-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LA/qddfLVLifuqReTEUFhRUOjsa9SC8+tyt9FMLbNNYc2Q2QYaT23kW1nuiFS/GB uPqJQFDUPvZ0Bx9qiuVZYQ== 0000025191-97-000002.txt : 19970115 0000025191-97-000002.hdr.sgml : 19970115 ACCESSION NUMBER: 0000025191-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 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: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 97505467 BUSINESS ADDRESS: STREET 1: 155 NORTH LAKE AVE CITY: PASADENA STATE: CA ZIP: 91101-1857 BUSINESS PHONE: 8183048400 10-Q 1 3RD QUARTER FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended November 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to __________________________ Commission File Number: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-2641992 - ------------------------------------- ----------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 155 N. Lake Avenue, Pasadena, California 91101 - -------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (818) 304-8400 ----------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 13, 1996 ----- ------------------------------- Common Stock $.05 par value 104,468,103 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) November 30, February 29, 1996 1996 ---------------- ----------------- (Dollar amounts in thousands, except per share data) ASSETS Cash $ 14,835 $ 16,444 Receivables for mortgage loans shipped 1,175,475 2,299,979 Mortgage loans held for sale 2,764,933 2,440,108 Other receivables 1,418,092 912,613 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 189,607 140,963 Capitalized servicing fees receivable 765,626 631,784 Mortgage servicing rights 2,019,666 1,691,881 Other assets 906,197 523,881 ---------------- ----------------- Total assets $9,254,431 $8,657,653 ================ ================= Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $1,996,931 $2,548,549 ================ ================= LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $6,072,390 $6,097,518 Drafts payable issued in connection with mortgage loan closings 259,740 238,020 Accounts payable and accrued liabilities 783,853 505,148 Deferred income taxes 615,233 497,212 ---------------- ----------------- Total liabilities 7,731,216 7,337,898 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 $.05 par value; issued and outstanding, 103,626,031 shares at November 30, 1996 and 102,242,329 shares at February 29, 1996 5,199 5,112 Additional paid-in capital 859,128 820,183 Retained earnings 658,888 494,460 ---------------- ----------------- Total shareholders' equity 1,523,215 1,319,755 ---------------- ----------------- Total liabilities and shareholders' equity $9,254,431 $8,657,653 ================ ================= Borrower and investor custodial accounts $1,996,931 $2,548,549 ================ ================= The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Nine Months Ended November 30, Ended November 30, 1996 1995 1996 1995 ------------------------------ ------------------------------ (Dollar amounts in thousands, except per share data) Revenues Loan origination fees $ 43,922 $ 52,049 $145,468 $146,955 Gain on sale of loans 65,562 23,674 171,053 55,688 ------------------------------ ------------------------------ Loan production revenue 109,484 75,723 316,521 202,643 Interest earned 100,113 94,148 300,539 259,762 Interest charges (77,238) (72,093) (230,547) (207,510) ------------------------------ ------------------------------ Net interest income 22,875 22,055 69,992 52,252 Loan servicing income 184,427 148,111 527,301 416,624 Less amortization and impairment of servicing assets (198,735) (156,284) (185,073) (355,705) Servicing hedge benefit 140,152 119,365 22,001 254,445 ------------------------------ ------------------------------ Net loan administration income 125,844 111,192 364,229 315,364 Commissions, fees and other income 23,327 16,598 64,885 43,582 ------------------------------ ------------------------------ Total revenues 281,530 225,568 815,627 613,841 ------------------------------ ------------------------------ Expenses Salaries and related expenses 71,548 57,652 208,537 164,260 Occupancy and other office expenses 33,036 26,800 94,349 77,883 Guarantee fees 40,607 31,675 117,471 85,956 Marketing expenses 7,743 6,848 25,665 19,388 Other operating expenses 20,506 14,336 59,677 36,217 ------------------------------ ------------------------------ Total expenses 173,440 137,311 505,699 383,704 ------------------------------ ------------------------------ Earnings before income taxes 108,090 88,257 309,928 230,137 Provision for income taxes 42,155 35,303 120,872 92,055 ------------------------------ ------------------------------ NET EARNINGS $ 65,935 $ 52,954 $189,056 $138,082 ============================== ============================== Earnings per share Primary $0.62 $0.51 $1.80 $1.39 Fully diluted $0.62 $0.51 $1.78 $1.39 The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended November 30, 1996 1995 ---------------- ----------------- (Dollar amounts in thousands) Cash flows from operating activities: Net earnings $ 189,056 $ 138,082 Adjustments to reconcile net earnings to net cash used by operating activities: Amortization and impairment of mortgage servicing rights 132,415 283,443 Amortization and impairment of capitalized servicing fees receivable 52,658 72,262 Depreciation and other amortization 29,248 22,086 Deferred income taxes 120,872 92,055 Servicing hedge unrealized benefit (75,842) (188,681) Origination and purchase of loans held for sale (28,491,353) (24,981,842) Principal repayments and sale of loans 29,291,032 23,214,329 ---------------- ----------------- Increase (decrease) in mortgage loans shipped and held for sale 799,679 (1,767,513) Increase in other receivables and other assets (822,931) (246,255) Increase in accounts payable and accrued liabilities 278,705 171,034 ---------------- ----------------- Net cash provided (used) by operating activities 703,860 (1,423,487) ---------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights (460,200) (466,017) Additions to capitalized servicing fees receivable (186,500) (193,207) Purchase of property, equipment and leasehold improvements - net (69,765) (11,165) ---------------- ----------------- Net cash used by investing activities (716,465) (670,389) ---------------- ----------------- Cash flows from financing activities: Net (decrease) increase in warehouse debt and other short-term borrowings (427,525) 1,703,547 Issuance of long-term debt 537,624 290,000 Repayment of long-term debt (113,507) (96,321) Issuance of common stock 39,032 208,621 Cash dividends paid (24,628) (22,797) ---------------- ----------------- Net cash provided by financing activities 10,996 2,083,050 ---------------- ----------------- Net decrease in cash (1,609) (10,826) Cash at beginning of period 16,444 17,624 ---------------- ----------------- Cash at end of period $ 14,835 $ 6,798 ================ ================= Supplemental cash flow information: Cash used to pay interest $ 212,653 $ 254,631 Cash used to pay income taxes $ 15 $ 25 The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended November 30, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 1997. 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 29, 1996 of Countrywide Credit Industries, Inc. (the "Company"). Certain amounts reflected in the consolidated financial statements for the nine-month period ended November 30, 1995 have been reclassified to conform to the presentation for the nine-month period ended November 30, 1996. NOTE B - NOTES PAYABLE
Notes payable consisted of the following. ------------------------------------------------------------------ ---- --------------- --- -------------- -- (Dollar amounts in thousands) November 30, February 29, 1996 1996 ------------------------------------------------------------------ ---- --------------- --- -------------- -- Commercial paper $3,104,815 $2,847,442 Medium-term notes 2,246,800 1,824,800 Repurchase agreements 342,990 808,353 Subordinated notes 200,000 200,000 Unsecured notes payable, maturing January 15, 1997 175,000 235,000 Pre-sale funding facilities - 181,255 Notes payable 2,785 668 --------------- -------------- $6,072,390 $6,097,518 =============== ============== ------------------------------------------------------------------ ---- --------------- --- -------------- --
Revolving Credit Facility and Commercial Paper As of November 30, 1996, Countrywide Home Loans, Inc. ("CHL"), the Company's mortgage banking subsidiary, had an unsecured credit agreement (revolving credit facility) with fifty commercial banks permitting CHL to borrow an aggregate maximum amount of $3.5 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 CHL. 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 CHL's credit ratings. No amount was outstanding on the revolving credit facility at November 30, 1996. The weighted average borrowing rate on commercial paper borrowings for the nine months ended November 30, 1996 was 5.39%. The weighted average borrowing rate on commercial paper outstanding as of November 30, 1996 was 5.42%. Under certain circumstances, including the failure to maintain specified minimum credit ratings, borrowings under the revolving credit facility and commercial paper may become secured by mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility expires on May 14, 2000. Medium-Term Notes As of November 30, 1996, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission were as follows.
