163,766 103,934
Less: accumulated depreciation and
amortization (41,823) (29,143)
121,943 74,791
Land 23,682 20,262
$145,625 $95,053
NOTE C - CAPITALIZED SERVICING FEES RECEIVABLE AND PURCHASED SERVICING
RIGHTS
The components of capitalized servicing fees receivable and purchased
servicing rights are as follows.
February 28(29),
(Dollar amounts in thousands) 1994 1993 1992
Capitalized Servicing Fees
Receivable
Balance at beginning of
period $211,785 $ 95,021 $ 81,097
Additions 178,612 148,248 43,525
Amortization
Scheduled (32,970) (21,333) (6,601)
Unscheduled (67,886) (10,151) (23,000)
Balance at end of period $289,541 $211,785 $ 95,021
Purchased Servicing Rights
Balance at beginning of
period $456,470 $295,889 $182,621
Additions 521,326 280,459 134,401
Amortization
Scheduled (108,822) (55,511) (17,167)
Unscheduled (32,499) (64,367) (7,000)
Other - - 3,034
Balance at end of period $836,475 $456,470 $295,889
NOTE D - NOTES PAYABLE
Notes payable consisted of the following.
February 28,
(Dollar amounts in thousands) 1994 1993
Commercial paper $2,194,543 $1,031,298
Medium-term notes, Series A, B and C,
net of discounts 1,088,550 535,570
Reverse-repurchase agreements 312,129 -
Pre-sale funding facilities 63,210 123,715
Subordinated notes 200,000 200,000
Other notes payable (2.90%-9.38%) 795 52,910
$3,859,227 $1,943,493
NOTE D - NOTES PAYABLE (Continued)
Bank Mortgage Warehouse Credit Facility and Commercial Paper
As of February 28, 1994, Countrywide Funding Corporation ("CFC"), the
Company's mortgage banking subsidiary, had an unsecured credit arrangement
(mortgage warehouse credit facility) with forty-one commercial banks
permitting CFC to borrow an aggregate maximum amount of $2.85 billion,
including commercial paper. This is an increase from the maximum amount
previously available, which as of February 28, 1993 was $1.73 billion. As of
February 28, 1994, CFC had no outstanding direct borrowings under the mortgage
warehouse credit facility and commercial paper borrowings amounted to $2.19
billion. The maximum amount that can be borrowed under the mortgage warehouse
credit facility may be increased to $3.0 billion in the event any lender or
lenders agree with CFC to increase such lender's maximum commitment and/or
through the inclusion as a lender of an additional financial institution or
institutions. The facility contains various financial covenants and
restrictions, including the prohibition of paying dividends, if at the date of
payment or distribution an event of default or potential default exists with
respect to the credit agreement. Interest on bank borrowings is based on the
prime rate and/or the London Interbank Offered Rates ("LIBOR") for U.S. dollar
deposits. The weighted average commercial paper rate for the year ended
February 28, 1994 was 3.31%. Under certain circumstances, including the
failure to maintain specified minimum credit ratings, borrowings under the
mortgage loan warehouse credit facility and commercial paper may become
secured by mortgage loans held for sale and receivables for mortgage loans
shipped. Under the provisions of the mortgage warehouse credit facility, $951
million of the total aggregate maximum borrowing amount expires on November
14, 1994; the remaining amount available under the facility of $1.90 billion
expires on November 15, 1995.
Medium-Term Notes
As of February 28, 1994, outstanding medium-term notes issued by the parent
and CFC under various shelf registrations filed with the Securities and
Exchange Commission were as follows.
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
Floating- Fixed-
Rate Rate Total From To From To
Parent
Series A $ - $12,750 $12,750 10.60% 10.60% Dec 1994 Aug 1995
CFC
Series A 5,000 494,800 499,800 4.47% 8.79% Jun 1994 Mar 2002
Series B 31,000 469,000 500,000 3.51% 6.98% Aug 1994 Aug 2005
Series C 55,000 21,000 76,000 4.36% 6.55% Mar 2001 Mar 2004
Subtotal $ 91,000 $984,800 $1,075,800
Total $ 91,000 $997,550 $1,088,550
At February 28, 1994, all of the outstanding fixed-rate notes of CFC had been
effectively converted by interest rate swap agreements to floating-rate notes.
In addition, as of February 28, 1994, $424.0 million was available for future
issuances under the Series C shelf registration.
