-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, j3ja/cEvmcpGB0Qg5Xgom2/bprtalWWyv7t9TrJJUvWbgLwJHYRE+N15QdtFLeir D4HtLdMIO2CzQIJjgu0gMg== 0000025191-94-000005.txt : 19940615 0000025191-94-000005.hdr.sgml : 19940615 ACCESSION NUMBER: 0000025191-94-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19940228 FILED AS OF DATE: 19940531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: 6162 IRS NUMBER: 954083087 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08422 FILM NUMBER: 94531291 BUSINESS ADDRESS: STREET 1: 155 NORTH LAKE AVE CITY: PASADENA STATE: CA ZIP: 91101-1857 BUSINESS PHONE: 8183048400 10-K 1 FORM 10-K 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
F-33 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 EX-10 2 1993 MANAGEMENT AGREEMENT - CMI / CAMC 1993 AMENDED AND EXTENDED MANAGEMENT AGREEMENT THIS AGREEMENT, initially made as of September 3, 1985 and amended and extended from time to time thereafter, is amended and extended as of May 15, 1993 by and between COUNTRYWIDE MORTGAGE INVESTMENTS, INC., a Delaware corporation which has elected to qualify as a real estate investment trust (the "Company"), and COUNTRYWIDE ASSET MANAGEMENT CORPORATION, a Delaware corporation, and its permitted successors and assigns under this agreement (the "Manager"). WITNESSETH WHEREAS, the Company has elected to qualify for the tax benefits accorded by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended; and WHEREAS, the Company, directly or through Subsidiaries, in the conduct of its business primarily operates a mortgage loan conduit, engages in warehouse lending and invests in mortgage loans and mortgage-related securities meeting the investment criteria established from time to time by its Board of Directors; and WHEREAS, the Company desires to retain the Manager to manage the operations and investments of the Company and its Subsidiaries and to perform administrative services for the Company and its Subsidiaries, each in the manner and on the terms set forth in this Agreement; and WHEREAS, the Company and the Manager wish to amend and extend their agreement originally entered into as of September 3, 1985 for a one year period through May 14, 1994; NOW, THEREFORE, in consideration of the mutual agreements set forth in this Agreement, the Company and the Manager agree as follows: Section 1. Definitions. Whenever used in this Agreement, the following terms, unless the context otherwise requires, shall have the following meanings: (a) "Affiliate" of another person shall mean any person directly or indirectly owning, controlling or holding with power to vote, more than 5% of the outstanding voting securities of such other person; any person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by such other person; any person directly or indirectly controlling, controlled by or under common control with, such other person; and any officer, director, partner or employee of such other person. The term "person" includes a natural person, corporation, partnership, trust, company or other entity. (b) "Agency Securities" shall mean (i) fully modified pass-through mortgage-backed certificates guaranteed as to timely payment of principal and interest by the Governmental National Mortgage Association, (ii) mortgage participation certificates guaranteed as to payment of interest and principal by the Federal Home Loan Mortgage Corporation and (iii) mortgage pass-through certificates guaranteed as to payment of interest and principal by the Federal National Mortgage Association. (c) "Agreement" shall mean this 1993 Amended and Extended Management Agreement. (d) "Average Invested Assets" for any period shall mean the average of the aggregate book value of the assets of the mortgage conduit operations of the Company and its Subsidiaries invested, directly or indirectly, in loans secured by real estate (including without limitation whole mortgage loans, retained undivided interests in mortgage loans and Agency Securities, but not including any whole mortgage loans, retained undivided interests in mortgage loans, or Agency Securities pledged to secure the issuance of collateralized mortgage obligations or other mortgage collateralized debt or sold in the form of mortgage backed securities in transactions entered into by the Company or a Subsidiary), before deduction of reserves for depreciation and similar non- cash reserves computed by taking the average of such values at the end of each calendar month during such period. (e) "Average Net Worth" for any period shall mean the arithmetic average of the Net Worth of the Company at the beginning of such period and at the end of each calendar month during such period. (f) "Board of Directors" shall mean the Board of Directors of the Company. (g) "CCI" shall mean Countrywide Credit Industries, Inc., a Delaware corporation. (h) "CFC" shall mean Countrywide Funding Corporation, a Subsidiary of CCI, and a New York corporation. (i) "CMC" shall mean Countrywide Mortgage Conduit, Inc. a Delaware corporation. (j) "Commitment" shall mean any document containing the terms pursuant to which the Company or any Subsidiary agrees to purchase on a forward basis any specified mortgage loans, including purchases from Affiliates of the Manager. (k) "Consolidated Average Invested Assets" for any period shall mean the average of the aggregate book value of the Company determined on a consolidated basis invested, directly or indirectly, in loans secured by real estate before deduction of reserves for depreciation and similar non-cash reserves, computed by taking the average of such values at the end of each calendar month during such period. (l) "Governing Instruments" shall mean the articles or certificate of incorporation, trust agreement and bylaws of the Company or any Subsidiary, as applicable. (m) "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended. (n) "Loan Purchase Agreement" shall mean the 1993 Amended and Extended Loan Purchase and Administrative Services Agreement, dated as of May 15, 1993, as thereafter amended or supplemented, between the Company and CFC. (o) "Mortgage Backed Securities" shall mean the collateralized mortgage obligations, mortgage collateralized debt, mortgage pass-through securities including real estate mortgage investment conduits or other mortgage-related securities issued by the Company or a Subsidiary of the Company. (p) "Net Income" for any period shall mean total revenues applicable to such period, less the expenses applicable to such period determined in accordance with generally accepted accounting principles. (q) "Net Worth" at any time shall mean the sum of the gross proceeds from any offerings of equity securities by the Company (before deducting any underwriting discounts and commissions and other expenses and costs relating to the offering), plus or minus any retained earnings or losses of the Company, computed in accordance with generally accepted accounting principals. (r) "Return on Equity" for a period shall be calculated by dividing the Company's Net Income for such period by the Company's Average Net Worth for such period. (s) "Servicing Agreement" shall mean an agreement between the Company or any Subsidiary and each seller or servicer of mortgage loans purchased by the Company, including CFC, which agreement governs the sale and/or servicing of such mortgage loans. (t) "Shareholders" shall mean the owners of the shares of the Company. (u) "Subsidiary" shall mean any corporation, whether now existing or in the future established, of which the Company, directly or indirectly, owns more than 50% of the outstanding voting securities of any class or classes, any business trust, partnership or similar non-corporate form in which the Company, directly or indirectly, owns more than 50% of the beneficial interests and CMC. (v) "Ten Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 10 years). (w) "Ten Year U.S. Treasury Rate" for a quarterly period shall mean the arithmetic average of the weekly per annum Ten Year Average Yields published by the Federal Reserve Board during such quarter. In the event that the Federal Reserve Board does not publish a weekly per annum Ten Year Average Yield during any week in a quarter, then the Ten Year U.S. Treasury Rate for such week shall be the weekly per annum Ten Year Average Yields published by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company for such week. In the event that the Company determines in good faith that for any reason the Company cannot determine the Ten Year U.S. Treasury Rate for any quarter as provided above, then the Ten Year U.S. Treasury Rate for such quarter shall be the arithmetic average of the per annum average yields to maturity based upon the daily closing bids during such quarter for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than securities which can, at the option of the holder, be surrendered at face value in payment of any federal estate tax) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted for each business day (or less frequently if daily quotations shall not be generally available) in each such quarterly period in New York City to the Company by at least three recognized dealers in U.S. Government securities selected by the Company. (x) "Unaffiliated Directors" shall mean those members of the Board of Directors of the Company who are not Affiliates of the Manager. Section 2. General Duties of the Manager. Subject to the supervision of the Board of Directors and in accordance with the Governing Instruments, the Manager shall provide services to the Company and CMC, and to the extent directed by the Board of Directors, shall provide similar services to any other Subsidiary of the Company, as follows: (a) conduct the day-to-day mortgage loan conduit, warehouse lending and other operations of the Company and CMC as approved by the Board of Directors, including without limitation, the purchase, accumulation, financing and securitization of mortgage loans, the establishment and financing of warehouse lending facilities, the management of assets and investments and the administration thereof; and (b) provide such reports and analysis to the Board of Directors regarding the operating strategies and results of the Company and its Subsidiaries as the Board may reasonably request. The Manager shall perform its duties and shall take actions on behalf of the Company and its Subsidiaries consistent with (i) the operating policies and criteria established from time to time by the Board of Directors or any authorized officer with respect thereto, and (ii) the obligations of the Company and its Subsidiaries under the various agreements to which each is a party. So long as the Manager is serving as the Manager under this Agreement, it shall be and remain a Subsidiary of and wholly owned, directly or indirectly, by CCI. Section 3. Additional Activities of Manager. Except as provided in the Letter Agreement between CCI and the Company attached hereto as Exhibit A, nothing herein shall prevent the Manager or its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in or advisory service to others investing in any type of real estate investment, including investments which meet the principal investment objectives of the Company or any Subsidiary of the Company. Directors, officers, employees and agents of the Manager or Affiliates of the Manager may serve as directors, officers, employees, agents, nominees or signatories for the Company or any Subsidiary of the Company, to the extent permitted by its Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to its Governing Instruments. When executing documents or otherwise acting in such capacities for the Company or any Subsidiary of the Company, such persons shall use their respective titles in the Company or such Subsidiary. Section 4. Purchases and Sales of Investments and Loans from the Manager and its Affiliates. The Manager agrees that sales of investments to and purchases of investments from the Manager and its Affiliates, including without limitation purchases and sales of mortgage loans, Agency Securities and Commitments, shall only be made as stated in an agreement therefor setting forth in general the operating policies and guidelines within which such sales or purchases may be made, which agreement has been approved by the Board of Directors, including a majority of the Unaffiliated Directors. Notwithstanding the terms of any other agreements between the manager or its Affiliates and the Company, the Manager further agrees that all such sales and purchases will be made upon terms no less favorable to the Company than are generally available to other third parties. The Manager shall purchase or exercise the Company's option to purchase mortgage loans from CFC in accordance with the Company's rights and obligations under the Loan Purchase Agreement or any other applicable agreement between the Company and CFC which is approved by the Board of Directors, including a majority of the Unaffiliated Directors. Section 5. Repurchase Obligation. (a) The Manager agrees that if the Company purchases any mortgage loan, Agency Security or other investment which does not meet the investment and/or purchase criteria and policies of the Company and/or CMC as applicable at the time of purchase, the Manager will repurchase or will cause the repurchase of such mortgage loan, Agency Security or other investment from the Company for an amount not less than the unpaid principal balance of the mortgage loan, Agency Security or other investment as of the date of repurchase, less any amounts received by the Company representing prepaid interest not accrued as of the date of repurchase, plus any amounts representing accrued and unpaid interest to the date of repurchase and any amounts incurred by the Company, including, but not limited to reasonable fees and out-of-pocket expenses of counsel, in enforcing the obligation of the Manager to repurchase or cause the repurchase of such mortgage loan. In lieu of repurchasing or causing the repurchase of any mortgage loan, Agency Security or other investment, the Manager may, in its discretion, substitute or cause the substitution, respectively, of a mortgage loan, Agency Security or other investment having an unpaid principal amount and yield at least equivalent to and a maturity not later than the defective mortgage loan, Agency Security or other investment and otherwise meeting the investment and/or purchase criteria and policies of the Company and/or CMC as applicable and the terms of the agreement, if any, pursuant to which the mortgage loan, Agency Security or other investment has been securitized. (b) The Manager shall be subrogated to any and all rights of the Company or any Subsidiary, and the Company agrees to assign to the Manager or direct its Subsidiary to assign to the Manager its rights, under any Servicing Agreement with any third party with respect to any mortgage loan repurchased or substituted for, by or on behalf of the Manager under Subsection (a). Section 6. Bank Accounts. The Manager may establish and maintain one or more bank accounts in the name of the Company or any Subsidiary, at the direction of the Board of Directors, and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, any money on behalf of the Company or any Subsidiary, under such terms and conditions as the Board of Directors may approve; and the Manager shall from time to time render appropriate accountings of such collections and payment to the Board of Directors and, when requested, to the auditors of the Company or any Subsidiary. Section 7. Records; Confidentiality. The Manager shall maintain appropriate books of account and records relating to services performed hereunder, which books of account and records shall be accessible for inspection by the Company or any Subsidiary at any time during normal business hours. The Manager agrees to keep confidential any and all information it obtains from time to time in connection with the services it renders under this Agreement and shall not disclose any portion thereof to non-affiliated third parties except with the prior written consent of the Company. Section 8. Obligations of Manager. (a) The Manager shall use its best efforts to provide that each mortgage loan conforms to the purchase criteria of the Company or CMC as applicable and shall require each seller or transferor of mortgage loans to the Company or CMC in connection with such purchase or transfer to make all applicable representations and warranties contained in the Servicing Agreement for such loans. The Manager shall take such other action as the Manager deems necessary or appropriate with regard to the protection of the Company's or CMC's investments. (b) Anything else in this Agreement to the contrary notwithstanding, the Manager shall refrain from any action which in its sole judgment made in good faith would adversely affect the status of the Company, or any Subsidiary which elects to so qualify, as a real estate investment trust as defined and limited in Section 856 through 860 of the Internal Revenue Code or which in its sole judgment made in good faith would violate any law, rule or regulation of any governmental body or agency having jurisdiction over the Company or any Subsidiary or which would otherwise not be permitted by the Company's or its Subsidiary's Governing Instruments except if such action shall be ordered by the Board of Directors, in which event the Manager shall promptly notify the Board of Directors of the Manager's judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments and shall refrain from taking such action pending further clarification or instructions from the Board of Directors. If the Board of Directors thereafter instructs the Manager, despite the Manager's notification as provided herein, to take any such action and the Manager so acts upon the instructions given, the Manager shall not be responsible for any loss of the Company's or Subsidiary's status as a real