-----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, RNdKtOF+gjNZT7/WzrCd9C6bBJXQxsevC+HMNjcFXUSYAUe6R6YE5gJ+7CQ5XVoU gCu1eAk1cUQ9q6BM0VsIeQ== 0000025191-00-000010.txt : 20000327 0000025191-00-000010.hdr.sgml : 20000327 ACCESSION NUMBER: 0000025191-00-000010 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000324 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/A SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 577105 BUSINESS ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8182253000 MAIL ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 10-Q/A 1 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1999 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.) 4500 Park Granada, Calabasas, California 91302 - --------------------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) (818) 225-3000 ------------------------------------------------------------------------- (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 registrant's classes of common stock, as of the latest practicable date. Class Outstanding at January 13, 2000 Common Stock $.05 par value 113,329,466 This amendment on Form 10-Q/A amends the Company's Quarterly Report on Form 10-Q previously filed for the quarterly period ended November 30, 1999. This Quarterly Report on Form 10-Q/A is filed to delete the information contained in "Part II Other Information", "Item 5. Other Information". PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollar amounts in thousands, except per share data) A S S E T S November 30, February 28, 1999 1999 ------------------- ------------------- Cash $171,503 $ 58,748 Mortgage loans and mortgage-backed securities held for sale 3,556,272 6,231,220 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 354,470 311,741 Mortgage servicing rights, net 5,262,854 4,496,439 Other assets 6,225,356 4,550,108 ------------------- ------------------- Total assets $ 15,570,455 $ 15,648,256 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $ 3,452,498 $ 4,020,998 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 9,570,944 $ 9,935,759 Drafts payable issued in connection with mortgage loan closings 368,465 1,083,499 Accounts payable, accrued liabilities and other 1,056,274 517,937 Deferred income taxes 1,291,804 1,092,176 ------------------- ------------------- Total liabilities 12,287,487 12,629,371 Commitments and contingencies - - Company-obligated mandatorily redeemable capital trust pass-through securities of subsidiary trusts holding solely Company guaranteed related subordinated debt 500,000 500,000 Shareholders' equity Preferred stock - authorized, 1,500,000 share of $0.05 par value; issue and outstanding, none - - Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and outstanding, 113,287,766 shares at November 30, 1999 and 112,619,313 shares at February 28, 1999 5,664 5,631 Additional paid-in capital 1,169,588 1,153,673 Accumulated other comprehensive (loss) income (48,022) (19,593) Retained earnings 1,655,738 1,379,174 ------------------- ------------------- Total shareholders' equity 2,782,968 2,518,885 ------------------- ------------------- Total liabilities and shareholders' equity $ 15,570,455 $ 15,648,256 =================== =================== Borrower and investor custodial accounts $ 3,452,498 $ 4,020,998 =================== ===================
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands, except per share data) Three Months Nine Months Ended November 30, Ended November 30, 1999 1998 1999 1998 ---------------- -- -------------- -------------- -------------- Revenues Loan origination fees $74,598 $ 166,934 $344,036 $ 462,740 Gain on sale of loans, net of commitment fees 115,954 186,241 444,618 517,073 ---------------- -------------- -------------- -------------- Loan production revenue 190,552 353,175 788,654 979,813 Interest earned 232,185 251,799 772,724 751,029 Interest charges (219,264) (244,681) (700,836) (722,752) ---------------- -------------- -------------- -------------- Net interest income 12,921 7,118 71,888 28,277 Loan servicing income 312,596 261,349 881,494 755,523 Amortization & impairment/recovery of mortgage servicing rights, net of servicing hedge (75,984) (147,897) (352,264) (448,340) ---------------- -------------- -------------- -------------- Net loan administration income 236,612 113,452 529,230 307,183 Commissions, fees and other income 47,270 40,452 171,601 131,346 Gain on sale of subsidiary 4,424 - 4,424 - ---------------- -------------- -------------- -------------- Total revenues 491,779 514,197 1,565,797 1,446,619 Expenses Salaries and related expenses 159,075 176,015 528,830 484,255 Occupancy and other office expenses 67,862 71,483 211,191 196,817 Guarantee fees 49,892 45,634 143,699 135,655 Marketing expenses 15,851 17,085 56,454 47,189 Other operating expenses 34,359 43,372 116,814 117,454 ---------------- -------------- -------------- -------------- Total expenses 327,039 353,589 1,056,988 981,370 ---------------- -------------- -------------- -------------- Earnings before income taxes 164,740 160,608 508,809 465,249 Provision for income taxes 64,176 62,637 198,363 181,447 ---------------- -------------- -------------- -------------- NET EARNINGS $100,564 $ 97,971 $310,446 $ 283,802 ================ ============== ============== ============== Earnings per share Basic $0.89 $0.88 $2.75 $2.56 Diluted $0.87 $0.84 $2.65 $2.43