- ----------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ------------------------------------------- ----------- ---------- ------------- ------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- ------------- ------------- Series A $ - $ 304,800 $ 304,800 6.53% 8.79% Mar 1997 Mar 2002 Series B 11,000 396,000 407,000 5.82% 6.98% Aug 1997 Aug 2005 Series C 303,000 197,000 500,000 5.61% 8.43% Dec 1997 Mar 2004 Series D 115,000 385,000 500,000 5.70% 6.88% Aug 1998 Sep 2005 Series E 210,000 325,000 535,000 5.68% 7.45% Aug 2000 Oct 2008 ------------------------------------------- Total $639,000 $1,607,800 $2,246,800 =========================================== ---------------------------------------------------------------------------------------------------------------
As of November 30, 1996, all of the outstanding fixed-rate notes had been effectively converted by interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the nine months ended November 30, 1996, including the effect of the interest rate swap agreements, was 6.13%. As of November 30, 1996, $465 million was available for future issuances under the Series E shelf registration. Repurchase Agreements As of November 30, 1996, the Company had entered into short-term financing arrangements to sell mortgage-backed securities ("MBS") under agreements to repurchase. The weighted average borrowing rate for the nine months ended November 30, 1996 was 5.39%. The weighted average borrowing rate on repurchase agreements outstanding as of November 30, 1996 was 5.40%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers, and all agreements are to repurchase the same or substantially identical MBS. 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 requirements. Pre-Sale Funding Facilities As of November 30, 1996, CHL had uncommitted revolving credit facilities with two government-sponsored entities and an affiliate of an investment banking firm. The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. Interest rates are based on LIBOR, federal funds and/or the prevailing rates for MBS repurchase agreements. The weighted average borrowing rate for all three facilities for the nine months ended November 30, 1996 was 5.57%. As of November 30, 1996, the Company had no outstanding borrowings under any of these facilities. NOTE C - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
The following tables present summarized financial information for Countrywide Home Loans, Inc. -- ----------------------------------------- ---- --------------------------------------------------- ------- (Dollar amounts in thousands) November 30, February 29, 1996 1996 -- ---------------------------------------------- -------- -------------- ---------- -------------- --------- Balance Sheets: Mortgage loans shipped and held for sale $3,940,408 $4,740,087 Other assets 4,527,522 3,441,678 -------------- -------------- Total assets $8,467,930 $8,181,765 ============== ============== Short- and long-term debt $6,327,203 $6,335,538 Other liabilities 717,009 588,446 Equity 1,423,718 1,257,781 -------------- -------------- Total liabilities and equity $8,467,930 $8,181,765 ============== ============== -- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
--- ----------------------------------------- --- -------------------------------------------------- -------- (Dollar amounts in thousands) Nine Months Ended November 30, --------------- ---------- --------------- 1996 1995 --- --------------------------------------------- ------- --------------- ---------- --------------- -------- Statements of Earnings: Revenues $740,193 $577,648 Expenses 468,165 358,687 Provision for income taxes 106,091 87,584 --------------- --------------- Net earnings $165,937 $ 131,377 =============== =============== --- --------------------------------------------- ------- --------------- ---------- --------------- --------
NOTE D - SERVICING HEDGE
The following summarizes the notional amounts of servicing hedge derivative contracts. - -------------------------------- ----------- ------------ --------------- --------- ------------ ---------- ------------ (Dollar amounts in millions) Long Call Options on Interest Long Call Interest Rate Principal Interest Rate Floors Options Futures Swap - Only Rate on MBS Caps Swaps Cap Swaptions - -------------------------------- ----------- ------------ --------------- --------- ------------ ---------- ------------ Balance, February 29, 1996 $15,750 $ 1,500 $ 3,550 $1,000 $268 $ - $ - Additions 10,000 - 9,690 - - 500 1,750 Dispositions/Expirations (1,000) (1,500) (8,650) - - - - ----------- ------------ --------------- --------- ------------ ---------- ------------ Balance, November 30, 1996 $24,750 $ - $ 4,590 $1,000 $268 $500 $1,750 =========== ============ =============== ========= ============ ========== ============ - -------------------------------- ----------- ------------ --------------- --------- ------------ ---------- ------------
During the nine months ended November 30, 1996, the Company entered into an interest rate cap agreement ("Cap") and purchased options on interest rate swaps ("Swaptions") as additional components of its Servicing Hedge. The Cap entitles the Company to receive payments if the selected market interest rate exceeds the stated rate. The Cap outstanding will expire on April 26, 2001. Under the terms of the Swaptions, the Company has the option to enter into a receive-fixed, pay-floating interest rate swap at a future date or to settle the transaction for cash. The Swaptions outstanding expire from March 11, 1999 to April 15, 2007. NOTE E - VALUATION ALLOWANCE FOR CAPITALIZED MORTGAGE SERVICING RIGHTS The following summarizes the aggregate activity in the valuation allowances for capitalized mortgage servicing rights. - -------------------------------------------------------- ----------------------- (Dollar amounts in thousands) Aggregate Balances ----------------------- Balances, February 29, 1996 ($61,634) Recovery 44,012 ----------------------- Balances, November 30, 1996 ($17,622) ======================= - -------------------------------------------------------- ----------------------- NOTE F - LEGAL PROCEEDINGS On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a purported class action, against CHL and a mortgage broker in the Northern Division of the United States District Court for the Middle District of Alabama. The suit claims, among other things, that in connection with residential mortgage loan closings, CHL made certain payments to mortgage brokers in violation of the Real Estate Settlement Procedures Act and induced mortgage brokers to breach their alleged fiduciary duties to their customers. The plaintiffs seek unspecified compensatory and punitive damages plus, as to certain claims, treble damages. CHL's management believes that its compensation programs to mortgage brokers comply with applicable laws and with long-standing industry practice, and that it has meritorious defenses to the action. CHL intends to defend vigorously against the action and believes that the ultimate resolution of such claims will not have a material adverse effect on the Company's results of operations or financial position. The Company and certain subsidiaries are defendants in various lawsuits involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. NOTE G - SUBSEQUENT EVENTS On December 17, 1996, the Company declared a cash dividend of $0.08 per common share payable January 31, 1997 to shareholders of record on January 15, 1997. On December 11, 1996, Countrywide Capital I issued $300 million of 8% trust preferred securities. The proceeds were used to purchase subordinated debt securities from the Company. The Company intends to use the net proceeds from the sale of the subordinated debt securities for general corporate purposes, principally for investment in servicing rights. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a new "safe harbor" for certain forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," "intend," "estimate" and other expressions which indicate future events and trends identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: (1) 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 demographics of the Company's lending markets; (2) the direction of interest rates; (3) the relationship between mortgage interest rates and the cost of funds; (4) federal and state regulation of the Company's mortgage banking operations and (5) competition within the mortgage banking industry. RESULTS OF OPERATIONS Quarter Ended November 30, 1996 Compared to Quarter Ended November 30, 1995 Revenues for the quarter ended November 30, 1996 increased 25% to $281.5 million from $225.6 million for the quarter ended November 30, 1995. Net earnings increased 25% to $65.9 million for the quarter ended November 30, 1996 from $53.0 million for the quarter ended November 30, 1995. The increase in revenues and net earnings for the quarter ended November 30, 1996 compared to the quarter ended November 30, 1995 was primarily attributable to a larger gain on sale of loans resulting from the sale of higher-margin home equity and sub-prime loans in the quarter ended November 30, 1996, improved pricing margins on prime credit quality first mortgages and an increase in the size of the Company's servicing portfolio. These positive factors during the quarter ended November 30, 1996 were partially offset by decreased loan production and increased expenses in the quarter ended November 30, 1996 over the quarter ended November 30, 1995. The total volume of loans produced decreased 11% to $8.3 billion for the quarter ended November 30, 1996 from $9.3 billion for the quarter ended November 30, 1995. Refinancings totaled $2.2 billion, or 26% of total fundings, for the quarter ended November 30, 1996, as compared to $3.4 billion, or 36% of total fundings, for the quarter ended November 30, 1995. Fixed-rate loan production totaled $5.9 billion, or 71% of total fundings, for the quarter ended November 30, 1996, as compared to $7.3 billion, or 79% of total fundings, for the quarter ended November 30, 1995. Total loan volume in the Company's production divisions is summarized below:
- -------------------------------------------- ------------------------------------ -------- Loan Production for the Quarter (Dollar amounts in millions) Ended November 30, - -------------------------------------------- ------------------------------------ -------- 1996 1995 ------------- ------------- Consumer Markets Division $1,787 $1,927 Wholesale Lending Division 2,096 2,076 Correspondent Lending Division 4,436 5,344 ------------- ------------- Total loan volume $8,319 $9,347 ============= ============= - -------------------------------------------- ------------- -------- ------------- --------
The factors which affect the relative volume of production among the Company's three divisions include the competitiveness of each division's product offerings, the level of mortgage lending activity in each division's markets, and the success of each division's sales and marketing efforts. Included in the Company's total volume of loans produced are $172 million of home equity loans funded in the quarter ended November 30, 1996 and $67 million funded in the quarter ended November 30, 1995. Sub-prime credit quality loan activity, which is also included in the Company's total production volume, was $255 million for the quarter ended November 30, 1996 and $45 million for the quarter ended November 30, 1995. At November 30, 1996 and 1995, the Company's pipeline of loans in process was $4.7 billion and $4.5 billion, respectively. In addition, at November 30, 1996, the Company had committed to make loans in the amount of $1.7 billion, subject to property identification and borrower qualification ("LOCK 'N SHOP(R) Pipeline"). At November 30, 1995, the LOCK 'N SHOP (R) Pipeline was $1.2 billion. Historically, approximately 43% to 77% of the pipeline of loans in process has funded. For the quarters ended November 30, 1996 and 1995, the Company received 117,821 and 113,280 new loan applications, respectively, at an average daily rate of $195 million and $193 million, respectively. The following actions were taken during the quarter ended November 30, 1996 on the total applications received during that quarter: 60,768 loans (52% of total applications received) were funded and 19,536 applications (17% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the quarter ended November 30, 1995 on the total applications received during that quarter: 62,140 loans (55% of total applications received) were funded and 16,340 applications (14% of total applications received) were either rejected by the Company or withdrawn by the applicant. The 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 November 30, 1996 as compared to the quarter ended November 30, 1995 due primarily to lower loan production. Gain on sale of loans improved during the quarter ended November 30, 1996 as compared to the quarter ended November 30, 1995 primarily due to the sale during the quarter ended November 30, 1996 of higher margin home equity and sub-prime loans and improved pricing margins on prime credit quality first mortgages. The sale of home equity and sub-prime loans contributed $12.0 million and $23.1 million, respectively, to the gain on sale of loans for the quarter ended November 30, 1996. There were no home equity or sub-prime loan sales in the quarter ended November 30, 1995. In general, loan origination fees and gain (loss) on sale of loans are affected by numerous factors including loan pricing decisions, interest rate volatility, the general direction of interest rates and the volume and mix of loans produced and sold. Net interest income (interest earned net of interest charges) increased to $22.9 million for the quarter ended November 30, 1996 from $22.1 million for the quarter ended November 30, 1995. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($16.2 million and $10.0 million for the quarters ended November 30, 1996 and 1995, respectively); (ii) interest expense related to the Company's investment in servicing rights ($21.8 million and $18.4 million for the quarters ended November 30, 1996 and 1995, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($28.5 million and $30.5 million for the quarters ended November 30, 1996 and 1995, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from the mortgage loan warehouse was primarily attributable to a higher net earnings rate during the quarter ended November 30, 1996 than in the quarter ended November 30, 1995. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio, partially offset by a decrease in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). The decrease in net interest income earned from the custodial balances was related to a decrease in the average custodial balance and by a decrease in the earnings rate from the quarter ended November 30, 1995 to the quarter ended November 30, 1996. During the quarter ended November 30, 1996, loan administration income was positively affected by the continued growth of the loan servicing portfolio. At November 30, 1996, the Company serviced $152.9 billion of loans (including $3.1 billion of loans subserviced for others) compared to $132.8 billion (including $2.2 billion of loans subserviced for others) at November 30, 1995, a 15% increase. The growth in the Company's servicing portfolio during the quarter ended November 30, 1996 was the result of loan production, 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 both November 30, 1996 and 1995 was 7.8%. It is the Company's strategy to build and retain its servicing portfolio because of the returns the Company can earn from such investment and because the Company believes that servicing income is countercyclical to loan production income. During the quarter ended November 30, 1996, the prepayment rate of the Company's servicing portfolio was 9%, compared to 13% for the quarter ended November 30, 1995. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, and activity in the home purchase market. The decrease in the prepayment rate from the quarter ended November 30, 1995 to the quarter ended November 30, 1996 was primarily attributable to decreased refinance activity caused by higher interest rates during the quarter ended November 30, 1996 than during the quarter ended November 30, 1995. 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. In addition, to mitigate the effect on earnings of higher amortization and impairment (which are deducted from loan servicing income) that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in value when interest rates decline (the "Servicing Hedge"). These financial instruments include call options on interest rate futures and mortgage-backed securities ("MBS"), interest rate floors, interest rate swaps (with the Company's maximum payment capped) ("Swap Caps"), principal-only ("P/O") swaps, options on interest rate swaps ("Swaptions") and certain tranches of collateralized mortgage obligations ("CMOs"). With the Swap Caps, the Company receives and pays interest on a specified notional amount. The rate received is fixed; the rate paid is adjustable, is indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR") and has a specified maximum or "cap." The P/O swaps are derivative contracts, the value of which is determined by changes in the value of the referenced P/O security. The payments received by the Company under the P/O swaps relate to the cash flows of the referenced P/O security. The payments made by the Company are based upon a notional amount tied to the remaining balance of the referenced P/O security multiplied by a floating rate indexed to LIBOR. With the Swaptions, the Company has the option to enter into a receive-fixed, pay-floating interest rate swap at a future date or to settle the transaction for cash. The CMOs, which consist primarily of P/O securities, have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs should increase. This should result in a decline in the average lives of the P/O securities and a corresponding increase in the present values of their cash flows. Conversely, as interest rates increase, prepayments on the collateral underlying the CMOs should decrease. These changes should result in an increase in the average lives of the P/O securities and a decrease in the present values of their cash flows. The Servicing Hedge instruments utilized by the Company are designed to protect the value of the investment in servicing rights from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the servicing rights increases while the value of the hedge instruments declines. With respect to the options, cap, swaptions, floors and CMOs, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. With respect to the Swap Caps contracts entered into by the Company as of November 30, 1996, the Company estimates that its maximum exposure to loss over the contractual term is $45 million. The Company's exposure to loss in the P/O swaps is related to changes in the market value of the referenced P/O security over the life of the contract. In the quarter ended November 30, 1996, the Company recognized a net gain of $140.2 million from its Servicing Hedge. The net gain included unrealized gains of $164.2 million and realized losses of $24.0 million from the amortization and sale of various financial instruments that comprise the Servicing Hedge. In the quarter ended November 30, 1995, the Company recognized a net gain of $119.4 million from its Servicing Hedge. The net gain included unrealized gains of $96.2 million and net realized gains of $23.2 million from the amortization and sale of various financial instruments that comprise the Servicing Hedge. The Company recorded amortization and net impairment of its capitalized servicing fees receivable and mortgage servicing rights ("Servicing Assets") in the quarter ended November 30, 1996 totaling $198.7 million (consisting of normal amortization amounting to $55.0 million and net impairment of $143.7 million), compared to $156.3 million of amortization and impairment of its Servicing Assets in the quarter ended November 30, 1995 (consisting of normal amortization amounting to $46.4 million and impairment of $109.9 million). The factors affecting the amount of amortization and impairment or recovery of the Servicing Assets recorded in an accounting period include the level of prepayments during the period, the change in estimated future prepayments and the amount of Servicing Hedge gains or losses. During the quarter ended November 30, 1996, the Company acquired bulk servicing rights for loans with principal balances aggregating $60.0 million at a price of 1.08% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the quarter ended November 30, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.3 billion at a price of 1.41% of the aggregate outstanding principal balance of the servicing portfolios acquired.
