-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VxkrkN/UM6GueV+yKUegI3M4CH3Q61RzGLeOvKgS3yY1p4MNw+M1R2teWT4fHYVJ 6zR8V4yPerUCddNl5Y30Qw== 0000025191-96-000002.txt : 19960117 0000025191-96-000002.hdr.sgml : 19960117 ACCESSION NUMBER: 0000025191-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960116 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954083087 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08422 FILM NUMBER: 96503765 BUSINESS ADDRESS: STREET 1: 155 NORTH LAKE AVE CITY: PASADENA STATE: CA ZIP: 91101-1857 BUSINESS PHONE: 8183048400 10-Q 1 3RD QUARTER FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended November 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to __________________________ Commission File Number: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-2641992 - -------------------------------------- ----------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 155 N. Lake Avenue, Pasadena, California 91101 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (818) 304-8400 ----------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 15, 1996 ----- ------------------------------- Common Stock $.05 par value 102,054,364 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) November 30, February 28, 1995 1995 ---------------- ----------------- (Dollar amounts in thousands) ASSETS Cash $ 6,798 $ 17,624 Receivables for mortgage loans shipped 1,362,848 1,174,648 Mortgage loans held for sale 3,303,490 1,724,177 Other receivables 446,209 476,754 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 139,416 145,612 Capitalized servicing fees receivable 585,213 464,268 Mortgage servicing rights 1,515,203 1,332,629 Other assets 568,461 243,950 ---------------- ----------------- Total assets $7,927,638 $5,579,662 ================ ================= Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $2,216,899 $1,063,676 ================ ================= LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $5,812,846 $3,963,091 Drafts payable issued in connection with mortgage loan closings 247,692 200,221 Accounts payable and accrued liabilities 139,886 105,097 Deferred income taxes 460,750 368,695 ---------------- ----------------- Total liabilities 6,661,174 4,637,104 Commitments and contingencies - - Shareholders' equity Common stock - authorized, 240,000,000 shares of $.05 par value; issued and outstanding, 102,022,880 shares at November 30, 1995 and 91,370,364 shares at February 28, 1995 5,101 4,568 Additional paid-in capital 816,377 608,289 Retained earnings 444,986 329,701 ---------------- ----------------- Total shareholders' equity 1,266,464 942,558 ---------------- ----------------- Total liabilities and shareholders' equity $7,927,638 $5,579,662 ================ ================= Borrower and investor custodial accounts $2,216,899 $1,063,676 ================ ================= The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Nine Months Ended November 30, Ended November 30, 1995 1994 1995 1994 ------------------------------ ------------------------------ (Dollar amounts in thousands, except per share data) Revenues Loan origination fees $ 52,049 $ 45,289 $146,955 $168,066 Gain (loss) on sale of loans 23,674 (25,551) 55,688 (30,306) ------------------------------ ------------------------------ Loan production revenue 75,723 19,738 202,643 137,760 Interest earned 94,148 66,345 259,762 201,585 Interest charges (72,093) (50,134) (207,510) (139,746) ------------------------------ ------------------------------ Net interest income 22,055 16,211 52,252 61,839 Loan servicing income 148,111 110,898 416,624 310,076 Less amortization and impairment of servicing assets (156,284) (23,329) (355,705) (71,397) Servicing hedge benefit (expense) 119,365 (162) 254,445 (39,422) Less write-off of servicing hedge - - - (25,600) ------------------------------ ------------------------------ Net loan administration income 111,192 87,407 315,364 173,657 Gain on sale of servicing - - - 56,880 Commissions, fees and other income 16,598 10,370 43,582 31,814 ------------------------------ ------------------------------ Total revenues 225,568 133,726 613,841 461,950 ------------------------------ ------------------------------ Expenses Salaries and related expenses 57,652 44,926 164,260 154,048 Occupancy and other office expenses 26,800 25,273 77,883 76,889 Guarantee fees 31,675 21,940 85,956 61,718 Marketing expenses 6,848 5,704 19,388 17,856 Branch and administrative office consolidation costs - - - 8,000 Other operating expenses 14,336 8,952 36,217 28,444 ------------------------------ ------------------------------ Total expenses 137,311 106,795 383,704 346,955 ------------------------------ ------------------------------ Earnings before income taxes 88,257 26,931 230,137 114,995 Provision for income taxes 35,303 10,773 92,055 45,998 ------------------------------ ------------------------------ NET EARNINGS $ 52,954 $ 16,158 $138,082 $ 68,997 ============================== ============================== Earnings per share Primary $0.51 $0.18 $1.39 $0.75 Fully diluted $0.51 $0.18 $1.39 $0.75 The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended November 30, 1995 1994 ---------------- ----------------- (Dollar amounts in thousands) Cash flows from operating activities: Net earnings $ 138,082 $ 68,997 Adjustments to reconcile net earnings to net cash used by operating activities: Amortization and impairment of mortgage servicing rights 283,443 69,080 Amortization and impairment of capitalized servicing fees receivable 72,262 2,317 Depreciation and other amortization 22,086 19,277 Deferred income taxes 92,055 45,998 Gain on bulk sale of servicing rights - (56,880) Origination and purchase of loans held for sale (24,981,842) (22,081,979) Principal repayments and sale of loans 23,214,329 21,894,904 ---------------- ----------------- Increase in mortgage loans shipped and held for sale (1,767,513) (187,075) (Increase) decrease in other receivables and other assets (298,691) 12,292 Increase in accounts payable and accrued liabilities 34,789 18,890 ---------------- ----------------- Net cash used by operating activities (1,423,487) (7,104) ---------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights (466,017) (444,063) Additions to capitalized servicing fees receivable (193,207) (145,149) Proceeds from bulk sale of servicing rights - 20,547 Purchase of property, equipment and leasehold improvements - net (11,165) (24,212) ---------------- ----------------- Net cash used by investing activities (670,389) (592,877) ---------------- ----------------- Cash flows from financing activities: Net increase in warehouse debt and other short-term borrowings 1,703,547 439,840 Issuance of long-term debt 290,000 271,205 Repayment of long-term debt (96,321) (90,632) Issuance of common stock 208,621 1,229 Cash dividends paid (22,797) (21,889) ---------------- ----------------- Net cash provided by financing activities 2,083,050 599,753 ---------------- ----------------- Net decrease in cash (10,826) (228) Cash at beginning of period 17,624 4,034 ================ ================= Cash at end of period $ 6,798 $ 3,806 ================ ================= Supplemental cash flow information: Cash used to pay interest $ 254,631 $ 196,088 Cash paid for (refunded from) income taxes $ 25 ($ 894) The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine month period ended November 30, 1995 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 28, 1995 of Countrywide Credit Industries, Inc. (the "Company"). In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, which the Company adopted effective March 1, 1995. SFAS No. 122 amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter and nine months ended November 30, 1995 are not directly comparable to prior periods. See Note E. Certain amounts reflected in the consolidated financial statements for the three and nine month periods ended November 30, 1994 have been reclassified to conform to the presentation for the three and nine months ended November 30, 1995. NOTE B - NOTES PAYABLE