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Nine Months Ended November 30, 1999 1998 ---------------- ----------------- Cash flows from operating activities: Net earnings $ 310,446 $ 283,802 Adjustments to reconcile net earnings to net cash Provided (used) by operating activities: Gain on sale of available-for-sale securities (11,914) (56,820) Gain on sale of subsidiary (4,424) - Gain on sale of securitized service fees (444) - Amortization and impairment/recovery of mortgage servicing rights 90,514 1,271,231 Depreciation and other amortization 45,939 41,418 Deferred income taxes 198,363 181,848 Origination and purchase of loans held for sale (55,533,204) (67,812,248) Principal repayments and sale of loans 58,208,152 65,324,697 ---------------- ----------------- Decrease (increase) in mortgage loans and mortgage- Backed securities held for sale 2,674,948 (2,487,551) Increase in other assets (849,160) (1,526,884) Increase in accounts payable and accrued liabilities 85,861 674,181 ---------------- ----------------- Net cash provided (used) by operating activities 2,540,129 (1,618,775) ---------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (1,075,699) (1,391,224) Proceeds from sale of securitized service fees 134,480 - Acquisition of insurance company (425,000) - Purchase of property, equipment and leasehold Improvements, net (77,958) (85,483) Proceeds from sale of available-for-sale securities 93,529 231,555 Proceeds from sale of subsidiary 21,053 - ---------------- ----------------- Net cash used by investing activities (1,329,595) (1,245,152) ---------------- ----------------- Cash flows from financing activities: Net decrease in warehouse debt and other short-term borrowings (1,723,786) (64,844) Issuance of long-term debt 1,462,355 3,062,070 Repayment of long-term debt (818,418) (144,796) Issuance of common stock 15,952 79,768 Cash dividends paid (33,882) (26,648) ---------------- ----------------- Net cash provided (used) by financing activities (1,097,779) 2,905,550 ---------------- ----------------- Net increase in cash 112,755 41,623 Cash at beginning of period 58,748 10,707 ================ ================= Cash at end of period $171,503 $ 52,330 ================ ================= Supplemental cash flow information: Cash used to pay interest $ 671,340 $ 422,788 Cash used to pay income taxes $ 1,270 $ 1,367 Noncash financing activities: Unrealized gain (loss) on available-for-sale securities, net of tax $ (28,429) $ (14,772) The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollar amounts in thousands) Three Months Nine Months Ended November 30, Ended November 30, 1999 1998 1999 1998 --------------- --------------- --------------- --------------- NET EARNINGS $100,564 $ 97,971 $310,446 $283,802 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period (7,699) (9,342) (21,161) 19,888 Less: reclassification adjustment for gains included in net earnings (147) (25,604) (7,268) (34,660) --------------- --------------- --------------- --------------- Other comprehensive income (loss) (7,846) (34,946) (28,429) (14,772) =============== =============== =============== =============== COMPREHENSIVE INCOME $92,718 $63,025 $282,017 $ 269,030 =============== =============== =============== ===============
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Page 9 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 months ended November 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 2000. 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, 1999 of Countrywide Credit Industries, Inc. (the "Company"). Certain amounts reflected in the consolidated financial statements for the nine-month period ended November 30, 1998 have been reclassified to conform to the presentation for the nine-month period ended November 30, 1999. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows. ------------------------------------------------ --------------------- ------------------------- Nine Months Ended November 30, (Dollar amounts in thousands) 1999 ------------------------------------------------ -- ---------------- -- --------------------- Mortgage Servicing Rights Balance at beginning of period $4,591,191 Additions 1,075,699 Securitization of service fees (218,770) Scheduled amortization (354,213) Hedge losses (gains) applied 213,899 --------------------- Balance before valuation reserve at end of period 5,307,806 --------------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (94,752) Reductions (additions) 49,800 --------------------- Balance at end of period (44,952) ===================== Mortgage Servicing Rights, net $5,262,854 ===================== ----------------------------------------------- -- ---------------- -- --------------------- ---