Salaries and related expenses are summarized below. -- --------------------------- -- -- --------- ------------------------------------------------- -- ------------- (Dollar amounts in Quarter Ended November 30, 1996 thousands) -- --------------------------- -- -- --------- ------------------------------------------------- -- ------------- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- ------------- Base Salaries $23,050 $10,716 $13,994 $3,281 $51,041 Incentive Bonus 7,870 203 3,733 1,892 13,698 Payroll Taxes and Benefits 3,220 1,833 1,302 454 6,809 ------------ ------------- ------------- ------------- ------------- Total Salaries and Related Expenses $34,140 $12,752 $19,029 $5,627 $71,548 ============ ============= ============= ============= ============= Average Number of Employees 2,325 1,593 1,155 250 5,323 -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
-- --------------------------- -- --- -------- ------------------------------------------------- -- ------------- (Dollar amounts in Quarter Ended November 30, 1995 thousands) -- --------------------------- -- --- -------- ------------------------------------------------- -- ------------- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- ------------- Base Salaries $18,051 $8,489 $12,043 $2,467 $41,050 Incentive Bonus 8,128 96 2,504 1,003 11,731 Payroll Taxes and Benefits 2,670 1,381 548 272 4,871 ------------ -------------- ------------- ------------- ------------- Total Salaries and Related Expenses $28,849 $9,966 $15,095 $3,742 $57,652 ============ ============== ============= ============= ============= Average Number of Employees 1,813 1,240 937 198 4,188 -- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- -------------
The amount of salaries increased during the quarter ended November 30, 1996 from the quarter ended November 30, 1995 primarily due to an increased number of employees resulting from diversification of loan products, a larger servicing portfolio and growth in the Company's non-mortgage banking activities. Occupancy and other office expenses for the quarter ended November 30, 1996 increased to $33.0 million from $26.8 million for the quarter ended November 30, 1995, reflecting the Company's expansion of its retail branch network. In addition, diversified loan production activity, a larger servicing portfolio and growth in the Company's non-mortgage banking activities contributed to the increase. Guarantee fees represent fees paid to guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio. For the quarter ended November 30, 1996, guarantee fees increased 28% to $40.6 million from $31.7 million for the quarter ended November 30, 1995. The factors which affect the amount of guarantee fees in a period include the size of the servicing portfolio, the mix of permanent investors and the terms negotiated at the time of loan sales. Marketing expenses for the quarter ended November 30, 1996 increased 13% to $7.7 million from $6.8 million for the quarter ended November 30, 1995, reflecting the Company's continued implementation of a marketing plan to increase brand awareness of the Company in the residential mortgage market. Other operating expenses for the quarter ended November 30, 1996 increased from the quarter ended November 30, 1995 by $6.2 million, or 43%. This increase was due primarily to a larger servicing portfolio, increased reserves for bad debts and increased systems development and operation costs in the quarter ended November 30, 1996 than in the quarter ended November 30, 1995. Profitability of Loan Production and Servicing Activities In the quarter ended November 30, 1996, the Company's pre-tax income from its loan production activities (which include loan origination and purchases, warehousing and sales) was $36.7 million. In the quarter ended November 30, 1995, the Company's comparable pre-tax income was $17.3 million. The increase of $19.4 million was primarily attributable to a larger gain on sale of loans resulting from the sale of higher margin home equity and sub-prime loans, and improved pricing margins on prime credit quality first mortgages. There were no home equity or sub-prime loan sales in the quarter ended November 30, 1995. These positive results were partially offset by higher production costs and a change in the internal method of allocating overhead between the Company's production and servicing activities. In the quarter ended November 30, 1996, 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, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer) was $64.3 million as compared to $66.3 million in the quarter ended November 30, 1995. The decrease of $2.0 million was principally due to increased operating expenses and guarantee fees, partially offset by an increase in the size of the servicing portfolio and the change in the internal method of allocating overhead expenses. Additionally, in the quarter ended November 30, 1996, the net total of Servicing Hedge benefit and Servicing Assets amortization and impairment exceeded the comparable total expense for the quarter ended November 30, 1995 by $21.7 million. Profitability of Other Activities In addition to loan production and loan servicing, the Company offers ancillary products and services related to the mortgage banking business. These include title insurance and escrow services, home appraisals, credit cards, management of a publicly traded real estate investment trust ("REIT"), securities brokerage and servicing rights brokerage. For the quarter ended November 30, 1996, these activities contributed $7.1 million to the Company's pre-tax income compared to $4.6 million for the quarter ended November 30, 1995. This increase to pre-tax income primarily results from improved performance of the title insurance and escrow services. RESULTS OF OPERATIONS Nine Months Ended November 30, 1996 Compared to Nine Months Ended November 30, 1995 Revenues for the nine months ended November 30, 1996 increased 33% to $815.6 million from $613.8 million for the nine months ended November 30, 1995. Net earnings increased 37% to $189.1 million for the nine months ended November 30, 1996 from $138.1 million for the nine months ended November 30, 1995. The increase in revenues and net earnings for the nine months ended November 30, 1996 compared to the nine months ended November 30, 1995 was primarily attributable to a larger gain on sale of loans resulting from the sale of higher-margin home equity and sub-prime loans in the nine months ended November 30, 1996, improved pricing margins on prime credit quality first mortgages, an increase in the size of the Company's servicing portfolio and higher loan production volume. These positive factors were partially offset by increased expenses in the nine months ended November 30, 1996 over the nine months ended November 30, 1995. The total volume of loans produced increased 14% to $28.5 billion for the nine months ended November 30, 1996 from $25.0 billion for the nine months ended November 30, 1995. Refinancings totaled $8.9 billion, or 31% of total fundings, for the nine months ended November 30, 1996, as compared to $7.1 billion, or 28% of total fundings, for the nine months ended November 30, 1995. Fixed-rate loan production totaled $21.4 billion, or 75% of total fundings, for the nine months ended November 30, 1996, as compared to $18.5 billion, or 74% of total fundings, for the nine months ended November 30, 1995. Total loan volume in the Company's production divisions is summarized below:
- -------------------------------------------- ------------------------------------ -------- Loan Production for the Nine (Dollar amounts in millions) Months Ended November 30, - -------------------------------------------- ------------------------------------ -------- 1996 1995 ------------- ------------- Consumer Markets Division $ 6,017 $ 5,243 Wholesale Lending Division 6,020 5,936 Correspondent Lending Division 16,454 13,803 ------------- ------------- Total loan volume $28,491 $24,982 ============= ============= - -------------------------------------------- ------------- -------- ------------- --------