NOTE D - NOTES PAYABLE (Continued)
Pre-Sale Funding Facilities
As of February 28, 1994, CFC had a $1 billion revolving credit facility ("Pre-
sale Funding Facility") with an affiliate of an investment banking firm. The
credit facility is secured by conforming mortgage loans which are in the
process of being pooled into mortgage-backed securities. Interest rates are
based on LIBOR. The weighted average borrowing rate for the year ended
February 28, 1994 was 3.75%. Of the total credit facility, $400 million is
committed through April 24, 1994. This commitment is subject to CFC's
compliance with certain financial and operational covenants. The balance of
the credit facility is cancelable by either party upon the maturity of all, if
any, then existing obligations. The balance outstanding under this facility
at February 28, 1994 was $63.2 million.
As of February 28, 1994, CFC had a $1.5 billion revolving credit facility
("Early Funding Agreement") with the Federal Home Loan Mortgage Corporation
("FHLMC"). The credit facility is secured by conforming mortgage loans which
are in the process of being pooled into FHLMC participation certificates.
Interest rates under the agreement are based on the prevailing rates for
mortgage-backed securities reverse-repurchase agreements. The weighted
average borrowing rate for the year ended February 28, 1994 was 3.25%. Of the
total credit facility, $750 million is committed through November 18, 1994.
This commitment is subject to CFC's compliance with certain financial and
operational covenants. The balance of the credit facility is cancelable by
either party upon the maturity of all, if any, then existing obligations. As
of February 28, 1994, the Company had no outstanding borrowings under this
facility.
As of February 28, 1994, CFC had a $1 billion revolving credit facility ("As
Soon as Pooled Agreement") with the Federal National Mortgage Association
("FNMA"). The credit facility is secured by conforming mortgage loans which
are in the process of being pooled into FNMA mortgage-backed securities.
Interest rates are based on LIBOR and/or federal funds. The weighted average
borrowing rate for the year ended February 28, 1994 was 3.65%. Of the total
credit facility, $500 million is committed through July 20, 1995. This
commitment is subject to CFC's compliance with certain financial and
operational covenants. The balance of the credit facility is cancelable by
either party upon the maturity of all, if any, then existing obligations. As
of February 28, 1994, the Company had no outstanding borrowings under this
facility.
Reverse-Repurchase Agreements
As of February 28, 1994, the Company had entered into short-term financing
arrangements to sell mortgage-backed securities and whole loans under
agreements to repurchase. The weighted average borrowing rate for the year
ended February 28, 1994 was 3.44%. The reverse-repurchase agreements were
collateralized by either mortgage-backed securities or whole loans. All
mortgage-backed securities and whole loans underlying reverse-repurchase
agreements are held in safekeeping by broker-dealers, and all agreements are
to repurchase the same or substantially identical mortgage-backed securities
or whole loans.
NOTE D - NOTES PAYABLE (Continued)
Subordinated Notes
In October 1992, CFC issued $200 million of 8.25% subordinated notes (the
"Subordinated Notes") due July 15, 2002 under a registration statement filed
in September 1992. Interest on the Subordinated Notes is payable semi-
annually on each January 15 and July 15, beginning January 15, 1993. The
Subordinated Notes are not redeemable prior to maturity and are not subject to
any sinking fund.
Other
As of February 28, 1994, CFC had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.19
billion. The effect of these agreements is to enable CFC to convert a portion
of its fixed-rate cost borrowings to LIBOR-based floating-rate cost borrowings
(notional amount $1.22 billion) and to manage the Company's exposure to
interest rate risk (notional amount $0.97 billion). The weighted average
borrowing rate on CFC's medium-term note borrowings for the year ended
February 28, 1994, including the effect of the interest rate swap agreements,
was 4.57%. Payments are due periodically through the termination date of each
agreement. The agreements expire between March 1994 and August 2005.
Maturities of notes payable are as follows.
(Dollar amounts in
Year ending February 28(29), thousands)
1995 $2,662,131
1996 95,600
1997 113,696
1998 85,300
1999 102,000
Thereafter 800,500
$3,859,227
NOTE E - INCOME TAXES
Components of the provision for income taxes consisted of the following.
Year ended February 28(29),
(Dollar amounts in 1994 1993 1992
thousands)
Federal expense (benefit)
Current $ - $ - $ 792
Deferred 99,074 71,152 29,946
99,074 71,152 30,738
State expense
Current - - 377
Deferred 20,566 22,230 9,016
20,566 22,230 9,393
$119,640 $93,382 $40,131
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate reflected in the consolidated statements of
earnings.
Year ended February
28(29),
1994 1993 1992
Statutory federal income 35.0% 34.0% 34.0%
tax rate
State income and franchise
taxes 5.0 6.4 6.1
Tax rate differential on
reversing timing - (.4) (.1)
differences
Effective income tax rate 40.0% 40.0% 40.0%
In August 1993, legislation was enacted that implemented a one percent
increase in the corporate federal tax rate. As a result, the Company increased
its deferred federal tax liability in the amount of approximately $5 million.