estate investment trust or violation of any law, rule or regulation or the Governing Instruments caused thereby. Section 9. Fidelity Bond. The Manager shall maintain a fidelity bond with a responsible surety company in an amount approved by the Board of Directors covering all officers and employees of the Manager handling funds of the Company or any Subsidiary and any documents or papers, which bond shall protect the Company or any Subsidiary against all losses of any such property from acts of such officers and employees through theft, embezzlement, fraud, negligent acts, errors and omissions or otherwise. The premium for said bond shall be paid by the Manager. Section 10. Compensation. (a) Manager will receive a base management fee equal to the Average Invested Assets Multiplied by 1/8 of 1%." (b) The Manager shall be paid for services rendered with respect to warehouse lending activities a management fee in an amount equal to 3/8 of 1% of the average daily balance of the amounts outstanding under warehouse lines of credit extended by the Company or its Subsidiaries to originators of mortgage loans. (c) If the Company's annualized Return on Equity during any fiscal quarter (computed by multiplying the Return on Equity for such fiscal quarter by four) is in excess of the Ten Year U.S. Treasury Rate, plus 2% after taking into account any recovery of the Manager's fees under Subsection (d), the Company will pay the Manager as incentive compensation for such quarter an amount equal to 25% of the amount by which the annualized Return on Equity of the Company for such fiscal quarter exceeds the Ten Year U.S. Treasury Rate plus 2%, but in no event shall any payment of incentive compensation under this Subsection reduce the Company's annualized Return on Equity for such quarter to less than the Ten Year U.S. Treasury Rate plus 2%. For purposes of the calculation contained in this Subsection (b), all Net Income of the Company and any Subsidiaries shall be deemed to have been distributed on the last day of each quarter. The incentive compensation shall be paid to the Manager within 60 days after the end of each fiscal quarter on an interim basis, subject to adjustment under Subsection (d). (d) The Manager shall compute the compensation payable under Subsections (a), (b) and (c) within 45 days after the end of each fiscal quarter. A copy of the computations made by the Manager to calculate its compensation shall thereafter by promptly delivered to the Company and, upon such delivery, payment of the interim compensation earned under Subsections (a), (b) and (c) shown therein shall be due and payable within 60 days after the end of such fiscal quarter. The aggregate amount of the Manager's compensation for each fiscal year shall be adjusted within 120 days after the end of such fiscal year so as to provide compensation for such year in the annual amounts stated in Subsections (a), (b) and (c) and any excess owed to, or shortfall owed by, the Manager with respect to such compensation, collectively, shall be promptly remitted by, or paid to, the Company. (e) Notwithstanding the definition of Average Invested Assets, in the event the Company implements a strategy of investing directly or indirectly in loans secured by real estate which are not intended to be securitized, the base management fee in Subsection (a) shall be paid with respect to these assets. The Manager acknowledges that it has waived all fees payable to the manager pursuant to Section 11(a) and (b) of this Agreement for the calendar year 1993 and 25% of all fees payable to the Manager pursuant to Section 11(c) of this Agreement, if any, for the calendar year 1994. Section 11. Operating Expenses. The Company will absorb all expenses of the Manager incurred in performing its duties and obligations under this Agreement from may 15, 1993 to the extent that such expenses exceed $900,000 calculated from January 1, 1993. For each month after the point in time during 1993 that such expenses exceed $900,000, the Manager shall be reimbursed by the Company for its operating expenses on a monthly basis. Promptly following the end of each month for which reimbursement is due, the Manager shall submit an itemized accounting of its expenses to the Company, and the Company shall pay within 30 days of the receipt of the accounting. Section 12. Limits of Manager Responsibility. The Manager assumes no responsibility under this Agreement other than to render the services called for hereunder in good faith and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager, including as set forth in Subsection 9(b) above. The Manager, its directors, officers, shareholders and employees will not be liable to the Company, any Subsidiary, the Unaffiliated Directors of the Company or the Company's or any Subsidiary's shareholders for any acts performed by the Manager, its directors, officers, shareholders or employees in accordance with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Company or any Subsidiaries, as applicable, shall reimburse, indemnify and hold harmless the Manager, its shareholders, directors, officers or employees for and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever in respect of or arising from any acts or omissions of the Manager, its shareholders, directors, officers and employees made in good faith in the performance of the Manager's duties under this Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties. Section 13. No Joint Venture. The Company and the Manager are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. Section 14. Term; Termination. This agreement shall continue in force through May 14, 1995, and thereafter it may be extended only with the consent of the Manager and by the affirmative vote of a majority of the Unaffiliated Directors. Each extension shall be executed in writing by all parties hereto before the expiration of this Agreement or of any extension thereof. Each such extension shall be effective for a period in no case exceeding twelve months. Notwithstanding any other provision to the contrary, this Agreement, or any extension hereof, may be terminated by any party, upon sixty (60) days' written notice, by majority vote of the Unaffiliated Directors or by majority vote of the Shareholders, in the case of termination by the Company, or, in the case of termination by the Manager, by majority vote of the directors of the Manager. If this Agreement is terminated pursuant to this Section, such termination shall be without any further liability or obligation of either party to the other, except as provided in Section 17. Section 15. Assignment; Subcontract. (a) This Agreement may not be assigned, in whole or in part, by the Manager, unless such assignment is to a corporation, association, trust or other organization which shall acquire the property and carry on the business of the Manager, if at the time of such assignment a majority of the voting stock of such assignee organization shall be owned, directly or indirectly, by CCI or any of its Affiliates or unless such assignment is consented to in writing by the Company with the consent of a majority of the Unaffiliated Directors. Such a permitted assignment shall bind the assignee hereunder in the same manner as the Manager is bound under this Agreement and, to further evidence its obligations, under this Agreement, the assignee shall execute and deliver to the Company a counterpart of this Agreement. This Agreement shall not be assignable by the Company without the consent of the Manager, except in the case of assignment by the Company to a real estate investment trust or other organization which is a successor (by merger, consolidation, or otherwise purchase of assets) to the Company, in which case such successor organization shall be bound hereunder and by the terms of said assignment in the same manner as the Company is bound hereunder. (b) Notwithstanding the foregoing, the Company and the Manager agree that the Manager may enter into a subcontract with CFC or any of its Affiliates pursuant to which CFC or such Affiliate will provide such of the management services required under this Agreement as the Manager deems necessary, and the Company hereby consents to the entering into and performance of such subcontract; provided, however, that no such arrangement between the Manager and CFC or any of its Affiliates shall relieve the Manager of any of its duties or obligations under this Agreement. Section 16. Termination by Company for Cause. At the option solely of the Company, this Agreement shall be and become terminated upon thirty days' written notice of termination from the Board of Directors to the Manager if any of the following events shall occur: (a) If the Manager shall violate any provision of this Agreement and, after notice of such violation, shall not cure such default within 30 days; or (b) There is entered an order for relief or similar decree or order with respect to the Manager by a court having jurisdiction in the premises