10-K 1 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, 1995 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 of other (I.R.S. Employer jurisdiction Identification No.) of incorporation) 155 N. Lake Avenue, 91101-1857 Pasadena, California (Address of principal (Zip Code) executive offices) 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 New York Stock Exchange Value Pacific Stock Exchange Preferred Stock Purchase New York Stock Exchange Rights 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. [ X ] As of May 16, 1995, there were 91,528,939 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 $1,786,905,000. 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 1995 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 also offers home equity loans both in conjunction with newly produced first-lien mortgages and as a separate product. 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 CWM Mortgage Holdings, Inc. (formerly Countrywide Mortgage Investments, Inc.) ("CWM"), a real estate investment trust whose shares are traded on the New York Stock Exchange. In 1993, CWM adopted a new operating plan and established a taxable subsidiary that principally operates as a jumbo and otherwise non-conforming mortgage loan conduit. CWM has also commenced warehouse lending operations which provide short-term revolving financing to certain mortgage bankers, and construction lending operations which provide financing to developers and individuals. See "Business--Countrywide Asset Management Corporation." The Company also has a subsidiary which acts as an agent in the sale of homeowners, fire, flood, earthquake, 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. The Company also has a subsidiary that provides title insurance services to realtors, builders, consumers, mortgage brokers and other financial institutions. 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 (although in the year ended February 28, 1995 the Company incurred a loss on 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; (iv) loan servicing fees and (v) interest benefit derived from the custodial balances associated with the Company's servicing portfolio. 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"), conventional mortgage loans and, beginning in the year ended February 28, 1995, home equity loans. A majority of the conventional loans are conforming loans which qualify for inclusion in guarantee programs sponsored by the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). 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 Fannie Mae or Freddie Mac 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 and home equity loan production for the periods indicated.
(Dollar amounts Summary of the Company's Mortgage and Home Equity Loan in millions, Production except average loan amount) Year Ended February 28(29), 1995 1994 1993 1992 1991 Conventional Loans Number of Loans 175,823 315,699 192,385 63,919 23,130 Volume of Loans $20,958.7 $46,473.4 $28,669.9 $9,986.6 $3,140.9 Percent of Total 82.2% 68.6% Volume 75.2% 88.6% 88.5% FHA/VA Loans Number of Loans 72,365 67,154 42,022 24,329 17,328 Volume of Loans $6,808.3 $5,985.5 $3,717.9 $2,169.7 $1,435.8 Percent of Total Volume 24.4% 11.4% 11.5% 17.8% 31.4% Home Equity Loans Number of Loans 2,147 - - - - Volume of Loans $99.2 - - - - Percent of Total Volume .4% - - - - Total Loans Number of Loans 250,335 382,853 234,407 88,248 40,458 Volume of Loans $27,866.2 $52,458.9 $32,387.8 $12,156.3 $4,576.7 Average Loan Amount $111,000 $137,000 $138,000 $138,000 $113,000
The increase in the number and dollar amount of FHA and VA loans produced in the year ended February 28, 1995 ("Fiscal 1995") from that produced in the years ended February 28, 1994 ("Fiscal 1994") and February 28, 1993 ("Fiscal 1993") was attributable to the Company's effort to expand its share of that market. The decrease in the number and dollar amount of conventional loans in Fiscal 1995 as compared to Fiscal 1994 was attributable primarily to the increasing mortgage interest rate environment, resulting in a decrease in mortgage loan activity, particularly refinancings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Fiscal 1995 Compared with Fiscal 1994." For the years ended February 28, 1995, 1994 and 1993, jumbo loans represented 17%, 30% and 27%, respectively, of the Company's total volume of mortgage loans produced. The decrease in the percentage of jumbo loans was primarily the result of diversification of the Company's loan production out of states with relatively higher housing costs (particularly California) and into states with relatively lower housing costs. For the years ended February 28, 1995, 1994 and 1993, adjustable-rate mortgage loans ("ARMs") comprised approximately 34%, 19% and 28%, respectively, of the Company's total volume of mortgage loans produced. The increase in the Company's percentage of ARM production from 1994 to 1995 was primarily caused by consumer preference for adjustable-rate mortgages due to the increasing mortgage interest rate environment that prevailed through most of the fiscal year ended February 28, 1995. For the years ended February 28, 1995, 1994 and 1993, refinancing activity represented 30%, 75% and 73%, respectively, of the Company's total volume of mortgage loans produced. The decrease in the percentage of refinance loans was principally due to the general increase in average mortgage interest rates which caused a decline in the demand for refinance loans. The Company produces mortgage loans through three separate divisions. The Company maintains a staff of central office quality control personnel that performs audits of the loan production of the three 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. Consumer Markets Division (formerly Retail and Consumer Divisions) The Company originates loans through its network of branch offices and through other means of direct contact with the borrower (the "Consumer Markets Division"). As of February 28, 1995, the Company had 235 Consumer Markets Division branch offices, 24 satellite offices (each typically staffed by one employee who accepts loan applications and forwards them to the host branch for processing) and three processing support centers. These various facilities are located in 41 states. The Company utilizes small branch offices, each staffed typically by three employees and connected to the Company's central office by a computer network. Business is also solicited through telemarketing, advertising in various forms of mass media, participation of branch management in local real estate-related business functions and extensive use of direct mailings to real estate brokers and builders. Consumer Markets 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 Consumer Markets Division uses continuous quality control audits of loans originated within each branch by branch management and quality control personnel to monitor compliance with the Company's underwriting criteria. The following table sets forth the number and dollar amount of the Consumer Markets Division's mortgage and home equity loan production for the periods indicated.
(Dollar amounts Summary of the Consumer Markets Division's Mortgage and in millions, Home Equity Loan Production except average loan amount) Year Ended February 28(29), 1995 1994 1993 1992 1991 Conventional Loans Number of Loans 48.772 73,249 39,787 19,549 9,333 Volume of Loans $5,442.2 $9,264.8 $5,026.7 $2,553.3 $1,141.4 Percent of Total Volume 77.0% 80.2% 82.4% 81.8% 67.3% FHA/VA Loans Number of Loans 19,060 26,418 11,739 6,505 6,489 Volume of Loans $1,612.1 $2,282.3 $1,073.0 $567.2 $555.0 Percent of Total Volume 22.8% 19.8% 17.6% 18.2% 32.7% Home Equity Loans Number of Loans 297 - - - - Volume of Loans $11.4 - - - - Percent of Total Volume 0.2% - - - - Total Loans Number of Loans 68,129 99,667 51,526 26,054 15,822 Volume of Loans $7,065.7 $11,547.1 $6,099.7 $3,120.5 $1,696.4 Average Loan Amount $104,000 $116,000 $118,000 $120,000 $107,000 Wholesale Division In its wholesale division (the "Wholesale Division"), the Company originates loans through and purchases loans from mortgage loan brokers. As of February 28, 1995, the division operated 56 branch offices and six 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 Consumer Markets 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. Approximately 8,700 mortgage brokers qualify to participate in this program. 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 and home equity loan production for the periods indicated. (Dollar amounts in millions, Summary of the Wholesale Division's Mortgage and Home except average Equity Loan Production loan amount) Year Ended February 28(29), 1995 1994 1993 1992 1991 Conventional Loans Number of Loans 65,713 130,937 92,922 27,661 8,763 Volume of Loans $7,790.0 $21,271.0 $15,480.1 $5,093.5 $1,392.3 Percent of Total Volume 91.6% 98.9% 100.0% 99.7% 97.0% FHA/VA Loans Number of Loans 6,239 2,700 15 230 611 Volume of Loans $626.3 $244.4 $1.5 $17.4 $43.1 Percent of Total Volume 7.4% 1.1% 0.0% 0.3% 3.0% Home Equity Loans Number of Loans 1,836 - - - - Volume of Loans $86.9 - - - - Percent of Total - Volume 1.0% - - - Total Loans Number of Loans 73,788 133,637 92,937 27,891 9,374 Volume of Loans $8,503.2 $21,515.4 $15,481.6 $5,110.9 $1,435.4 Average Loan Amount $115,000 $161,000 $167,000 $183,000 $153,000 Correspondent Division The Company purchases loans through its network of correspondent offices (the "Correspondent Division") primarily from other mortgage bankers, commercial banks, savings and loan associations, credit unions and other financial intermediaries. The Company's correspondent offices are located in Pasadena, California; Plano, Texas and Pittsburgh, Pennsylvania. Over 1,500 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 Consumer Markets 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 and home equity loan production for the periods indicated. (Dollar amounts Summary of the Correspondent Division's Mortgage and Home in millions, Equity Loan Production except average loan amount) Year Ended February 28(29), 1995 1994 1993 1992 1991 Conventional Loans Number of Loans 61,338 111,513 59,676 16,709 5,034 Volume of Loans $7,726.5 $15,937.6 $8,163.0 $2,340.0 $607.2 Percent of Total Volume 62.8% 82.2% 75.5% 59.6% 42.0% FHA/VA Loans Number of Loans 47,066 38,036 30,268 17,594 10,228 Volume of Loans $4,570.0 $3,458.8 $2,643.5 $1,585.0 $837.7 Percent of Total Volume 37.2% 17.8% 24.5% 40.4% 58.0% Home Equity Loans Number of Loans 14 - - - - Volume of Loans $0.8 - - - - Percent of Total Volume 0.0% - - - - Total Loans Number of Loans 108,418 149,549 89,944 34,303 15,262 Volume of Loans $12,297.3 $19,396.4 $10,806.5 $3,925.0 $1,444.9 Average Loan Amount $113,000 $130,000 $120,000 $114,000 $95,000 Fair Lending Programs In conjunction with fair lending initiatives undertaken by both Fannie Mae and Freddie Mac 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 Fannie Mae and Freddie Mac) than historical industry standards, thereby enabling more people to qualify for home loans than had qualified under such historical 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. House Americar is the Company's principal affordable home loan program for low- and moderate-income borrowers. During the year ended February 28, 1995, the Company produced approximately $2.0 billion of mortgage loans under this program. House Americar personnel work with all of the Company's production divisions to help properly implement the flexible underwriting guidelines. In addition, an integral part of the program is the House Americar Counseling Center, a free educational service, which can provide 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. In addition, a selection of applications from certain designated minority and other borrowers that are initially recommended for denial by one of the Company's production divisions are forwarded for an additional review by a manager of the Company to insure that denial is appropriate. 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 similar to that of FHA and VA loans in the Company's servicing portfolio. 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 Fannie Mae and/or Freddie Mac. 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 Fannie Mae and Freddie Mac, the Company has established affordable home loan programs for low- and moderate-income and designated minority borrowers offering more flexible underwriting guidelines than historical 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 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 "Business--Mortgage Banking Operations--Sale of Loans." Proprietary Data Processing Systems The Company employs technology wherever applicable and continually searches for new and better ways of both providing services to its customers and maximizing efficiency of its operations. Proprietary systems currently in use by the Company include CLUES, an artificial intelligence system that is designed to expedite the review of applications, credit reports and property appraisals. The Company believes that CLUES increases underwriters' productivity, reduces costs and provides greater consistency to the underwriting process. Another system in use is "EDGE," which is an advanced automated loan origination system that is designed to reduce the time and cost associated with 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 improves the quality of the loan products and customer service by: (i) reducing risk of deficient loans; (ii) facilitating accurate pricing; (iii) promptly generating loan documents with the use of 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. The Company has developed and implemented DirectLine Plus, which is designed to provide support to mortgage brokers and enable them to obtain the latest pricing, to review the Company's lending program guidelines, to submit applications, to directly obtain information about specific loans in progress and to send and receive electronic messages to and from the Company's processing center. Recent enhancements to DirectLine Plus integrate that application with CLUES-ON-LINE, an adaption of CLUES for use with DirectLine Plus, which allows the mortgage broker to submit loan information and receive a qualified underwriting decision within minutes. In addition, the Company is developing CLASS, which is designed to offer automated loan settlement services by using electronic data interchange to facilitate the preparation of closing documents at the office of the closing agent. The Company plans to deploy CLASS in the offices of a wide range of business partners (for example, Realtors and other entities that are involved in the closing of a mortgage loan transaction). Currently under development is the LOAN COUNSELOR. The LOAN COUNSELOR is being designed to give business partners direct access to the Company's package of financial services and to permit such business partners to pre-qualify prospective applicants, provide "what if" scenarios to help find the appropriate loan product, take the application and receive a qualified underwriting decision. The Company plans to integrate the LOAN COUNSELOR with both CLUES and the EDGE system. The Company intends to implement a telemarketing application designed to provide enterprise-wide information on both current and prospective customers. The purpose of the telemarketing system is to enable production divisions to identify prospective customers to solicit for specific products or services, and to obtain the results of any solicitation. Management believes that the database will give the Company a significant advantage in its ability to protect its servicing portfolio and generate additional revenue by cross- selling other products and services. Geographic Distribution The following table sets forth the geographic distribution of the Company's mortgage and home equity loan production for the year ended February 28, 1995. Geographic Distribution of the Company's Mortgage and Home Equity Loan Production Percentag e of Total (Dollar amounts Number Principal Dollar in millions) of Loans Amount Amount California 58,832 $8,566,233 30.7% Florida 15,580 1,321,876 4.7% Washington 11,405 1,296,488 4.7% Texas 13,786 1,180,763 4.2% Colorado 10,975 1,139,163 4.1% New York 7,739 1,041,250 3.7% Illinois 7,917 878,301 3.2% New Jersey 6,371 775,101 2.8% Arizona 8.176 751,798 2.7% Massachusetts 5,024 694,706 2.5% Ohio 7,949 664,208 2.4% Michigan 6,816 663,120 2.4% Maryland 5,098 617,906 2.2% Nevada 5,758 611,934 2.2% Pennsylvania 6,072 584,501 2.1% Hawaii 2,858 556,870 2.0% Others (1) 69,979 6,521,952 23.4% 250,335 $27,866,170 100.0% (1) No other state constitutes more than 2.0% of the total dollar amount of loan production. California loan production as a percentage of total loan production (measured by principal balance) for the fiscal years ended February 28, 1995, 1994 and 1993 was 31%, 46% and 58%, 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 the Company's strategy to expand production capacity and market share outside of California. At February 28, 1995 and 1994, 79% and 77%, respectively, of the Consumer Markets Division branch offices and the Wholesale Division loan centers were located outside of California. The following table sets forth the distribution by county of the Company's California loan production for the year ended February 28, 1995. Distribution by County of the Company's California Loan Production Percentage of (Dollar amounts Number Principal Total Dollar in millions) of Loans Amount Amount Los Angeles 15,306 $2,381.3 27.8% Orange 5,014 844.2 9.9 San Diego 4,519 662.1 7.7 Santa Clara 3,138 587.5 6.9 San Bernardino 3,893 433.6 5.1 Others (1) 26,962 3,657.5 42.6 58,832 $8,566.2 100.0% (1) No other county in California constitutes more than 5.0% 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 mortgage loans into pools of loans. It sells these pools in the form of modified pass-through mortgage-backed securities ("MBS") 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 Fannie Mae or Freddie Mac, which securities are then sold to national or regional broker-dealers. Loans securitized through Fannie Mae or Freddie Mac are sold on a non-recourse basis whereby foreclosure losses are generally the responsibility of Fannie Mae and Freddie Mac, and not the Company. Alternatively, the Company may sell FHA-insured and VA-guaranteed 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. 