Also, the Company has diversified its business activities outside California,
a state that has a corporate tax rate that is higher than the average tax rate
among the states in which the Company does business. This diversification
reduced the Company's effective state tax rate by approximately one percent,
and therefore its deferred state tax liability was decreased by approximately
$5 million. The Company's total deferred tax liability and combined tax rate
did not change materially as a result of these two events.
NOTE E - INCOME TAXES (Continued)
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below.
February
(Dollar amounts in thousands) 28,1994
Deferred income tax assets:
Federal net operating losses $68,240
State net operating losses 7,342
Alternative minimum tax credits 2,664
State income and franchise taxes 22,326
Allowance for losses 5,965
Other 1,650
Total deferred income tax assets 108,187
Deferred income tax liabilities:
Capitalized servicing fees receivable
and 410,773
purchased servicing rights
Accumulated depreciation 5,939
Total deferred income tax liabilities 416,712
Deferred income taxes $308,525
Deferred income tax expense (benefit) resulted from timing differences in the
recognition of revenues and expenses for tax and financial statement purposes.
The sources of these differences and the effects of each were as follows.
Year ended February 28(29),
(Dollar amounts in thousands) 1993 1992
Capitalized servicing fees $101,800 $46,055
State income and franchise (7,729) (4,717)
taxes
Accelerated depreciation 1,022 393
Allowance for credit losses (1,711) (2,156)
Direct finance leases - (174)
Other - (439)
$ 93,382 $38,962
At February 28, 1994, the Company had net operating loss carryforwards for
federal income tax purposes of $13,612,000 expiring in 2003, $16,448,000
expiring in 2004, $4,712,000 expiring in 2006, $8,034,000 expiring in 2008 and
$152,165,000 expiring in 2009.
NOTE F - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business through the production and sale of mortgage
loans and the management of interest-rate risk. These instruments include
short-term commitments (interest rate and points) to extend credit, mortgage-
backed securities mandatory forward commitments, put or call options to sell
or buy mortgage-backed securities and interest rate swaps. These instruments
involve, to varying degrees, elements of credit and interest-rate risk.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the various agreements. However, the Company does not
anticipate nonperformance by the counterparties. The Company manages credit
risk with respect to mortgage-backed securities mandatory forward commitments,
put or call options to sell or buy mortgage-backed securities and interest
rate swaps by exclusively entering into agreements with Wall Street investment
bankers having primary dealer status, money center banks and permanent
investors meeting certain standards. The Company's exposure to credit risk in
the event of default by the counterparty is the difference between the
contract price and the current market price offset by any available margins
retained by the Company or an independent clearing agent. The amounts of
credit risk as of February 28, 1994, if any counterparty failed completely and
if the margins retained by an independent clearing agent were to become
unavailable, are approximately $159 million for mortgage-backed securities
mandatory forward commitments and approximately $4 million for interest rate
swaps. Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk.
As discussed in Note H, the Company's exposure to credit risk with respect to
the servicing portfolio in the event of nonperformance by the mortgagor is
limited due to the non-recourse nature of the loans in the servicing
portfolio.
NOTE G - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
as of February 28, 1994 and 1993 is made in accordance with the requirement of
SFAS 107, Disclosures about Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
NOTE G - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
February 28, 1994 February 28, 1993
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) amount fair Value amount fair value
Assets:
Cash $ 4,034 $ 4,034 $ 12,573 $ 12,573
Mortgage loans shipped and held for sale 3,714,261 3,725,913 2,316,297 2,335,634
Other receivables 349,770 349,770 112,460 112,460
Capitalized servicing fees receivable 289,541 295,403 211,785 221,156
Other financial instruments included in
Other assets 238,841 173,829
Liabilities:
Notes payable 3,859,227 3,901,179 1,943,493 1,993,487
Drafts payable 449,814 449,814 370,958 370,958
Accounts payable and accrued liabilities 87,818 87,818 57,597 57,597
Off-balance-sheet unrealized gains (losses):
Interest rate swaps (6,669) 14,941
Short-term commitments to extend credit (59,533) 40,806
Commitments to buy and sell
mortgage-backed securities 59,533 25,370
The fair value estimates as of February 28, 1994 and 1993 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
those dates and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair values.
Cash
The carrying amount approximates fair value.
Mortgage Loans Shipped and Held for Sale
Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
Other Receivables
The carrying amount approximates fair value.
NOTE G - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Capitalized Servicing Fees Receivable
Fair value is estimated by discounting future cash flows from excess
servicing fees using discount rates that approximate current market rates and
market consensus prepayment rates.