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) NOTE C - OTHER ASSETS Other assets consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- November 30, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- -- ----------------- --- ---------------- --- Servicing hedge instruments $1,781,452 $991,401 Trading securities 1,232,000 1,460,446 Mortgage-backed securities retained in securitization 645,493 500,631 Insurance company investment portfolio 639,304 - Rewarehoused FHA and VA loans 435,054 216,598 Reverse repurchase agreements 313,464 76,246 Servicing related advances 202,731 199,143 Loans held for investment 162,450 125,236 Receivables related to broker-dealer activities 29,410 401,232 Other 783,998 579,175 ----------------- --- ---------------- $6,225,356 $4,550,108 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- ---
The insurance company investment portfolio includes fixed income securities, stocks and other short-term investments. The Company has designated these investments as available for sale securities. See footnote N. NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows. ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- November 30, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $639,193 $31,794 ($25,494) $645,493 Principal only securities 962,372 3,123 (65,254) 900,241 Insurance company investment portfolio 639,304 - - 639,304 Equity securities 63,136 2,234 (25,093) 40,277 ================ ================= ================ ================ $2,304,005 $37,151 ($115,841) $2,225,315 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE D - AVAILABLE FOR SALE SECURITIES (Continued) ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 28, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $519,321 - ($18,690) $500,631 Principal only securities 32,514 312 - 32,826 Equity securities 42,498 3,098 (16,904) 28,692 ================ ================= ================ ================ $594,333 $3,410 ($35,594) $562,149 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE E - NOTES PAYABLE Notes payable consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- November 30, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- -- --- ---------------- --- ----------------- --- Commercial paper $1,930 $176,559 Medium-term notes, Series A, B, C, D, E, F, G, H and Euro Notes 8,672,824 8,039,824 Repurchase agreements 693,282 1,517,405 Subordinated notes 200,000 200,000 Other notes payable 2,908 1,971 ================= ================ $9,570,944 $9,935,759 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Commercial Paper and Backup Credit Facilities As of November 30, 1999, CHL, the Company's mortgage banking subsidiary, had unsecured credit agreements (revolving credit facilities) with consortiums of commercial banks permitting CHL to borrow an aggregate maximum amount of $5.0 billion. The facilities included a $4.0 billion revolving credit facility with forty-four commercial banks consisting of: (i) a five-year facility of $3.0 billion, which expires on September 24, 2002, and (ii) a one-year facility of $1.0 billion which expires on September 20, 2000. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. There is an additional one-year facility, which expires April 12, 2000, with eleven of the forty-four banks referenced above for total commitments of $1.0 billion. As consideration for the facility, CHL pays annual commitment fees of $0.8 million. The purpose of these credit facilities is to provide liquidity backup for CHL's commercial paper program. No amount was outstanding under these revolving credit facilities at November 30, 1999. The weighted average borrowing rate on commercial paper borrowings for the nine months ended November 30, 1999 was 5.08%. The weighted average borrowing rate on commercial paper outstanding as of November 30, 1999 was 5.33%. In addition, CHL has entered into a $1.2 billion committed mortgage loan conduit facility, with four commercial banks. The committed mortgage loan conduit facility has a maturity date of December 3, 1999. As consideration for this facility, CHL pays annual commitment fees of $1.5 million. Loans made under this facility are secured by conforming and non-conforming mortgage loans. This facility was extended on December 3, 1999. See footnote K. All of the facilities contain various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. NOTE E - NOTES PAYABLE (Continued) Medium-Term Notes As of November 30, 1999, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission or issued by CHL pursuant to its Euro medium-term note program were as follows. - --------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ---------------------- ---------------------- ------------------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- -------------- ------------- Series A - $143,500 $143,500 7.29% 8.79% Aug. 2000 Mar. 2002 Series B - 301,000 301,000 6.53% 6.98% Apr. 2000 Aug. 2005 Series C $163,000 127,000 290,000 5.66% 7.75% Feb. 2000 Mar. 2004 Series D 75,000 385,000 460,000 5.81% 6.88% Aug. 2000 Sep. 2005 Series E 310,000 690,000 1,000,000 5.55% 7.45% Feb. 2000 Oct. 2008 Series F 581,000 1,344,000 1,925,000 5.47% 7.00% Jan. 2000 May 2013 Series G 5,000 581,000 586,000 5.35% 7.00% Oct. 2000 Nov. 2018 Series H 114,500 2,069,000 2,183,500 5.16% 8.00% Dec. 1999 Oct. 2019 Euro Notes 659,600 1,124,224 1,783,824 5.41% 6.81% Jul. 2000 Jan. 2009 ------------------------------------------- Total $1,908,100 $6,764,724 $8,672,824 =========================================== - ---------------------------------------------------------------------------------------------------------------------------