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, 1995, 1994 and 1993, the aggregate loss experience of the Company on VA loans in excess of the VA guaranty was approximately $2.6 million, $2.1 million and $1.0 million, respectively. In the opinion of management, the losses increased from the year ended February 28, 1994 to the year ended February 28, 1995 due to an increase in the size of the VA loan servicing portfolio. CWM, 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. CWM purchased $80.4 million, $300.5 million and $130.3 million of conventional non-conforming mortgage loans during the years ended February 28, 1995, 1994 and 1993, respectively. 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 substantially all of its inventory of conforming and government loans and the maximum portion of its Committed Pipeline that it believes may close be hedged with forward contracts for the delivery of MBS or options on MBS. The inventory is then used to form the MBS that will fill the forward delivery contracts and options. 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 forward contracts and 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. See Note F to the Company's Consolidated Financial Statements. The Company's data processing systems for processing and recording loan sales have been integrated with the EDGE system. The integration increases efficiency of the loan sale process. Loan Servicing Servicing includes collecting and remitting loan payments, making advances when required, accounting for principal and interest, holding custodial (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 17% of the Company's mortgage servicing portfolio as of February 28, 1995. At February 28, 1995, the Company's servicing portfolio of single-family mortgage loans was stratified by interest rate as follows. (Dollar mounts in millions) Total Portfolio at February 28, 1995 Weighted Percent Average Servicing Interest Principal of Maturity Assets Rate Balance Total (Years) Balance (1) 7% and under $ 38,292.7 33.9% 25.5 $602.9 7.01-8% 45,012.9 39.8 25.7 694.3 8.01-9% 21,313.5 18.8 26.6 365.8 9.01-10% 7,165.1 6.3 26.5 115.4 over 10% 1,287.1 1.2 23.4 18.5 $113,071.3 100.0% 25.8 $1,796.9 (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, 1995 was 7.6% as compared with 7.2% at February 28, 1994. At February 28, 1995, 77% of the loans in the servicing portfolio bore interest at fixed rates and 23% bore interest at adjustable rates. The weighted average net service fee of the portfolio was 0.356% at February 28, 1995 and the weighted average interest rate of the fixed- rate loans in the servicing portfolio was 7.8%. The following table sets forth certain information regarding the Company's servicing portfolio of single-family mortgage loans, including loans held for sale and loans subserviced for others, for the periods indicated.
(Dollar amounts in Year Ended February 28(29), millions) Composition of 1995 1994 1993 1992 1991 Servicing Portfolio at Period End: FHA-Insured Mortgage $17,587.5 $ 9,793.7 $ 8,233.8 $ 6,271.2 $ 4,474.1 Loans VA-Guaranteed Mortgage Loans 7,454.3 3,916.0 3,307.2 2,438.3 1,910.2 Conventional Mortgage Loans 88,029.5 70,915.2 42,876.8 18,833.5 9,296.3 Total Servicing Portfolio $113,071.3 $84,624.9 $54,417.8 $27,543.0 $15,680.6 Beginning Servicing Portfolio $84,624.9 $54,417.8 $27,543.0 $15,680.6 $12,511.5 Add:Loan Production 27,866.2 52,458.9 32,387.8 12,156.3 4,576.7 Bulk Servicing and Subservicing Acquired 17,888.1 3,514.9 3,083.9 2,932.6 571.9 Less: Servicing Transferred (1) (6,287.4) (8.1) (12.6) (269.3) (859.5) Runoff (2) (11,020.5) (25,758.6) (8,584.3) (2,957.2) (1,120.0) Ending Servicing Portfolio $113,071.3 $84,624.9 $54,417.8 $27,543.0 $15,680.6 Delinquent Mortgage Loans and Pending Foreclosures at Period End (3): 30 days 1.84% 1.89% 2.08% 2.46% 3.09% 60 days 0.30 0.29 0.41 0.59 0.61 90 days or more 0.44 0.40 0.60 0.80 0.76 Total Delinquencies 2.58% 2.58% 3.09% 3.85% 4.46% Foreclosures Pending 0.30% 0.30% 0.38% 0.46% 0.40% (1)Servicing rights sold are generally deleted from the servicing portfolio at the time of sale. The Company generally subservices such loans from the sales contract date to the transfer date. (2)Runoff refers to scheduled principal repayments 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 loans subserviced for others, as of February 28, 1995. Percentage of Principal Balance Serviced California 43.0% Florida 3.9 Washington 3.5 Texas 3.5 Massachusetts 2.6 New York 2.6 Illinois 2.6 Colorado 2.4 New Jersey 2.4 Arizona 2.3 Virginia 2.2 Hawaii 2.2 Other (1) 26.8 100.0% (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 scheduled amortization or by prepayment or foreclosure of outstanding loans. In addition, the Company has sold, 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 "Properties"). The Company 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 a 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 virtually 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 loan production earnings will partially offset the effect of interest rate fluctuations on the earnings from its servicing portfolio. 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 increasing interest rates, which prevailed through most of the Company's fiscal year ended February 28, 1995, 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 servicing portfolio hedging activities. Such amortization, net of servicing hedge gain, is deducted from loan administration revenue. The increase in interest rates also causes loan production (particularly refinancings) to decline. 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. At the same time, the decline in interest rates contributes to high levels of loan production (particularly refinancings). 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 commercial paper backed by its revolving 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 $5.6 billion at February 28, 1995. In addition, in the past the Company has relied on direct borrowings from its revolving credit facility, 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. C. Countrywide Asset Management Corporation Through its subsidiary Countrywide Asset Management Corporation ("CAMC"), the Company manages the investments and oversees the day-to-day operations of CWM and its subsidiaries. For performing these services, CAMC receives a base management fee of 1/8 of 1% per annum of CWM's average-invested mortgage- related assets not pledged to secure CMOs. CAMC also receives a management fee equal to 0.2% per annum of the average amounts outstanding under CWM's warehouse lines of credit. In addition, CAMC receives incentive compensation equal to 25% of the amount by which the CWM annualized return on equity exceeds the ten-year U.S. treasury rate plus 2%. In connection with a new business plan implemented by CWM in 1993, CAMC waived all management fees for calendar year 1993 and 25% of the incentive compensation earned in 1994. In addition, in 1993 CAMC absorbed $0.9 million of operating expenses incurred in connection with the new business plan. In June 1993, CWM and its subsidiaries began reimbursing CAMC for all expenses of the new operations. As of December 31, 1994, 1993 and 1992, the consolidated total assets of CWM were $2.0 billion, $1.4 billion and $0.7 billion, respectively. During the fiscal years ended February 28, 1995, 1994 and 1993, CAMC earned $0.3 million, $0.1 million and $0.8 million, respectively, in base management fees from CWM and its subsidiaries. In addition, during the fiscal year ended February 28, 1995, CAMC recorded $1.1 million in incentive compensation, net of the amount waived as described above. At February 28, 1995, the Company and CAMC owned 1,120,000 shares or approximately 2.77% of the common stock of CWM. See Note K to the Company's Consolidated Financial Statements. 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, generally 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, earthquake, mortgage life and disability insurance to mortgagors whose loans are serviced by CFC. Another subsidiary of the Company, CTC Foreclosure Services Corporation, formerly Countrywide Title Corporation, serves as trustee under deeds of trust in connection with the Company's mortgage loan production in California and certain other states. 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. LandSafe, Inc. and its subsidiaries act as a provider of various title insurance services in the capacity of an agent rather than an underwriter. The Company offers title insurance commitments and policies, settlement services and property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. While no longer engaged in the business of originating mobile home installment contracts, a subsidiary of the Company, Countrywide Partnership Investments, Inc., owned and operated two mobile home parks located in Houston, Texas, both of which were for sale as of February 28, 1995. During Fiscal 1995, the Company sold three of its mobile home parks and all of the mobile home coaches located in Fort Worth, Texas and Jacksonville, Florida. Subsequent to February 28, 1995, the Company sold one of its two remaining mobile home parks and the mobile home coaches contained therein for $4.4 million. The Company's investment in mobile home parks and mobile home coaches was approximately $9 million at February 28, 1995. E. Regulation The Company's mortgage banking business is subject to the rules and regulations of HUD, FHA, VA, Fannie Mae, Freddie Mac 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 and title insurance operations are subject to insurance laws of each of the states in which the Company conducts such operations. F. Competition The mortgage banking industry is highly competitive and fragmented. The Company competes with other financial intermediaries (such as mortgage bankers, commercial banks, savings and loan associations, credit unions and insurance companies) and mortgage banking subsidiaries or divisions of diversified companies. During the year ended February 28, 1995, excess industry capacity caused by increased mortgage interest rates resulted in intense price competition. Consequently, loan production for the year ended February 28, 1995 was unprofitable. In addition, during periods of increasing interest rates, as existed for most of Fiscal 1995, consumers tend to prefer adjustable-rate mortgage products. Particularly in California, savings and loans and other portfolio lenders competed with the Company by offering aggressively-priced ARM products. 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 49% during the third quarter of calendar year 1994. The Company believes that it has benefited from this trend. G. Employees At February 28, 1995, the Company employed 3,613 persons, 2,377 of whom were engaged in production activities, 949 were engaged in loan administration activities, and 287 were engaged in other activities. None of these employees was represented by a collective 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 220,000 square feet. The principal leases covering such space expire in the year 2011. 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 a portion of the Company's loan servicing and data processing operations, and a 253,000 square foot office building situated on 18 acres in Plano, Texas, which houses additional loan servicing, loan production and data processing operations. In addition, the Plano facility provides the Company with a business recovery site located out of the State of California. The Company leases or owns office space in several other buildings in the Pasadena area. Additionally, CFC leases office space for each of its Consumer Markets Division branch and satellite offices (each ranging from approximately 261 to 2,148 square feet), Wholesale Division branch offices (each ranging from approximately 525 to 5,038 square feet) and Correspondent Division offices (each ranging from approximately 6,150 to 10,929 square feet). These leases vary in term and have different rent escalation provisions. In general, the leases extend through fiscal year 1999, contain buyout provisions and provide for rent escalation tied to increases in the Consumer Price Index or operating costs of the premises. As of February 28, 1995, the Company owned 148 acres in Texas for use as mobile home parks. These properties contained 638 completed mobile home pads, occupied by 309 mobile homes owned by the Company and 240 mobile homes owned by third parties, with 89 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 SHAREHOLDER 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, 1995 and 1994, 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 1995 Fiscal 1994 Declared Fiscal Fiscal Quarter High Low High Low 1995 1994 First $17.50 $13.33 $23.25 $16.92 $0.08 $0.07 Second 18.75 12.88 22.17 17.25 0.08 0.07 Third 15.38 13.63 23.33 16.25 0.08 0.07 Fourth 16.25 12.38 19.08 15.25 0.08 0.08 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, 1995 and 1994, the Company declared quarterly cash dividends aggregating $0.32 per share and $0.29 per share, respectively. On March 20, 1995, the Company declared a quarterly cash dividend of $0.08 per common share, paid April 17, 1995. 