Other Financial Instruments
Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and
market consensus prepayment rates.
Notes Payable
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
Drafts Payable and Accounts Payable and Accrued Liabilities
The carrying amounts approximate fair values due to the short-term nature of
these instruments.
Interest Rate Swaps
The fair value of interest rate swaps is the estimated amount that the
Company would receive to terminate the swap agreements at the respective
dates.
Short-term Commitments to Extend Credit
The fair value is based upon the difference between the current value of
similar loans and the price at which the Company has committed to make the
loans.
Commitments to Buy and Sell Mortgage-Backed Securities
The fair value of commitments to buy and sell mortgage-backed securities is
based on the difference between the settlement values of those commitments and
the quoted market values of the underlying securities.
NOTE H - COMMITMENTS AND CONTINGENCIES
1. Commitments to Sell Mortgage-Backed Securities
As of February 28, 1994, the Company had open commitments amounting to
approximately $17 billion to sell mortgage-backed securities with varying
settlement dates. These commitments are utilized in delivering mortgage loans
held for sale and are considered in the valuation of the mortgage loan
inventory. In connection with these commitments, the Company is required to
maintain margin deposits if aggregate commitment prices are less than current
market prices.
NOTE H - COMMITMENTS AND CONTINGENCIES (Continued)
2. Lease Commitments
The Company leases office facilities under lease agreements extending through
September 2001. Future minimum annual rental commitments under these non-
cancelable operating leases with initial or remaining terms of one year or
more are as follows.
(Dollar
Year ending February 28(29), amounts in
thousands)
1995 $14,505
1996 12,468
1997 10,672
1998 8,881
1999 7,026
Thereafter 6,532
$60,084
Rent expense was $19,115,000, $13,049,000 and $8,442,000 for the years ended
February 28(29), 1994, 1993 and 1992, respectively.
3. Restrictions on Transfers of Funds
Certain of the parent's subsidiaries are subject to regulatory and/or credit
agreement restrictions which limit their ability to transfer funds to the
Company through intercompany loans, advances or dividends. Pursuant to a
credit agreement as of February 28, 1994, the Company is required to maintain
$612,000,000 in consolidated net worth and CFC is required to maintain
$578,000,000 of net worth, as defined in the credit agreement.
4. Loan Servicing
As of February 28(29), 1994, 1993 and 1992, the Company was servicing loans
totaling approximately $84.7 billion, $54.5 billion and $27.5 billion,
respectively. Included in the loans serviced as of February 28(29), 1994, 1993
and 1992 were loans being serviced under subservicing agreements with total
principal balances of $592 million, $627 million and $442 million,
respectively.
Conforming conventional loans serviced by the Company (59% of the servicing
portfolio at February 28, 1994) are securitized through FNMA or FHLMC programs
on a non-recourse basis, whereby foreclosure losses are generally the
responsibility of FNMA or FHLMC and not of the Company. Similarly, the
government loans serviced by the Company are securitized through Government
National Mortgage Association programs, whereby the Company is insured against
loss by the Federal Housing Administration (11% of the servicing portfolio at
February 28, 1994) or partially guaranteed against loss by the Veterans
Administration (5% of the servicing portfolio at February 28, 1994). In
addition, jumbo mortgage loans (25% of the servicing portfolio at February 28,
1994) are also serviced on a non-recourse basis.
Properties securing the mortgage loans in the Company's servicing portfolio
are geographically dispersed throughout the United States. As of February 28,
1994, approximately 49% of the mortgage loans (measured by unpaid principal
balance) in the Company's servicing portfolio are secured by properties
located in California. No other state contains more than 4% of the properties
securing mortgage loans.
NOTE H - COMMITMENTS AND CONTINGENCIES (Continued)
5. Pipeline of Mortgage Loan Applications in Process
As of February 28, 1994, the Company had open short-term commitments
(interest rate and points) amounting to approximately $6 billion to fund
mortgage loan applications in process subject to approval of the loans and an
additional $1.6 billion subject to property identification and borrower
qualification. After funding and sale of the mortgage loans, the Company's
exposure to credit loss in the event of nonperformance by the mortgagor is
limited as described above in Note H4. The Company uses the same credit
policies in the commitments as are applied to all lending activities.
NOTE I - EMPLOYEE BENEFITS
1. Stock Option Plans
The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and
directors. Options are generally granted at the average market price of the
Company's common stock on the date of grant and are exercisable beginning one
year from the date of grant and expire up to eleven years from date of grant.
Stock option transactions under the Plans were as follows.