in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager (i) ceases or admits in writing its inability to pay debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) The Manager agrees that if any of the events specified in paragraph (b) of this Section 16 shall occur, it will give prompt written notice thereof to the Board of Directors after the happening of such event. Section 17. Action Upon Termination. From and after the effective date of termination of this Agreement, pursuant to Sections 14, 15, or 16 hereof, the Manager shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination, subject to adjustment on an annualized basis in accordance with Section 10(d). The Manager shall forthwith upon such termination: (a) Pay over to the Company or any Subsidiary, as applicable, all money collected and held for the account of the Company or any Subsidiary pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled; (b) Deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any Subsidiary; and (c) Deliver to the Board of Directors all property and documents of the Company or any Subsidiary then in the custody of the Manager. Section 18. Release of Money or Other Property Upon Written Request. The Manager agrees that any money or other property of the Company or any Subsidiary held by the Manager under this Agreement shall be held for the Company or such Subsidiary in a custodial capacity, and the Manager's records shall be appropriately marked to reflect clearly the ownership of such money or other property by the Company or such Subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any Subsidiary any money or other property then held by the Manager for the account of the Company or any Subsidiary under this Agreement, the Manager shall release such money or other property to the Company or any Subsidiary within a reasonable period of time, but in no event later than 60 days following such request. The Manager shall not be liable to the Company, any Subsidiary, the Unaffiliated Directors, or the Company's Shareholders for any acts thereafter performed or omissions thereafter to act by the Company or any Subsidiary of the Company in connection with the money or other property released to the Company or any Subsidiary in accordance with this Section. The Company and any Subsidiary receiving released money or other property hereby agree to indemnify the Manager, its directors, officers, shareholders and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager's release of such money or other property to the Company or such Subsidiary in accordance with the terms of this Section. This provision shall be in addition to any right of the Manager to indemnification under Section 12. Section 19. Representations and Warranties. (a) The Company hereby represents and warrants to the Manager as follows: (i) Corporate Existence. The Company is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its Subsidiaries, taken as a whole. The Company does not do business under any fictitious business name. (ii) Corporate Power; Authorization; Enforceable Obligations. The Company has the corporate power, authority and legal right to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action authorize this Agreement on the terms and conditions hereof and its execution, delivery and performance of this Agreement and all obligations required hereunder. Except such as have been obtained, no consent of any other person including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (iii) No Legal Bar to This Agreement. The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the certificate of incorporation or by-laws of, or any securities issued by the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its Subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. (b) The Manager hereby represents and warrants to the Company as follows: (i) Corporate Existence. The Manager is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its Subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. (ii) Corporate Power; Authorization; Enforceable Obligations. The Manager has the corporate power, authority and legal right to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and its execution, delivery and performance of this Agreement and all obligations required hereunder. Except such as have been obtained, no consent of any other person including, without limitation, stockholders and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. (iii) No Legal Bar to This Agreement. The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the certificate of incorporation or by-laws of, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Manager and its Subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. Section 20. Notices. Any notice, report, or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report, or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto: The Company: Countrywide Mortgage Investments, Inc. 155 North Lake Avenue P.O. Box 7137 Pasadena, California 91109-7137 Attention: General Counsel The Manager: Countrywide Asset Management Corporation 155 North Lake Avenue P.O. Box 7137 Pasadena, California 91109-7137 Attention: General Counsel Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 20. Section 21. Name Change Upon Termination of Management Agreement. The Company agrees that, if at any time the Manager or any Affiliate of CCI shall cease to serve generally as manager of the Company or any Subsidiary, upon receipt of a written request from the Manager, the Company and such Subsidiary will cause their Governing Instruments to be amended so as to change their names to a name that does not include "Countrywide" or any approximation thereof; provided, however, that such requirement shall not apply to any trust in which the Company or any of its Subsidiaries has sold a majority of the beneficial interest, and which has issued Mortgage Backed Securities that remain outstanding in whole or in part. Section 22. Amendments. This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. Section 23. Successors and Assigns. This Agreement shall bind any successors or assigns of the parties hereto as herein provided. Section 24. Governing Law. This Agreement shall be governed, construed and interpreted in accordance with the laws of the State of California. Section 25. Headlines and Cross References. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. Any reference in this Agreement to a "Section" or "subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement in which the reference appears. Section 26. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. Section 27. Entire Agreement. This instrument contains the entire agreement between the parties as to the rights granted and the obligations assumed in this instrument. Section 28. Waiver. Any forbearance by a party to this Agreement in exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of that or any other right or remedy. Section 29. Execution in Counterparts. This Agreement may be executed in one or more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of both parties. Section 30. Guaranty of Manager's Obligations. The Manager agrees that in order to insure the performance of its duties under this Agreement, it will be necessary for CFC to guarantee the full performance of the Manager, and this Agreement is conditioned upon the execution and delivery to the Company of a Guaranty Agreement in the form attached to this Agreement as Exhibit B. Such Guaranty Agreement shall remain in effect through the term of this Agreement, including any renewals or extensions; provided, however, that the Guaranty Agreement may be terminated by the Guarantor as provided therein at such time as the Manager and the Guarantor are no longer Affiliates. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the day and year first above written. COUNTRYWIDE MORTGAGE INVESTMENTS, INC. By __________________________________ Sandor E. Samuels Senior Vice President and Secretary COUNTRYWIDE ASSET MANAGEMENT CORPORATION By __________________________________ Kevin M. Bartlett Executive Vice President EXHIBIT B GUARANTY THIS GUARANTY (the "Guaranty"), dated as of September 3, 1985, is made by Countrywide Funding Corporation (the "Guarantor") to Countrywide Asset Management Corporation (the "Manager") and Countrywide Mortgage Investments, Inc. (the "Company"). RECITALS A. Pursuant to the Management Agreement, dated as of September 3, 1985, (the "Agreement"), entered into between the Manager and the Company concurrently with the execution of this Guaranty, the Manager has agreed to manage the investments and the day-to-day operations of the Company, including the issuance of commitments on behalf of the Company to acquire mortgage loans meeting the investment criteria set from time to time by the Company's Board of Directors; B. The Manager is a newly organized corporation which is a wholly-owned subsidiary of Countrywide Credit Industries, Inc.; C. The Guarantor is an experienced originator and servicer of mortgage loans which is also a wholly-owned subsidiary of Countrywide Credit Industries, Inc., and in order to induce the parties thereto to enter into the Agreement, has agreed to guarantee the full performance of the Manager of its obligations under the Agreement; and D. The Guarantor will benefit from the relationship embodied in the Agreement between the Company and the Manager. NOW THEREFORE, for the consideration recited above and other good and valuable consideration, the Guarantor agrees as follows: 1. The Guarantor hereby unconditionally guarantees to the Company the due and punctual payment, performance and discharge of all duties, obligations, debts and liabilities of the Manager to the Company under the Agreement (the "Obligations"), together with any and all expenses of, for and incidental to collection of the Obligations, including attorneys' fees and court costs. Nothing shall discharge or satisfy the liability of the Guarantor hereunder except the full performance and payment of the Obligations to the Company. 