-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WasD+5lb1fWBCofspOBzEEjg+7j/jrUkTIXkRQADdJLG3oXcmuWKaHOPwsvz3JRC fRVDa5PUtu3QMX0ZtY3rMw== 0000025191-95-000010.txt : 199507180000025191-95-000010.hdr.sgml : 19950718 ACCESSION NUMBER: 0000025191-95-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950531 FILED AS OF DATE: 19950717 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954083087 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08422 FILM NUMBER: 95554224 BUSINESS ADDRESS: STREET 1: 155 NORTH LAKE AVE CITY: PASADENA STATE: CA ZIP: 91101-1857 BUSINESS PHONE: 8183048400 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended May 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to __________________________ Commission File Number: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2641992 (State or other jurisdiction (IRS Employer of Identification No.) incorporation or organization) 155 N. Lake Avenue, Pasadena, California 91101 (Address of principal executive offices) (Zip Code) (818) 304-8400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 3,1995 Common Stock $.05 par value 101,639,098 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) May 31, February 28, 1995 1995 (Dollar amounts in thousands) ASSETS Cash $ 12,891 $ 17,624 Receivables for mortgage loans shipped 1,956,740 1,174,648 Mortgage loans held for sale 1,756,589 1,724,177 Other receivables 506,027 476,754 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 139,166 145,612 Capitalized servicing fees receivable 486,276 464,268 Mortgage servicing rights 1,378,607 1,332,629 Other assets 400,590 243,950 Total assets $6,636,886 $5,579,662 Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $1,387,779 $1,063,676 LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $4,964,281 $3,963,091 Drafts payable issued in connection with mortgage loan closings 151,735 200,221 Accounts payable and accrued liabilities 154,946 105,097 Deferred income taxes 392,813 368,695 Total liabilities 5,663,775 4,637,104 Commitments and contingencies - - Shareholders' equity Preferred stock - authorized, 1,500,000 shares of $.05 par value; issued and outstanding, none - - Common stock - authorized, 240,000,000 shares of $.05 par value; issued and outstanding, 91,561,027 shares at May 31, 1995 and 91,370,364 shares at February 28, 1995 4,578 4,568 Additional paid-in capital 609,971 608,289 Retained earnings 358,562 329,701 Total shareholders' equity 973,111 942,558 Total liabilities and shareholders' equity $6,636,886 $5,579,662 Borrower and investor custodial accounts $1,387,779 $1,063,676 The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended May 31, 1995 1994 (Dollar amounts in thousands, except per share data) Revenues Loan origination fees $ 41,521 $ 73,736 Gain (loss) on sale of loans 12,731 11,748 Loan production revenue 54,252 85,484 Interest earned 91,731 90,782 Interest charges (80,112) (63,643) Net interest income 11,619 27,139 Loan servicing income 129,382 95,930 Less amortization and impairment of servicing assets (145,743) (23,000) Servicing hedge benefit (expense) 116,975 (19,916) Net loan administration income 100,614 53,014 Commissions, fees and other income 12,478 11,481 Total revenues 178,963 177,118 Expenses Salaries and related expenses 50,639 60,132 Occupancy and other office expenses 26,545 26,005 Guarantee fees 26,022 19,058 Marketing expenses 5,951 6,757 Other operating expenses 9,512 8,951 Total expenses 118,669 120,903 Earnings before income taxes 60,294 56,215 Provision for income taxes 24,118 22,486 NET EARNINGS $ 36,176 $ 33,729 Earnings per share Primary $0.39 $0.37 Fully diluted $0.39 $0.37 The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended May 31, 1995 1994 (Dollar amounts in thousands) Cash flows from operating activities: Net earnings $ 36,176 $ 33,729 Adjustments to reconcile net earnings to net cash (used) provided by operating activities: Amortization and impairment of mortgage servicing rights 111,489 23,000 Amortization and impairment of capitalized servicing fees receivable 34,254 - Depreciation and other amortization 6,917 6,366 Deferred income taxes 24,118 22,486 Servicing hedge benefit (106,821) - Origination and purchase of loans held for sale (6,771,558) (9,353,167) Principal repayments and sale of loans 5,957,054 10,119,827 (Increase) decrease in mortgage loans shipped and held for sale (814,504) 766,660 Increase in other receivables and other assets (80,375) (54,993) Increase in accounts payable and accrued liabilities 49,849 25,439 Net cash (used) provided by operating activities (738,897) 822,687 Cash flows from investing activities: Additions to mortgage servicing rights (157,467) (129,389) Additions to capitalized servicing fees receivable (56,262) (65,453) Sale (purchase) of property, equipment and leasehold improvements - net 812 (15,223) Net cash used by investing activities (212,917) (210,065) Cash flows from financing activities: Net increase (decrease) in warehouse debt and other short-term borrowings 972,945 (706,695) Issuance of long-term debt 25,000 101,706 Repayment of long-term debt (45,241) (181) Issuance of common stock 1,692 448 Cash dividends paid (7,315) (7,290) Net cash provided (used) by financing activities 947,081 (612,012) Net (decrease) increase in cash (4,733) 610 Cash at beginning of period 17,624 4,034 Cash at end of period $ 12,891 $ 4,644 Supplemental cash flow information: Cash used to pay interest $ 57,445 $ 61,231 Cash refunded from income taxes - ($ 804) The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended May 31, 1995 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 28, 1995 of Countrywide Credit Industries, Inc. (the "Company"). In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, which the Company adopted in the quarter ended May 31, 1995. SFAS No. 122 amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter ended May 31, 1995 are not directly comparable to prior periods. See Note E. NOTE B - NOTES PAYABLE Notes payable consisted of the following. (Dollar amounts in thousands) May 31, February 28, 1995 1995 Commercial paper $2,418,372 $2,122,348 Medium-term notes, Series A, B and C, net of discounts 1,373,900 1,393,900 Reverse-repurchase agreements 782,555 245,212 Subordinated notes 200,000 200,000 Unsecured note payable, matured June 2, 1995 100,000 - Pre-sale funding facilities 88,064 - Other notes payable (2.40%-2.90%) 1,390 1,631 $4,964,281 $3,963,091 Revolving Credit Facility and Commercial Paper As of May 31, 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. This agreement was amended in June 1995 and the borrowing limit was increased to $3 billion. 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 three months ended May 31, 1995, including the effect of the interest rate swap agreements discussed below, was 6.06%. The weighted average borrowing rate on commercial paper outstanding as of May 31, 1995 was 6.04%. 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 June 1995 amendment extended the facility from September 1997 until May 1998. See Note C. Medium-Term Notes As of May 31, 1995, outstanding medium-term notes issued by the Company 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 - 384,800 384,800 6.10% 8.79% Jun 1995 Mar 2002 Series B 11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005 Series C 303,000 195,500 498,500 6.33% 8.43% Dec 1997 Mar 2004 Subtotal $314,000 $1,049,300 $1,363,300 Total $314,000 $1,059,900 $1,373,900