Notes payable consisted of the following. ------------------------------------------------------------------ ---- --------------- --- -------------- -- (Dollar amounts in thousands) November 30, February 28, 1995 1995 ------------------------------------------------------------------ ---- --------------- --- -------------- -- Commercial paper $2,788,251 $2,122,348 Revolving credit facility 100,000 - Medium-term notes, Series A, B, C and D 1,588,300 1,393,900 Repurchase agreements 855,379 245,212 Subordinated notes 200,000 200,000 Unsecured notes payable, matured December 1995 113,000 - Pre-sale funding facilities 167,006 - Other notes payable (2.40%-2.90%) 910 1,631 =============== ============== $5,812,846 $3,963,091 =============== ============== ------------------------------------------------------------------ ---- --------------- --- -------------- --
Revolving Credit Facility and Commercial Paper As of November 30, 1995, Countrywide Funding Corporation ("CFC"), the Company's mortgage banking subsidiary, had an unsecured credit agreement (revolving credit facility) with forty-seven commercial banks permitting CFC to borrow an aggregate maximum amount of $3.01 billion, less commercial paper backed by the agreement. The amount available under the facility is subject to a borrowing base, which consists of mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility contains various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CFC. The interest rate on direct borrowings is based on a variety of sources, including the prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies, depending on CFC's credit ratings. The weighted average borrowing rate on direct and commercial paper borrowings for the nine months ended November 30, 1995 was 5.82%. The weighted average borrowing rate on commercial paper outstanding as of November 30, 1995 was 5.82%. Under certain circumstances, including the failure to maintain specified minimum credit ratings, borrowings under the revolving credit facility and commercial paper may become secured by mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility expires in May 1998. Medium-Term Notes
As of November 30, 1995, outstanding medium-term notes issued by CFC under various shelf registrations filed with the Securities and Exchange Commission were as follows. - ----------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ------------------------------------------- ----------- ---------- ------------- ------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- ------------- ------------- Series A - 344,800 344,800 6.10% 8.79% Mar 1997 Mar 2002 Series B 11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005 Series C 303,000 195,500 498,500 5.57% 8.43% Dec 1997 Mar 2004 Series D 115,000 150,000 265,000 6.07% 6.88% Aug 1998 Sep 2005 ------------------------------------------- Total $429,000 $1,159,300 $1,588,300 =========================================== ---------------------------------------------------------------------------------------------------------------
As of November 30, 1995, all of the outstanding fixed-rate notes had been effectively converted by interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the nine months ended November 30, 1995, including the effect of the interest rate swap agreements, was 6.79%. In addition, as of November 30, 1995, $1.5 million and $235 million were available for future issuances under the Series C and Series D shelf registrations, respectively. Repurchase Agreements As of November 30, 1995, the Company had entered into short-term financing arrangements to sell mortgage-backed securities ("MBS") under agreements to repurchase. The weighted average borrowing rate for the nine months ended November 30, 1995 was 5.95%. The weighted average borrowing rate on repurchase agreements outstanding as of November 30, 1995 was 5.84%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers, and all agreements are to repurchase the same or substantially identical MBS. Pre-Sale Funding Facilities As of November 30, 1995, CFC had uncommitted revolving credit facilities with two government-sponsored entities and an affiliate of an investment banking firm. The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. Interest rates are based on LIBOR, federal funds and/or the prevailing rates for MBS repurchase agreements. The weighted average borrowing rate for all three facilities for the nine months ended November 30, 1995 was 6.03%. The balance outstanding under the facilities at November 30, 1995 was $167 million. NOTE C - SUBSEQUENT EVENTS On December 11, 1995, the Company declared a cash dividend of $0.08 per common share payable January 22, 1996 to shareholders of record on December 29, 1995. NOTE D - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
The following tables present summarized financial information for Countrywide Funding Corporation. -- ----------------------------------------- ---- --------------------------------------------------- ------- (Dollar amounts in thousands) November 30, February 28, 1995 1995 -- ---------------------------------------------- -------- -------------- ---------- -------------- --------- Balance Sheets: Mortgage loans shipped and held for sale $4,640,543 $2,898,825 Other assets 3,209,140 2,621,458 ============== ============== Total assets $7,849,683 $5,520,283 ============== ============== Short- and long-term debt $6,060,538 $4,152,712 Other liabilities 568,641 433,025 Equity 1,220,504 934,546 ============== ============== Total liabilities and equity $7,849,683 $5,520,283 ============== ============== -- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
--- ----------------------------------------- --- -------------------------------------------------- --------- (Dollar amounts in thousands) Nine Months Ended November 30, --------------- ---------- --------------- 1995 1994 --- --------------------------------------------- ------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $577,648 $433,812 Expenses 358,687 327,226 Provision for income taxes 87,584 42,634 =============== =============== Net earnings $131,377 $ 63,952 =============== =============== --- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE E - IMPLEMENTATION OF NEW ACCOUNTING STANDARD In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, which the Company adopted effective March 1, 1995. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended November 30, 1995 of $8.1 million, or $0.08 per share. The overall increase to earnings for the nine months ended November 30, 1995 was $27.7 million, or $0.28 per share. SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was charged to earnings when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 was an increase in net earnings of $23.8 million, or $0.23 per share, and $67.3 million, or $0.68 per share, for the quarter and nine months ended November 30, 1995, respectively. With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. The separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization by $15.7 million, or $0.15 per share and $39.6 million, or $0.40 per share, for the quarter and nine months ended November 30, 1995, respectively. SFAS No. 122 also requires that all capitalized mortgage servicing rights ("MSRs") be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. For purposes of measuring impairment, MSRs are stratified on the basis of interest rate and type of interest rate (fixed or adjustable). In addition to normal amortization of the servicing assets amounting to $46.4 million and $116.7 million for the quarter and nine months ended November 30, 1995, respectively, the Company reduced the servicing assets by an additional $109.9 million and $239.0 million of impairment during the quarter and nine months ended November 30, 1995, respectively. The entire amount of such impairment was offset by a pre-tax net gain of $119.4 million and $254.4 million for the quarter and nine months ended November 30, 1995, respectively, in the Company's servicing hedge which is designed to protect its servicing investment. For the quarter and nine months ended November 30, 1995, respectively, the net gain included net unrealized gains of $96.2 million and $188.7 million and realized gains of $23.2 million and $65.7 million from the sale of various financial instruments that comprise the servicing hedge. As a part of the adoption of SFAS No. 122, the Company revised its servicing hedge accounting policy, effective March 1, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the servicing hedge. NOTE F - SERVICING HEDGE
The following summarizes the notional amounts of servicing hedge derivative contracts. - ---------------------------------------- --------------------- ---------------------- --------------------- (Dollar amounts in millions) Long Call Options Interest Rate on Interest Rate Long Call Options Floors Futures on MBS - ---------------------------------------- --------------------- ---------------------- --------------------- Balance, February 28, 1995 $ 4,000 $ - $ - Additions 12,500 5,950 2,000 Dispositions (1,000) (2,950) (600) ===================== ====================== --------------------- Balance, November 30, 1995 $15,500 $3,000 $1,400 ===================== ====================== --------------------- - ---------------------------------------- --------------------- ---------------------- ---------------------
NOTE G - VALUATION ALLOWANCE FOR CAPITALIZED MORTGAGE SERVICING RIGHTS The following summarizes the aggregate activity in the valuation allowances for capitalized mortgage servicing rights. - ---------------------------------------------------- -------------------------- (Dollar amounts in thousands) Aggregate Balances -------------------------- At February 28, 1995 $ - Additions charged 57,050 -------------------------- At November 30, 1995 $57,050 -------------------------- - ---------------------------------------------------- -------------------------- NOTE H - RATIO OF EARNINGS TO FIXED CHARGES The ratios of earnings to fixed charges for the nine months ended November 30, 1995 and 1994 were 2.08 and 1.79, respectively. For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes, plus fixed charges. Fixed charges include interest expense on debt and the portion of rental expenses which is considered to be representative of the interest factor (one-third of operating leases). Since the major portion of the Company's interest costs is incurred to finance mortgage loans which generate interest income, and since interest income and interest expense are generated simultaneously, management believes that a more meaningful measure of its debt service requirements is the ratio of earnings to net fixed charges. Under this alternative formula, net fixed charges are defined as interest expense on debt, other than debt incurred to finance the Company's mortgage loan inventory, plus the interest element (one-third) of operating leases. Under such alternative formula, these ratios for the nine months ended November 30, 1995 and 1994 were 9.30 and 3.54, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarter Ended November 30, 1995 Compared to Quarter Ended November 30, 1994 Revenues for the quarter ended November 30, 1995 increased 69% to $225.6 million from $133.7 million for the quarter ended November 30, 1994. Net earnings increased 228% to $53.0 million for the quarter ended November 30, 1995 from $16.2 million for the quarter ended November 30, 1994. Effective March 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter ended November 30, 1995 are not directly comparable to periods prior to the implementation date. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended November 30, 1995 of $8.1 million, or $0.08 per share. In addition to the accounting change, the increase in revenues and net earnings for the quarter ended November 30, 1995 compared to the quarter ended November 30, 1994 was attributable to an increase in the size of the Company's servicing portfolio, higher production volume and improved pricing margins. The total volume of loans produced increased 44% to $9.3 billion for the quarter ended November 30, 1995 from $6.5 billion for the quarter ended November 30, 1994. Refinancings totaled $3.4 billion, or 36% of total fundings, for the quarter ended November 30, 1995, as compared to $1.3 billion, or 20% of total fundings, for the quarter ended November 30, 1994. Fixed-rate loan production totaled $7.3 billion, or 79% of total fundings, for the quarter ended November 30, 1995, as compared to $3.6 billion, or 55% of total fundings, for the quarter ended November 30, 1994. Production in the Company's Consumer Markets Division increased to $1.9 billion for the quarter ended November 30, 1995 compared to $1.3 billion for the quarter ended November 30, 1994. Production in the Company's Wholesale Division amounted to $2.1 billion for each of the quarters ended November 30, 1995 and November 30, 1994. The Company's Correspondent Division purchased $5.3 billion in mortgage loans for the quarter ended November 30, 1995 compared to $3.1 billion for the quarter ended November 30, 1994. The factors which affect the relative volume of production among the Company's three divisions include pricing decisions and the relative competitiveness of such pricing, the level of real estate and mortgage lending activity in each Division's markets, and the success of each Division's sales and marketing efforts. At November 30, 1995 and 1994, the Company's pipeline of loans in process was $4.5 billion and $4.4 billion, respectively. In addition, at November 30, 1995, the Company had committed to make loans in the amount of $1.2 billion, subject to property identification and borrower qualification ("LOCK N' SHOPSM Pipeline"). At November 30, 1994, the LOCK N' SHOP Pipeline was $2.7 billion. Historically, approximately 43% to 75% of the pipeline of loans in process has funded. For the quarters ended November 30, 1995 and 1994, the Company received 113,280 and 82,355 new loan applications, respectively, at an average daily rate of $193 million and $149 million, respectively. The following actions were taken during the quarter ended November 30, 1995 on the total applications received during that quarter: 62,140 loans (55% of total applications received) were funded and 16,340 applications (14% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the quarter ended November 30, 1994 on the total applications received during that quarter: 43,123 loans (52% of total applications received) were funded and 8,702 applications (11% of total applications received) were either rejected by the Company or withdrawn by the applicant. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production divisions' loan processing efficiency and loan pricing decisions. Loan origination fees increased during the quarter ended November 30, 1995 as compared to the quarter ended November 30, 1994 due to higher loan production that resulted from a decrease in the level of mortgage interest rates. The percentage increase in loan origination fees was less than the percentage increase in total production. This is primarily because production by the Correspondent Division (which, due to lower cost structures, charges lower origination fees per dollar loaned) comprised a greater percentage of total production in the quarter ended November 30, 1995 than in the quarter ended November 30, 1994. Gain (loss) on sale of loans improved during the quarter ended November 30, 1995 as compared to the quarter ended November 30, 1994 primarily due to improved pricing margins and the impact of adopting SFAS No. 122. SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. This accounting methodology, in turn, increases the gain (or reduces the loss) on sale of loans as compared to the accounting results obtained under SFAS No. 65, the previously applicable accounting standard. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was included in the gain or loss recorded when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the quarter ended November 30, 1995 was an increase in gain on sale of loans of $39.7 million. With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. During the quarter ended November 30, 1995, the separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $26.3 million. In general, loan origination fees and gain (loss) on sale of loans are affected by numerous factors including loan pricing decisions, interest rate volatility, the general direction of interest rates and the volume of loans produced. Net interest income (interest earned net of interest charges) increased to $22.1 million for the quarter ended November 30, 1995 from $16.2 million for the quarter ended November 30, 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($10.0 million and $5.1 million for the quarters ended November 30, 1995 and 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($18.4 million and $4.6 million for the quarters ended November 30, 1995 and 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($30.5 million and $15.7 million for the quarters ended November 30, 1995 and 1994, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from the mortgage loan warehouse was attributable to an increase in the average amount of the mortgage loan warehouse due to increased production, offset somewhat by a lower net earnings rate. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio and an increase in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate and an increase in the average custodial balances (caused by growth of the servicing portfolio and an increase in prepayments) from the quarter ended November 30, 1994 to the quarter ended November 30, 1995. During the quarter ended November 30, 1995, loan administration income was positively affected by the continued growth of the loan servicing portfolio. At November 30, 1995, the Company serviced $132.8 billion of loans (including $2.2 billion of loans subserviced for others) compared to $105.4 billion (including $0.7 billion of loans subserviced for others) at November 30, 1994, a 26% increase. The growth in the Company's servicing portfolio during the quarter ended November 30, 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments and scheduled amortization of mortgage loans. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at November 30, 1995 was 7.8% compared to 7.4% at November 30, 1994. It is the Company's strategy to build and retain its servicing portfolio because of the returns the Company can earn from such investment and because the Company believes that servicing income is countercyclical to loan production income. During the quarter ended November 30, 1995, the prepayment rate of the Company's servicing portfolio was 13%, as compared to 7% for the quarter ended November 30, 1994. In general, the prepayment rate is affected by the relative level of mortgage interest rates, activity in the home purchase market and the relative level of home prices in a particular market. The increase in the prepayment rate is primarily attributable to increased refinance activity caused by decreased mortgage interest rates in the quarter ended November 30, 1995 from the quarter ended November 30, 1994. The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong loan production capability and a growing servicing portfolio. To mitigate the effect on earnings of higher amortization and impairment (which are deducted from loan servicing income) resulting from increased prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in value when interest rates decline (the "Servicing Hedge"). These financial instruments include call options on interest rate futures and MBS, interest rate floors and certain tranches of collateralized mortgage obligations ("CMOs"). The CMOs, which consist primarily of principal-only ("P/O") securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase. These changes should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows. The Servicing Hedge instruments utilized by the Company are designed to protect the value of the investment in servicing rights from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the servicing rights increases while the value of the hedge instruments declines. However, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. During the quarter ended November 30, 1995, the Company recognized a net gain of $119.4 million from its Servicing Hedge. The net gain included unrealized gains of $96.2 million and realized gains of $23.2 million from the sale of various financial instruments that comprise the Servicing Hedge. As a part of the adoption of SFAS No. 122, the Company has revised its servicing hedge accounting policy, effective March 1, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the Servicing Hedge. There can be no assurance the Company's Servicing Hedge will generate gains in the future, or that if gains are generated, they will fully offset impairment of the Servicing Assets. The Company recorded amortization and impairment of its servicing assets in the quarter ended November 30, 1995 totaling $156.3 million (consisting of normal amortization amounting to $46.4 million and impairment of $109.9 million), compared to $23.3 million of amortization in the quarter ended November 30, 1994. SFAS No. 122 requires that all capitalized mortgage servicing rights be evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. Under SFAS No. 65, the impairment evaluation could be made using either discounted or undiscounted cash flows. No uniform required level of disaggregation was specified. The Company used a disaggregated undiscounted method. The factors affecting the amount of amortization and impairment recorded in an accounting period include the level of prepayments during the period, the change in prepayment expectations and the amount of Servicing Hedge gains. During the quarter ended November 30, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.3 billion at a price of 1.41% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the quarter ended November 30, 1994, the Company acquired bulk servicing rights for loans with principal balances aggregating $4.5 billion at a price of $80.9 million or 1.79% of the aggregate outstanding principal balance of the servicing portfolios acquired.