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 revolving credit facility, from paying dividends on any capital stock (other than dividends payable in capital stock or stock rights), except that so long as no event of default under such agreements exists at the time, the Company may pay dividends in an aggregate amount not to exceed 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 cannot be paid by the Company and CFC in compliance with certain of CFC's debt obligations (including the revolving 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 26, 1995, there were 2,635 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) 1995 1994 1993 1992 1991 Selected Statement of Earnings Data: Revenues: Loan origination fees $203,426 $379,533 $241,584 $91,933 $38,317 Gain (loss) on sale of loans (41,342) 88,212 67,537 38,847 24,236 Loan production revenue 162,084 467,745 309,121 130,780 62,553 Interest earned 343,138 376,225 211,542 115,213 83,617 Interest charges (267,685) (275,906) (148,765) (81,959) (73,428) Net interest income 75,453 100,319 62,777 33,254 10,189 Loan servicing income 428,994 307,477 177,291 94,830 66,486 Less amortization of servicing assets (95,768) (242,177) (151,362) (53,768) (24,871) Add (less) servicing hedge benefit (expense) (40,030) 73,400 74,075 17,000 - Less write-off of servicing hedge (25,600) - - - - Net loan administration income 267,596 138,700 100,004 58,062 41,615 Gain on sale of Servicing 56,880 - - 4,302 6,258 Commissions, fees and other income 40,650 48,816 33,656 19,714 14,396 Total revenues 602,663 755,580 505,558 246,112 135,011 Expenses: Salaries and related expenses 199,061 227,702 140,063 72,654 48,961 Occupancy and other office expenses 102,193 101,691 64,762 36,645 24,577 Guarantee fees 85,831 57,576 29,410 13,622 9,529 Marketing expenses 23,217 26,030 12,974 5,015 3,117 Branch and Administrative office consolidation costs 8,000 - - - - Other operating expenses 37,016 43,481 24,894 17,849 11,642 Total expenses 455,318 456,480 272,103 145,785 97,826 Earnings before income taxes 147,345 299,100 233,455 100,327 37,185 Provision for income taxes 58,938 119,640 93,382 40,131 14,874 Net earnings $88,407 $179,460 $140,073 $60,196 $22,311 Per Share Data (1): Primary earnings $0.96 $1.97 $1.65 $0.89 $0.48 Fully diluted earnings $0.96 $1.94 $1.52 $0.81 $0.43 Cash dividends $0.32 $0.29 $0.25 $0.15 $0.12 Weighted average shares outstanding - Primary 92,087,000 90,501,000 82,514,000 63,800,000 41,576,000 Fully diluted 92,216,000 92,445,000 92,214,000 74,934,000 53,679,000 Selected Balance Sheet Data at End of Period: Total assets $5,579,662 $5,585,521 $3,299,133 $2,409,974 $1,121,999 Short-term debt $2,664,006 $3,111,945 $1,579,689 $1,046,289 $459,470 Long-term debt $1,499,306 $1,197,096 $ 734,762 $ 383,065 $ 153,811 Convertible preferred stock - - $ 25,800 $ 37,531 $ 38,098 Common shareholders' equity $ 942,558 $ 880,137 $ 693,105 $ 558,617 $ 133,460 Operating Data (dollar amounts in millions): Loan servicing portfolio (2) $ 113,111 $ 84,678 $ 54,484 $27,546 $15,684 Volume of loans originated $ 27,866 $ 52,459 $ 32,388 $12,156 $4,577 (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. A strong loan production capability and a growing servicing portfolio are the primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates because loan production income characteristics are countercyclical to the effect of interest rate changes on servicing 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, earthquake, 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. The fiscal year ended February 28, 1993 ("Fiscal 1993") was a then-record performance year for the Company. The Company became the nation's 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) the 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) the 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) the 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. The fiscal year ended February 28, 1995 ("Fiscal 1995") was a period of transition from a mortgage market dominated by refinances resulting from historically low interest rates to an extremely competitive and smaller mortgage market in which refinances declined to a relatively small percentage of total fundings and customer preference for adjustable-rate mortgages increased. In this transition, which resulted from the increase in interest rates during the year, intense price competition developed that resulted in the Company experiencing negative production margins in Fiscal 1995. At the same time, the increase in interest rates caused a decline in the prepayment rate in the servicing portfolio which, combined with a decline in the rate of expected future prepayments, caused a reduction in amortization of the capitalized servicing fees receivable and purchased servicing rights ("Servicing Assets"). This decrease in amortization contributed to improved earnings from the Company's servicing activities. The Company addressed the challenges of the year by: (i) expanding its share of the home purchase market; (ii) reducing costs to maintain its production infrastructure in line with reduced production levels and (iii) accelerating the growth of its servicing portfolio by aggressively acquiring servicing contracts through bulk purchases. These strategies produced the following results: (i) home purchase production increased from $13.3 billion, or 25% of total fundings, in Fiscal 1994 to $19.5 billion, or 70% of total fundings, in Fiscal 1995, helping the Company maintain its position as the nation's leader in originations of single-family mortgages for the third consecutive year; (ii) the number of staff engaged in production activities declined from approximately 3,900 at the end of Fiscal 1994 to approximately 2,400 at the end of Fiscal 1995; (iii) production-related and overhead costs declined from $328 million in Fiscal 1994 to $270 million in Fiscal 1995 and (iv) bulk servicing purchases increased to $17.6 billion in Fiscal 1995 from $3.4 billion in Fiscal 1994. These bulk servicing acquisitions, combined with slower prepayments caused by increased mortgage interest rates, helped the Company maintain its position as the nation's largest servicer of single- family mortgages for the second consecutive year. In Fiscal 1995, the Company's market share decreased to approximately 4% of the estimated $660 billion single-family mortgage origination market. RESULTS OF OPERATIONS Fiscal 1995 Compared with Fiscal 1994 Revenues for Fiscal 1995 decreased 20% to $602.7 million from $755.6 million for Fiscal 1994. Net earnings decreased 51% to $88.4 million in Fiscal 1995 from $179.5 million in Fiscal 1994. The decrease in revenues was due to decreased loan production resulting from increased mortgage interest rates in Fiscal 1995. In addition, intense price competition during Fiscal 1995 resulted in the Company's recording a loss on the sale of loans. The Company had a gain on sale of loans in Fiscal 1994. In Fiscal 1995, the Company did not realize any servicing hedge gains; in addition, amortization of option and interest rate floor premiums related to the servicing hedge amounted to $40.0 million and the write-off of the remaining unamortized costs of the Company's prior servicing hedge amounted to $25.6 million. During Fiscal 1994, the Company realized $73.4 million in net servicing hedge gains. These negative effects experienced in Fiscal 1995 were somewhat offset by the favorable impact of a larger and more slowly prepaying loan servicing portfolio and of a gain recognized on the sale of servicing. The decrease in net earnings for Fiscal 1995 was primarily the result of the decrease in revenues, a smaller decline in expenses than revenues from Fiscal 1994 to Fiscal 1995, higher guarantee fees caused by the larger servicing portfolio and a charge due to the Company's downsizing and office consolidation process. The total volume of loans produced decreased 47% to $27.9 billion for Fiscal 1995 from $52.5 billion for Fiscal 1994. Refinancings totaled $8.4 billion, or 30% of total fundings, for Fiscal 1995, as compared to $39.2 billion, or 75% of total fundings, for Fiscal 1994. ARM loan production totaled $9.5 billion, or 34% of total fundings, for Fiscal 1995, as compared to $10.1 billion, or 19% of total fundings, for Fiscal 1994. Production in the Company's Consumer Markets Division decreased to $7.1 billion for Fiscal 1995 compared to combined production of $11.6 billion for the Retail and Consumer Divisions for Fiscal 1994. Production in the Company's Wholesale Division decreased to $8.5 billion (which included approximately $3.3 billion of originated loans and $5.2 billion of purchased loans) for Fiscal 1995 from $21.5 billion (which included approximately $10.9 billion of originated loans and $10.6 billion of purchased loans) for Fiscal 1994. The Company's Correspondent Division purchased $12.3 billion in mortgage loans for Fiscal 1995 compared to $19.4 billion for Fiscal 1994. The factors which affect the relative volume of production among the Company's three divisions include pricing decisions and the relative competitiveness of such pricing, the level of real estate and mortgage lending activity in each division's markets, and the success of each division's sales and marketing efforts. At February 28, 1995 and 1994, the Company's pipeline of loans in process was $3.6 billion and $7.6 billion, respectively. In addition, at February 28, 1995, the Company has committed to make loans in the amount of $2.7 billion, subject to property identification and approval of the loans ("Lock N' Shop PipelineSM"). At February 28, 1994, the Lock N' Shop Pipeline was $1.6 billion. Historically, approximately 43% to 75% of the pipeline of loans in process has funded. In Fiscal 1995 and Fiscal 1994, the Company received 315,632 and 515,104 new loan applications, respectively, at an average daily rate of $141 million and $282 million, respectively. The following actions were taken during Fiscal 1995 on the total applications received during that year: 220,715 loans (70% of total applications received) were funded and 66,725 applications (21% of total applications received) were either rejected by the Company or withdrawn by the applicant. 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 factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production divisions' loan processing efficiency and loan pricing decisions. Loan origination fees decreased in Fiscal 1995 as compared to Fiscal 1994 and a loss was recorded in Fiscal 1995 on the sale of loans due to lower loan production that resulted from the increase in the level of mortgage interest rates. Reduced margins due to increased price competition caused by lower demand for mortgage loans during Fiscal 1995 than Fiscal 1994 also contributed to the loss on the sale of loans. In general, loan origination fees and gain or loss 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) decreased to $75.5 million for Fiscal 1995 from $100.3 million for Fiscal 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($35.7 million and $110.1 million for Fiscal 1995 and Fiscal 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($20.0 million and $68.0 million for Fiscal 1995 and Fiscal 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($59.8 million and $58.2 million for Fiscal 1995 and Fiscal 1994, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The decrease in net interest income from the mortgage loan warehouse was attributable to a decrease in the average amount of the mortgage loan warehouse due to the decline in production and to a decrease in the net earnings rate. The decrease in interest expense on the investment in servicing rights resulted primarily from a decline 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 custodial balances was related to an increase in the earnings rate, offset somewhat by a decline in the average custodial balances from Fiscal 1994 to Fiscal 1995. During Fiscal 1995, loan administration income was positively affected by the continued growth of the Company's loan servicing portfolio. At February 28, 1995, the Company serviced $113.1 billion of loans (including $0.7 billion of loans subserviced for others) compared to $84.7 billion (including $0.6 billion of loans subserviced for others) at February 28, 1994, a 34% increase. The growth in the Company's servicing portfolio during Fiscal 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, scheduled amortization of mortgage loans and a sale of servicing rights of loans with principal balances aggregating $5.9 billion. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at February 28, 1995 was 7.6% compared to 7.2% at February 28, 1994. It is the Company's strategy to build and retain its servicing portfolio because of the returns the Company can earn from such investment and because the Company believes that servicing income is countercyclical to loan origination income. See "Prospective Trends- -Market Factors." During Fiscal 1995, the prepayment rate of the Company's servicing portfolio was 9%, as compared to 35% for Fiscal 1994. In general, the prepayment rate is affected by the relative level of mortgage interest rates, activity in the home purchase market and the relative level of home prices in a particular market. The decrease in the prepayment rate is primarily attributable to decreased refinance activity caused by increased mortgage interest rates in Fiscal 1995 from Fiscal 1994. The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong loan production capability and a growing servicing portfolio. To mitigate the effect on earnings of higher amortization (which is deducted from loan servicing income) resulting from increased prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in value when interest rates decline (the "Servicing Hedge"). These financial instruments include call options on U.S. treasury futures and MBS, interest rate floors and certain tranches of CMOs. The CMOs, which consist primarily of principal-only ("P/O") securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase, These changes should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows. The Servicing Hedge instruments utilized by the Company partially 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 in Fiscal 1995, the value of the servicing rights increases while the value of the hedge instruments declines. However, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. At February 28, 1995, the carrying value of interest rate floor contracts and P/O securities included in the Servicing Hedge was approximately $16 million and $42 million, respectively. There can be no assurance the Company's Servicing Hedge will generate gains in the future. See Note F to the Company's Consolidated Financial Statements. For Fiscal 1995, total amortization amounted to $95.8 million, representing an annual rate of 7% of average Servicing Assets. During Fiscal 1995, the Company did not realize any Servicing Hedge gains; in addition, amortization of option and interest rate floor premiums related to the Servicing Hedge amounted to $40.0 million. Also during Fiscal 1995, the Company decided to replace its prior Servicing Hedge with a new hedge resulting in a write-down of the remaining unamortized costs of the prior hedge of $25.6 million. For Fiscal 1994, total amortization was $242.2 million, or an annual rate of 28% of the average Servicing Assets. Amortization for Fiscal 1994 was offset by Servicing Hedge gains which aggregated $73.4 million. The decline in the rate of amortization from Fiscal 1994 to Fiscal 1995 resulted primarily from a decline in the current and projected future prepayment rates caused by an increase in mortgage interest rates. 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. During Fiscal 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $17.6 billion at a price of $261.9 million or 1.49% of the aggregate outstanding principal balances of the servicing portfolios acquired. 