As of May 31, 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 three months ended May 31, 1995, including the effect of the interest rate swap agreements, was 7.02%. In addition, as of May 31, 1995, $1.5 million was available for future issuances under the Series C shelf registration. In May 1995, the Company and CFC filed a shelf registration statement providing for the issuance by CFC of an additional series of medium-term notes. Under the terms of the filing, floating- and fixed-rate notes can be issued with maturities from nine months or more from date of issue. As of May 31, 1995, this registration statement was not effective and no medium-term notes had been issued pursuant to it. Reverse-Repurchase Agreements As of May 31, 1995, the Company had entered into short-term financing arrangements to sell mortgage-backed securities ("MBS") and whole loans under agreements to repurchase. The weighted average borrowing rate for the three months ended May 31, 1995 was 6.09%. The weighted average borrowing rate on reverse-repurchase agreements outstanding as of May 31, 1995 was 6.07%. 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 May 31, 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 three months ended May 31, 1995 was 6.17%. The facility is committed through July 20, 1995, subject to CFC's compliance with certain financial and operational covenants. The balance outstanding under this facility at May 31, 1995 was $58.4 million. As of May 31, 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 three months ended May 31, 1995 was 6.76%. The balance outstanding under this facility at May 31, 1995 was $29.7 million. As of May 31, 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 three months ended May 31, 1995 was 6.05%. As of May 31, 1995, the Company had no outstanding borrowings under this facility. NOTE C - SUBSEQUENT EVENTS In June 1995, CFC entered into an amendment to its revolving credit facility. The borrowing limit under the facility was increased by $500 million to $3 billion and the expiration date of the facility was extended from September 1997 to May 1998. On June 9, 1995, the Company declared a cash dividend of $0.08 per common share payable July 17, 1995 to shareholders of record on June 26, 1995. On June 30, 1995, the Company completed a public offering of its common stock through the issuance and sale of 10,000,000 shares at a price of $21 per share. The proceeds will be used for general corporate purposes, which may include retirement of indebtedness of the Company or CFC and investment in servicing rights through the current production of loans and the bulk acquisition of contracts to service loans. NOTE D - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY The following tables present summarized financial information for Countrywide Funding Corporation. (Dollar amounts in thousands) May 31, February 28, 1995 1995 Balance Sheets: Mortgage loans shipped and held for sale $3,713,329 $2,898,825 Other assets 2,857,082 2,621,458 Total assets $6,570,411 $5,520,283 Short- and long-term debt $5,105,417 $4,152,712 Other liabilities 507,505 433,025 Equity 957,489 934,546 Total liabilities and equity $6,570,411 $5,520,283 (Dollar amounts in thousands) Three Months Ended May 31, 1995 1994 Statements of Earnings: Revenues $168,515 $167,973 Expenses 110,277 115,133 Provision for income taxes 23,295 21,136 Net earnings $ 34,943 $ 31,704 NOTE E - IMPLEMENTATION OF NEW ACCOUNTING STANDARD In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, which the Company adopted in the quarter ended May 31, 1995. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended May 31, 1995 of $8.9 million, or $0.10 per fully diluted share. SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was charged to earnings when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the quarter ended May 31, 1995 was an increase in net earnings of $18.6 million, or $0.20 per fully diluted share. With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. During the quarter ended May 31, 1995, the separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization by $9.7 million, or $0.10 per fully diluted share. SFAS No. 122 also requires that all capitalized mortgage servicing rights ("MSRs") be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. For purposes of measuring impairment, MSRs are stratified on the basis of interest rate and type of interest rate (fixed or adjustable). In addition to normal amortization of the servicing assets amounting to $29.1 million, the Company reduced the servicing assets by an additional $116.7 million of impairment during the quarter ended May 31, 1995. The entire amount of such impairment was offset by a net gain of $117.0 million in the Company's servicing hedge which is designed to protect its servicing investment. The net gain includes unrealized gains of $106.9 million and realized gains of $10.1 million from the sale of various financial instruments that comprise the hedge. As a part of the adoption of SFAS No. 122, the Company revised its servicing hedge accounting policy, effective with the quarter ended May 31, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the servicing hedge. NOTE F - SERVICING HEDGE The following summarizes the notional amounts of servicing hedge derivative contracts. Long Call Options Interest on U.S. (Dollar amounts Rate Treasury in millions) Floors Futures Balance, February 28, 1995 $4,000 $ - Additions 3,000 2,100 Balance, May 31, 1995 $7,000 $2,100 NOTE G - VALUATION ALLOWANCE FOR CAPITALIZED MORTGAGE SERVICING RIGHTS The following summarizes the aggregate activity in the valuation allowances for capitalized mortgage servicing rights. Aggregate (Dollar amounts in thousands) Balances At February 28, 1995 $ - Additions charged 32,717 At May 31, 1995 $32,717 NOTE H - RATIO OF EARNINGS TO FIXED CHARGES The ratios of earnings to fixed charges for the quarters ended May 31, 1995 and 1994 were 1.74 and 1.86, respectively. For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before Federal income taxes, plus fixed charges. Fixed charges include interest expense on debt and the portion of rental expenses which is considered to be representative of the interest factor (one-third of operating leases). Since the major portion of the Company's interest costs is incurred to finance mortgage loans which generate interest income, and since interest income and interest expense are generated simultaneously, management believes that a more meaningful measure of its debt service requirements is the ratio of earnings to net fixed charges. Under this alternative formula, net fixed charges are defined as interest expense on debt, other than debt incurred to finance the Company's mortgage loan inventory, plus the interest element (one-third of operating leases). Under such alternative formula, these ratios for the quarters ended May 31, 1995 and 1994 were 5.73 and 4.18, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS Quarter Ended May 31, 1995 Compared to Quarter Ended May 31, 1994 Revenues for the quarter ended May 31, 1995 increased 1% to $179.0 million from $177.1 million for the quarter ended May 31, 1994. Net earnings increased 7% to $36.2 million for the quarter ended May 31, 1995 from $33.7 million for the quarter ended May 31, 1994. Effective with the quarter ended May 31, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter ended May 31, 1995 are not directly comparable to prior periods. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended May 31, 1995 of $8.9 million, or $0.10 per fully diluted share. In addition to the accounting change, the increase in revenues and net earnings for the quarter ended May 31, 1995 compared to the quarter ended May 31, 1994 was attributable to an increase in the size of the Company's servicing portfolio, offset in part by lower production and increased price competition caused by lower demand for mortgage loans. The total volume of loans produced decreased 28% to $6.8 billion for the quarter ended May 31, 1995 from $9.4 billion for the quarter ended May 31, 1994. Refinancings totaled $1.2 billion, or 17% of total fundings, for the quarter ended May 31, 1995, as compared to $4.8 billion, or 52% of total fundings, for the quarter ended May 31, 1994. Adjustable-rate mortgage ("ARM") loan production totaled $2.3 billion, or 33% of total fundings, for the quarter ended May 31, 1995, as compared to $2.0 billion, or 21% of total fundings, for the quarter ended May 31, 1994. Production in the Company's Consumer Markets Division decreased to $1.3 billion for the quarter ended May 31, 1995 compared to a combined production of $2.9 billion for the Company's Retail and Consumer Divisions for the quarter ended May 31, 1994. Production in the Company's Wholesale Division decreased to $1.8 billion for the quarter ended May 31, 1995 compared to $3.0 billion for the quarter ended May 31, 1994. The Company's Correspondent Division purchased $3.7 billion in mortgage loans for the quarter ended May 31, 1995 compared to $3.5 billion for the quarter ended May 31, 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 May 31, 1995 and 1994, the Company's pipeline of loans in process was $4.3 billion and $4.4 billion, respectively. In addition, at May 31, 1995, the Company had committed to make loans in the amount of $1.6 billion, subject to property identification and borrower qualification ("Lock N' ShopSM Pipeline"). At May 31, 1994, the Lock N' Shop Pipeline was $2.7 billion. Historically, approximately 43% to 75% of the pipeline of loans in process has funded. For the quarters ended May 31, 1995 and 1994, the Company received 101,205 and 90,900 new loan applications, respectively, at an average daily rate of $160 million and $165 million, respectively. The following actions were taken during the quarter ended May 31, 1995 on the total applications received during that quarter: 51,018 loans (50% of total applications received) were funded and 14,626 applications (14% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the quarter ended May 31, 1994 on the total applications received during that quarter: 44,048 loans (48% of total applications received) were funded and 13,240 applications (15% of total applications received) were either rejected by the Company or withdrawn by the applicant. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production divisions' loan processing efficiency and loan pricing decisions. Loan origination fees decreased during the quarter ended May 31, 1995 as compared to the quarter ended May 31, 1994 due to lower loan production that resulted from an increase in the level of mortgage interest rates. The percentage decrease in loan origination fees was greater than the percentage decrease in total production. This is primarily because production by the divisions that, due to lower cost structures, charge lower origination fees per dollar loaned comprised a greater percentage of total production in the quarter ended May 31, 1995 than in the quarter ended May 31, 1994. Gain (loss) on sale of loans improved during the quarter ended May 31, 1995 as compared to the quarter ended May 31, 1994 primarily due to the impact of adopting SFAS No. 122. SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. This accounting methodology, in turn, increases the gain (or reduces the loss) on sale of loans as compared to the accounting results obtained under SFAS No. 65, the previously applicable accounting standard. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was included in the gain or loss recorded when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the quarter ended May 31, 1995 was an increase in gain on sale of loans of $31.0 million. With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. During the quarter ended May 31, 1995, the separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $16.2 million. Those market conditions included increased price competition caused by lower demand for mortgage loans during the quarter ended May 31, 1995 than during the quarter ended May 31, 1994. In general, loan origination fees and gain or loss on sale of loans are affected by numerous factors including loan pricing decisions, interest rate volatility, the general direction of interest rates and the volume of loans produced. Net interest income (interest earned net of interest charges) decreased to $11.6 million for the quarter ended May 31, 1995 from $27.1 million for the quarter ended May 31, 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($2.3 million and $19.4 million for the quarters ended May 31, 1995 and 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($8.8 million and $6.4 million for the quarters ended May 31, 1995 and 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($18.1 million and $14.1 million for the quarters ended May 31, 1995 and 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 increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio. The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate, offset somewhat by a decline in the average custodial balances from the quarter ended May 31, 1994 to the quarter ended May 31, 1995. During the quarter ended May 31, 1995, loan administration income was positively affected by the continued growth of the loan servicing portfolio. At May 31, 1995, the Company serviced $120.9 billion of loans (including $1.1 billion of loans subserviced for others) compared to $93.6 billion (including $0.9 billion of loans subserviced for others) at May 31, 1994, a 29% increase. The growth in the Company's servicing portfolio during the quarter ended May 31, 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, and scheduled amortization of mortgage loans. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at May 31, 1995 was 7.7% compared to 7.2% at May 31, 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. During the quarter ended May 31, 1995, the prepayment rate of the Company's servicing portfolio was 6%, as compared to 17% for the quarter ended May 31, 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 the quarter ended May 31, 1995 from the quarter ended May 31, 1994. The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong loan production capability and a growing servicing portfolio. To mitigate the effect on earnings of higher amortization and impairment (which are deducted from loan servicing income) resulting from increased prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in value when interest rates decline (the "Servicing Hedge"). These financial instruments include call options on U.S. Treasury futures and MBS, interest rate floors and certain tranches of collateralized mortgage obligations ("CMOs"). The CMOs, which consist primarily of principal-only ("P/O") securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase. These changes should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows. The Servicing Hedge instruments utilized by the Company 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. During the quarter ended May 31, 1995, the Company recognized a net gain of $117.0 million from its Servicing Hedge. The net gain includes unrealized gains of $106.9 million and realized gains of $10.1 million from the sale of various financial instruments that comprise the Servicing Hedge. As a part of the adoption of SFAS No. 122, the Company has revised its servicing hedge accounting policy, effective with the quarter ended May 31, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the Servicing Hedge. There can be no assurance the Company's