Included in the Company's total volume of loans produced are $405 million of home equity loans funded in the nine months ended November 30, 1996 and $179 million funded in the nine months ended November 30, 1995. Sub-prime loan activity, which is also included in the Company's total production volume, was $634 million for the nine months ended November 30, 1996 and $46 million during the nine months ended November 30, 1995. For the nine months ended November 30, 1996 and 1995, the Company received 378,159 and 330,267 new loan applications, respectively, at an average daily rate of $204 million and $183 million, respectively. The following actions were taken during the nine months ended November 30, 1996 on the total applications received during that nine months: 248,406 loans (66% of total applications received) were funded and 88,845 applications (23% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the nine months ended November 30, 1995 on the total applications received during that nine months: 219,972 loans (67% of total applications received) were funded and 69,811 applications (21% of total applications received) were either rejected by the Company or withdrawn by the applicant. Loan origination fees decreased slightly during the nine months ended November 30, 1996 from the nine months ended November 30, 1995 despite higher production during the nine months ended November 30, 1996 primarily because production by the Company's Correspondent Lending Division which, due to its lower cost structure, charges lower origination fees per dollar loaned, increased. Gain on sale of loans improved during the nine months ended November 30, 1996 as compared to the nine months ended November 30, 1995 primarily due to the sale during the nine months ended November 30, 1996 of higher margin home equity and sub-prime loans and improved pricing margins on prime credit quality first mortgages. The sale of home equity and sub-prime loans contributed $12.0 million and $45.6 million, respectively, to the gain on sale of loans for the nine months ended November 30, 1996. There were no home equity or sub-prime loan sales during the nine months ended November 30, 1995. Net interest income (interest earned net of interest charges) increased to $70.0 million for the nine months ended November 30, 1996 from $52.3 million for the nine months ended November 30, 1995. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($47.8 million and $21.6 million for the nine months ended November 30, 1996 and 1995, respectively); (ii) interest expense related to the Company's investment in servicing rights ($65.6 million and $42.7 million for the nine months ended November 30, 1996 and 1995, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($87.8 million and $73.4 million for the nine months ended November 30, 1996 and 1995, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from the mortgage loan warehouse was primarily attributable to an increase in the average amount of the mortgage loan warehouse. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio and an increase in Interest Costs Incurred on Payoffs. The increase in net interest income earned from the custodial balances was related to an increase in the average custodial balances (caused by growth of the servicing portfolio), offset somewhat by a decrease in the earnings rate, from the nine months ended November 30, 1995 to the nine months ended November 30, 1996. During the nine months ended November 30, 1996, loan administration income was positively affected by the continued growth of the loan servicing portfolio. The growth in the Company's servicing portfolio during the nine months ended November 30, 1996 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, and scheduled amortization of mortgage loans. The prepayment rate of the Company's servicing portfolio was 11% for the nine month periods ended both November 30, 1996 and November 30, 1995. During the nine months ended November 30, 1996, the Company recognized a net gain of $22.0 million from its Servicing Hedge. The net gain included unrealized gains of $75.8 million and realized losses of $53.8 million from the amortization and sale of various financial instruments that comprise the Servicing Hedge. During the nine months ended November 30, 1995, the Company recognized a net gain of $254.4 million from its Servicing Hedge. The net gain included unrealized gains of $188.7 million and net realized gains of $65.7 million from the amortization and sale of various financial instruments that comprise the Servicing Hedge. The Company recorded amortization and net impairment of its Servicing Assets in the nine months ended November 30, 1996 totaling $185.1 million (consisting of normal amortization amounting to $158.8 million and net impairment of $26.3 million), compared to $355.7 million of amortization and impairment (consisting of normal amortization amounting to $116.7 million and impairment of $239.0 million) in the nine months ended November 30, 1995. During the nine months ended November 30, 1996, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.2 billion at a price of approximately 1.69% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the nine months ended November 30, 1995, bulk servicing rights were acquired for loans with principal balances aggregating $4.7 billion at a price of approximately 1.32% of the aggregate outstanding principal balance of the servicing portfolios.
Salaries and related expenses are summarized below. -- --------------------------- -- ------------ ------------------------------------------------- -- ------------- (Dollar amounts in Nine Months Ended November 30, 1996 thousands) -- --------------------------- -- ------------ ------------------------------------------------- -- ------------- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- ------------- Base Salaries $ 66,202 $30,617 $39,436 $9,437 $145,692 Incentive Bonus 24,884 545 10,994 4,681 41,104 Payroll Taxes and Benefits 10,436 5,455 4,602 1,248 21,741 ------------ ------------- ------------- ------------- ------------- Total Salaries and Related Expenses $101,522 $36,617 $55,032 $15,366 $208,537 ============ ============= ============= ============= ============= Average Number of Employees 2,225 1,524 1,083 247 5,079 -- --------------------------- -- ------------ ------------------------------------------------- -- -------------
-- --------------------------- -- ------------ ------------------------------------------------- -- ------------- (Dollar amounts in Nine Months Ended November 30, 1995 thousands) -- --------------------------- -- ------------ ------------------------------------------------- -- ------------ Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------ - ------------- -- -------------- -- ------------- Base Salaries $49,718 $22,478 $33,804 $6,920 $112,920 Incentive Bonus 23,053 346 7,289 3,571 34,259 Payroll Taxes and Benefits 7,920 3,754 4,563 844 17,081 ------------ -------------- ------------- ------------- ------------- Total Salaries and Related Expenses $80,691 $26,578 $45,656 $11,335 $164,260 ============ ============== ============= ============= ============= Average Number of Employees 1,670 1,079 872 177 3,798 Employees -- --------------------------- -- ------------ ------------------------------- -- -------------- -- -------------
The amount of salaries increased during the nine months ended November 30, 1996 from the nine months ended November 30, 1995 primarily due to an increased number of employees resulting from higher loan production and diversification of loan products, a larger servicing portfolio and growth in the Company's non-mortgage banking activities. Occupancy and other office expenses for the nine months ended November 30, 1996 increased to $94.3 million from $77.9 million for the nine months ended November 30, 1995, reflecting the Company's goal of expanding its retail branch network. In addition, higher loan production, a larger servicing portfolio and growth in the Company's non-mortgage banking activities also contributed to the increase. Guarantee fees for the nine months ended November 30, 1996 increased 37% to $117.5 million from $86.0 million for the nine months ended November 30, 1995. This increase resulted from an increase in the servicing portfolio, changes in the mix of permanent investors and terms negotiated at the time of loan sales. Marketing expenses for the nine months ended November 30, 1996 increased 32% to $25.7 million from $19.4 million for the nine months ended November 30, 1995, reflecting the Company's continued implementation of a marketing plan to increase brand awareness of the Company in the residential mortgage market. Other operating expenses for the nine months ended November 30, 1996 increased from the nine months ended November 30, 1995 by $23.5 million, or 65%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased reserves for bad debts and increased systems development and operation costs in the nine months ended November 30, 1996 than in the nine months ended November 30, 1995. Profitability of Loan Production and Servicing Activities In the nine months ended November 30, 1996, the Company's pre-tax income from its loan production activities (which include loan origination and