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 1995, the Company sold servicing rights for loans with principal balances aggregating $5.9 billion and recognized a gain of $56.9 million. No servicing rights were sold during Fiscal 1994. Salaries and related expenses are summarized below for Fiscal 1995 and Fiscal 1994. (Dollar amounts in thousands) Fiscal 1995 Production Loan Other Activities Administration Activities Total Base Salaries $109,276 $23,929 $6,811 $140,016 Incentive Bonus 29,815 463 4,204 34,482 Payroll Taxes and Benefits 19,695 4,020 848 24,563 Total Salaries and Related Expenses $158,786 $28,412 $11,863 $199,061 Average Number of Employees 2,631 850 246 3,727 (Dollar amounts in thousands) Fiscal 1994 Production Loan Other Activities Administration 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 The amount of salaries decreased during Fiscal 1995 primarily due to the decreased number of employees resulting from reduced loan production, offset somewhat by increased employees due to a larger servicing portfolio. Incentive bonuses earned during Fiscal 1995 decreased primarily due to decreased loan production and decreased loan production personnel. Occupancy and other office expenses for Fiscal 1995 slightly increased to $102.2 million from $101.7 million for Fiscal 1994. This was due to increased office and equipment rental expenses resulting from the opening of 59 Consumer Markets Division branch offices in Fiscal 1995, partially offset by a decline in expenses resulting from the closure of 86 Consumer Markets Division satellite offices and 13 Wholesale Division branch offices. Guarantee fees (fees paid to guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio) for Fiscal 1995 increased 49% to $85.8 million from $57.6 million for Fiscal 1994. This increase resulted primarily from an increase in the servicing portfolio. Marketing expenses for Fiscal 1995 decreased 11% to $23.2 million from $26.0 million for Fiscal 1994. The decrease in marketing expenses reflected the Company's strategy to centralize and streamline its marketing functions. In Fiscal 1995, the Company incurred an $8.0 million charge related to the consolidation and relocation of branch and administrative offices that occurred as a result of the reduction in staff caused by declining production. Other operating expenses for Fiscal 1995 decreased from Fiscal 1994 by $6.5 million, or 15%. This decrease was due primarily to decreased loan production. Profitability of Loan Production and Servicing Activities In Fiscal 1995, the Company's pre-tax loss from its loan production activities (which include loan origination and purchases, warehousing and sales) was $94.8 million. In Fiscal 1994, the Company's comparable pre-tax earnings were $250.1 million. The decrease of $344.9 million is primarily attributed to lower loan production and increased price competition caused by lower demand for mortgage loans. In Fiscal 1995, the Company's pre-tax earnings 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 $229.6 million as compared to $46.6 million in Fiscal 1994. This increase was primarily due to an increase in the servicing portfolio, a reduction in amortization due to lower prepayment activity and reduced prepayment expectations and a sale of servicing during Fiscal 1995 which resulted in a gain of $56.9 million. The increase was partially offset by an increase in Servicing Hedge expense and a write-off of the remaining costs of the prior Servicing Hedge. 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 (which in Fiscal 1995 became part of the Consumer Markets 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 (which in Fiscal 1995 became part of the Consumer Markets Division) increased to $3.9 billion for Fiscal 1994 compared to $1.5 billion for Fiscal 1993. 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 had 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. 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 contained lower origination fees in their pricing structure. 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 custodial balances associated with the Company's servicing portfolio ($58.2 million and $21.8 million for Fiscal 1994 and Fiscal 1993, respectively). 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 Interest Costs Incurred on Payoffs. The increase in net interest income earned from the custodial balances was related to larger custodial 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. During Fiscal 1994, the prepayment rate of the Company's servicing portfolio was 35%, as compared to 20% for Fiscal 1993. The increase in the prepayment rate was 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. For Fiscal 1994, total amortization amounted to $242.2 million, representing an annual rate of 28% of average 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 the Company's accounting policies. Amortization for Fiscal 1993 was offset by Servicing Hedge gains which aggregated $74.1 million. The following summarizes the notional amounts of Servicing Hedge transactions. Long Long Call 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 partially 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 MBS, which expired 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 expired in September 1994, had an unamortized cost of approximately $21 million and a replacement value of approximately $7 million. 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 Production Loan Other Activities Administration 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 Production Loan Other Activities Administration 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 resulted in an increase in occupancy and other office expenses related to the Company's central office. Guarantee fees 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 earnings 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 was primarily attributed to higher loan production. In Fiscal 1994, the Company's pre-tax earnings from its loan servicing activities 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. INFLATION Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down, thereby extending the average life of the Company's servicing portfolio and reducing amortization of the Servicing Assets and Interest Costs Incurred on Payoffs, and because the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then- current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings primarily due to increased amortization of the Servicing Assets, a decreased rate of interest earned from the custodial balances, and increased Interest Costs Incurred on Payoffs. SEASONALITY The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid- November through February. 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 commercial paper supported by its revolving credit facility, medium-term note issuances, pre-sale funding facilities, MBS and whole loan reverse-repurchase agreements, subordinated notes and cash flow from operations. In addition, in the past the Company has relied on direct borrowings from its revolving credit facility, servicing-secured bank facilities, privately-placed financings and public offerings of preferred and common stock. See Note D to the Company's Consolidated Financial Statements included herein for more information on the Company's financings. Certain of the debt obligations of the Company and CFC contain various provisions that may affect the ability of the Company and CFC to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth, current ratio and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CFC to pay dividends. On September 23, 1994, CFC entered into a new three-year revolving credit agreement with a group of forty commercial banks, replacing the existing mortgage warehouse credit facility. The agreement permits CFC to borrow an aggregate maximum amount of $2.5 billion, less commercial paper backed by the agreement. The amount available under the facility is subject to a borrowing base, which consists of mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The agreement expires on September 19, 1997. 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 MBS and of its interest rate swaps. 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. With respect to the interest rate swap agreements, the margin requirements are negotiated with the various counterparties and are generally tied to the credit ratings of CFC and each counterparty. In the course of the Company's mortgage banking operations, the Company sells to investors the mortgage loans it originates and purchases but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results or liquidity. Cash Flows Operating Activities In Fiscal 1995, the Company's operating activities provided cash primarily from the decline in its warehouse of mortgage loans of approximately $815 million, offset by increases in other assets and working capital of $125 million. The Company's operating activities also generated $212 million of positive cash flow. Cash provided by operating activities was principally allocated to the long-term investment in servicing as discussed below under Investing Activities. Investing Activities The primary investing activity for which cash was used in Fiscal 1995 was the investment in servicing. Net cash used by investing activities decreased to $717 million for Fiscal 1995 from $765 million for Fiscal 1994. This decrease was primarily from the cash provided by the sale of servicing rights during Fiscal 1995 and lower cash outlay for purchases of property, equipment and leasehold improvements during Fiscal 1995 than in Fiscal 1994, offset somewhat by an increase in purchased servicing rights and capitalized servicing fees receivable of $97 million during Fiscal 1995. Financing Activities Net cash used by financing activities amounted to $0.2 billion for Fiscal 1995. Net cash provided by financing activities amounted to $2.0 billion for Fiscal 1994. This change was primarily attributable to the Company's net reduction in borrowings in Fiscal 1995 and net additions to borrowings in Fiscal 1994. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process During Fiscal 1995, the Company received new loan applications at an average daily rate of $141 million and at February 28, 1995, the Company's pipeline of loans in process was $3.6 billion. This compares to a daily application rate in Fiscal 1994 of $282 million and a pipeline of loans in process at February 28, 1994 of $7.6 billion. The decline in the pipeline of loans in process from Fiscal 1994 to Fiscal 1995 was primarily due to a decrease in demand for mortgage loans caused by an increase in mortgage interest rates. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 75% of the pipeline of loans in process has funded. In addition, the Company's Lock N' Shop Pipeline at February 28, 1995 was $2.7 billion and at February 28, 1994 was $1.6 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage credit, the extent of price competition in the market, the direction of interest rates, seasonal factors and general economic conditions. For the month ended March 31, 1995, the average daily amount of applications received was $153 million, and at March 31, 1995, the pipeline of loans in process was $3.9 billion and the Lock N' Shop Pipeline was $1.9 billion. Market Factors Since late 1993, mortgage interest rates have increased. An environment of rising interest rates has resulted in lower production (particularly from refinancings) and greater price competition, which has adversely impacted earnings from loan origination activities and may continue to do so 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. However, there was a time lag between the reduction in income caused by declining production and the reduction in expenses. The Company's production staff declined from approximately 3,900 at February 28, 1994 to approximately 2,400 at February 28, 1995. The Company has reduced its total staffing levels from approximately 4,900 at February 28, 1994 to approximately 3,600 at February 28, 1995. However, the rising interest rates enhanced earnings from the Company's loan servicing portfolio as amortization of the Servicing Assets and Interest Costs Incurred on Payoffs decreased from levels experienced during the prior periods of declining interest rates, and the rate of interest earned from the custodial balances associated with the Company's servicing portfolio increased. The Company has further increased the size of its servicing portfolio, thereby increasing its servicing revenue base, by acquiring servicing contracts through bulk purchases. During Fiscal 1995, the Company purchased such servicing contracts with principal balances amounting to $17.6 billion. The Company's primary competitors are commercial banks and savings and loans and mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Particularly in California, savings and loans and other portfolio lenders are competing with the Company by offering aggressively priced adjustable-rate mortgage products which have grown in popularity with the rise in interest rates. Generally, the Company has experienced significant price competition among mortgage lenders which has resulted in downward pressure on loan production earnings. Some regions in which the Company operates, particularly some regions of California, have been experiencing slower economic growth, and real estate financing activity in these regions has been negatively impacted. As a result, home lending activity for single- (one-to-four) family residences in these regions may also have experienced slower growth. There can be no assurance that the Company's operations and results will not continue to be negatively impacted by such adverse economic conditions. The Company's California mortgage loan production (measured by principal balance) constituted 31% of its total production during Fiscal 1995, down from 46% for Fiscal 1994. The decline in the percentage of California loan production was due to the Company's continuing effort to expand its production capacity outside of California and the aggressively priced adjustable-rate mortgage products offered by the Company's competitors in the state. Since California's mortgage loan production constituted a significant portion of the Company's production during Fiscal 1995, there can be no assurance that the Company's operations will not continue to be adversely affected to the extent California continues to experience slower or negative economic growth resulting in decreased residential real estate lending activity or market factors further impact the Company's competitive position in the state. 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 (22% of the Company's servicing portfolio at February 28, 1995) are insured or partially guaranteed against loss by the Federal Housing Administration or the Veterans Administration. In the Company's view, the limited unreimbursed costs that may be incurred by the Company on government foreclosed loans are not material to the Company's consolidated financial statements. Servicing Hedge As previously discussed, the Company realized no gains and recorded amortization of Servicing Hedge option premiums amounting to $40.0 million during Fiscal 1995. In addition, the Company decided to replace its prior Servicing Hedge with a new hedge, which the Company believed would be more cost effective. As a result, the Company recorded an additional write-down of $25.6 million during Fiscal 1995, representing the unamortized costs of the prior Servicing Hedge. At February 28, 1995, the carrying value of interest rate floor contracts and P/O securities included in the Servicing Hedge was approximately $16 million and $42 million, respectively. There can be no assurance the Company's Servicing Hedge will generate gains in the future. Federal Legislation 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 enacted increase in the federal tax rate. Implementation of New Accounting Standards Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, was 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. In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights. This Statement, among other provisions, requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. Presently, the cost of OMSRs is included with the cost of the related loans and written off against income when the loans are sold, while the cost of PMSRs is recorded as an asset. Also under the new Statement, all capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. In measuring impairment, the carrying amount must be stratified based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for an individual stratum. Under current accounting requirements, the impairment evaluation may be made using either discounted or undiscounted cash flows. No uniform required level of disaggregation is specified. The Company uses a disaggregated, undiscounted method. The Statement is effective prospectively in fiscal years beginning after December 15, 1995, with earlier application encouraged. The Company plans to adopt the Statement in the first quarter of its fiscal year ending February 29, 1996. The actual effect of implementing this new Statement on the Company's financial position and results of operations will depend on factors determined as of the end of a reporting period, including the amount and mix of originated and purchased production, the level of interest rates and market estimates of future prepayment rates. Accordingly, the Company cannot determine at this time the impact on its future earnings of applying the new methodologies of recording all mortgage servicing rights as assets, of calculating impairment and of applying the other provisions of the Statement. 