Servicing Hedge will generate gains in the future. The Company recorded amortization and impairment of its servicing assets in the quarter ended May 31, 1995 totaling $145.7 million (consisting of normal amortization amounting to $29.1 million and impairment of $116.7 million), compared to $23.0 million of amortization in the quarter ended May 31, 1994. SFAS No. 122 requires that all capitalized mortgage servicing rights be evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. Under SFAS No. 65, the impairment evaluation was made using either discounted or undiscounted cash flows. No uniform required level of disaggregation was specified. The Company used a disaggregated undiscounted method. The factors affecting the amount of amortization and impairment recorded in an accounting period include the level of prepayments during the period, the change in prepayment expectations and the amount of Servicing Hedge gains. During the quarter ended May 31, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $3.0 billion at a price of $37.3 million or 1.26% of the aggregate outstanding principal balances of the servicing portfolios acquired. During the quarter ended May 31, 1994, the Company acquired bulk servicing rights for loans with principal balances aggregating $3.5 billion at a price of $42.9 million or 1.23% of the aggregate outstanding principal balances of the servicing portfolios acquired. Salaries and related expenses are summarized below for the quarters ended May 31, 1995 and 1994. (Dollar amounts in thousands) Quarter Ended May 31, 1995 Loan Production Administrat Other Activities ion Activities Total Base Salaries $25,535 $6,653 $2,064 $34,252 Incentive Bonus 8,000 136 1,754 9,890 Payroll Taxes and Benefits 4,998 1,202 297 6,497 Total Salaries and Related Expenses $38,533 $7,991 $4,115 $50,639 Average Number of Employees 2,350 961 308 3,619 (Dollar amounts in thousands) Quarter Ended May 31, 1994 Loan Production Administr Other Activities ation Activities Total Base Salaries $33,656 $5,492 $1,334 $40,482 Incentive Bonus 10,693 110 683 11,486 Payroll Taxes and Benefits 6,541 958 665 8,164 Total Salaries and Related Expenses $50,890 $6,560 $2,682 $60,132 Average Number of Employees 3,389 804 204 4,397 The amount of salaries decreased during the quarter ended May 31, 1995 primarily due to the decreased number of employees resulting from reduced loan production, offset somewhat by an increased number of employees due to a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries. Incentive bonuses earned during the quarter ended May 31, 1995 decreased primarily due to decreased loan production and decreased loan production personnel. Occupancy and other office expenses for the quarter ended May 31, 1995 slightly increased to $26.5 million from $26.0 million for the quarter ended May 31, 1994. This was due to increased office and equipment rental expenses resulting from the opening of four Consumer Markets Division branch offices in the quarter ended May 31, 1995, partially offset by a decline in expenses resulting from the closure of 19 Consumer Markets Division satellite 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 the quarter ended May 31, 1995 increased 37% to $26.0 million from $19.1 million for the quarter ended May 31, 1994. This increase resulted primarily from an increase in the servicing portfolio. Marketing expenses for the quarter ended May 31, 1995 decreased 12% to $6.0 million from $6.8 million for the quarter ended May 31, 1994. The decrease in marketing expenses reflected the Company's strategy to centralize and streamline its marketing functions. Other operating expenses for the quarter ended May 31, 1995 increased from the quarter ended May 31, 1994 by $1.5 million, or 6%. This increase was due primarily to increased activity in the Company's non-mortgage banking subsidiaries. Profitability of Loan Production and Servicing Activities In the quarter ended May 31, 1995, the Company's pre-tax loss from its loan production activities (which include loan origination and purchases, warehousing and sales) was $1.5 million. In the quarter ended May 31, 1994, the Company's comparable pre-tax earnings were $20.9 million. The decrease of $22.4 million was primarily attributable to lower loan production and increased price competition caused by lower demand for mortgage loans, partially offset by the effect of the adoption of SFAS No. 122 previously discussed and by a change of $10.0 million in the Company's internal method of allocating overhead between its production and servicing activities. In the quarter ended May 31, 1995, the Company's pre-tax income from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance and acting as tax payment agent) was $60.0 million as compared to $32.0 million in the quarter ended May 31, 1994. The increase of $28.0 million was principally due to an increase in the size of the servicing portfolio, offset in part by the change in the Company's internal overhead allocation method discussed above. INFLATION Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down. This extends the average life of the Company's servicing portfolio and reduces both amortization of the servicing assets and the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans which payments exceed the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). In addition, the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings. This is primarily due to increased amortization and impairment of the Servicing Assets, 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 and unsecured 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 B to the Company's Consolidated Financial Statements included herein for more information on the Company's financings. Certain of the debt obligations of the Company and CFC contain various provisions that may affect the ability of the Company and CFC to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth, current ratio and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CFC to pay dividends. In June 1995, CFC entered into an amendment to its revolving credit facility. The borrowing limit under the facility was increased by $500 million to $3 billion and the expiration date of the facility was extended from September 1997 to May 1998. 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 and liquidity. Cash Flows Operating Activities In the quarter ended May 31, 1995, the Company's operating activities used cash of approximately $815 million on a short-term basis to fund the increase in its warehouse of mortgage loans. The Company's operating activities also generated $76 million of positive cash flow, which was principally allocated to the long-term investment in servicing as discussed below under "Investing Activities." Investing Activities The primary investing activity for which cash was used during the quarter ended May 31, 1995 was the investment in servicing. Net cash used by investing activities increased to $213 million for the quarter ended May 31, 1995 from $210 million for the quarter ended May 31, 1994. The additional cash outlay for servicing was offset somewhat by a lower cash outlay for purchases of property, equipment and leasehold improvements during the quarter ended May 31, 1995 than in the quarter ended May 31, 1994. Financing Activities Net cash provided by financing activities amounted to $947 million for the quarter ended May 31, 1995. Net cash used by financing activities amounted to $612 million for the quarter ended May 31, 1994. The increase in net cash provided was primarily the result of net short-term borrowings by the Company during the quarter ended May 31, 1995 and net short- term debt repayments in the quarter ended May 31, 1994. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process During the quarter ended May 31, 1995, the Company received new loan applications at an average daily rate of $160 million and at May 31, 1995, the Company's pipeline of loans in process was $4.3 billion. This compares to a daily application rate during the quarter ended May 31, 1994 of $165 million and a pipeline of loans in process at May 31, 1994 of $4.4 billion. During most of the period from May 31, 1994 to February 28, 1995, interest rates increased, resulting in a decrease in demand for mortgage loans. However, during the quarter ended May 31, 1995, interest rates decreased, resulting in an increase in demand for mortgage loans. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 75% of the pipeline of loans in process has funded. In addition, the Company's Lock N' Shop Pipeline at May 31, 1995 was $1.6 billion and at May 31, 1994 was $2.7 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage credit, the extent of price competition in the market, the direction of interest rates, seasonal factors and general economic conditions. For the month ended June 30, 1995, the average daily amount of applications received was $199 million, and at June 30, 1995, the pipeline of loans in process was $5.0 billion and the Lock N' Shop pipeline was $1.6 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 production 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. The Company has reduced its total staffing levels from approximately 4,100 at May 31, 1994 to approximately 3,600 at May 31, 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 decline in interest rates during the quarter ended May 31, 1995 resulted in impairment (as specified in SFAS No. 122) of $116.7 million and a servicing hedge gain of $117.0 million. In addition, the Company has further increased the size of its servicing portfolio, thereby increasing its servicing revenue base, by acquiring servicing contracts through bulk purchases. During quarter ended May 31, 1995, the Company purchased such servicing contracts with principal balances amounting to $3.0 billion. Prepayments in the Company's servicing portfolio were $1.6 billion during the quarter ended May 31, 1995 and $1.0 billion during the month of June 1995. The Company's primary competitors are commercial banks and savings and loans and mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Particularly in California, savings and loans and other portfolio lenders have competed with the Company by offering aggressively priced adjustable-rate mortgage products which grew 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. The Company's California mortgage loan production (measured by principal balance) constituted 29% of its total production during the quarter ended May 31, 1995, down from 34% for the quarter ended May 31, 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 the quarter, 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 (23% of the Company's servicing portfolio at May 31, 1995) are insured or partially guaranteed against loss by the Federal Housing Administration or the Veterans Administration. In the Company's view, the limited unreimbursed costs that may be incurred by the Company on government foreclosed loans are not material to the Company's consolidated financial statements. Servicing Hedge As previously discussed, the Company recorded a net gain of $117.0 million from its Servicing Hedge which is designed to partially protect its servicing investment from the effects of increased prepayment activity that generally results from declining interest rates. There can be no assurance the Company's Servicing Hedge will generate gains in the future. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.1 Form of Supplemental Indenture No.1 dated as of June 15, 1995, to the Indenture dated as of January 1, 1992, among CFC, CCI, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the registration statement on Form S-3 of CCI and CFC (File No. 33-59559) filed with the SEC on June 16, 1995). 4.2 Form of Medium-Term Notes, Series D (fixed-rate) of CFC (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the registration statement on Form S-3 of CCI and CFC (File No. 33-59559) filed with the SEC on June 16, 1995). 4.3 Form of Medium-Term Notes, Series D (floating-rate) of CFC (incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the registration statement on Form S-3 of CCI and CFC (File No. 33-59559) filed with the SEC on June 16, 1995). 10.1 First Amendment to Credit Documents dated as of June 1, 1995, by and among CFC, CCI, The First National Bank of Chicago, Bankers Trust Company and the Lenders Party Thereto. 11.1 Statement Regarding Computation of Per Share Earnings. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 12.2 Computation of the Ratio of Earnings to Net Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). (b) Reports on Form 8-K. No reports on Form 8-K have been filed during this reporting period. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COUNTRYWIDE CREDIT INDUSTRIES, INC. (Registrant) DATE: July 14, 1995 /s/ Stanford L. Kurland Senior Managing Director and Chief Operating Officer DATE: July 14, 1995 /s/ Carlos M. Garcia Managing Director; Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) EXHIBIT INDEX Exhibit Number Document Description 4.1 Form of Supplemental Indenture No.1 dated as of June 15, 1995, to the Indenture dated as of January 1, 1992, among CFC, CCI, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the registration statement on Form S-3 of CCI and CFC (File No. 33-59559) filed with the SEC on June 16, 1995). 4.2 Form of Medium-Term Notes, Series D (fixed-rate) of CFC (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the registration statement on Form S-3 of CCI and CFC (File No. 33- 59559) filed with the SEC on June 16, 1995). 4.3 Form of Medium-Term Notes, Series D (floating-rate) of CFC (incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the registration statement on Form S-3 of CCI and CFC (File No. 33- 59559) filed with the SEC on June 16, 1995). 10.1 First Amendment to Credit Documents dated as of June 1, 1995, by and among CFC, CCI, The First National Bank of Chicago, Bankers Trust Company and the Lenders Party Thereto. 11.1 Statement Regarding Computation of Per Share Earnings. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 12.2 Computation of the Ratio of Earnings to Net Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). EX-10 2 FIRST AMENDMENT TO CREDIT DOCUMENTS THIS FIRST AMENDMENT TO CREDIT DOCUMENTS (the "Amendment") is made and dated as of the 1st day of June, 1995, by and among COUNTRYWIDE FUNDING CORPORATION, a New York corporation (the "Company"); COUNTRYWIDE CREDIT INDUSTRIES, a Delaware corporation (the "Parent"); THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("FNBC"), as credit agent (in such capacity, the "Credit Agent") for the Lenders from time to time party to that certain Revolving Credit Agreement dated as of September 23, 1994 by and among such Lenders, the Company and others (the "Credit Agreement," and with capitalized terms not otherwise defined herein used with the meanings given such terms in the Glossary attached to the Credit Agreement as "Annex I"); FNBC and BANKERS TRUST COMPANY, a New York State banking corporation ("BT"), as co-arrangers of the credit facility evidenced by the Credit Agreement (in such capacity, the "Co-Arrangers"); BT as syndication agent of the credit facility evidenced by the Credit Agreement (in such capacity, the "Syndication Agent"); and the Lenders. RECITALS A. Pursuant to the Credit Agreement the Lenders agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. B. The Company and such Lenders desire to amend the Credit Documents in certain respects, as more particularly described below. C. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT I. Extension of Maturity Date. To reflect the agreement of the parties hereto to extend the Maturity Date of the credit facility evidenced by the Credit Agreement, the date "September 19, 1997" set forth in the first line of the definition of "Maturity Date" set forth in the Glossary is hereby replaced with the date "May 31, 1998". II. Increase in Credit Limits. To reflect the agreement of the parties hereto to permit the increase of the Primary Loan Credit Limit, with a concomitant increase in the Aggregate Credit Limit, and the L/C Commitments under certain circumstances without the written consent of one hundred percent of the Lenders: A. The definition of the term "Aggregate Credit Limit" set forth in the Glossary is hereby amended to delete the dollar amount "$2,500,000,000.00" appearing in the parenthetical set forth therein and to replace the same with the dollar amount "$4,000,000,000.00"; and B. The definition of the term "Primary Loan Credit Limit" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Primary Loan Credit Limit' shall mean at any date the aggregate of the Lenders' Maximum Primary Loan Commitments at such date, as set forth on the then effective Commitment Schedule; provided, however, that in no event shall the Primary Loan Credit Limit exceed at any date the Aggregate Credit Limit minus the aggregate L/C Commitments and the GNMA Pool Advance Commitment at such date." C. The dollar amount "$50,000,000.00" appearing in the last line of the definition of "L/C Commitment" is hereby deleted and replaced with the dollar amount "$100,000,000.00". III. Modification of Minimum Net Worth Provision. To reflect the extension of the Maturity Date: A. Paragraph 10(j) of the Credit Agreement is hereby amended to read in its entirety as follows: "10(j) Minimum Net Worth. Permit its net worth determined in accordance with GAAP on and as of each Applicable Financial Test Date to be less than the greater of $725,000,000.00 and eighty percent (80%) of its net worth determined in accordance with GAAP as of the most recent February 28 preceding the date such net worth is calculated." B. Paragraph 11(d) of the Guaranty is hereby amended to read in its entirety as follows: "(d) Guarantor shall not permit its consolidated net worth determined in accordance with GAAP on and as of each Applicable Financial Test Date to be less than the greater of $750,000,000.00 and eighty percent (80%) of its net worth determined in accordance with GAAP as of the most recent February 28 preceding the date such net worth is calculated; and" IV. Modification of Total Debt Restriction. To reflect the agreement of the parties hereto to modify the restriction on Total Debt set forth in the Credit Agreement: A. Paragraph 10(k) thereof is hereby amended to read in its entirety as follows: "10(k) Maximum Total Debt. Permit Total Debt on and as of each Applicable Financial Test Date to exceed the sum of: (1) One hundred percent (100%) of Cash, plus (2) Ninety percent (90%) of Margins, plus (3) Ninety seven percent (97%) of the amount of each of Mortgage Loans Held For Sale and Receivables for Mortgage Loans Shipped (including Mortgage Loans and Mortgage-Backed Securities subject to a Lien under a repurchase agreement but excluding all other Mortgage Loans and Mortgage-Backed Securities which are excluded from "Eligible Mortgage Assets" pursuant to subparagraphs (a), (b) and (c) of the definition of such term), plus (4) Ninety percent (90%) of Pool Loan Purchases and Mortgage Claims Receivable to the extent such assets represent VA and FHA Mortgage Loans repurchased by the Company from pools supporting GNMA Mortgage-Backed Securities, plus (5) Fifty percent (50%) of Deferred Commitment Fees, plus (6) Fifty percent (50%) of Property and Equipment, plus (7) Sixty seven percent (67%) of each of Capitalized Servicing Fees Receivable and Purchased Servicing Rights, plus (8) Fifty percent (50%) of Other Assets." B. The following new definitions are added, in correct alphabetical order, to the Glossary: "Capitalized Servicing Fees Receivable" shall mean the dollar amount shown as "Capitalized Servicing Fees Receivable" on the balance sheet of the Company as of the Applicable Financial Test Date delivered by the Company pursuant to Paragraph 9(a)(2) of the Agreement. "Deferred Commitment Fees" shall mean the dollar amount shown as "Deferred Commitment Fees" on the balance sheet of the Company as of the Applicable Financial Test Date delivered by the Company pursuant to Paragraph 9(a)(2) of the Agreement. "Margins" shall mean the dollar amount shown as "Margins" on the most recent Covenant Compliance Certificate delivered by the Company pursuant to Paragraph 9(a)(3) of the Agreement and shall equal the sum of: (a) that dollar portion of "Other Receivables" shown on the balance sheet of the Company as of the Applicable Financial Test Date delivered by the Company pursuant to Paragraph 9(a)(2) of the Agreement constituting margins (relating to cash and government securities with a maturity of less than one year), plus (b) Letters of Credit outstanding as of such Applicable Financial Test Date. "Other Assets" shall mean the dollar amount shown as "Other Assets" on the most recent Covenant Compliance Certificate delivered by the Company pursuant to Paragraph 9(a)(3) of the Agreement and shall consist of all assets of the Company shown on the balance sheet of the Company as of the most recent Applicable Financial Test Date other than the assets included in the calculation of subparagraphs (1) through (7) of Paragraph 10(k) of the Agreement; provided, however, that in no event shall Other Assets include intangible assets. "Property and Equipment" shall mean the dollar amount shown as "Property, Equipment and Leasehold Improvements" on the balance sheet of the Company as of the Applicable Financial Test Date delivered by the Company pursuant to Paragraph 9(a)(2) of the Agreement. "Purchased Servicing Rights" shall mean the dollar amount shown as "Purchased Servicing Rights" on the balance sheet of the Company as of the Applicable Financial Test Date delivered by the Company pursuant to Paragraph 9(a)(2) of the Agreement. 5. Modification of Collateral Value of Borrowing Base. To reflect the agreement of the parties with respect to an increase in the value to be given to the Company's servicing portfolio in the computation of the Collateral Value of the Borrowing Base: (a) Subparagraph (e) of the definition of "Collateral Value of the Secured Borrowing Base" set forth in the Glossary is hereby amended to read in its entirety as follows: "(e) The least of: (1) three quarters of one percent (0.75%) of the outstanding principal balances of Mortgage Loans being serviced by the Company under the Pledged Eligible Mortgage Servicing Assets, (2) fifteen percent (15%) of the Aggregate Credit Limit, and (3) $400,000,000.00." (b) Subparagraph (c) of the definition of "Collateral Value of the Unsecured Borrowing Base" set forth in the Glossary is hereby amended to read in its entirety as follows: "(c) The least of: (1) three quarters of one percent (0.75%) of the outstanding principal balances of Mortgage Loans being serviced by the Company under Eligible Mortgage Servicing Assets, (2) fifteen percent (15%) of the Aggregate Credit Limit, and (3) $400,000,000.00." 