Year ended February 28(29),
1994 1993 1992
(Number of Shares)
Shares subject to:
Outstanding options at beginning
of year 4,396,109 3,552,887 4,066,142
Options granted 1,955,273 1,749,678 1,360,964
Options exercised (662,469) (819,909) (1,731,720)
Options expired or canceled (129,032) (86,547) (142,499)
Outstanding options at end of year 5,559,881 4,396,109 3,552,887
Exercise price:
Per share for options exercised
during the year $2.19 - $16.19 $1.98 - $12.65 $1.72 - $3.84
Per share for options outstanding
at end of year $2.19 - $21.83 $2.19 - $16.19 $1.98 - $12.65
Of the outstanding options as of February 28, 1994, 1,716,986 shares were
immediately exercisable under the Plans. Also as of February 28, 1994,
3,781,401 shares were designated for future grants under the Plans.
The Company has also adopted two non-qualified plans (1985 and 1986 Non-
Qualified Stock Option Plans) granting directors of the Company the right to
acquire up to 82,595 shares of the Company's common stock. As of February 28,
1994, options for 43,445 shares were exercisable under the 1986 Non-Qualified
Stock Option Plan at $2.52 per share, while no remaining options were
exercisable under the 1985 Non-Qualified Stock Option Plan. During the years
ended February 28(29), 1994, 1993 and 1992, options exercised under both plans
were 39,150, 17,712 and 911,427 respectively. No shares were designated for
future issuances under the two non-qualified plans.
NOTE I - EMPLOYEE BENEFITS (Continued)
2. Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the
minimum funding standards of ERISA.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
Year ended February 28,
(Dollar amounts in thousands) 1994 1993
Actuarial present value of benefit
obligations:
Vested $5,024 $3,961
Non-vested 1,540 1,726
Total accumulated benefit obligation 6,564 5,687
Additional benefits based on estimated
future salary levels 4,517 6,364
Projected benefit obligations for service
rendered to date 11,081 12,051
Less Plan assets at fair value, primarily
mortgage-backed securities (7,482) (6,351)
Projected benefit obligation in excess
of Plan assets 3,599 5,700
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions (780) (3,048)
Prior service cost not yet recognized
in net periodic pension cost (1,522) (2,265)
Unrecognized net asset at February 28,
1987 being recognized over 15 years 566 637
Accrued pension cost $1,863 $1,024
Net pension cost included the following
components:
Service cost - benefits earned during
the period $1,395 $751
Interest cost on projected benefit
obligations 677 626
Actual return on Plan assets (413) (372)
Net amortization and deferral (28) (13)
Net periodic pension cost $1,631 $992
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.0% and 5.0%, respectively. The expected
long-term rate of return on assets used was 7.5%. Pension expense for 1994,
1993 and 1992 was $1,631,000, $992,000 and $691,000, respectively. The
Company makes contributions to the Plan in amounts that are deductible in
accordance with federal income tax regulations.
NOTE J - REDEEMABLE PREFERRED STOCK
On July 6, 1993, the Company called all of its outstanding Convertible
Preferred Stock, which was represented by depositary convertible shares (each
depositary share represented 1/10 of a share of Convertible Preferred Stock).
Each depositary share was convertible into 6.3 shares of Common Stock, and
each depositary share not converted was redeemable for $27.375 in cash. All
holders converted their shares into Common Stock.
NOTE K - SHAREHOLDERS' EQUITY
In February 1988, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock. One Right will also be
issued for each share of common stock issued between the record date for the
initial dividend distribution of Rights and the "Distribution Date" (as
defined below). As the result of stock splits and a stock dividend, each .423
Right, when exercisable, entitles the holder to purchase from the Company one
one-hundredth share of $.05 par value Serial Preferred Stock, designated as
Series A Participating Preferred Stock (the "Series A Preferred Stock"), at a
price of $145, subject to adjustments in certain cases to prevent dilution.
The Series A Preferred Stock has terms intended to cause the value of one one-
hundredth share of Series A Preferred Stock to be equivalent to the value of
one share of common stock at the time of initial issuance.
The Rights are evidenced by the common stock certificates and are not
exercisable or transferable, apart from the common stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
common stock ("Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of
common stock, or the equivalent thereof, of the Company which, at the time of
such transaction, would have a market value of two times the exercise price of
the Right. The Board of Directors of the Company may delay the exercisability
of the Rights during the period in which they are exercisable only for Series
A Preferred Stock (and not common stock).