2. The Guarantor hereby waives notice of acceptance hereof, notice of the amount of the Obligations of the Manager to the Company from time to time, notice of any adverse change in the Manager's financial condition or any other fact which might increase the Guarantor's risk. The Guarantor waives all (x) set-offs, counterclaims, presentments and (y) protests, notices of protest, notices of dishonor and notices of any action or non-action, including acceptance of this Guaranty, notices of default under the Agreement or any agreement related thereto and notice of any other extension of credit to the Manager. The Guarantor further waives any rights granted by statute or otherwise to require the Company to institute suit against the Manager or to exhaust its rights and remedies against the Manager, it being acknowledged that the Guarantor is bound for the payment of all Obligations of the Manager to the Company now existing or hereafter occurring as fully as if such Obligations were owing directly to the Company by the Guarantor. The Guarantor waives all rights of exoneration granted by statute or otherwise in the event this Agreement is altered in any respect by or with the consent of the Manager without the consent of the Guarantor. The Guarantor shall not be released from any liability by reason of the Manager's personal disability. 3. The Guarantor consents and agrees that without notice to the Guarantor and without affecting or impairing the obligations of the Guarantor hereunder, the Company may compromise or settle, extend the period or duration of time for payment or discharge of performance of, or may refuse to enforce or may release all or any parties to any and all of the Obligations, or may grant other indulgences to the Manager with respect thereof, or may amend or modify in any manner any documents or agreements relating to such obligations. 4. The Guarantor agrees to pay any and all expenses incurred by the Company in connection with the enforcement of its obligations under this Guaranty, as well as court costs, collections charges and attorneys' fees and disbursements. 5. This Guaranty is a primary, original obligations of the Guarantor and is an absolute, unconditional, continuing and irrevocable guaranty of payment and performance and, except as provided in Section 10, shall remain in full force and effect throughout the term of the Agreement without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to the issuance of any Obligations of the Manager to the Company. This is a continuing Guaranty relating to the Obligations, including that arising under successive transactions under the Agreement which shall either continue the Obligations or from time to time renew any or all of them. The obligations hereunder are independent of the Obligations of the Manager and the obligations of any other guarantor of the Obligations of the Manger under the Agreement, and a separate action or actions may be brought and prosecuted against the Guarantor whether any action is brought against the Manager or any of such other guarantors or whether the Manager be joined any such action or actions; and the Guarantor waives all principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty. However, this Guaranty shall not limit the effect of any provisions in the Agreement or any principles or provisions of law, statutory or otherwise, which provide legal rights to the Manager, and to the extent the Guarantor is required to perform any of the Obligations under this Guaranty, it shall be entitled to seek enforcement of such principles or provisions of law to the same extent as the Manager. 6. The Company shall have the right to seek recourse against the Guarantor to the full extent provided for herein and in any other document or instrument evidencing the Obligations and against the Manager to the full extent provided for in the Agreement. No election to proceed in one form of action or proceeding, or against any party, or on any Obligations, shall constitute a waiver of the Company's right to proceed in any other form of action or proceeding or against other parties. 7. The Guarantor agrees that all the rights, benefits and privileges herein shall vest in, and be enforceable by, the Company and its successors and assigns. 8. So long as any Obligations shall be owing to the company, the Guarantor shall not, without the prior consent of The Company, commence or join with any other person in commencing any bankruptcy, reorganization or insolvency proceedings of or against the Manager. The obligations of the Guarantor under this Guaranty shall not be altered, limited or affected by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of the Manger or by any defense which the Manager may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. The Company shall have the sole right to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to take. In the event that all or any portion of the Obligations is paid or performed by the Manager, the obligations of Guarantor hereunder shall continue and remain in full force and effect in the event that all or any part of such payment(s) or performance(s) is avoided or recovered directly or indirectly from the Company as a preference, fraudulent transfer or otherwise in such proceeding. 9. In order to induce the Company to accept this Guaranty and to make the Agreement, Guarantor hereby represents the warrants to the Company that the following statements are true and correct: (i) Corporate Existence. Guarantor is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of Guarantor and its subsidiaries, taken as a whole. Guarantor does not do business under any fictitious business name. (ii) Corporate Power; Authorization; Enforceable Obligations. Guarantor has the corporate power, authority and legal right to execute, deliver and perform the Guaranty and all obligations required hereunder and has taken all necessary corporate action to authorize its Guaranty hereunder on the terms and conditions hereof and its execution, delivery and performance of this Guaranty and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of Guarantor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by Guarantor in connection with this Guaranty or the execution, delivery, performance, validity or enforceability of this Guaranty and all obligations required hereunder. This Guaranty has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of Guarantor, and this Guaranty constitutes, and each instrument of document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of Guarantor enforceable against Guarantor in accordance with its terms. (iii) No Legal Bar to This Guaranty. The execution, delivery and performance of this Guaranty and the documents or instruments required hereunder will not violate and provision of any existing law or regulation binding on Guarantor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on Guarantor, or the certificate of incorporation or by-laws of, or any securities issued by Guarantor, or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which Guarantor is a party or by which Guarantor or any of its assets may be bound, the violation of which would have a material adverse effect on the business operation, assets or financial condition of Guarantor and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. 10. This Guaranty shall remain in effect through the term of the Agreement, including any renewals or extensions thereof; provided however, that this Guaranty may be terminated by the Guarantor at such time as the Manager and the Guarantor are not longer "Affiliates" as such term is defined in the Agreement. 