6. Liens Securing Margin Call Obligations. To reflect the agreement of the parties to clarify the right of the Company to provide collateral consisting of property and assets of the Company (other than property and assets included in the calculation of, as applicable, the Collateral Value of the Unsecured Borrowing Base or the Collateral Value of the Secured Borrowing Base) as security for the obligation of the Company to meet margin calls arising under investment transactions entered into by the Company in the normal course of its business, Paragraph 10(a)(2) of the Credit Agreement is hereby amended to add the phrase ",margin call requirements" following the word "leases" in the fifth line thereof. 7. Modification of Certificate Forms. To reflect the amendment of certain financial covenants and of the method of computation of the Collateral Value of the Borrowing Base set forth in this Amendment, the form of Covenant Compliance Certificate for the Company attached to the Glossary as Exhibit F- 1, the form of Secured Period Borrowing Base Certificate attached to the Glossary as Exhibit Q and the form of Unsecured Period Borrowing Base Certificate attached to the Glossary as Exhibit T are hereby replaced with the forms of such Certificates attached hereto as Replacement Exhibits F-1, Q and T, respectively. 8. Differentiation of Accounts. To reflect the agreement of the parties that during any Unsecured Period the Company may enter into such agreements with FNBC as it may elect with respect to the issuance and payment of CPNs and that the Settlement Account may be such unrestricted access accounts as the Company may elect: (a) The definition of "Depositary Agreement" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Depositary Agreement' shall mean an issuing and paying agreement with the Paying Agent governing the authentication and issuance of CPNs, which agreement shall, during any Secured Period, be substantially in the form of that attached hereto as Exhibit I." (b) The definition of "Settlement Account" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Settlement Account' shall mean: (a) during any Unsecured Period, such account or accounts as the Company may designate from time to time in writing, and (b) during any Secured Period, Account No. 19-13433 maintained in the Credit Agent's name at the Contact Office." 9. Modification of Pricing Provisions. To reflect the agreement of the parties with respect to a modification of the pricing of the credit facility evidenced by the Credit Agreement: (a) The definition of "Pricing Spread" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Pricing Spread' shall be determined for each Eurodollar Interest Period and each Discount Loan Interest Period on the first Business Day of such Interest Period, and with respect to each Swing Loan for each day such Swing Loan is outstanding, as follows: If on such day the Company's long term unsecured debt rating is: (a) at least "A+" with S&P or "A1" with Moody's, the Pricing Spread shall be 0.25, (b) at least "A-" with S&P or "A3" with Moody's, the Pricing Spread shall be 0.35; (c) at least "BBB+" with S&P or "Baa1" with Moody's, the Pricing Spread shall be 0.40; (d) at least "BBB" with S&P or "Baa2" with Moody's, the Pricing Spread shall be 0.45 and (e) below "BBB" with S&P and "Baa2" with Moody's, the Pricing Spread shall be 0.50; provided, however, that if on any day for whatever reason the Company's long term unsecured debt rating is not available from S&P or Moody's or is not otherwise determinable hereunder (including, without limitation, by reference to an alternate rating agency of recognized standing), the Pricing Spread shall be deemed to be 0.50." (b) The Fee Letter is hereby amended and restated in its entirety in the form of the modified fee letter attached hereto as Amendment Exhibit 1 (the "Replacement Fee Letter"). From and after the effective date of this Amendment the Replacement Fee Letter shall be deemed to be the "Fee Letter" for all purposes of the Credit Documents. 10. Substitution of Lenders; Replacement Commitment Schedule and Schedule of Addresses for Notices. To reflect the withdrawal of certain Lenders from the credit facility evidenced by the Agreement and the inclusion of certain new Lenders (each, a "New Lender") therein, effective as of the effective date of this Amendment, the "Commitment Schedule" referred to in the Credit Documents shall be deemed to be the Commitment Schedule attached hereto as Amendment Exhibit 2 (the "Replacement Commitment Schedule") for all purposes thereof and Annex II (Schedule of Addresses for Notices) shall be replaced by the Replacement Annex II attached hereto as Amendment Exhibit 3. Upon the effective date of this Amendment, the Lenders party to the Credit Agreement, whether prior to or after the same has been amended by this Amendment, shall buy and sell among themselves the Obligations outstanding on the effective date such that the Lenders remaining party to the Credit Agreement following amendment hereby shall hold the outstanding Obligations consistent with the Replacement Commitment Schedule. 11. Reaffirmation of Credit Documents. Each of the Company and the Parent hereby acknowledges and agrees that: (a) the execution and delivery by each of the Company and the Parent of and the performance of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the Parent or the rights of any party to the Credit Documents, (b) the term "Obligations" as used in the Credit Documents includes, without limitation, the Obligations of the Company under the Agreement as amended by this Amendment, and (c) for any and all purposes, any reference to the Credit Documents, including, without limitation, the Glossary and the Fee Letter, following the effective date of this Amendment shall constitute a reference to such Credit Documents as amended by this Amendment. 12. Effective Date. This Amendment shall be effective as of the day and year first above written on the earliest date upon which: (a) Each of the parties hereto have executed and delivered this Amendment to the Credit Agent; (b) The Company has executed and delivered the Replacement Fee Letter to the Credit Agent; (c) The Company has executed and delivered to each New Lender a Direct Loan Note, a Discount Loan Note and a Negotiated Loan Note; and (d) The Credit Agent has received such board resolutions, incumbency certificates and other additional documentation as the Credit Agent may request in connection herewith. 13. Representations and Warranties. Each of the Company and the Parent hereby represents and warrants to the Credit Agent and the Lenders (as to itself) as follows: (a) It has the corporate power and authority and the legal right to execute, deliver and perform this Amendment (and, in the case of the Company, the Replacement Fee Letter and the Notes to be issued to each New Lender) (collectively, the "Amendment Documents") and has taken all necessary corporate action to authorize the execution, delivery and performance of the Amendment Documents to which it is party; the Amendment Documents to which it is a party have been duly executed and delivered on its behalf and constitute its legal, valid and binding obligations enforceable against it in accordance with their terms; and the execution, delivery and performance of the Amendment Documents will not violate any Requirement of Law or Contractual Obligation or require any consent, approval, authorization of, or registration, declaration or filing with, any Governmental Authority. (b) At and as of the date of execution hereof and at and as of the effective date of this Amendment and both prior to and after giving effect hereto: (1) the representations and warranties made by it contained in the Credit Documents are accurate and complete in all respects, and (2) there has not occurred an Event of Default or Potential Default. (c) When delivered to the Credit Agent and each Lender as required pursuant to Paragraph 9(a)(1) of the Agreement, the audited financial statements referred to therein will not differ in any material respect from the Company-prepared unaudited financial statements dated February 28, 1995 delivered to the Lenders prior to the date of this Amendment. 