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). 4.6* 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* Indenture dated as of January 15, 1988 between the Company and The Chase Manhattan Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 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). 4.9* 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). 4.10* 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). 4.11* Form of Medium-Term Notes, Series A (fixed-rate) of CFC (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). 4.12* Form of Medium-Term Notes, Series A (floating-rate) of CFC (incorporated by reference to Exhibit 4.3 to the Company's registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). 4.13* Form of Medium-Term Notes, Series B (fixed-rate) of CFC (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). 4.14* Form of Medium-Term Notes, Series B (floating-rate) of CFC (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). 4.15* Countrywide Credit Industries, Inc. Dividend Reinvestment Plan dated October 30, 1992 (incorporated by reference to the Company's registration statement on Form S-3 (File No. 33- 53048) filed with the SEC on October 9, 1992). 4.16* Form of Medium-Term Notes, Series C (fixed-rate) of 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 and 33-50661-01) filed with the SEC on October 19, 1993). 4.17* 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). 4.18* Indenture dated as of January 1, 1992 among CFC, the Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 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* Revolving Credit Agreement dated as of September 23, 1994 by and among CFC, the First National Bank of Chicago, Bankers Trust Company and the Lenders Party Thereto (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10- Q dated November 30, 1994). +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 Exhibits 10.2 - 10.5 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* 1994 Amended and Extended Management Agreement, dated as of May 15, 1994, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset Management Corporation (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). 10.14* 1987 Amended and Restated Servicing Agreement, dated as of May 15,1987, between CWM and CFC (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated February 28, 1990). 10.15* 1994 Amended and Restated Loan Purchase and Administrative Services Agreement, dated as of May 15, 1994, between CWM and CFC (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). +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 Exhibit 10.19.1 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 Exhibit 10.19.2 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 Exhibit 10.19.3 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 Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated February 28, 1993). +10.19.5 Fifth Amendment to the 1991 Stock Option Plan. +10.20* 1992 Stock Option Plan dated as of December 22, 1992 (incorporated by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated February 28, 1993). +10.21* 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). +10.21.1 First Amendment to the 1993 Stock Option Plan. 10.23* 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 Exhibit 10.21 to the Company's Annual Report on Form 10-K dated February 28, 1993). 10.24* 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). +10.26* Supplemental Executive Retirement Plan effective March 1, 1994 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). +10.27* Split-Dollar Life Insurance Agreement (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). +10.27.1* Split-Dollar Collateral Assignment (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). 11.1 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 LLP. *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 /s/ DAVID S. LOEB : David S. Loeb, Chairman and President Dated: May 23, 1995 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, Chairman of the Board of Directors and Director (Principal /s/ DAVID S. LOEB Executive Officer) May 23, 1995 David S. Loeb Executive Vice /s/ ANGELO R. MOZILO President and Director May 23, 1995 Angelo R. Mozilo Senior Managing Director and Chief /s/ STANFORD L. KURLAND Operating Officer May 23, 1995 Stanford L. Kurland Managing Director; Chief Financial Officer and Chief Accounting Officer(Principal Financial Officer and Principal Accounting /s/ CARLOS M. GARCIA Officer) May 23, 1995 Carlos M. Garcia /s/ ROBERT J. DONATO Director May 23, 1995 Robert J. Donato /s/ BEN M. ENIS Director May 23, 1995 Ben M. Enis /s/ EDWIN HELLER Director May 23, 1995 Edwin Heller /s/ HARLEY W. SNYDER Director May 23, 1995 Harley W. Snyder EXHIBIT 22.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. SUBSIDIARIES Countrywide Funding Corporation New York Continental Mobile Home Brokerage Corporation California Countrywide Agency of Ohio, Inc. Ohio Countrywide Agency of Texas, Inc. Texas Countrywide Agency, Inc. New York Countrywide Asset Management Corporation Delaware Countrywide Capital Markets, Inc. California Countrywide Securities Corporation California Countrywide Servicing Exchange California Countrywide Financial Services Corporation California Countrywide Financial Planning Services, Inc. California Countrywide Investments, Inc. Delaware Countrywide GP, Inc. Nevada Countrywide Lending Corporation California Countrywide LP, Inc. Nevada Countrywide Mortgage Pass Through Corporation Delaware Countrywide Partners Corporation Delaware Countrywide Partnership Investments, Inc. California Countrywide Parks I, Inc. California Countrywide Parks V, Inc. California Countrywide Parks VI, Inc. California Countrywide Parks VII, Inc. California Countrywide Parks VIII, Inc. California Countrywide Tax Services Corporation California CTC Foreclosure Services Corporation California CWMBS, Inc. Delaware Independent National Mortgage Corporation Delaware LandSafe, Inc. Delaware LandSafe Finance, Inc. California LandSafe Title Agency, Inc. California LandSafe Title of Florida, Inc. Florida LandSafe Title of Texas, Inc. Texas LandTrack Data Services, Inc. California Residential Mortgage Source of America, Inc. California The Countrywide Foundation California 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, 1995 F-1 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES February 28, 1995 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 I - Condensed Financial Information of F-31 Registrant Schedule II - Valuation and Qualifying Accounts F-34 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended February 28, 1995, in conformity with generally accepted accounting principles. We also have audited Schedules I and II for each of the three years in the period ended February 28, 1995. In our opinion, such schedules present fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Los Angeles, California April 18, 1995 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 1995 1994 Cash $ 17,624 $ 4,034 Receivables for mortgage loans shipped 1,174,648 1,970,431 Mortgage loans held for sale 1,724,177 1,743,830 Other receivables 476,754 349,770 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 145,612 145,625 Capitalized servicing fees receivable 464,268 289,541 Purchased servicing rights 1,332,629 836,475 Other assets 243,950 245,815 Total assets $5,579,662 $5,585,521 Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $1,063,676 $1,366,643 LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $3,963,091 $3,859,227 Drafts payable issued in connection with mortgage loan closings 200,221 449,814 Accounts payable and accrued liabilities 105,097 87,818 Deferred income taxes 368,695 308,525 Total liabilities 4,637,104 4,705,384 Commitments and contingencies - - Shareholders' equity Preferred stock - authorized, 1,500,000 shares of $0.05 par value;issued and outstanding, none - - Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and outstanding, 91,370,364 shares in 1995 and 91,063,751 shares in 1994 4,568 4,553 Additional paid-in capital 608,289 606,031 Retained earnings 329,701 269,553 Total shareholders' equity 942,558 880,137 Total liabilities and shareholders' equity $5,579,662 $5,585,521 Borrower and investor custodial accounts $1,063,676 $1,366,643 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, (Dollar amounts in thousands, except per share data) 1995 1994 1993 Revenues Loan origination fees $203,426 $379,533 $241,584 Gain (loss) on sale of loans, net of commitment fees (41,342) 88,212 67,537 Loan production revenue 162,084 467,745 309,121 Interest earned 343,138 376,225 211,542 Interest charges (267,685) (275,906) (148,765) Net interest income 75,453 100,319 62,777 Loan servicing income 428,994 307,477 177,291 Less amortization of servicing assets (95,768) (242,177) (151,362) Add (less) servicing hedge benefit (expense) (40,030) 73,400 74,075 Less write-off of servicing hedge (25,600) - - Net loan administration income 267,596 138,700 100,004 Gain on sale of servicing 56,880 - - Commissions, fees and other income 40,650 48,816 33,656 Total revenues 602,663 755,580 505,558 Expenses Salaries and related expenses 199,061 227,702 140,063 Occupancy and other office expenses 102,193 101,691 64,762 Guarantee fees 85,831 57,576 29,410 Marketing expenses 23,217 26,030 12,974 Branch and administrative office consolidation costs 8,000 - - Other operating expenses 37,016 43,481 24,894 Total expenses 455,318 456,480 272,103 Earnings before income taxes 147,345 299,100 233,455 Provision for income taxes 58,938 119,640 93,382 NET EARNINGS $88,407 $179,460 $140,073 Earnings per share Primary $0.96 $1.97 $1.65 Fully diluted $0.96 $1.94 $1.52 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, 1995 (Dollar amounts in thousands) Additional Number Common Paid-in Retained of Shares Stock Capital Earnings Total Balance at March 1, 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 Cash dividends paid - common - - - (28,259) (28,259) Stock options exercised 283,147 14 1,584 - 1,598 Tax benefit of stock - options exercised - - 697 697 Dividend reinvestment - plan - - (14) (14) Settlement of three-for- - two stock split 23,466 1 (9) (8) Net earnings for the year - - - 88,407 88,407 Balance at February 28, 1995 91,370,364 $4,568 $608,289 $329,701 $942,558
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, (Dollar amounts in thousands) 1995 1994 1993 Cash flows from operating activities: Net earnings $ 88,407 $ 179,460 $ 140,073 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Amortization of purchased servicing rights 92,897 141,321 119,878 Amortization of capitalized servicing fees receivable 2,871 100,856 31,484 Depreciation and other amortization 26,050 15,737 8,746 Deferred income taxes 58,938 119,640 93,382 Gain on bulk sale of servicing rights (56,880) - - Origination and purchase of loans held for sale (27,866,170) (52,458,879) (32,387,774) Principal repayments and sale of loans 28,681,606 51,060,915 31,725,953 Decrease (increase) in mortgage loans shipped and held for sale 815,436 (1,397,964) (661,821) Increase in other receivables and other assets (142,241) (407,080) (28,700) Increase in accounts payable and accrued liabilities 17,279 30,221 16,462 Net cash provided (used) by operating activities 902,757 (1,217,809) (280,496) Cash flows from investing activities: Additions to purchased servicing rights (589,051) (521,326) (280,459) Additions to capitalized servicing fees receivable (207,663) (178,611) (148,248) Purchase of property, equipment and leasehold improvements - net (21,414) (64,660) (49,401) Proceeds from bulk sale of servicing rights 100,676 - - Proceeds from sale of finance receivables - - 111,897 Finance receivables originations - - (425) Principal repayments on finance receivables - - 4,254 Net cash used by investing activities (717,452) (764,597) (362,382) Cash flows from financing activities: Net (decrease) increase in warehouse debt and other short- term borrowings (451,915) 1,477,593 526,820 Issuance of long-term debt 399,205 576,718 462,000 Repayment of long-term debt (93,019) (59,721) (103,723) Issuance of common stock 2,273 4,398 3,448 Cash dividends paid (28,259) (25,121) (23,572) Net decrease in thrift investment accounts - - (224,036) Net cash (used) provided by financing activities (171,715) 1,973,867 640,937 Net increase (decrease) in cash 13,590 (8,539) (1,941) Cash at beginning of period 4,034 12,573 14,514 Cash at end of period $ 17,624 $ 4,034 $ 12,573 Supplemental cash flow information: Cash used to pay interest $ $ 277,518 $ 143,106 262,858 Cash (refunded from) used to pay income taxes ($841) ($ 1,823) $ 4,567 Noncash financing activities - conversion of preferred stock $- $ 25,800 $ 11,731 The accompanying notes are an integral part of these statements. F-7 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 wholly-owned 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 lives of the serviced 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. F-8 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 The Company acquires financial instruments, including derivative contracts, that increase in value when interest rates decline ("Servicing Hedge"). These financial instruments include call options on U.S. treasury futures and mortgage-backed securities ("MBS"), interest rate floors and certain tranches of collateralized mortgage obligations ("CMOs"). The Servicing Hedge partially protects the value of the capitalized servicing fees receivable and purchased servicing rights ("Servicing Assets") from the effects of increased prepayment activity. The value of the interest rate floors and call options is derived from an underlying instrument or index. The notional or contractual amount is not recognized in the balance sheet. The cost of the interest rate floors and call options is charged to expense (and included in net loan administration income) over the contractual life of the contract. Unamortized costs are included in Other Assets in the balance sheet. Realized gains from the Servicing Hedge 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, the Company reduces the carrying amount of the Servicing Assets by such excess through additional amortization. The Company recognized $65 million in net expense (including a write-off of the Servicing Hedge amounting to $26 million) and $73 million as an offset to incremental amortization for the years ended February 28, 1995 and 1994, respectively. The Company measures the effectiveness of its Servicing Hedge by computing the correlation under a variety of interest rate scenarios between the present value of servicing cash flows and the value of the Servicing Hedge instruments. 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, other economic conditions and market forecasts, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. F-9 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 MBS. 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. Investment Securities The Company has designated its investments in certain tranches of CMOs as available for sale. Those securities are reported at fair value, with any net material unrealized gains and losses included in equity. Unrealized losses that are other than temporary are recognized in earnings. 11. 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. 12. 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. The related amount payable to or receivable from counterparties is included in Accounts Payable and Accrued Liabilities. 13. 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. 