11. This Guaranty, all acts and transactions hereunder, and the rights and obligations of the parties hereto shall be governed by, construed under and interpreted in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Guarantor executed this Guaranty as of the 3rd day of September, 1985. COUNTRYWIDE FUNDING CORPORATION By: Angelo R. Mozilo Title: President, Chief Executive Officer Attest: Wayne Turkheimer Title: Secretary (CORPORATE SEAL) EX-10 3 1993 LOAN PURCHASE AND ADMIN SERVICES AGREEMENT 1993 AMENDED AND EXTENDED LOAN PURCHASE AND ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT is made as of May 15, 1993 by and between Countrywide Mortgage Investments, Inc., a Delaware corporation (the "Company"), and Countrywide Funding Corporation, a New York corporation ("CFC"). WITNESSETH: WHEREAS, the Company has elected to qualify for the tax benefits accorded by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended; and WHEREAS, the Company, directly or through Subsidiaries, in the conduct of its business primarily operates a mortgage loan conduit, engages in warehouse lending and invests in mortgage loans and mortgage-related securities meeting the investment criteria established from time to time by the Board of Directors; and WHEREAS, the Company may desire to purchase mortgage loans originated or purchased by CFC and may want CFC to cause the issuance of Agency Securities supported by pools of such mortgage loans on its behalf; and WHEREAS, the Company may desire to appoint CFC to service mortgage loans originated by others and purchased by the Company through its mortgage loan conduit operations; and WHEREAS, the Company and CFC desire to amend and extend the Loan Purchase and Administrative Services Agreement originally entered into as of September 3, 1985 for a one-year period through May 14, 1994 upon the terms and subject to the conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Definitions. Whenever used in this Agreement, the following terms, unless the context otherwise requires, shall have the following meanings: (a) "Affiliate" shall have the meaning attributed to such term in the Management Agreement. (b) "Agency Securities" shall mean GNMA Certificates, FHLMC Certificates and/or FNMA Certificates. (c) "Agreement" shall mean this 1993 Amended and Extended Loan Purchase and Administrative Services Agreement. (d) "Board of Directors" shall mean the Board of Directors of the Company. (e) "Conforming Loan" shall mean an FHA Loan, a VA Loan or a conventional mortgage loan eligible for sale to FNMA or FHLMC. (f) "FHA Loan" shall mean any mortgage loan insured by the Federal Housing Administration under the National Housing Act. (g) "FHLMC" shall mean the Federal Home Loan Mortgage Corporation, a corporation organized and existing under the laws of the United States, or any successor thereto. (h) "FHLMC Certificate" shall mean a mortgage participation certificate, guaranteed as to payment of interest and principal by FHLMC and backed by a pool of conventional mortgage loans. (i) "FNMA" shall mean the Federal National Mortgage Association, a corporation organized and existing under the laws of the United States, or any successor thereto. (j) "FNMA Certificate" shall mean a guaranteed mortgage pass-through certificate, guaranteed as to timely payment of interest and principal by FNMA and backed by a pool of FHA Loans, VA Loans, and/or conventional mortgage loans. (k) "GNMA" shall mean the Government National Mortgage Association, a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development, or any successor thereto. (l) "GNMA Certificate" shall mean a fully modified pass-through mortgage-backed certificate guaranteed as to timely payment of interest and principal by GNMA and backed by a pool of FHA Loans or VA Loans. (m) "Jumbo Loan" shall mean any mortgage loan which is not a Conforming Loan. (n) "Management Agreement" shall mean that certain agreement dated as of May 15, 1993 between the Company and the Manager governing the management of the Company's investments and day-to-day operations. (o) "Manager" shall mean Countrywide Asset Management Corporation, or any successor thereto, under a Management Agreement with the Company. (p) "Mortgage Backed Securities" shall have the meaning attributed to such term in the Management Agreement. (q) "Subsidiary" shall have the meaning attributed to such term in the Management Agreement. (r) "Unaffiliated Directors" shall mean those members of the Board of Directors who are not Affiliates of the Manager. (s) "VA Loan" shall mean any mortgage loan guaranteed by the Veterans Administration under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States Code. Section 2. Purchase of Mortgage Loans and Agency Securities from CFC by the Company. (a) CFC may sell to the Company mortgage loans, Agency Securities and other mortgage-related assets meeting the Company's investment criteria. CFC agrees that all such sales shall be made in accordance with the normal and customary industry practices with respect to the sale of mortgage loans, Agency Securities and other mortgage-related assets. CFC agrees that all mortgage loans or other investments sold by it to the Company will meet the investment criteria of the Company in effect at the time of sales. (b) CFC agrees that, any sale of mortgage loans, Agency Securities and other mortgage-related assets from CFC to the Company will be made at prices no less favorable to the Company than are available to CFC from other purchasers. (c) The Company agrees that prior to the delivery of each mortgage loan purchased, it shall have no interest in such mortgage loan. CFC shall bear all expenses and costs associated with the mortgage loans prior to delivery, including the costs associated with mortgage loans that are not sold. Upon the delivery of such mortgage loan, the Company shall be the sole beneficial owner of such mortgage loan although legal title to the mortgage and the mortgage note will be held by CFC if so directed by the Company to permit the issuance of Agency Securities under Section 3. (d) Notwithstanding the fact that the Company is the beneficial owner of the mortgage loans it purchases, the Company and CFC agree that from and after the date first written above, the Conforming Loans sold to the Company under this Agreement shall be sold "servicing retained" and the servicing rights therefor shall remain with CFC or the other holder thereof. Notwithstanding the foregoing, neither CFC nor such holder may assign its servicing rights to such Conforming Loans without the consent of the Company prior to the issuance of Agency Securities backed by such Conforming Loans. The Company agrees that it will not unreasonably withhold its consent to such an assignment of servicing rights. CFC's rights to assign the servicing rights to Conforming Loans that have been pooled and exchanged for Agency Securities shall be subject to Subsection 3(c). (e) CFC hereby represents and warrants that at the time of sale of mortgage loans to the Company such mortgage loans will meet the representations and warranties required to be made by sellers of mortgage loans to the Company or any Subsidiary pursuant to the Seller/Servicer Guide incorporated by reference into the Seller/Servicer Contract executed by CFC. (f) CFC shall act as an independent contractor and not as an agent of the Company for purposes of originating and purchasing mortgage loans and selling to the Company mortgage loans and Agency Securities and other investments. Section 3. Pooling of Mortgage Loans; Issuance of Agency Securities; Payments of Certain Amounts to Company. (a) If directed by the Company, CFC on behalf of the Company will pool any FHA Loans and VA Loans purchased by the Company in accordance with the requirements of FNMA and will use its best efforts to have GNMA Certificates issued backed by such FHA Loans and VA Loans. In connection therewith, CFC will (i) apply to GNMA for a commitment to guarantee mortgage-backed securities by the issuance of such GNMA Certificates; (ii) once such a commitment has been issued by GNMA, deliver the pool of mortgage loans to a custodian (selected by CFC and acceptable to the Company, subject to GNMA requirements) to be held for the benefit of the holder of the Certificates; and (iii) once the custodian verifies to GNMA that it has custody of the pool, enter into or cause to be created an appropriate GNMA guaranty pursuant to which CFC will issue a GNMA Certificate owned by and registered in the name of or deposited into a depository institution for the account of the Company. After the issuance of such GNMA Certificates, CFC will retain all responsibilities and duties to GNMA, including the payment of all GNMA guaranty fees, with respect to such FHA Loans, VA Loans and GNMA Certificates and will service such FHA Loans and VA Loans after the issuance of the GNMA Certificates in accordance with GNMA requirements. (b) If directed by the Company, CFC on behalf of the Company will pool any conventional mortgage loans and/or FHA Loans and VA Loans purchased by the Company in accordance with the requirements of FNMA and/or the requirements of FHLMC and will use its best efforts to have FNMA Certificates and/or FHLMC Certificates issued backed by such conventional