purchases, warehousing and sales) was $101.4 million. In the nine months ended November 30, 1995, the Company's comparable pre-tax earnings were $33.8 million. The increase of $67.6 million was primarily attributable to a larger gain on sale of loans resulting from the sale of higher margin home equity and sub-prime loans and improved pricing margins on prime credit quality first mortgages. There were no home equity or sub-prime loan sales in the nine months ended November 30, 1995. These positive results were partially offset by higher production costs and a change in the internal method of allocating overhead between the Company's production and servicing activities. In the nine months ended November 30, 1996, 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, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer) was $190.7 million compared to $187.2 million in the nine months ended November 30, 1995. The increase of $3.5 million was principally due to an increase in the size of the servicing portfolio and in the rate of servicing and miscellaneous fees earned. Largely offsetting these positive factors was that in the nine months ended November 30, 1996, the net total of Servicing Hedge benefit and Servicing Assets amortization and impairment was greater than the comparable total expense for the nine months ended November 30, 1995 by $61.8 million. Profitability of Other Activities Other ancillary products and services contributed $17.8 million to the Company's pre-tax income in the nine months ended November 30, 1996, compared to $9.1 million during the nine months ended November 30, 1995. This increase to pre-tax income primarily resulted from improved performance of the title insurance, escrow, and REIT management services. INFLATION Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings primarily due to increased amortization and impairment of the Servicing Assets, a decreased rate of interest earned from the custodial balances and increased Interest Costs Incurred on Payoffs. Conversely, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by 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 both amortization and impairment of the Servicing Assets and Interest Costs Incurred on Payoffs, and because the rate of interest earned from the custodial balances tends to increase. The impacts of changing interest rates on servicing-related earnings are reduced by performance of the Servicing Hedge, which is designed to mitigate the impact on earnings of higher amortization and impairment that may result from declining interest rates. SEASONALITY The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's principal financing needs are the financing of loan funding activities and the investment in servicing rights. To meet these needs, the Company currently utilizes commercial paper supported by CHL's revolving credit facility, medium-term notes, MBS repurchase agreements, subordinated notes, unsecured notes, an optional cash purchase feature in the dividend reinvestment plan and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, direct borrowings from CHL's revolving credit facility, privately-placed financings, pre-sale funding facilities and public offerings of preferred stock. Certain of the debt obligations of the Company and CHL contain various provisions that may affect the ability of the Company and CHL 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 CHL to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. In December 1996, Countrywide Capital I issued $300 million of 8% trust preferred securities. The proceeds were used to purchase subordinated debt securities from the Company. The Company intends to use the net proceeds from the sale of the subordinated debt securities for general corporate purposes, principally for investment in servicing rights. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells to investors the mortgage loans it originates and purchases but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In the nine months ended November 30, 1996, the Company's operating activities provided cash of approximately $0.7 billion on a short-term basis primarily from the decrease in its warehouse of mortgage loans. Mortgage loans shipped and held for sale are generally financed with short-term borrowings; therefore, the operating cash so provided was used to repay short-term debt as discussed under "Financing Activities." Investing Activities The primary investing activity for which cash was used during the nine months ended November 30, 1996 was the investment in servicing. Net cash used by investing activities was $0.7 billion for the nine months ended November 30, 1996 and November 30, 1995. Financing Activities Net cash provided by financing activities amounted to $11.0 million for the nine months ended November 30, 1996 and $2.1 billion for the nine months ended November 30, 1995. The decrease in cash provided by financing activities was primarily the result of net short-term debt repayments by the Company in the nine months ended November 30, 1996 and net short-term borrowings during the nine months ended November 30, 1995. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process During the nine months ended November 30, 1996, the Company received new loan applications at an average daily rate of $204 million and at November 30, 1996, the Company's pipeline of loans in process was $4.7 billion. This compares to a daily application rate during the nine months ended November 30, 1995 of $183 million and a pipeline of loans in process at November 30, 1995 of $4.5 billion. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 77% of the pipeline of loans in process has funded. In addition, the Company's LOCK 'N SHOP (R) Pipeline at November 30, 1996 was $1.7 billion and at November 30, 1995 was $1.2 billion. For the month ended December 31, 1996, the average daily amount of applications received was $229 million, and at December 31, 1996, the pipeline of loans in process was $4.5 billion and the LOCK 'N SHOP (R) pipeline was $1.1 billion. Interest rates increased slightly during December 1996. 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. Market Factors During the quarter ended November 30, 1996, interest rates declined slightly. However, loan production declined from the quarter ended August 31, 1996 to the quarter ended November 30, 1996. This is primarily due to several factors. First, the pipeline of loans in process at September 1, 1996 was relatively low due to higher interest rates during the quarter ended August 30, 1996. Second, as discussed in "Seasonality," sales and resales of homes typically decline to lower levels in the fall and winter months, which correspond to the Company's third and fourth quarters. Home purchase activity was $7.1 billion for the quarter ended August 31, 1996 and $6.7 billion for the quarter ended November 30, 1996. On the other hand, sub-prime and home-equity loan fundings, which are generally less sensitive to interest rate fluctuations than prime credit quality first mortgages, increased during the quarter ended November 30, 1996 from the quarter ended August 31, 1996. The prepayment rate in the servicing portfolio remained flat during the quarter ended November 30, 1996. Because interest rates declined at the end of the quarter, impairment of the Servicing Assets was recognized and the Servicing Hedge resulted in a gain. The Company's primary competitors are commercial banks, savings and loans and mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Certain commercial banks have expanded their mortgage banking operations through acquisition of formerly independent mortgage banking companies or through internal growth. The Company believes that these transactions and activities have not had a material impact on the Company or on the degree of competitive pricing in the market. The Company's California mortgage loan production (measured by principal balance) constituted 25% of its total production during the nine months ended November 30, 1996, down from 31% for the nine months ended November 30, 1995. The Company is continuing its efforts to expand its production capacity outside of California. Some regions in which the Company operates have experienced 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. To the extent that any geographic region's mortgage loan production constitutes a significant portion of the Company's production, there can be no assurance that the Company's operations will not be adversely affected to the extent that region experiences slow or negative economic growth resulting in decreased residential real estate lending activity or market factors further impact the Company's competitive position in that region. The delinquency rate in the Company-owned servicing portfolio increased slightly to 3.23% at November 30, 1996 from 3.20% at November 30, 1995. The Company believes that this increase was primarily the result of portfolio mix changes and aging. The proportion of government and high loan-to-value conventional loans, which tend to experience higher delinquency rates than low loan-to-value conventional loans, has increased from 44% of the portfolio at November 30, 1995 to 48% at November 30, 1996. In addition, the weighted average age of the portfolio was 27 months at November 30, 1996, up from 24 months at November 30, 1995. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. However, because the loans in the portfolio are generally serviced on a non-recourse basis, the Company's exposure to credit loss resulting from increased delinquency rates is substantially limited. Further, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. The percentage of loans in the Company's owned servicing portfolio that are in foreclosure increased to 0.62% at November 30, 1996 from 0.37% at November 30, 1995. 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 (28% of the Company's servicing portfolio at November 30, 1996) 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's Servicing Hedge is designed to protect the value of its investment in servicing rights from the effects of increased prepayment activity that generally results from declining interest rates. In periods of increasing interest rates, the value of the Servicing Hedge generally declines and the value of the servicing rights generally increases. There can be no assurance that, in periods of increasing interest rates, the increase in value of the Servicing Assets will offset the amount of Servicing Hedge expense; or in periods of declining interest rates, that the Company's Servicing Hedge will generate gains or if gains are generated, that they will fully offset impairment of the Servicing Assets. Recently Announced Planned Transactions Countrywide Asset Management Corp. ("CAMC"), a wholly-owned subsidiary of the Company, currently manages a publicly traded REIT, CWM Mortgage Holdings, Inc. ("CWM"). All CWM management and other personnel are employed by CAMC, and CWM pays CAMC base and incentive fees under a management contract. On November 4, 1996, the Company announced that CWM and it had reached a preliminary understanding on restructuring the business relationship between the two companies. In substance, CWM will acquire the operations and employees of CAMC, and in return, the Company will receive a significant equity position in CWM. The proposed transaction is structured as a merger of CAMC with and into CWM, with the Company to receive approximately 3.6 million newly issued common shares of CWM (approximately $75.0 million based on certain recent closing prices of CWM stock). Although a definitive agreement remains to be negotiated, the parties anticipate executing such an agreement in the near future. The transaction will occur after regulatory and shareholder approvals are obtained. On December 12, 1996, the Company announced an agreement to acquire all of the outstanding stock of Leshner Financial, Inc., a midwest-based financial services company, in exchange for newly issued Company common stock. The company being acquired operates through its subsidiaries as a broker-dealer, an investment advisor and fund manager and also as a service provider for unaffiliated mutual funds. The value of Company common stock to be issued in this transaction is approximately $16 million, subject to an upward adjustment of up to $2.5 million if certain performance goals are met over the next five years. The acquisition is based in part on the Company's long-term commitment to offer mortgage customers a diversified array of financial products and services. Implementation of New Accounting Standards In June 1996, the Financial Accounting Standard Board issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No. 125"). Among other provisions, this Statement uses a "financial components" approach that focuses on control to determine the proper accounting for financial asset transfers, addresses the accounting for servicing rights on financial assets in addition to mortgage loans and extends the disaggregated lower of cost or market approach for measuring servicing rights (including excess servicing) on all financial assets. The financial asset transfers provisions of SFAS No. 125 are not expected to have a material impact on the Company's financial position or results of operations. Although management does not expect the impact of adopting the new Statement's servicing rights provisions to be material, such impact is not known because it is dependent on the fair value of the Company's capitalized servicing fees receivable (excess servicing) on December 31, 1996, and the necessary analysis is not yet completed. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement Regarding Computation of Per Share Earnings. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). (b) Reports on Form 8-K. None Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COUNTRYWIDE CREDIT INDUSTRIES, INC. (Registrant) DATE: January 14, 1997 /s/ Stanford L. Kurland ------------------------------------- Senior Managing Director and Chief Operating Officer DATE: January 14, 1997 /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 11.1 Statement Regarding Computation of Per Share Earnings. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). EX-11 2 COMPUTATION OF EARNINGS PER SHARE
Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Nine Months Ended November 30, 1996 1995 ---------------- ----------------- (Dollar amounts in thousands, except per share data) Primary Net earnings applicable to common stock $189,056 $138,082 ================ ================= Average shares outstanding 102,666 97,165 Net effect of dilutive stock options -- based on the treasury stock method using average market price 2,287 1,893 ---------------- ----------------- Total average shares 104,953 99,058 ================ ================= Per share amount $1.80 $1.39 ================ ================= Fully diluted Net earnings applicable to common stock $189,056 $138,082 ================ ================= Average shares outstanding 102,666 97,165 Net effect of dilutive stock options -- based on the treasury stock method using the closing market price, if higher than average market price. 3,400 2,095 ---------------- ----------------- Total average shares 106,066 99,260 ================ ================= Per share amount $1.78 $1.39 ================ =================
EX-12 3 RATIO OF EARNINGS TO FIXED CHARGES COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the nine months ended November 30, 1996 and 1995 and for the five fiscal years ended February 29(28), 1996 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).
Nine Months Ended November 30, Fiscal Years Ended February 29(28), ------------------------- ------------------------------------------------------------------ 1996 1995 1996 1995 1994 1993 1992 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Net earnings $189,056 $138,082 $195,720 $ 88,407 $179,460 $140,073 $ 60,196 Income tax expense 120,872 92,055 130,480 58,938 119,640 93,382 40,131 Interest charges 230,547 207,510 281,573 205,464 219,898 128,612 69,760 Interest portion of rental expense 5,486 5,002 6,803 7,379 6,372 4,350 2,814 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Earnings available to cover fixed charges $545,961 $442,649 $614,576 $360,188 $525,370 $366,417 $172,901 ============ ============ ============= ============ ============= ============ ============ Fixed charges Interest charges $230,547 $207,510 $281,573 $205,464 $219,898 $128,612 $ 69,760 Interest portion of rental expense 5,486 5,002 6,803 7,379 6,372 4,350 2,814 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Total fixed charges $236,033 $212,512 $288,376 $212,843 $226,270 $132,962 $ 72,574 ============ ============ ============= ============ ============= ============ ============ Ratio of earnings to fixed charges 2.31 2.08 2.13 1.69 2.32 2.76 2.38 ============ ============ ============= ============ ============= ============ ============
EX-27 4 ART.5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS FEB-28-1997 NOV-30-1996 14,835 0 1,418,092 0 0 0 283,227 93,620 9,254,431 0 2,446,800 0 0 5,199 1,518,016 9,254,431 0 815,627 0 505,699 0 0 0 309,928 120,872 189,056 0 0 0 189,056 1.80 1.78 Note: Revenues includes $230,547 of interest expense related to mortgage loan activities.
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