As of November 30, 1999, substantially all of the outstanding fixed-rate notes had been effectively converted through 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, 1999, including the effect of the interest rate swap agreements, was 5.63%. As of November 30, 1999, $1,074 million foreign currency denominated fixed-rate notes issued pursuant to the Euro medium-term notes program were outstanding. Such notes are denominated in Deutsche Marks, French Francs, Portuguese Escudos and Euros. The Company manages the associated foreign currency risk by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars. Repurchase Agreements The Company routinely enters into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the nine-months ended November 30, 1999 was 5.04%. The weighted average borrowing rate on repurchase agreements outstanding as of November 30, 1999, was 5.74%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to repurchase the same or substantially identical MBS. NOTE E - NOTES PAYABLE (Continued) Pre-Sale Funding Facilities As of November 30, 1999, CHL had uncommitted revolving credit facilities with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. As of November 30, 1999, the Company had no outstanding borrowings under any of these facilities. NOTE F - FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge. - -------------------------------------- -------------------- -------------------- ------------------ --------------------- (Dollar amounts in millions) Balance, Balance, February 28, 1999 Additions Dispositions/ November 30, Expirations 1999 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- Interest Rate Floors $33,000 18,000 (500) $50,500 Long Call Options on Interest Rate Futures $32,000 18,750 (35,750) $15,000 Long Put Options on Interest Rate Futures $54,600 3,500 (58,100) - Short Call Options on Interest Rate Futures $22,000 2,000 (24,000) - Short Put Options on Interest Rate Futures $720 - (720) - Interest Rate Futures $22,500 - (22,500) - Capped Swaps $1,000 - - $1,000 Interest Rate Swaps $15,150 1,050 (14,700) $1,500 Interest Rate Cap $4,500 - (1,000) $3,500 Swaptions $32,550 20,500 (11,800) $41,250 Options on Callable Pass-through Certificates $4,561 - - $4,561 - -------------------------------------- -------------------- -------------------- ------------------ ---------------------
Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of November 30, 1999 and February 28, 1999 is made by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. NOTE F- FINANCIAL INSTRUMENTS (Continued) ---- ------------------------------------------------- --------------------------------- --- ---------------------------- November 30, 1999 February 28, 1999 --------------------------------- --- ---------------------------- Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount fair value Amount fair value ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- ------------- Assets: Mortgage loans and mortgage-backed securities held for sale $3,556,272 $3,556,272 $6,231,220 $6,231,220 Items included in other assets: Trading securities 1,232,000 1,232,000 1,460,446 1,460,446 Principal only securities purchased 900,241 900,241 32,826 32,826 Mortgage-backed securities retained in securitizations 645,493 645,493 500,631 500,631 Insurance company investment portfolio 639,304 639,304 - - Rewarehoused FHA and VA loans 435,054 435,054 216,598 216,598 Reverse repurchase agreements 313,464 313,464 76,246 76,246 Loans held for investment 162,450 162,450 125,236 125,236 Equity Securities - restricted and unrestricte40,277 40,277 59,875 46,971 Receivables related to broker-dealer activitie29,410 29,410 401,232 401,232 Liabilities: Notes payable 9,570,944 9,250,782 9,935,759 9,883,859 Securities sold not yet purchased 172,668 172,668 84,775 84,775 Derivatives: Interest rate floors 435,821 251,197 426,838 402,061 Forward contracts on MBS 1,680 13,674 12,775 120,709 Options on MBS 25,516 17,293 34,883 62,475 Options on interest rate futures 2,743 609 18,261 15,729 Options on callable pass-through certificates 54,092 19,197 55,593 36,460 Interest rate caps 55,464 42,765 77,508 40,437 Capped Swaps (2,319) (5,590) 8,470 3,092 Swaptions 366,163 148,717 337,703 271,073 Interest rate futures - - 57,280 57,280 Interest rate swaps (3,018) (300,265) 43,570 93,205 Short-term commitments to extend credit - 49,300 - 26,400 ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of November 30, 1999 and February 28, 1999 are based on pertinent information that was available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. NOTE G - LEGAL PROCEEDINGS Legal Proceedings The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, 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 