In the event that, after a person has become an Acquiring Person, the Company
is acquired in a merger or other business combination, as defined for the
purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise
price of the Right, that number of shares of common stock, or the equivalent
thereof, of the other party (or publicly-traded parent thereof) to such merger
or business combination which at the time of such transaction would have a
market value of two times the exercise price of the Right. The Rights expire
on the earlier of February 28, 2002, consummation of certain merger
transactions or optional redemption by the Company prior to any person
becoming an Acquiring Person.
On April 8, 1993, the Company's Board of Directors approved the Countrywide
Credit Industries, Inc. 1993 Stock Option Plan. A registration statement was
filed on September 28, 1993 for 3,000,000 shares of common stock (4,500,000
shares after the 1994 3-for-2 stock split) to be reserved for future issuance
under the Plan.
NOTE L - RELATED PARTY TRANSACTIONS
Countrywide Asset Management Corporation ("CAMC"), a wholly-owned subsidiary
of the Company, has entered into an agreement (the "Management Agreement")
with Countrywide Mortgage Investments, Inc. ("CMI"), a real estate investment
trust. CAMC has entered into a subcontract with its affiliate, CFC, to
perform such services for CMI as CAMC deems necessary. In accordance with the
Management Agreement, CAMC advises CMI on various facets of its business and
manages its operations subject to the supervision of CMI's Board of Directors.
For performing these services, CAMC receives certain management fees and
incentive compensation. For the calendar year 1993, CAMC waived all fees
pursuant to the above. In addition, in 1993 CAMC absorbed $900,000 of
operating expenses incurred in connection with its duties under the Management
Agreement. CMI began paying all expenses of the new operations in June 1993.
Management fees for the fiscal years ended February 28(29), 1994, 1993 and
1992 amounted to $84,000, $821,000 and $1,752,000, respectively. The
Management Agreement is renewable annually and expires on May 15, 1994.
NOTE L - RELATED PARTY TRANSACTIONS (Continued)
CMI has an option to purchase conventional loans from CFC at the prevailing
market price. During the years ended February 28, 1994 and 1993, CMI
purchased $300,484,000 and $130,261,000, respectively, of conventional non-
conforming mortgage loans from CFC pursuant to this option. No purchases of
conventional loans were made by CMI during the year ended February 29, 1992.
In 1987 and 1993, the subsidiaries of CMI entered into servicing agreements
appointing CFC as servicer of five series of bonds payable that are
collateralized by pools of mortgage loans. CFC is entitled under each
agreement to an annual fee of up to .32% of the aggregate unpaid principal
balance of the pledged mortgage loans. Servicing fees received by CFC under
such agreements for the years ended February 28(29), 1994, 1993 and 1992 were
approximately $530,000, $250,000 and $446,000, respectively.
CFC has extended CMI a $10,000,000 line of credit bearing interest at prime
and maturing September 30, 1994. At February 28, 1994, there was no
outstanding amount under the agreement.
NOTE M - AMORTIZATION AND SERVICING HEDGE
Components of amortization expense and servicing hedge gain, included in net
loan administration income, are as follows.
Year ended February 28(29),
(Dollar amounts in thousands) 1994 1993 1992
Amortization of purchased
servicing rights $141,321 $119,878 $24,167
Amortization of capitalized
servicing fees receivable 100,856 31,484 29,601
242,177 151,362 53,768
Servicing hedge gain, net (73,400) (74,075) (17,000)
Amortization, net of
servicing $168,777 $ 77,287 $36,768
hedge gain
NOTE N - SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in the mortgage banking
industry. Operations in mortgage banking involve CFC's origination and
purchase of mortgage loans, sale of mortgage loans in the secondary mortgage
market, servicing of mortgage loans, and the purchase and sale of rights to
service mortgage loans.
Segment information for the year ended February 28, 1994 follows.
Adjustments
(Dollar amounts in Mortgage and
thousands) banking Other eliminations Consolidated
Unaffiliated revenue $719,533 $36,047 $ - $755,580
Intersegment revenue 744 - (744) -
Total revenue $720,277 $36,047 ($ 744) $755,580
Earnings before income
taxes $286,069 $13,031 $ - $299,100
Identifiable assets as
of February 28, 1994 $5,523,664 $930,720 ($868,863) $5,585,521
Segment information for the year ended February 28, 1993 follows.
Adjustments
(Dollar amounts in Mortgage and
thousands) banking Other eliminations Consolidated
Unaffiliated revenue $463,394 $42,164 $ - $505,558
Intersegment revenue 3,021 - (3,021) -
Total revenue $466,415 $42,164 ($3,021) $505,558
Earnings before income
taxes $217,073 $16,382 $ - $233,455
Identifiable assets as
of February 28, 1993 $3,229,243 $765,954 ($696,064) $3,299,133
NOTE N - SEGMENT INFORMATION (Continued)
Segment information for the year ended February 29, 1992 follows.