14. No Other Amendment. Except as expressly amended herein, the Credit Documents shall remain in full force and effect as currently written. 15. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. COUNTRYWIDE FUNDING CORPORATION, a New York corporation By Name Title COUNTRYWIDE CREDIT INDUSTRIES, a Delaware corporation By Name Title THE FIRST NATIONAL BANK OF CHICAGO, a national banking association, as Co-Arranger and Credit Agent By Name Title BANKERS TRUST COMPANY, a New York State banking corporation, as Co-Arranger and Syndication Agent By Name Title ABN AMRO BANK N.V., LOS ANGELES INTERNATIONAL BRANCH, as a Lender By Name Title By Name Title BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender By Name Title BANK BRUSSELS LAMBERT, NEW YORK BRANCH, as a Lender By Name Title By Name Title BANK OF HAWAII, as a Lender By Name Title BANK OF MONTREAL, as a Lender By Name Title THE BANK OF NEW YORK, as a Lender By Name Title BANKERS TRUST COMPANY, as a Lender By Name Title BANQUE NATIONALE DE PARIS, LOS ANGELES AGENCY, as a Lender By Name Title BANQUE PARIBAS, as a Lender By Name Title By Name Title CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender By Name Title THE CHASE MANHATTAN BANK, N.A., as a Lender By Name Title CITICORP USA, INC., as a Lender By Name Title COMMERZBANK AKTIENGESELLSCHAFT, LOS ANGELES BRANCH, as a Lender By Name Title By Name Title CREDIT LYONNAIS SAN FRANCISCO BRANCH AND/OR CAYMAN ISLANDS BRANCH, as a Lender By Name Title By Name Title CREDIT SUISSE, as a Lender By Name Title THE DAI-ICHI KANGYO BANK, LIMITED, SAN FRANCISCO AGENCY, as a Lender By Name Title DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a Lender By Name Title By Name Title DG BANK, DEUTSCHE GENOSSENSCHAFTSBANK, as a Lender By Name Title By Name Title FIRST INTERSTATE BANK OF CALIFORNIA, as a Lender By Name Title By Name Title THE FIRST NATIONAL BANK OF BOSTON, as a Lender By Name Title THE FIRST NATIONAL BANK OF CHICAGO, as a Lender By Name Title FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as a Lender By Name Title THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, as a Lender By Name Title THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY, as a Lender By Name Title KREDIETBANK N.V., as a Lender By Name Title By Name Title LLOYDS BANK PLC, as a Lender By Name Title THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as a Lender By Name Title THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY, as a Lender By Name Title NATIONAL WESTMINSTER BANK USA, as a Lender By Name Title NATIONSBANK OF TEXAS, N.A., as a Lender By Name Title PNC BANK KENTUCKY, as a Lender By Name Title ROYAL BANK OF CANADA, as a Lender By Name Title THE SAKURA BANK, LTD., LOS ANGELES AGENCY, as a Lender By Name Title By Name Title THE SANWA BANK LIMITED, LOS ANGELES BRANCH, as a Lender By Name Title SHAWMUT BANK, N.A., as a Lender By Name Title SOCIETE GENERALE, NEW YORK BRANCH, as a Lender By Name Title THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender By Name Title THE SUMITOMO TRUST AND BANKING CO., LTD., LOS ANGELES AGENCY, as a Lender By Name Title THE TOYO TRUST & BANKING CO., LTD., LOS ANGELES AGENCY, as a Lender By Name Title UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as a Lender By Name Title By Name Title UNITED STATES NATIONAL BANK OF OREGON, as a Lender By Name Title WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS BRANCH, as a Lender By Name Title By Name Title THE YASUDA TRUST & BANKING COMPANY, LIMITED, LOS ANGELES AGENCY, as a Lender By Name Title SCHEDULE OF EXHIBITS AND ATTACHMENTS AMENDMENT EXHIBIT 1: REPLACMENT FEE LETTER AMENDMENT EXHIBIT 2: REPLACEMENT COMMITMENT SCHEDULE AMENDMENT EXHIBIT 3: REPLACEMENT ANNEX II REPLACEMENT EXHIBIT F-1: FORM OF COVENANT COMPLIANCE CERTIFICATE (COMPANY) REPLACEMENT EXHIBIT Q: FORM OF SECURED PERIOD BORROWING BASE CERTIFICATE REPLACEMENT EXHIBIT T: FORM OF UNSECURED PERIOD BORROWING BASE CERTIFICATE EX-11 3 Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Three Months Ended May 31, 1995 1994 (Dollar amounts in thousands, except per share data) Primary Net earnings applicable to common stock $36,176 $33,729 Average shares outstanding 91,440 91,121 Net effect of dilutive stock options -- based on the treasury stock method using average market price 1,243 1,060 Total average shares 92,683 92,181 Per share amount $0.39 $0.37 Fully diluted Net earnings applicable to common stock $36,176 $33,729 Average shares outstanding 91,440 91,121 Net effect of dilutive stock options -- based on the treasury stock method using the closing market price, if higher than average market price. 1,409 1,224 Total average shares 92,849 92,345 Per share amount $0.39 $0.37 EX-12 4
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 three months ended May 31, 1995 and 1994 and 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). Three Months Ended May 31, For Fiscal Years Ended February 28(29), 1995 1994 1995 1994 1993 1992 1991 Net earnings $36,176 $33,729 $88,407 $179,460 $140,073 $60,196 $22,311 Income tax expense 24,118 22,486 58,938 119,640 93,382 40,131 14,874 Interest charges 80,112 63,643 267,685 275,906 148,765 81,959 73,428 Interest portion of rental expense 1,682 1,921 7,379 6,372 4,350 2,814 2,307 Earnings available to cover fixed charges $142,088 $121,779 $422,409 $581,378 $386,570 $185,100 $112,920 Fixed charges Interest charges $80,112 $63,643 $267,685 $275,906 $148,765 $81,959 $73,428 Interest portion of rental expense 1,682 1,921 7,379 6,372 4,350 2,814 2,307 Total fixed charges $81,794 $65,564 $275,064 $282,278 $153,115 $84,773 $75,735 Ratio of earnings to fixed charges 1.74 1.86 1.54 2.06 2.52 2.18 1.49
EX-12 5
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 three months ended May 31, 1995 and 1994 and for the five fiscal years ended February 28, 1995 computed by dividing net fixed charges (interest expense on debt other than to finance mortgage loan inventory plus the interest element (one-third) of operating leases) into earnings (income before income taxes and net fixed charges). Three Months Ended May 31, For Fiscal Years Ended February 28(29), 1995 1994 1995 1994 1993 1992 1991 Net earnings $36,176 $33,729 $88,407 $179,460 $140,073 $60,196 $22,311 Income tax expense 24,118 22,486 58,938 119,640 93,382 40,131 14,874 Interest charges 11,070 15,745 55,045 85,240 51,551 45,928 23,609 Interest portion of rental expense 1,682 1,921 7,379 6,372 4,350 2,814 2,307 Earnings available to cover net fixed charges $73,046 $73,881 $209,769 $390,712 $289,356 $149,069 $63,101 Net fixed charges Interest charges $11,070 $15,745 $55,045 $85,240 $51,551 $45,928 $23,609 Interest portion of rental expense 1,682 1,921 7,379 6,372 4,350 2,814 2,307 Total net fixed charges $12,752 $17,666 $62,424 $91,612 $55,901 $48,742 $25,916 Ratio of earnings to net fixed charges 5.73 4.18 3.36 4.26 5.18 3.06 2.43
EX-27 6
5 1,000 3-MOS FEB-29-1996 MAY-31-1995 12,891 0 506,027 0 0 0 198,584 59,418 6,636,886 0 1,575,290 4,578 0 0 968,533 6,636,886 0 178,963 0 118,669 0 0 0 60,294 24,118 36,176 0 0 0 36,176 .39 .39 Includes $80,112 of interest expense related to mortgage loan activities.
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