14. Income Taxes Effective March 1, 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. 15. 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 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. F-10 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The weighted average shares outstanding for computing primary and fully diluted earnings per share were 92,087,000 and 92,216,000 respectively, for the year ended February 28, 1995; 90,501,000 and 92,445,000, respectively, for the year ended February 28, 1994 and 82,514,000 and 92,214,000, respectively, for the year ended February 28, 1993. 16. Financial Statement Reclassifications and Restatement Certain amounts reflected in the Consolidated Financial Statements for the years ended February 28, 1994 and 1993 have been reclassified to conform to the presentation for the year ended February 28, 1995. 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 May 3, 1994, the Company's $0.05 par value common stock was split 3 for 2. 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) 1995 1994 Buildings $ 36,983 $ 35,305 Office equipment 116,661 95,976 Leasehold improvements 25,729 23,656 Mobile homes 3,751 8,829 183,124 163,766 Less: accumulated depreciation and amortization (55,848) (41,823) 127,276 121,943 Land 18,336 23,682 $145,612 $145,625 F-11 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, (Dollar amounts in thousands) 1995 1994 1993 Capitalized Servicing Fees Receivable Balance at beginning of period $ 289,541 $211,785 $ 95,021 Additions 207,663 178,612 148,248 Sale of servicing (30,065) - - Amortization Scheduled (2,871) (32,970) (21,333) Unscheduled - (67,886) (10,151) Balance at end of period $ 464,268 $289,541 $211,785 Purchased Servicing Rights Balance at beginning of period $ 836,475 $456,470 $295,889 Additions 589,051 521,326 280,459 Amortization Scheduled (92,897) (108,822) (55,511) Unscheduled - (32,499) (64,367) Balance at end of period $1,332,629 $836,475 $456,470 NOTE D - NOTES PAYABLE Notes payable consisted of the following. February 28, (Dollar amounts in thousands) 1995 1994 Commercial paper $2,122,348 $2,194,543 Medium-term notes, Series A, B and C,net of discounts 1,393,900 1,088,550 Reverse-repurchase agreements 245,212 312,129 Pre-sale funding facilities - 63,210 Subordinated notes 200,000 200,000 Other notes payable (2.40%-2.90%) 1,631 795 $3,963,091 $3,859,227 F-12 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE D - NOTES PAYABLE (Continued) Revolving Credit Facility and Commercial Paper As of February 28, 1995, Countrywide Funding Corporation ("CFC"), the Company's mortgage banking subsidiary, had an unsecured credit agreement (revolving credit facility) with forty-two commercial banks permitting CFC to borrow an aggregate maximum amount of $2.5 billion, less commercial paper backed by the agreement. The amount available under the facility is subject to a borrowing base, which consists of mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility contains various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CFC. The interest rate on direct borrowings is based on a variety of sources, including the prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies depending on CFC's credit ratings. The weighted average borrowing rate on direct borrowings and commercial paper borrowings for the year ended February 28, 1995, including the effect of the interest rate swap agreements discussed in Note F, was 4.69%. The weighted average borrowing rate on commercial paper outstanding as of February 28, 1995 was 5.94%. Under certain circumstances, including the failure to maintain specified minimum credit ratings, borrowings under the revolving credit facility and commercial paper may become secured by mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The revolving credit facility expires on September 19, 1997. Medium-Term Notes As of February 28, 1995, 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- Rate Fixed-Rate Total From To From To Parent Series A $ - $ 10,600 $ 10,600 10.60% 10.60% Jun 1995 Aug 1995 CFC Series A 5,000 424,800 429,800 6.10% 8.79% Mar 1995 Mar 2002 Series B 11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005 Series C 278,000 195,500 473,500 6.31% 8.43% Dec 1997 Mar 2004 Subtotal $294,000 $1,089,300 $1,383,300 Total $294,000 $1,099,900 $1,393,900
As of February 28, 1995, all of the outstanding fixed-rate notes of CFC had been effectively converted by interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on CFC's medium-term note borrowings for the year ended February 28, 1995, including the effect of the interest rate swap agreements, was 5.54%. As of February 28, 1995, $26.5 million was available for future issuance under the Series C shelf registration. F-13 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE D - NOTES PAYABLE (Continued) Reverse-Repurchase Agreements As of February 28, 1995, the Company had entered into short-term financing arrangements to sell MBS and whole loans under agreements to repurchase. The weighted average borrowing rate for the year ended February 28, 1995, was 4.63%. The weighted average borrowing rate on reverse-repurchase agreements outstanding as of February 28, 1995 was 6.01%. The reverse-repurchase agreements were collateralized by either MBS or whole loans. All MBS 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 MBS or whole loans. Pre-Sale Funding Facilities As of February 28, 1995, CFC had a $500 million revolving credit facility ("As Soon as Pooled Agreement") with the Federal National Mortgage Association ("Fannie Mae"). The credit facility is secured by conforming mortgage loans which are in the process of being pooled into Fannie Mae MBS. Interest rates are based on LIBOR and/or federal funds. The weighted average borrowing rate for the year ended February 28, 1995, was 5.03%. This facility is committed through July 20, 1995, subject to CFC's compliance with certain financial and operational covenants. As of February 28, 1995, the Company had no outstanding borrowings under this facility. As of February 28, 1995, CFC had an uncommitted 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 MBS. Interest rates are based on LIBOR. The weighted average borrowing rate for the year ended February 28, 1995, was 6.03%. As of February 28, 1995, the Company had no outstanding borrowings under this facility. As of February 28, 1995, CFC had an uncommitted revolving credit facility ("Early Funding Agreement") with the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facility is secured by conforming mortgage loans which are in the process of being pooled into Freddie Mac participation certificates. Interest rates under the agreement are based on the prevailing rates for MBS reverse-repurchase agreements. The weighted average borrowing rate for the year ended February 28, 1995 was 3.91%. As of February 28, 1995, the Company had no outstanding borrowings under this facility. Subordinated Notes The 8.25% subordinated notes are due July 15, 2002. Interest is payable semi- annually on each January 15 and July 15. The subordinated notes are not redeemable prior to maturity and are not subject to any sinking fund. F-14 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE D - NOTES PAYABLE (Continued) Maturities of notes payable are as follows. Year ending February (Dollar amounts 28(29), in thousands) 1996 $2,463,785 1997 114,006 1998 180,300 1999 102,000 2000 228,000 Thereafter 875,000 $3,963,091 NOTE E - INCOME TAXES Components of the provision for income taxes consisted of the following. Year ended February 28, (Dollar amounts in thousands) 1995 1994 1993 Federal expense - deferred $48,680 $ 99,074 $71,152 State expense - deferred 10,258 20,566 22,230 $58,938 $119,640 $93,382 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, 1995 1994 1993 Statutory federal income tax rate 35.0% 35.0% 34.0% State income and franchise taxes 5.0 5.0 6.4 Tax rate differential on reversing timing differences - - (.4) 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. Consequently, the Company's total deferred tax liability and combined tax rate did not change materially as a result of these two events. F-15 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE E - INCOME TAXES (Continued) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below. Year ended February 28, (Dollar amounts in thousands) 1995 1994 Deferred income tax assets: Federal net operating losses $111,455 $68,240 State net operating losses 10,685 7,342 Alternative minimum tax credits 2,664 2,664 State income and franchise taxes 25,183 22,326 Allowance for losses 4,968 5,965 Other 3,297 1,650 Total deferred income tax assets 158,252 108,187 Deferred income tax liabilities: Capitalized servicing fees receivable and purchased servicing rights 521,225 410,773 Accumulated depreciation 5,722 5,939 Total deferred income tax liabilities 526,947 416,712 Deferred income taxes $368,695 $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. (Dollar amounts in thousands) February 28, 1993 Capitalized servicing fees $101,800 State income and franchise taxes (7,729) Accelerated depreciation 1,022 Allowance for credit losses (1,711) $ 93,382 At February 28, 1995, 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, $124,160,000 expiring in 2009 and $151,477,000 expiring in 2010. F-16 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE F - FINANCIAL INSTRUMENTS Derivative Financial Instruments The Company utilizes a variety of derivative financial instruments in the management of interest-rate risk. These instruments include priced short-term commitments to extend credit, MBS mandatory forward delivery and purchase commitments, put and call options to sell or buy mortgage-backed and treasury securities, interest rate floors and interest rate swaps. These instruments involve, to varying degrees, elements of credit and interest-rate risk. All of the Company's derivative financial instruments are held or issued for purposes other than trading. While the Company does not anticipate nonperformance by any counterparty, the Company is exposed to credit loss in the event of nonperformance by the counterparties to the various instruments. The Company manages credit risk with respect to MBS mandatory forward commitments, put or call options to sell or buy mortgage-backed and treasury securities and interest rate swaps and floors by entering into agreements with entities approved by senior management and initially having a long-term credit rating of single A or better. These entities include Wall Street firms having primary dealer status, money center banks and permanent investors. 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, 1995, if the counterparties failed completely and if the margins, if any, retained by the Company or an independent clearing agent were to become unavailable, are approximately $61 million for MBS mandatory forward commitments, approximately $14 million for interest rate swaps and approximately $23 million for interest rate floors. As of February 28, 1995, the Company had priced short-term commitments amounting to approximately $2.2 billion (including $1.5 billion fixed-rate and $0.7 billion adjustable-rate) to fund mortgage loan applications in process subject to approval of the loans and an additional $2.7 billion (including $2.5 billion fixed-rate and $0.2 billion adjustable-rate) subject to property identification and approval of the loans. Substantially all of these commitments are for periods of 90 days or less. 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 in Note G4. The Company uses the same credit policies in the approval of the commitments as are applied to all lending activities. F-17 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE F - FINANCIAL INSTRUMENTS (Continued) Hedge of Mortgage Loan Inventory and Committed Pipeline 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 substantially 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 or options on MBS. The MBS that are to be delivered under these contracts and options are fixed- or adjustable-rate, corresponding with the composition of the Company's inventory and Committed Pipeline. At February 28, 1995, the Company had open commitments amounting to approximately $8.5 billion to sell MBS with varying settlement dates generally not extending beyond May 1995 and options on MBS through October 1995 with a total notional amount of $4.2 billion. The mortgage loan inventory is used to form the MBS that will fill the forward delivery contracts and options. 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 mortgage loan 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 forward contracts and options to purchase MBS needed to replace the loans in process that do not close at their committed price. At February 28, 1995, the notional amount of forward contracts and options to purchase MBS aggregated $4.1 billion and $2.6 billion, respectively. The forward contracts extend through May 1995 and the options extend through September 1995. 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. Servicing Hedge 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 utilizes its Servicing Hedge, consisting of financial instruments, including derivative contracts, that increase in value when interest rates decline. These financial instruments include call options on U.S. treasury futures and MBS, interest rate floors and certain tranches of CMOs. The CMOs, which consist primarily of principal-only ("P/O") securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase. These changes should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows. F-18 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE F - FINANCIAL INSTRUMENTS (Continued) The following summarizes the notional amounts of Servicing Hedge derivative contracts. Long Call Interest Long Options Call on U.S. Rate Options Treasury (Dollar amounts in millions) Floors on MBS Futures Balance, March 1, 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 Additions 4,000 - 1,300 Dispositions - 2,000 3,070 Balance, February 28, 1995 $4,000 $ - $ - The terms of the open Servicing Hedge derivative contracts at February 28, 1995 are presented below. Interest Rate Floors 10-Year Constant Index Maturity Treasury Yield Floor 6.50% - 7.25% Term 3 - 5 Years The Servicing Hedge instruments utilized by the Company partially protect the value of the investment in servicing rights from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the servicing rights increases while the value of the hedge instruments declines. However, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. At February 28, 1995, the carrying value of interest rate floor contracts and P/O securities included in the Servicing Hedge was approximately $16 million and $42 million, respectively. There can be no assurance the Company's Servicing Hedge will generate gains in the future. Interest Rate Swaps As of February 28, 1995, CFC had interest rate swap agreements with certain financial institutions having notional principal amounts totaling $2.47 billion. The effect of these agreements is to enable CFC to convert a portion of its medium-term note borrowings to LIBOR-based floating-rate cost borrowings (notional amount $1.09 billion), to convert a portion of its commercial paper and medium-term note borrowings from one floating-rate index to another (notional amount $0.13 billion) and to convert the earnings rate on the custodial accounts held by CFC from floating to fixed (notional amount $1.25 billion). Payments are due periodically through the termination date of each agreement. The agreements expire between March 1995 and August 2005. F-19 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE F - FINANCIAL INSTRUMENTS (Continued) The terms of the open interest rate swap agreements at February 28, 1995 are presented below. Swaps related to debt Average receive rate 6.367% Average pay rate 6.329% Index 3-month LIBOR Swaps related to custodial accounts Average receive rate 6.468% Average pay rate 6.223% Index 1-3 month LIBOR Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of February 28, 1995 and 1994 is made 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.