Adjustments
(Dollar amounts in Mortgage and
thousands) banking Other eliminations Consolidated
Unaffiliated revenue $215,165 $30,947 $ - $246,112
Intersegment revenue 840 - (840) -
Total revenue $216,005 $30,947 ($840) $246,112
Earnings before income
taxes $91,968 $8,359 $ - $100,327
Identifiable assets as
of February 29, 1992 $2,108,592 $870,462 ($569,080) $2,409,974
NOTE O - SUBSEQUENT EVENTS
On March 21, 1994, the Company declared a cash dividend of $0.12 per common
share ($0.08 per share adjusted for the 3-for-2 stock split payable May 3,
1994), payable April 26, 1994 to shareholders of record on April 8, 1994. The
Company also declared a 3-for-2 split of the Company's $0.05 par value common
stock, payable on May 3, 1994 to shareholders of record on April 11, 1994. As
a result of the split, approximately 30.4 million additional shares will be
issued, with a reduction to paid-in capital of approximately $1,518,000. All
references in the accompanying consolidated balance sheets, consolidated
statements of earnings, and notes to consolidated financial statements to the
number of common shares and share amounts have been restated to reflect the
stock split.
On March 4, 1994, CFC successfully negotiated an increase in its mortgage
warehouse credit facility, permitting CFC to borrow an aggregate maximum
amount of $2.92 billion, including borrowings under the commercial paper
arrangement.
NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data is as follows.
Three months ended
(Dollar amounts in
thousands, except share May 31 August 31 November 30 February 28
data)
Year ended February 28, 1994
Revenue $166,665 $188,272 $196,446 $204,197
Expenses 94,503 111,507 124,844 125,626
Provision for income 28,865 30,706 28,641 31,428
taxes
Net earnings 43,297 46,059 42,961 47,143
Earnings per share(1)
Primary $0.49 $0.51 $0.46 $0.51
Fully diluted $0.47 $0.50 $0.46 $0.51
Year ended February 28, 1993
Revenue $103,646 $122,790 $136,599 $142,523
Expenses 55,361 65,748 73,622 77,372
Provision for income 19,314 22,817 25,191 26,060
taxes
Net earnings 28,971 34,225 37,786 39,091
Earnings per share(1)
Primary $0.34 $0.41 $0.45 $0.45
Fully diluted $0.32 $0.37 $0.41 $0.42
(1) Earnings per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per
share amounts may not equal the annual amount. This is caused by
rounding and the averaging effect of the number of share equivalents
utilized throughout the year, which changes with the market price of the
common stock.
NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for Countrywide Funding Corporation is as
follows.
February 28,
(Dollar amounts in thousands) 1994 1993
Balance Sheets:
Mortgage loans shipped and held
for sale $3,714,261 $2,316,297
Other assets 1,809,403 912,946
Total assets $5,523,664 $3,229,243
Short- and long-term debt $4,296,291 $2,275,241
Other liabilities 374,559 272,829
Equity 852,814 681,173
Total liabilities and equity $5,523,664 $3,229,243
Year ended February 28,
1994 1993
Statements of Earnings:
Revenues $720,277 $466,415
Expenses 434,208 249,342
Provision for income taxes 114,427 86,876
Net earnings $171,642 $130,197
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
Three years ended February 28, 1994
(Dollar amounts in thousands)
Column A Column B Column C Column D
Balance at end of
Deductions period
Balance
at Amounts
beginning Amounts written Not
Name of Debtor of period Additions collected off Current current
Year ended February
28, 1994
David Loeb - $ 405 $ 101 - $ 101 $ 203
Year ended February
28, 1993
David Loeb $ 947 - $ 947 - - -
Year ended February
29, 1992
Ralph Mozilo $ 40 - $ 40 - - -
Sidney Lenz $ 95 - $ 95 - - -
David Loeb - $ 961 $ 14 - $ 163 $ 784
F-30
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COUNTRYWIDE CREDIT INDUSTRIES, INC.