mortgage loans, FHA Loans and VA Loans, but only if CFC in its sole discretion determines that such conventional mortgage loans, FHA Loans and VA Loans meet all FNMA or FHLMC underwriting and other requirements for such issuance. In connection therewith, CFC will (i) apply to FNMA or FHLMC for a commitment to issue FNMA Certificates or FHLMC Certificates and (ii) once such commitment has been approved, CFC will contract with FNMA or FHLMC to pool such conventional mortgage loans, FHA Loans and VA Loans and cause to be issued FNMA Certificates or FHLMC Certificates backed by such loans, which FNMA Certificates or FHLMC Certificates will be owned by and will be registered in the name of or deposited into a depository institution for the account of the Company. After the issuance of such FNMA Certificates and FHLMC Certificates, CFC will retain all responsibilities and duties to FNMA and FHLMC, including the payment of all FNMA or FHLMC guaranty fees, with respect to such conventional mortgage loans, FHA Loans, VA Loans, FNMA Certificates and FHLMC Certificates and will service such conventional mortgage loans, FHA Loans and VA Loans after the issuance of the FNMA or FHLMC Certificates which they back, in accordance with FNMA and FHLMC requirements. (c) If Agency Securities are issued to the Company pursuant to this Section, CFC agrees that for such time as it is servicing the mortgage loans underlying each Agency Security on behalf of the Company, in addition to all duties and obligations imposed on CFC by the servicing agreement which incorporates the appropriate GNMA, FNMA or FHLMC requirements, CFC shall remit to the Company at the same time it remits each periodic installment of principal and interest on the Agency Security, the amount, if any, representing the difference between (i) the schedules installment of principal and interest on the mortgage loans underlying the Agency Security, less the applicable GNMA, FNMA or FHLMC guaranty fee and CFC's servicing fee as agreed to between the Company and CFC, and (ii) the scheduled installment of principal and interest on the Agency Security. The obligation of CFC to remit such amounts to the Company shall arise upon receipt from the mortgagor by CFC of the scheduled installment of principal and interest on the underlying mortgage loan. CFC agrees that in the event it assigns its right to service the mortgage loans underlying Agency Securities, either the successor servicer of such mortgage loans will continue to remit the amounts referred to above to the Company or CFC will remit to the Company an amount representing the present value of the anticipated amounts which would otherwise be received by the Company over the life of the mortgage loans under this Subsection. Section 4. Obligation to Assume Servicing. In the event the Company or any Subsidiary acquires rights to service mortgage loans or terminates the servicing rights of any entity which has sold mortgage loans to the Company or any Subsidiary on a servicing retained basis, the Company and CFC agree to negotiate a servicing agreement pursuant to which CFC will assume the servicing function. Section 5. Additional Activities of CFC. Nothing herein shall prevent CFC or its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including the performance of monitoring, administering or servicing activities for others investing in any type of real estate investment. Section 6. Bank Accounts. Fidelity Bond. (a) CFC may establish and maintain in connection with the services performed hereunder one or more bank accounts in the name of the Company, at the direction of the Company, and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, moneys on behalf of the Company, under such terms and conditions as the Company may approve; and CFC shall from time to time render appropriate accountings of such collections and payments to the Company and, when requested, to the auditors of the Company. (b) CFC shall maintain a fidelity bond with a responsible surety company in an amount approved by the Board of Directors covering all officers and employees of CFC handling funds of the Company and any documents or papers, which bond shall protect the Company against all losses of any such property from acts of such officers and employees through theft, embezzlement, fraud, negligent acts, errors and omissions or otherwise, the premium for said bond to be paid by CFC. Section 7. Records; Confidentiality. CFC shall maintain appropriate books of account and records relating to services performed hereunder, which books of account and records shall be accessible for inspection and copying by the Company at any time during normal business hours. CFC agrees to keep confidential any and all information it obtains from time to time in connection with the services it renders hereunder and shall not disclose any portion thereof to nonaffiliated third parties except with the prior written consent of the Company. Section 8. Term; Termination. (a) This Agreement shall continue in force through May 14, 1994 and thereafter it may be extended only with the consent of CFC and by the affirmative vote of a majority of the Unaffiliated Directors. Each extension shall be executed in writing by both parties hereto before the expiration of this Agreement or of any extension thereof. (b) CFC may terminate this Agreement upon 30 days' written notice if at any time any of the Affiliates of Countrywide Credit Industries, Inc. are no longer servicing as Manager. (c) Notwithstanding any other provision herein to the contrary, this Agreement, or any extension hereof, may be terminated by the Company with cause, upon 30 days', written notice, or by either party without cause, upon 60 days' written notice, by majority vote of the Unaffiliated Directors or by vote of the holders of a majority of the outstanding shares of common stock of the Company, in the case of termination by the Company, or in the case of termination by CFC, by majority vote of the Directors of CFC. Section 9. Assignment. This Agreement shall not be assignable in whole or in part by CFC, unless such assignment is to a corporation, association, trust or other organization which shall acquire the property and carry on the business of CFC, if at the time of such assignment a majority of the voting stock of such assignee organization shall be owned, directly or indirectly, by Countrywide Credit Industries, Inc. or unless such assignment is consented to in writing by the Company with the consent of a majority of the Unaffiliated Directors. Such an assignment shall bind the assignee hereunder in the same manner as CFC is bound hereunder, and, to further evidence its obligations hereunder, the assignee shall execute and deliver to the Company a counterpart of this Agreement. This Agreement shall not be assignable by the Company without the consent of CFC, except in the case of an assignment by the Company to a corporation or other organization which is a successor (by merger, consolidation or purchase of assets) to the Company, in which case such successor organization shall be bound hereunder by the terms of said assignment in the same manner as the Company is bound hereunder. Section 10. Termination by Company for Cause. At the option solely of the Company, this Agreement may be and become terminated upon receipt of thirty days' written notice of termination from the Board of Directors to CFC is any of the following events shall occur: (a) If CFC shall violate any provisions of this Agreement and, after notice of such violation, shall not cure such default within 30 days; or (b) There is entered an order for relief or similar decree or order with respect to CFC by a court having jurisdiction in the premises in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or CFC (i) ceases or admits in writing its inability to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of CFC or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against CFC and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against CFC without such authorization, application or consent and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) CFC agrees that if any of the events specified in paragraph (b) of this Section 10 shall occur, it will give prompt written notice thereof to the Board of Directors after the happening of such event. Section 11. Action Upon Termination. From and after the effective date of termination of this Agreement, pursuant to Sections 8, 9 or 10 hereof, CFC shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination. CFC shall forthwith upon such termination: (a) Pay over to the Company any money collected and held for the account of the Company pursuant to this Agreement or otherwise, after deducting any accrued compensation to which it is then entitled; (b) Deliver to the Board of Directors a full accounting, including a statement showing any payments collected by it and a statement of any money held by it, covering the period following the date of the last accounting furnished to the Board of Directors; and (c) Deliver to the Board of Directors all property and documents of the Company then in the custody of CFC, except to the extent that to do so would conflict with the terms of its servicing agreement with the Company. Section 12. Release of Money or other Property Upon Written Request. CFC agrees that any money or other property of the Company held by CFC under this Agreement shall be held for the Company in a custodial capacity, and CFC's records shall be appropriately marked to clearly reflect the ownership of such money or other property of the Company. CFC shall release its custody of any money or other property only in accordance with written instructions from the Company. Section 13. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing, unless some other method of giving such notice , report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto: The Company: Countrywide Mortgage Investments, Inc. 155 North Lake Avenue Post Office Box 7137 Pasadena, CA 91109-7137 Attention: General Counsel CFC: Countrywide Funding Corporation 155 North Lake Avenue Post Office 7137 Pasadena, CA 91109-7137 Attention: General Counsel Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 13. Section 14. No Joint Venture. The Company and CFC are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. Section 15. Amendments. This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part, and the performance of any obligation hereunder may not be waived, except by an instrument in writing signed by both parties hereto, or their respective successors or permitted assigns, or otherwise as provided herein. Section 16. Successors and Assigns. This Agreement shall bind any successors or permitted assigns of the parties hereto as herein provided. Section 17. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. Section 18. Entire Agreement. This instrument contains the entire agreement between the parties as to the rights granted and the obligations assumed in this instrument. Section 19. Waiver. Any forbearance by a party to this Agreement in exercising any right or remedy under this Agreement or otherwise afforded by applicable laws shall not be a waiver of or preclude the exercise of that or any other right or remedy. Section 20. Governing Law. This Agreement shall be governed by, construed under and interpreted in accordance with the laws of the State of California. Section 21. Supplemental Servicing. From and after the date of this Agreement the Supplemental Servicing Agreement dated as of May 15, 1987 by and among the Company, CFC and the Manager shall be of no further force and effect. Section 22. Headings and Cross-References. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. Any reference in this Agreement to a "Section" or "Subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement in which the reference appears. Section 23. Execution in Counterparts. This Agreement may be executed in one or more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of both parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the day and year first above written. COUNTRYWIDE MORTGAGE INVESTMENTS, INC. By: _____________________________ Michael W. Perry Title: Senior Vice President COUNTRYWIDE FUNDING CORPORATION By: _____________________________ Kevin W. Bartlett Title: Managing Director The undersigned, as Manager, consents to the foregoing terms and provisions of this Agreement and agrees to be bound by them in performing its duties as Manager of the Company. COUNTRYWIDE ASSET MANAGEMENT CORPORATION By: _____________________________ Eric P. Sieracki Title: Senior Vice President EX-11 4 COMPUTATION OF EARNINGS PER SHARE COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year ended February 28(29), 1994 1993 1992 PRIMARY Net earnings $179,460 $140,073 $60,196 Preferred stock dividend requirement (732) (3,482) (3,800) Net earnings applicable to common stock $178,728 $136,591 $56,396 Average shares outstanding 88,792 80,678 61,461 Net effect of dilutive stock options - based on the treasury stock method using average market price 1,709 1,836 2,339 Total average shares 90,501 82,514 63,800 Per share amount $1.97 $1.65 $0.89 FULLY DILUTED Net earnings $179,460 $140,073 $60,196 Add 7% convertible subordinated debentures interest, net of income taxes - - 161 Net earnings applicable to common stock $179,460 $140,073 $60,357 Average shares outstanding 88,792 80,677 61,461 Net effect of dilutive stock options - based on the treasury stock method using the year-end market price, if higher than average market price 1,709 2,387 2,646 Assumed conversion of 7% convertible 770 subordinated debentures - - Assumed conversion of convertible preferred shares 1,944 9,150 10,057 Total average shares 92,445 92,214 74,934 Per share amount $1.94 $1.52 $0.81
EX-12 5 COMPUTATION OF 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 five fiscal years ended February 28, 1994 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).
For Fiscal Years Ended February 28(29), 1994 1993 1992 1991 1990 Net earnings $179,460 $140,073 $60,196 $22,311 $13,085 Income tax expense 119,640 93,382 40,131 14,874 8,722 Interest charges 275,906 148,765 81,959 73,428 74,687 Interest portion of rental expense 6,372 4,350 2,814 2,307 2,150 Earnings available to cover fixed charges $581,378 $386,570 $185,100 $112,920 $98,644 Fixed charges Interest charges $275,906 $148,765 $81,959 $73,428 $74,687 Interest portion of rental expense 6,372 4,350 2,814 2,307 2,150 Total fixed charges $282,278 $153,115 $84,773 $75,735 $76,837 Ratio of earnings to fixed charges 2.06 2.52 2.18 1.49 1.28
EX-12 6 COMPUTATION OF RATIO OF EARNINGS TO NET FIXED CHGS 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 five fiscal years ended February 28, 1994 computed by dividing net fixed charges (interest expense on debt other than to finance mortgage loan inventory plus interest element (one-third) of operating leases) into earnings (income before income taxes and net fixed charges).
For Fiscal Years Ended February 28(29), 1994 1993 1992 1991 1990 Net earnings $179,460 $140,073 $60,196 $22,311 $13,085 Income tax expense 119,640 93,382 40,131 14,874 8,722 Interest charges 85,240 51,551 45,928 23,609 25,135 Interest portion of rental expense 6,372 4,350 2,814 2,307 2,150 Earnings available to cover net fixed charges $390,712 $289,356 $149,069 $63,101 $49,092 Net fixed charges Interest charges $85,240 $51,551 $45,928 $23,609 $25,135 Interest portion of rental expense 6,372 4,350 2,814 2,307 2,150 Total net fixed $91,612 $55,901 $48,742 $25,916 $27,285 charges Ratio of earnings to net 4.26 5.18 3.06 2.43 1.80 fixed charges
EX-22 7 LIST OF SUBSIDIARIES EXHIBIT 22.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. SUBSIDIARIES Countrywide Funding Corporation New York 1. Countrywide Title Corporation California 2. Countrywide Agency, Inc. New York 3. Countrywide Securities Corporation California 4. Countrywide Agency of Texas, Inc. Texas 5. Countrywide Plan, Inc. California 6. Countrywide Lending Corporation California 7. Countrywide Financial Services Corporation California 8. (Inactive) Countrywide Asset Management Corporation Delaware 9. 10. Countrywide Partnership Investments, Inc. California 11. Continental Mobile Home Brokerage Corporation California 12. Countrywide Parks I, Inc. California 13. Countrywide Parks V, Inc. California 14. Countrywide Parks VI, Inc. California 15. Countrywide Parks VII, Inc. California 16. Countrywide Parks VIII, Inc. California 17. Countrywide Servicing Exchange California 18. Landsafe Title Agency, Inc. California 19. The Countrywide Foundation California 20. Countrywide Receivables Corporation Delaware 21. Countrywide Mortgage Pass Through Corporation Delaware 22. Countrywide LP, Inc. Nevada 23. Countrywide GP, Inc. Nevada 24. Countrywide Capital Markets, Inc. California 25. CWMBS, Inc. Delaware 26. Countrywide Mortgage Conduit, Inc. Delaware EX-24 8 CONSENT OF GRANT THORNTON CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 22, 1994, accompanying the consolidated financial statements and schedules included in the Annual Report of Countrywide Credit Industries, Inc. on Form 10-K for the year ended February 28, 1994. We hereby consent to the incorporation by reference of said report in the Registration Statements of Countrywide Credit Industries, Inc. on Form S-3 (File No. 33-19708, effective January 26, 1988; File No. 33-29941, effective July 25, 1989; File No. 33-44194(-1), effective November 27, 1991; File No. 33-45174, effective February 6, 1992; File No. 33-53048, effective October 9, 1992) and on Form S-8 (File No. 33-9231, effective October 20, 1986, as amended on February 19, 1987; File No. 33-17271, effective October 6, 1987; File No. 33- 42625, effective September 6, 1991; File No. 33-56168, effective December 22, 1992; and File No. 33-69498, effective September 28, 1993). Los Angeles, California April 22, 1994 Exhibit 24.1 -----END PRIVACY-ENHANCED MESSAGE-----