February 28, 1995 February 28, 1994 Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount Fair Value Amount Fair Value Assets: Mortgage loans shipped and held for sale $2,898,825 $2,941,709 $3,714,261 $3,725,913 Capitalized servicing fees receivable 464,268 473,623 289,541 295,403 Items included in other assets: - - 238,841 173,829 Principal-only 91,793 92,726 - - securities Derivatives: Interest rate floors 15,820 23,396 - - Contracts and options related to mortgage loans shipped and held for sale 47,647 (2,926) - 59,533 Liabilities: Notes payable 3,963,091 3,934,160 3,859,227 3,901,179 Derivatives gain (loss): Interest rate swaps 4,093 (55,570) 2,950 (6,669) Short-term commitments to extend credit - 69,252 - (59,533)
The fair value estimates as of February 28, 1995 and 1994 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. F-20 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE F - FINANCIAL INSTRUMENTS (Continued) The following describes the methods and assumptions used by the Company in estimating fair values. 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. 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. Derivatives Fair value is estimated as the amounts that the Company would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. Market or dealer quotes are available for many derivatives; otherwise, pricing or valuation models are applied to current market information to estimate fair value. 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. NOTE G - COMMITMENTS AND CONTINGENCIES 1. Commitments to Sell Mortgage-Backed Securities In connection with its open commitments to buy or sell MBS and with its interest rate swap agreements, the Company may be required to maintain margin deposits. With respect to the MBS commitments, these requirements are generally greatest during periods of rapidly declining interest rates. The interest rate swap margin requirements are generally greatest during periods of increasing interest rates. F-21 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE G - COMMITMENTS AND CONTINGENCIES (Continued) 2. Lease Commitments The Company leases office facilities under lease agreements extending through September 2011. Future minimum annual rental commitments under these non- cancelable operating leases with initial or remaining terms of one year or more are as follows. Year ending February 28(29), (Dollar amounts in thousands) 1996 $15,214 1997 13,151 1998 10,778 1999 8,619 2000 6,078 Thereafter 55,588 $109,428 Rent expense was $22,136,000, $19,115,000 and $13,049,000 for the years ended February 28, 1995, 1994 and 1993, respectively. 3. Restrictions on Transfers of Funds The Company and certain of its 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 the revolving credit facility as of February 28, 1995, the Company is required to maintain $750 million in consolidated net worth and CFC is required to maintain $725 million of net worth, as defined in the credit agreement. 4. Loan Servicing As of February 28, 1995, 1994 and 1993, the Company was servicing loans totaling approximately $113.1 billion, $84.7 billion and $54.5 billion, respectively. Included in the loans serviced as of February 28, 1995, 1994 and 1993 were loans being serviced under subservicing agreements with total principal balances of $679 million, $592 million and $627 million, respectively. Conforming conventional loans serviced by the Company (57% of the servicing portfolio at February 28, 1995) are securitized through Fannie Mae or Freddie Mac programs on a non-recourse basis, whereby foreclosure losses are generally the responsibility of Fannie Mae or Freddie Mac 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 (16% of the servicing portfolio at February 28, 1995) or partially guaranteed against loss by the Veterans Administration (6% of the servicing portfolio at February 28, 1995). In addition, jumbo mortgage loans (21% of the servicing portfolio at February 28, 1995) 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, 1995, approximately 43% 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. F-22 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE H - 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, 1995 1994 1993 Shares subject to: (Number of shares) Outstanding options at beginning of year 5,603,325 4,478,703 3,653,193 Options granted 1,948,290 1,955,273 1,749,678 Options exercised (307,847) (701,619) (837,621) Options expired or canceled (560,354) (129,032) (86,547) Outstanding options at end of year 6,683,414 5,603,325 4,478,703 Exercise price: Per share for options exercised during the year $2.19 - $19.50 $2.19 - $16.19 $1.98 - $12.65 Per share for options outstanding at end of year $2.39 - $21.83 $2.19 - $21.83 $2.19 - $16.19 Of the outstanding options as of February 28, 1995, 2,704,728 shares were immediately exercisable under the Plans. Also as of February 28, 1995, 2,393,441 shares were designated for future grants under the Plans. 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. F-23 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE H - EMPLOYEE BENEFITS (Continued) 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) 1995 1994 Actuarial present value of benefit obligations: Vested $5,112 $5,024 Non-vested 1,095 1,540 Total accumulated benefit obligation 6,207 6,564 Additional benefits based on estimated future salary levels 4,250 4,517 Projected benefit obligations for service rendered to date 10,457 11,081 Less Plan assets at fair value, primarily mortgage-backed securities (9,484) (7,482) Projected benefit obligation in excess of Plan assets 973 3,599 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions 1,862 (780) Prior service cost not yet recognized in net periodic pension cost (1,422) (1,522) Unrecognized net asset at February 28, 1987 being recognized over 15 years 496 566 Accrued pension cost $1,909 $1,863 Net pension cost included the following components: Service cost - benefits earned during the period $1,648 $1,395 Interest cost on projected benefit obligations 789 677 Actual return on Plan assets (318) (413) Net amortization and deferral (327) (28) Net periodic pension cost $1,792 $1,631 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 7.625% and 5.0%, respectively. The weighted average expected long-term rate of return on assets used was 8.125%. Pension expense for 1995, 1994 and 1993 was $1,792,000, $1,631,000 and $992,000, respectively. The Company makes contributions to the Plan in amounts that are deductible in accordance with federal income tax regulations. NOTE I - 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. F-24 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE J - 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. As the result of stock splits and stock dividends, 0.399 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). Each Right, when exercisable, entitles the holder to purchase from the Company one one- hundredth share of $0.05 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. NOTE K - RELATED PARTY TRANSACTIONS Countrywide Asset Management Corporation ("CAMC"), a wholly-owned subsidiary of the Company, has entered into an agreement (the "Management Agreement") with CWM Mortgage Holdings, Inc. ("CWM"), formerly Countrywide Mortgage Investments, Inc., a real estate investment trust. CAMC has entered into a subcontract with its affiliate, CFC, to perform such services for CWM and its subsidiaries as CAMC deems necessary. In accordance with the Management Agreement, CAMC advises CWM on various facets of its business and manages its operations subject to the supervision of CWM's Board of Directors. For performing these services, CAMC receives certain management fees and incentive compensation. CAMC waived all management fees pursuant to the above for calendar year 1993 and 25% of incentive compensation earned in 1994. In addition, in 1993 CAMC absorbed $0.9 million of operating expenses incurred in connection with its duties under the Management Agreement. CWM and its subsidiaries began paying all expenses of the new operations in June 1993. During the fiscal years ended February 28, 1995, 1994 and 1993, CAMC earned $0.3 million, $0.1 million and $0.8 million, respectively, in base management fees from CWM and its subsidiaries. In addition, during the fiscal year ended February 28, 1995, CAMC recorded $1.1 million in incentive compensation, net of the amount waived as described above. The Management Agreement is renewable annually and expires on May 15, 1995. As of February 28, 1995, the Company and CAMC own 1,120,000 shares or approximately 2.77% of the common stock of CWM. F-25 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE K - RELATED PARTY TRANSACTIONS (continued) CAMC incurs many of the expenses related to the operations of CWM and its subsidiaries, including personnel and related expenses, subject to reimbursement by CWM. CWM's conduit operations are primarily conducted in Independent National Mortgage Corporation ("INMC"), formerly Countrywide Mortgage Conduit, and all other operations are conducted in CWM. Accordingly, INMC is charged with the majority of the conduit's cost and CWM is charged with the other operations' costs. During Fiscal 1995, the amount of common expenses incurred by CFC which were allocated to CAMC and reimbursed by CWM totaled $1.2 million. CWM has an option to purchase conventional loans from CFC at the prevailing market price. During the years ended February 28, 1995, 1994 and 1993, CWM purchased $80.4 million, $300.5 million and $130.3 million, respectively, of conventional non-conforming mortgage loans from CFC pursuant to this option. During the year ended February 28, 1995, CFC purchased from INMC bulk servicing rights for loans with principal balances aggregating $3.0 billion at a price of $38.2 million. In 1987 and 1993, subsidiaries of CWM entered into servicing agreements appointing CFC as servicer of mortgage loans collateralizing five series of CMOs with outstanding balances of approximately $94.0 million at February 28, 1995. CFC is entitled under each agreement to an annual fee of up to 0.32% 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, 1995, 1994 and 1993 were approximately $0.3 million, $0.5 million and $0.3 million, respectively. CFC has extended CWM a $10 million line of credit bearing interest at prime and maturing September 30, 1995. At February 28, 1995, there was no outstanding amount under the agreement. NOTE L - 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, 1995 follows. Adjustments (Dollar amounts Mortgage and in thousands) Banking Other Eliminations Consolidated Unaffiliated revenue $563,586 $39,077 $ - $602,663 Intersegment revenue 744 - (744) - Total revenue $564,330 $39,077 ($744) $602,663 Earnings before income taxes $136,220 $11,125 $ - $147,345 Identifiable assets as of February 28, 1995 $5,520,283 $1,014,391 ($955,012) $5,579,662 F-26 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE L - SEGMENT INFORMATION (continued) Segment information for the year ended February 28, 1994 follows. Adjustments (Dollar amounts Mortgage and in 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 Mortgage and in 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 F-27 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly data is as follows. Three months ended (Dollar amounts in thousands, except per share data) May 31 August 31 November 30 February 28 Year ended February 28, 1995 Revenue $177,118 $151,106 $133,726 $140,713 Expenses 120,903 119,257 106,795 108,363 Provision for income taxes 22,486 12,739 10,773 12,940 Net earnings 33,729 19,110 16,158 19,410 Earnings per share(1) Primary $0.37 $0.21 $0.18 $0.21 Fully diluted $0.37 $0.21 $0.18 $0.21 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 taxes 28,865 30,706 28,641 31,428 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 (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 P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Funding Corporation is as follows. February 28, (Dollar amounts in thousands) 1995 1994 Balance Sheets: Mortgage loans shipped and held for sale $2,898,825 $3,714,261 Other assets 2,621,458 1,809,403 Total assets $5,520,283 $5,523,664 Short- and long-term debt $4,152,712 $4,296,291 Other liabilities 433,025 374,559 Equity 934,546 852,814 Total liabilities and equity $5,520,283 $5,523,664 F-29 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (continued) Year ended February 28, 1995 1994 Statements of Earnings: Revenues $564,330 $720,277 Expenses 428,110 434,208 Provision for income taxes 54,488 114,427 Net earnings $ 81,732 $171,642 F-30 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT COUNTRYWIDE CREDIT INDUSTRIES, INC. BALANCE SHEETS (Dollar amounts in thousands) February 28, 1995 1994 Assets Cash $ - $ - Other receivables 3,344 3,333 Intercompany receivable 49,234 55,688 Investment in subsidiaries at equity in net assets 954,123 863,974 Equipment and leasehold improvements 113 79 Other assets 16,984 12,689 $1,023,798 $935,763 Liabilities and Shareholders' Equity Notes payable $ 10,600 $ 12,750 Intercompany payable 54,010 30,756 Accounts payable and accrued liabilities 8,949 5,870 Deferred income taxes 7,681 6,250 Preferred stock - - Common shareholders' equity Common stock 4,568 4,553 Additional paid-in capital 608,289 606,031 Retained earnings 329,701 269,553 $1,023,798 $935,763 F-31 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF EARNINGS (Dollar amounts in thousands) Year ended February 28, 1995 1994 1993 Revenue Interest earned $ 36 $ 221 $ 635 Interest charges (2,646) (2,247) (3,862) (2,610) (2,026) (3,227) Expenses (3,104) (2,641) (1,415) Loss before income tax benefit and equity in net earnings of subsidiaries (5,714) (4,667) (4,642) Income tax benefit 2,285 1,867 1,857 Loss before equity in net earnings of subsidiaries (3,429) (2,800) (2,785) Equity in net earnings of subsidiaries 91,836 182,260 142,858 NET EARNINGS $88,407 $179,460 $140,073 F-32 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash (Dollar amounts in thousands) Year ended February 28, 1995 1994 1993 Cash flows from operating activities: $88,407 $179,460 $140,073 Net earnings Adjustments to reconcile net earnings to net cash (used) provided by operating activities: Earnings of subsidiaries (91,836) (182,260) (142,858) Depreciation and amortization 16 12 12 Increase (decrease) in accounts payable and accrued liabilities 3,079 2,560 (982) (Increase) decrease in other receivables and other assets (2,925) 14,971 (77) Net cash (used) provided by operating activities (3,259) 14,743 (3,832) Cash flows from investing activities: Net change in intercompany receivables and payables 31,458 29,000 65,560 Investment in subsidiaries (63) 0 (10,304) Net cash provided by investing activities 31,395 29,000 55,256 Cash flows from financing activities: Repayment of long-term debt (2,150) (23,020) (31,300) Issuance of common stock 2,273 4,398 3,448 Cash dividends paid (28,259) (25,121) (23,572) Net cash used by financing activities (28,136) (43,743) (51,424) Net change in cash - - - Cash at beginning of year - - - Cash at end of year $ - $ - $ - Supplemental cash flow information: Cash used to pay interest $2,114 $2,554 $4,181 Cash (refunded from) used to pay income tax ($841) ($1,823) $4,567 Noncash financing activities - conversion of preferred stock - $25,800 $11,731 F-33 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Three years ended February 28, 1995 (Dollar amounts in thousands) Column A Column Column C Column D Column B E Additions Balance Charged Charged Balance at to to other at end beginning costs and accounts Deductions of of period expenses (2) (1) period Year ended February 28, 1995 Allowance for losses $13,826 $1,808 $3,466 $ 7,917 $11,183 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 (1) Actual losses charged against reserve, net of recoveries and reclassification. (2) Additions charged to gain (loss) on sale of loans. F-34 EX-10 2 FIFTH AMENDMENT TO THE COUNTRYWIDE CREDIT INDUSTRIES, INC. 1991 STOCK OPTION PLAN WHEREAS, Countrywide Credit Industries, Inc. (the "Company") established the Countrywide Credit Industries, Inc. 1991 Stock Option Plan (the "Plan"); and WHEREAS, the Company adopted the Fourth Amendment to the Plan pursuant to which Paragraph (a) of Section 5 of the Plan was amended to permit a nonemployee director to elect not to receive a stock option grant thereunder, provided such election is made prior to the time such person becomes a director of the Company or at least six months and one day prior to the time the grant would have been made under the Plan; and WHEREAS, the Company desires to amend the Plan to provide that a nonemployee director may elect to decline an award thereunder or may elect to revoke a previously made election to decline an award thereunder, in either case at any time prior to the date that Director Options (as defined in the Plan) are schedule to be granted under the Plan; and NOW, THEREFORE, 1. Paragraph (a) of Section 5 of the Plan is hereby deleted in its entirety and the following is inserted in its place and stead: (a) Grant. Director Options shall be granted to each Nonemployee Director on the first business day of June of each year that the Plan is in effect. The number of Shares and the purchase price therefor of each Director Option shall be as provided in this Section 5 and such Options shall be evidenced by an Agreement containing such other terms and conditions not inconsistent with the provisions of this Plan as determined by the Board. Notwithstanding the foregoing provisions of this Subsection (a), no Option shall be granted in any year to a Nonemployee Director who makes a written election not to receive such Option under the Plan, provided such election is filed with the Secretary of the Company at least one business day prior to the date such grant would otherwise be made under the Plan; provided, further, that an election made pursuant to this sentence (including an election that was effective under this Subsection as in effect before February 2, 1995) shall remain effective until the next business day following the date a written notice revoking such election is made and filed with the Secretary of the Company. A Nonemployee Director who makes an election not to receive an Option will not receive anything from the Company in lieu thereof. IN WITNESS WHEREOF, the Company has caused this Fifth Amendment to be executed by its duly authorized officer this 2nd day of February, 1995. Countrywide Credit Industries, Inc. By Sandor E. Samuels Managing Director [Corporate Seal] Attest: Gwen J. Eells Assistant Secretary s:\gje\AMEND5.doc EX-10 3 FIRST AMENDMENT TO THE COUNTRYWIDE CREDIT INDUSTRIES, INC. 1993 STOCK OPTION PLAN WHEREAS, Countrywide Credit Industries, Inc. (the "Company") established the Countrywide Credit Industries, Inc. 1993 Stock Option Plan (the "Plan"); and WHEREAS, Paragraph (a) of Section 5 of the Plan permits a nonemployee director to elect not to receive a stock option grant thereunder, provided such election is made prior to the time such person becomes a director of the Company or at least six months and one day prior to the time the grant would have been made under the Plan; and WHEREAS, the Company desires to amend the Plan to provide that a nonemployee director may elect to decline an award thereunder or may elect to revoke a previously made election to decline an award thereunder, in either case at any time prior to the date that Director Options (as defined in the Plan) are schedule to be granted under the Plan; and NOW, THEREFORE, 1. Paragraph (a) of Section 5 of the Plan is hereby deleted in its entirety and the following is inserted in its place and stead: (a) Grant. Director Options shall be granted to each Nonemployee Director on the first business day of June of each year that the Plan is in effect. The number of Shares and the purchase price therefor of each Director Option shall be as provided in this Section 5 and such Options shall be evidenced by an Agreement containing such other terms and conditions not inconsistent with the provisions of this Plan as determined by the Board. Notwithstanding the foregoing provisions of this Subsection (a), no Option shall be granted in any year to a Nonemployee Director who makes a written election not to receive such Option under the Plan, provided such election is filed with the Secretary of the Company at least one business day prior to the date such grant would otherwise be made under the Plan; provided, further, that an election made pursuant to this sentence (including an election that was effective under this Subsection as in effect before February 2. 1995) shall remain effective until the next business day following the date a written notice revoking such election is made and filed with the Secretary of the Company. A Nonemployee Director who makes an election not to receive an Option will not receive anything from the Company in lieu thereof. IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed by its duly authorized officer this 2nd day of February, 1995. Countrywide Credit Industries, Inc. By Sandor E. Samuels Managing Director [Corporate Seal] Attest: Gwen J. Eells Assistant Secretary EX-11 4 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Year ended February 28, (Dollar amounts in thousands, except per share data) 1995 1994 1993 PRIMARY Net earnings $88,407 $179,460 $140,073 Preferred stock dividend requirement - (732) (3,482) Net earnings applicable to common stock $88,407 $178,728 $136,591 Average shares outstanding 91,240 88,792 80,678 Net effect of dilutive stock options - based on the treasury stock method using average market price 847 1,709 1,836 Total average shares 92,087 90,501 82,514 Per share amount $0.96 $1.97 $1.65 FULLY DILUTED Net earnings $88,407 $179,460 $140,073 Average shares outstanding 91,240 88,792 80,677 Net effect of dilutive stock options -- based on the treasury stock method using the year-end market price, if higher than average market price 976 1,709 2,387 Assumed conversion of convertible preferred shares - 1,944 9,150 Total average shares 92,216 92,445 92,214 Per share amount $0.96 $1.94 $1.52 EX-12 5 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, 1995 computed by dividing net fixed charges (interest expense on all debt plus the interest element (one- third) of operating leases) into earnings (income before income taxes and fixed charges). For Fiscal Years Ended February 28(29), 1995 1994 1993 1992 1991 Net earnings $ 88,407 $179,460 $140,073 $ 60,196 $ 22,311 Income tax expense 58,938 119,640 93,382 40,131 14,874 Interest charges 267,685 275,906 148,765 81,959 73,428 Interest portion of rental expense 7,379 6,372 4,350 2,814 2,307 Earnings available to cover fixed charges $422,409 $581,378 $386,570 $185,100 $112,920 Fixed charges Interest charges 267,685 $275,906 $148,765 $ 81,959 $ 73,428 Interest portion of rental expense 7,379 6,372 4,350 2,814 2,307 Total fixed charges $275,064 $282,278 $153,115 $ 84,773 $75,735 Ratio of earnings to fixed charges 1.54 2.06 2.52 2.18 1.49 EX-12 6 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, 1995 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), 1995 1994 1993 1992 1991 Net earnings $88,407 $179,460 $140,073 $60,196 $22,311 Income tax expense 58,938 119,640 93,382 40,131 14,874 Interest charges 55,045 85,240 51,551 45,928 23,609 Interest portion of rental expense 7,379 6,372 4,350 2,814 2,307 Earnings available to cover net fixed charges $209,769 $390,712 $289,356 $149,069 $63,101 Net fixed charges Interest charges 55,045 $85,240 $51,551 $45,928 $23,609 Interest portion of rental expense 7,379 6,372 4,350 2,814 2,307 Total net fixed charges $62,424 $91,612 $55,901 $48,742 $25,916 Ratio of earnings to net fixed charges 3.36 4.26 5.18 3.06 2.43 EX-22 7 EXHIBIT 22.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. SUBSIDIARIES Countrywide Funding Corporation New York Continental Mobile Home Brokerage Corporation California Countrywide Agency of Ohio, Inc. Ohio Countrywide Agency of Texas, Inc. Texas Countrywide Agency, Inc. New York Countrywide Asset Management Corporation Delaware Countrywide Capital Markets, Inc. California Countrywide Securities Corporation California Countrywide Servicing Exchange California Countrywide Financial Services Corporation California Countrywide Financial Planning Services, Inc. California Countrywide Investments, Inc. Delaware Countrywide GP, Inc. Nevada Countrywide Lending Corporation California Countrywide LP, Inc. Nevada Countrywide Mortgage Pass Through Corporation Delaware Countrywide Partners Corporation Delaware Countrywide Partnership Investments, Inc. California Countrywide Parks I, Inc. California Countrywide Parks V, Inc. California Countrywide Parks VI, Inc. California Countrywide Parks VII, Inc. California Countrywide Parks VIII, Inc. California Countrywide Tax Services Corporation California CTC Foreclosure Services Corporation California CWMBS, Inc. Delaware Independent National Mortgage Corporation Delaware LandSafe, Inc. Delaware LandSafe Finance, Inc. California LandSafe Title Agency, Inc. California LandSafe Title of Florida, Inc. Florida LandSafe Title of Texas, Inc. Texas LandTrack Data Services, Inc. California Residential Mortgage Source of America, Inc. California The Countrywide Foundation California EX-24 8 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 18, 1995, accompanying the consolidated financial statements and schedules in the Annual Report of Countrywide Credit Industries, Inc. on form 10-K for the year ended February 28, 1995. 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; File No. 33-51816 , effective September 9, 1992; File Nos. 33-50661 and 33-50661-01 , effective October 19, 1993) 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). GRANT THORNTON LLP Los Angeles, California May 23, 1995 EX-27 9
5 1,000 YEAR FEB-28-1995 FEB-28-1995 17,624 0 476,754 0 0 0 201,460 55,848 5,579,662 0 1,595,531 4,568 0 0 937,990 5,579,662 0 602,663 0 455,318 0 0 0 147,345 58,938 88,407 0 0 0 88,407 0.96 0.96 Includes $267,685 of interest expense related to mortgage loan activities.