BALANCE SHEETS
February 28,
(Dollar amounts in thousands)
1994 1993
Assets
Cash $ - $ -
Other receivables 3,333 21,961
Intercompany receivable 55,688 66,540
Investment in subsidiaries at
equity in net assets 863,974 695,175
Equipment and leasehold improvements 79 79
Other assets 12,689 1,922
$ 935,763 $ 785,677
Liabilities and Shareholders' Equity
Notes payable $ 12,750 $ 35,770
Intercompany payable 30,756 26,069
Accounts payable and accrued liabilities 5,870 3,310
Deferred income taxes 6,250 1,623
Preferred stock - 25,800
Common shareholders' equity
Common stock 4,553 2,784
Additional paid-in capital 606,031 573,635
Retained earnings 269,553 116,686
$ 935,763 $ 785,677
F-31
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF EARNINGS
Year ended February 28(29),
(Dollar amounts in thousands)
1994 1993 1992
Revenue
Interest earned $ 221 $ 635 $ 3,470
Interest charges (2,247) (3,862) (8,032)
(2,026) (3,227) (4,562)
Expenses (2,641) (1,415) (1,186)
Loss before income tax benefit and
equity in net earnings of subsidiaries (4,667) (4,642) (5,748)
Income tax benefit 1,867 1,857 2,299
Loss before equity in net earnings
of subsidiaries (2,800) (2,785) (3,449)
Equity in net earnings of subsidiaries 182,260 142,858 63,645
NET EARNINGS $179,460 $140,073 $60,196
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Year ended February 28(29),
Increase (Decrease) in Cash
(Dollar amounts in thousands)
1994 1993 1992
Cash flows from operating activities:
Net earnings $ 179,460 $ 140,073 $ 60,196
Adjustments to reconcile net earnings to
net cash (used)
provided by operating activities:
Earnings of subsidiaries (182,260) (142,858) (63,645)
Depreciation and amortization 12 12 8
Increase (decrease) in accounts
payable and accrued liabilities 2,560 (982) 556
Decrease (increase) in other
receivables and other assets 14,971 (77) 3,651
Net cash provided (used) by
operating activities 14,743 (3,832) 766
Cash flows from investing activities:
Net change in intercompany receivables and
payables 29,000 65,560 (1,337)
Investment in subsidiaries 0 (10,304) (308,101)
Net cash provided (used) by
investing activities 29,000 55,256 (309,438)
Cash flows from financing activities:
Repayment of long-term debt (23,020) (31,300) (29,050)
Issuance of common stock 4,398 3,448 350,811
Cash dividends paid (25,121) (23,572) (13,089)
Net cash (used) provided by
financing activities (43,743) (51,424) 308,672
Net change in cash - - -
Cash at beginning of year - - -
Cash at end of year $ - $ - $ -
Supplemental cash flow information:
Cash used to pay interest $ 2,554 $ 4,181 $ 8,917
Cash (refunded from) used to pay income
taxes ($ 1,823) $ 4,567 $ 102
Noncash financing activities - conversion
of preferred stock $ 25,800 $ 11,731 $ 567
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COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Three years ended February 28, 1994
(Dollar amounts in thousands)
Column A Column B Column C Column D Column E
Additions
Balance Charged Charged
at to costs to other Balance
beginning and accounts Deductions at end of
Description of period expenses (2) (1) period
Year ended February 28, 1994
Allowance for losses $16,144 $6,046 $3,051 $11,415 $13,826
Year ended February 28, 1993
Allowance for losses $9,909 $4,103 $7,991 $5,859 $16,144
Year ended February 29, 1992
Allowance for losses $5,447 $5,631 $3,600 $4,769 $9,909
(1) Actual losses charged against reserve, net of recoveries and
reclassification.
(2) Additions charged to gain (loss) on sale of loans.
F-34
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
Three years ended February 28, 1994
(Dollar amounts in thousands)
Column A Column B Column C Column D Column E Column F
Average Weighted
Maximum amount average
Weighted outstand outstand interest
Category of aggregate short- Balance at average -ing -ing rate
term borrowings end of interest during the during the during
period rate period period (1) the
period
(2)
Year ended February 28, 1994
Notes payable (3) $375,339 3.35% $4,133,361 $1,827,338 3.46%
Commercial paper $2,194,543 3.30% $2,726,100 $1,789,607 3.31%
Year ended February 28, 1993
Notes payable (3) $123,715 3.44% $3,176,803 $1,637,381 3.49%
Commercial paper $1,031,298 3.57% $1,126,559 $363,010 3.98%
Year ended February 29, 1992
Notes payable (3) $775,571 4.25% $1,347,670 $726,119 4.59%
Commercial paper $49,945 5.45% $198,865 $22,132 5.42%
(1) Calculation of average amount outstanding during the period based upon the
daily principal balance of borrowings.
(2) Calculation of weighted average interest rate during the period based upon
the daily average principal balance of borrowings divided into total interest
charges on such borrowings.
(3) Includes borrowings under repurchase agreements and master notes.
F-35
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Column A Column B
Year ended February 28(29),
Item 1994 1993 1992
(Dollar amounts in thousands)
Maintenance and repairs $4,494 $2,880 $3,644
F-36