Salaries and related expenses are summarized below for the quarters ended November 30, 1995 and 1994. -- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- ----- (Dollar amounts in Quarter Ended November 30, 1995 thousands) -- --------- ------------------------------------------------- -- --- --- ----- -- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- ------------- Base Salaries $18,051 $8,489 $12,043 $2,467 $41,050 Incentive Bonus 8,128 96 2,504 1,003 11,731 Payroll Taxes and Benefits 2,670 1,381 548 272 4,871 ------------ ------------- ------------- ------------- ------------- Total Salaries and Related Expenses $28,849 $9,966 $15,095 $3,742 $57,652 ============ ============= ============= ============= ------------- Average Number of 1,813 1,240 937 198 4,188 Employees -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
-- --------------------------- -- --- -------- ------------------------------------------------- ---- --- -- ---- (Dollar amounts in Quarter Ended November 30, 1994 thousands) --- -------- ------------------------------------------------- ---- --- -- ---- -- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- ------------- Base Salaries $15,429 $6,025 $9,013 $1,858 $32,325 Incentive Bonus 4,461 128 2,264 627 7,480 Payroll Taxes and Benefits 2,111 929 1,881 200 5,121 ------------ -------------- ------------- ------------- ------------- Total Salaries and Related Expenses $22,001 $7,082 $13,158 $2,685 $44,926 ============ ============== ============= ============= ------------- Average Number of 1,601 853 743 138 3,335 Employees -- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- -------------
The amount of salaries increased during the quarter ended November 30, 1995 primarily due to the increased number of employees resulting from increased production volume and a larger servicing portfolio. Incentive bonuses earned during the quarter ended November 30, 1995 increased primarily due to larger loan production and increased loan production personnel, and growth in the Company's non-mortgage banking subsidiaries operations. Occupancy and other office expenses for the quarter ended November 30, 1995 increased to $26.8 million from $25.3 million for the quarter ended November 30, 1994. The increase was primarily due to increased postage and telephone usage associated with loan servicing activities. Guarantee fees (fees paid to guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio) for the quarter ended November 30, 1995 increased 44% to $31.7 million from $21.9 million for the quarter ended November 30, 1994. This increase resulted primarily from an increase in the servicing portfolio. Marketing expenses for the quarter ended November 30, 1995 increased 20% to $6.8 million from $5.7 million for the quarter ended November 30, 1994. The increase in marketing expenses reflected the Company's implementation of a new marketing plan. Other operating expenses for the quarter ended November 30, 1995 increased from the quarter ended November 30, 1994 by $5.4 million, or 60%. This increase was primarily due to an increased provision for bad debts resulting from a larger servicing portfolio, home equity loans held in portfolio pending securitization and increased production. Profitability of Loan Production and Servicing Activities In the quarter ended November 30, 1995, the Company's pre-tax earnings from its loan production activities (which include loan origination and purchases, warehousing and sales) were $17.3 million. In the quarter ended November 30, 1994, the Company's comparable pre-tax loss was $41.2 million. The increase of $58.5 million was primarily attributable to increased loan production, improved pricing margins, the effect of the adoption of SFAS No. 122 previously discussed and a change of $11.3 million in the Company's internal method of allocating overhead between its production and servicing activities. In the quarter ended November 30, 1995, the Company's pre-tax income from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance and acting as tax payment agent) was $66.3 million as compared to $64.4 million in the quarter ended November 30, 1994. The increase of $1.9 million was principally due to an increase in the servicing portfolio, partially offset by the change in the Company's internal overhead allocation method and the increase in Interest Costs Incurred on Payoffs. RESULTS OF OPERATIONS Nine Months Ended November 30, 1995 Compared to Nine Months Ended November 30, 1994 Revenues for the nine months ended November 30, 1995 increased 33% to $613.8 million from $462.0 million for the nine months ended November 30, 1994. Net earnings increased 100% to $138.1 million for the nine months ended November 30, 1995 from $69.0 million for the nine months ended November 30, 1994. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the nine months ended November 30, 1995 are not directly comparable to prior periods. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the nine months ended November 30, 1995 of $27.7 million, or $0.28 per share. In addition to the accounting change, the increase in revenues and net earnings for the nine months ended November 30, 1995 compared to the nine months ended November 30, 1994 was attributable to an increase in the size of the Company's servicing portfolio and improved pricing margins, partially offset by the non-recurring gain on the sale of servicing in the prior year which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year. The total volume of loans produced increased 13% to $25.0 billion for the nine months ended November 30, 1995 from $22.1 billion for the nine months ended November 30, 1994. Refinancings totaled $7.1 billion, or 28% of total fundings, for the nine months ended November 30, 1995, as compared to $7.4 billion, or 34% of total fundings, for the nine months ended November 30, 1994. Fixed-rate mortgage loan production totaled $18.5 billion, or 74% of total fundings, for the nine months ended November 30, 1995, as compared to $15.0 billion, or 68% of total fundings, for the nine months ended November 30, 1994. Production in the Company's Consumer Markets Division decreased to $5.3 billion for the nine months ended November 30, 1995 from $6.0 billion for the nine months ended November 30, 1994. Production in the Company's Wholesale Division decreased to $5.9 billion for the nine months ended November 30, 1995 from $7.1 billion for the nine months ended November 30, 1994. The Company's Correspondent Division purchased $13.8 billion in mortgage loans for the nine months ended November 30, 1995 compared to $9.0 billion for the nine months ended November 30, 1994. For the nine months ended November 30, 1995 and 1994, the Company received 330,267 and 243,151 new loan applications, respectively, at an average daily rate of $183 million and $145 million, respectively. The following actions were taken during the nine months ended November 30, 1995 on the total applications received during that nine months: 219,972 loans (67% of total applications received) were funded and 69,811 applications (21% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the nine months ended November 30, 1994 on the total applications received during that nine months: 161,136 loans (66% of total applications received) were funded and 47,028 applications (19% of total applications received) were either rejected by the Company or withdrawn by the applicant. Loan origination fees decreased during the nine months ended November 30, 1995 as compared to the nine months ended November 30, 1994 primarily because production by the Correspondent Division comprised a greater percentage of total production in the nine months ended November 30, 1995 than in the nine months ended November 30, 1994. Gain (loss) on sale of loans improved during the nine months ended November 30, 1995 as compared to the nine months ended November 30, 1994 primarily due to the impact of adopting SFAS No. 122 and improved pricing margins. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the nine months ended November 30, 1995 was an increase in gain on sale of loans of $112.1 million. The separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $65.9 million during the nine months ended November 30, 1995. Net interest income (interest earned net of interest charges) decreased to $52.3 million for the nine months ended November 30, 1995 from $61.8 million for the nine months ended November 30, 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($21.6 million and $32.3 million for the nine months ended November 30, 1995 and 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($42.7 million and $13.4 million for the nine months ended November 30, 1995 and 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($73.4 million and $42.9 million for the nine months ended November 30, 1995 and 1994, respectively). The decrease in net interest income from the mortgage loan warehouse was primarily attributable to a lower net earnings rate. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio. The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate and an increase in the average custodial balances from the nine months ended November 30, 1994 to the nine months ended November 30, 1995. During the nine months ended November 30, 1995, loan administration income was positively affected by the continued growth of the loan servicing portfolio. The growth in the Company's servicing portfolio during the nine months ended November 30, 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, and scheduled amortization of mortgage loans. The prepayment rate of the Company's servicing portfolio was 11% for each of the nine month periods ended November 30, 1995 and 1994. During the nine months ended November 30, 1995, the Company recognized a net gain of $254.4 million from its Servicing Hedge. The net gain included unrealized gains of $188.7 million and realized gains of $65.7 million from the sale of various financial instruments that comprise the Servicing Hedge. The Company recorded amortization and impairment of its servicing assets in the nine months ended November 30, 1995 totaling $355.7 million (consisting of normal amortization amounting to $116.7 million and impairment of $239.0 million), compared to $71.4 million of amortization in the nine months ended November 30, 1994. During the nine months ended November 30, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $4.7 billion at a price of $62.2 million or 1.32% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the nine months ended November 30, 1994, the Company acquired bulk servicing rights for loans with principal balances aggregating $13.1 billion at a price of $192.7 million or 1.47% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the nine months ended November 30, 1994, the Company sold servicing rights for loans with principal balances of $5.9 billion and recognized a gain of $56.9 million. No servicing rights were sold during the nine months ended November 30, 1995.
Salaries and related expenses are summarized below for the nine months ended November 30, 1995 and 1994. -- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Nine Months Ended November 30, 1995 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- -- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $49,718 $22,478 $33,804 $6,920 $112,920 Incentive Bonus 23,053 346 7,289 3,571 34,259 Payroll Taxes and Benefits 7,920 3,754 4,563 844 17,081 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $80,691 $26,578 $45,656 $11,335 $164,260 ============ ============= ============= ============= ------------ Average Number of 1,670 1,079 872 177 3,798 Employees -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- --- --- ----- (Dollar amounts in Nine Months Ended November 30, 1994 thousands) -- ------ ------------------------------------------------- ----- --- --- ----- -- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ----------- -- -------------- -- -------------- - ------------ -- ------------- Base Salaries $55,009 $17,444 $29,691 $4,780 $106,924 Incentive Bonus 18,989 336 6,364 3,393 29,082 Payroll Taxes and Benefits 9,081 2,842 5,498 621 18,042 ----------- -------------- -------------- ------------ ------------- Total Salaries and Related Expenses $83,079 $20,622 $41,553 $8,794 $154,048 =========== ============== ============== ============ ------------- Average Number of 1,847 830 875 120 3,672 Employees -- --------------------------- -- ----------- -- -------------- -- -------------- - ------------ -- -------------
The amount of salaries increased during the nine months ended November 30, 1995 primarily due to the increased number of employees resulting from a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries. Occupancy and other office expenses for the nine months ended November 30, 1995 increased slightly to $77.9 million from $76.9 million for the nine months ended November 30, 1994. The increase was primarily attributable to loan servicing activities. Guarantee fees for the nine months ended November 30, 1995 increased 39% to $86.0 million from $61.7 million for the nine months ended November 30, 1994. This increase resulted primarily from an increase in the servicing portfolio. Marketing expenses for the nine months ended November 30, 1995 increased 9% to $19.4 million from $17.9 million for the nine months ended November 30, 1994, reflecting the Company's implementation of a new marketing plan. In the nine months ended November 30, 1994, the Company incurred an $8.0 million charge related to the consolidation and relocation of branch and administrative offices that occurred as a result of the reduction in staff caused by declining production. No such charge was incurred in the nine months ended November 30, 1995. Other operating expenses for the nine months ended November 30, 1995 increased from the nine months ended November 30, 1994 by $7.8 million, or 27%. This increase was primarily due to an increased provision for bad debts resulting from a larger servicing portfolio, home equity loans held in portfolio pending securitization and increased production. Profitability of Loan Production and Servicing Activities In the nine months ended November 30, 1995, the Company's pre-tax earnings from its loan production activities were $33.8 million. In the nine months ended November 30, 1994, the Company's comparable pre-tax loss was $58.6 million. The increase of $92.4 million was primarily attributable to improved pricing margins, the effect of the adoption of SFAS No. 122 previously discussed and a change of $31.8 million in the Company's internal method of allocating overhead between its production and servicing activities. In the nine months ended November 30, 1995, the Company's pre-tax income from its loan servicing activities was $187.2 million as compared to $164.4 million in the nine months ended November 30, 1994. The increase of $22.8 million was principally due to the increase in the size of the servicing portfolio, partially offset by the change in the Company's internal overhead allocation method discussed above and a non-recurring gain on the sale of servicing in the prior year (which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year). INFLATION Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down. This extends the average life of the Company's servicing portfolio and reduces both amortization of the servicing assets and Interest Costs Incurred on Payoffs. In addition, the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings. This is primarily due to increased amortization and impairment of the Servicing Assets (which may be offset by income from the Servicing Hedge), a decreased rate of interest earned from the custodial balances, and increased Interest Costs Incurred on Payoffs. SEASONALITY The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's principal financing needs are the financing of loan funding activities and the investment in servicing rights. To meet these needs, the Company currently utilizes commercial paper supported by its revolving credit facility, medium-term notes, MBS repurchase agreements, subordinated notes, unsecured notes, pre-sale funding facilities, cash flow from operations and direct borrowings from its revolving credit facility. In June 1995, the Company completed a public offering of its common stock through the issuance and sale of 10,000,000 shares at a price of $21 per share. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, privately-placed financings and public offerings of preferred stock. See Note B to the Company's Consolidated Financial Statements included herein for more information on the Company's financings. Certain of the debt obligations of the Company and CFC contain various provisions that may affect the ability of the Company and CFC to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth, current ratio and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CFC to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells to investors the mortgage loans it originates and purchases but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In the nine months ended November 30, 1995, the Company's operating activities used cash of approximately $1.8 billion on a short-term basis to fund the increase in its warehouse of mortgage loans. The Company's operating activities also generated $344 million of positive cash flow, which was principally allocated to the long-term investment in servicing as discussed below under "Investing Activities." Investing Activities The primary investing activity for which cash was used during the nine months ended November 30, 1995 was the investment in servicing rights. Net cash used by investing activities increased to $670 million for the nine months ended November 30, 1995 from $593 million for the nine months ended November 30, 1994. Financing Activities Net cash provided by financing activities amounted to $2.1 billion and $600 million for the nine months ended November 30, 1995 and 1994, respectively. The increase in net cash provided was primarily the result of higher net short-term borrowings by the Company during the nine months ended November 30, 1995 and from the issuance and sale of common stock. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process During the nine months ended November 30, 1995, the Company received new loan applications at an average daily rate of $183 million and at November 30, 1995, the Company's pipeline of loans in process was $4.5 billion. This compares to a daily application rate during the nine months ended November 30, 1994 of $149 million and a pipeline of loans in process at November 30, 1994 of $4.4 billion. During the nine months ended November 30, 1995, interest rates decreased, resulting in an increase in demand for mortgage loans. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 75% of the pipeline of loans in process has funded. In addition, the Company's LOCK N' SHOP Pipeline at November 30, 1995 was $1.2 billion and at November 30, 1994 was $2.7 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage credit, the extent of price competition in the market, the direction of interest rates, seasonal factors and general economic conditions. For the month ended December 31, 1995, the average daily amount of applications received was $192 million, and at December 31, 1995, the pipeline of loans in process was $4.4 billion and the LOCK N' SHOP pipeline was $863 million. Market Factors Mortgage interest rates generally increased in 1994 and have declined in 1995. The environment of rising interest rates resulted in lower production (particularly from refinancings) and greater price competition, which adversely impacted earnings from loan production activities and may continue to do so in the future. The Company took steps to maintain its productivity and efficiency, particularly in the loan production area, by reducing staff and embarking on a program to reduce production-related and overhead costs. However, the rising interest rates enhanced earnings from the Company's loan servicing portfolio as amortization and impairment of the servicing assets and Interest Costs Incurred on Payoffs decreased from levels experienced during the periods of declining interest rates and the rate of interest earned from the custodial balances associated with the Company's servicing portfolio increased. The decline in interest rates during the nine months ended November 30, 1995 resulted in impairment (as specified in SFAS No. 122) of $239.0 million and a servicing hedge gain of $254.4 million. In addition, the Company has further increased the size of its servicing portfolio, thereby increasing its servicing revenue base, by acquiring servicing contracts through bulk purchases. During the nine months ended November 30, 1995, the Company purchased such servicing contracts with principal balances amounting to $4.7 billion. Prepayments in the Company's servicing portfolio were $9.3 billion during the nine months ended November 30, 1995 and $1.6 billion during the month ended December 31, 1995. The Company's primary competitors are commercial banks and savings and loans and mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Particularly in California, savings and loans and other portfolio lenders have competed with the Company by offering aggressively priced adjustable-rate mortgage products which grow in popularity when interest rates rise. Generally, the Company has experienced significant price competition among mortgage lenders which has resulted in downward pressure on loan production earnings. Some regions in which the Company operates, particularly some regions of California, have been experiencing slower economic growth, and real estate financing activity in these regions has been negatively impacted. As a result, home lending activity for single- (one-to-four) family residences in these regions may also have experienced slower growth. The Company's California mortgage loan production (measured by principal balance) constituted 31% of its total production during the nine months ended November 30, 1995 and 32% for the nine months ended November 30, 1994. The Company is continuing its efforts to expand its production capacity outside of California. Since California's mortgage loan production constituted a significant portion of the Company's production during the period, there can be no assurance that the Company's operations will not continue to be adversely affected to the extent California continues to experience slower or negative economic growth resulting in decreased residential real estate lending activity or market factors further impact the Company's competitive position in the state. The Company's servicing portfolio delinquency rate increased to 3.52% at December 31, 1995 and 3.20% at November 30, 1995, up from 1.94% at November 30, 1994. This increase was primarily the result of portfolio mix changes and aging. The proportion of government and high loan-to-value conventional loans, which tend to experience higher delinquency rates than low loan-to-value conventional loans, has increased from 37% of the portfolio at November 30, 1994 to 45% at December 31, 1995. In addition, the weighted average age of the portfolio is 25 months at December 31, 1995, up from 19 months at November 30, 1994. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. However, because the loans in the portfolio are serviced on a non-recourse basis, the Company's exposure to credit loss resulting from increased delinquency rates is substantially limited. Further, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. Because the Company services substantially all conventional loans on a non-recourse basis, foreclosure losses are generally the responsibility of the investor or insurer and not the Company. Accordingly, any increase in foreclosure activity should not result in significant foreclosure losses to the Company. However, the Company's expenses may be increased somewhat as a result of the additional staff efforts required to foreclose on a loan. Similarly, government loans serviced by the Company (24% of the Company's servicing portfolio at November 30, 1995) are insured or partially guaranteed against loss by the Federal Housing Administration or the Veterans Administration. In the Company's view, the limited unreimbursed costs that may be incurred by the Company on government foreclosed loans are not material to the Company's consolidated financial statements. Servicing Hedge As previously discussed, the Company recorded a net gain of $254.4 million during the nine months ended November 30, 1995 from its Servicing Hedge which is designed to protect its servicing investment from the effects of increased prepayment activity that generally results from declining interest rates. There can be no assurance the Company's Servicing Hedge will generate gains in the future, or that if gains are generated, they will fully offset impairment of the Servicing Assets. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement Regarding Computation of Per Share Earnings. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 12.2 Computation of the Ratio of Earnings to Net Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). (b) Reports on Form 8-K. No reports on Form 8-K were filed during this reporting period. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COUNTRYWIDE CREDIT INDUSTRIES, INC. (Registrant) DATE: January 16, 1996 /s/ Stanford L. Kurland ------------------------------------- Senior Managing Director and Chief Operating Officer DATE: January 16, 1996 /s/ Carlos M. Garcia ------------------------------------- Managing Director; Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) EX-11 2 COMPUTATION OF PER SHARE EARNINGS
Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Three Months Nine Months Ended November 30, Ended November 30, 1995 1994 1995 1994 ----------------------------- ----------------------------- (Dollar amounts in thousands, except per share data) Primary Net earnings applicable to common stock $52,954 $16,158 $138,082 $68,997 ============================= ============================= Average shares outstanding 101,926 91,296 97,165 91,208 Net effect of dilutive stock options -- based on the treasury stock method using average market price 2,420 799 1,893 888 ----------------------------- ----------------------------- Total average shares 104,346 92,095 99,058 92,096 ============================= ============================= Per share amount $0.51 $0.18 $1.39 $0.75 ============================= ============================= Fully diluted Net earnings applicable to common stock $52,954 $16,158 $138,082 $68,997 ============================= ============================= Average shares outstanding 101,926 91,296 97,165 91,208 Net effect of dilutive stock options -- based on the treasury stock method using the closing market price, if higher than average market price. 2,420 799 2,095 888 ----------------------------- ----------------------------- Total average shares 104,346 92,095 99,260 92,096 ============================= ============================= Per share amount $0.51 $0.18 $1.39 $0.75 ============================= =============================
EX-12 3 RATIO OF EARNINGS TO FIXED CHARGES
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the nine months ended November 30, 1995 and 1994 and for the five fiscal years ended February 28, 1995 computed by dividing fixed charges (interest expense on all debt plus the interest element (one-third) of operating leases) into earnings (income before income taxes and fixed charges). Nine Months Ended November 30, For Fiscal Years Ended February 28(29), ------------------------- ------------------------------------------------------------------ 1995 1994 1995 1994 1993 1992 1991 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Net earnings $138,082 $68,997 $88,407 $179,460 $140,073 $60,196 $22,311 Income tax expense 92,055 45,998 58,938 119,640 93,382 40,131 14,874 Interest charges 207,510 139,746 205,464 219,898 128,612 69,760 60,888 Interest portion of rental expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Earnings available to cover fixed charges $442,649 $260,408 $360,188 $525,370 $366,417 $172,901 $100,380 ============ ============ ============= ============ ============= ============ ============ Fixed charges Interest charges $207,510 $139,746 $205,464 $219,898 $128,612 $69,760 $60,888 Interest portion of rental expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Total fixed charges $212,512 $145,413 $212,843 $226,270 $132,962 $72,574 $63,195 ============ ============ ============= ============ ============= ============ ============ Ratio of earnings to fixed charges 2.08 1.79 1.69 2.32 2.76 2.38 1.59 ============ ============ ============= ============ ============= ============ ============
EX-12 4 RATIO OF EARNINGS TO NET FIXED CHARGES
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.2 - COMPUTATION OF THE RATIO OF EARNINGS TO NET FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to net fixed charges of the Company for the nine months ended November 30, 1995 and 1994 and for the five fiscal years ended February 28, 1995 computed by dividing net fixed charges (interest expense on debt other than to finance mortgage loan inventory plus the interest element (one-third) of operating leases) into earnings (income before income taxes and net fixed charges). Nine Months Ended November 30, For Fiscal Years Ended February 28(29), -------------------------- ----------------------------------------------------------------- 1995 1994 1995 1994 1993 1992 1991 ------------ ------------- ------------ ------------ ------------- ------------ ------------ Net earnings $138,082 $68,997 $88,407 $179,460 $140,073 $60,196 $22,311 Income tax expense 92,055 45,998 58,938 119,640 93,382 40,131 14,874 Interest charges 22,715 39,647 (7,176) 29,232 31,398 33,729 11,069 Interest portion of rental expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307 ------------ ------------- ------------ ------------ ------------- ------------ ------------ Earnings available to cover net fixed charges $257,854 $160,309 $147,548 $334,704 $269,203 $136,870 $50,561 ============ ============= ============ ============ ============= ============ ============ Net fixed charges Interest charges $22,715 $39,647 ($7,176) $29,232 $31,398 $33,729 $11,069 Interest portion of rental expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307 ------------ ------------- ------------ ------------ ------------- ------------ ------------ Total net fixed charges $27,717 $45,314 $ 203 $35,604 $35,748 $36,543 $13,376 ============ ============= ============ ============ ============= ============ ============ Ratio of earnings to net fixed charges 9.30 3.54 726.84 9.40 7.53 3.75 3.78 ============ ============= ============ ============ ============= ============ ============
EX-27 5 ART.5 FDS FOR THE 3RD QUARTER 10-Q
5 1,000 9-MOS FEB-29-1996 NOV-30-1995 6,798 0 446,209 0 0 0 206,615 67,199 7,927,638 0 1,789,210 5,101 0 0 1,261,363 7,927,638 0 613,841 0 383,704 0 0 0 230,137 92,055 138,082 0 0 0 138,082 1.39 1.39 Includes $207,510 of interest expense related to mortgage loan activities.
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