H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Home Loans, Inc. was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- --------- November 30, February 28, (Dollar amounts in thousands) 1999 1999 ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $3,556,272 $ 6,231,220 Mortgage servicing rights, net 5,262,854 4,496,439 Other assets 4,661,646 2,955,382 ============== ============== Total assets $13,480,772 $13,683,041 ============== ============== Short- and long-term debt $9,338,217 $9,910,966 Other liabilities 1,588,676 1,434,727 Equity 2,553,879 2,337,348 ============== ============== Total liabilities and equity $13,480,772 $13,683,041 ============== ============== ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- ----- ----------------------------------------- --- --------------------------------------------------- -------- Nine Months Ended November 30, (Dollar amounts in thousands) 1999 1998 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $1,260,294 $1,224,689 Expenses 857,321 844,303 Provision for income taxes 156,837 148,351 =============== =============== Net earnings $246,136 $232,035 =============== =============== ----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE I - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement becomes effective in the fiscal year ending February 28, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. NOTE J - SEGMENTS AND RELATED INFORMATION The Company has three major segments: Loan Production, Loan Servicing and Capital Markets. The Loan Production segment is comprised of the Consumer Markets, Wholesale and Correspondent Divisions and Full Spectrum Lending, Inc. The Loan Production segment originates and purchases conventional mortgage loans, mortgage loans insured by the FHA and VA, home equity and sub-prime loans and sells those loans to permanent investors. The Loan Servicing segment services on a primarily non-recourse basis substantially all of the mortgage loans originated and purchased by the Loan Production segment. In addition, the Loan Servicing segment purchases bulk servicing rights, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. The Capital Markets segment trades securities, primarily mortgage-related securities, with broker-dealers and institutional investors and, as an agent, facilitates the purchase and sale of bulk servicing rights and mortgage loans. Included in the tables below labeled "Other" are the operating segments that provide ancillary services and certain reclassifications to conform management reporting to the consolidated financial statements. - --------------------------------------------------------------------------------------------------------------------- For the three months ended November 30, 1999 - -------------------------------- -- -- ----------- --- ---------- -- ------------ -- ------------ -- ------------ --- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- --- ---------- -- ------------ -- ------------ -- ------------ --- Non-interest revenues $174,426 $263,500 $17,086 $23,846 $478,858 Interest earned 154,613 59,067 23,755 (5,250) 232,185 Interest charges (121,199) (84,255) (18,742) 4,932 (219,264) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 33,414 (25,188) 5,013 (318) 12,921 ----------- ----------- ------------ ------------ ------------ Total revenue $207,840 $238,312 $22,099 $23,528 $491,779 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $25,309 $127,684 $8,141 $3,606 $164,740 Segment assets $5,013,922 $8,550,616 $1,557,535 $448,382 $15,570,455 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --- - -------------------------------------------------------------------------------------------------------------------- For the nine months ended November 30, 1999 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $744,039 $629,117 $45,858 $74,895 $1,493,909 Interest earned 534,137 176,846 75,066 (13,325) 772,724 Interest charges (405,997) (248,175) (57,972) 11,308 (700,836) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 128,140 (71,329) 17,094 (2,017) 71,888 ----------- ----------- ------------ ------------ ------------ Total revenue $872,179 $557,788 $62,952 $72,878 $1,565,797 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $251,467 $221,434 $23,493 $12,415 $508,809 Segment assets $5,013,922 $8,550,616 $1,557,535 $448,382 $15,570,455 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE J - SEGMENTS AND RELATED INFORMATION (Continued) - --------------------------------------------------------------------------------------------------------------------- For the three months ended November 30, 1998 - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $339,827 $125,333 $14,844 $27,075 $507,079 Interest earned 168,386 71,434 16,768 (4,789) 251,799 Interest charges (143,998) (90,316) (14,019) 3,652 (244,681) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 24,388 (18,882) 2,749 (1,137) 7,118 ----------- ----------- ------------ ------------ ------------ Total revenue $364,215 $106,451 $17,593 $25,938 $514,197 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $141,465 $4,893 $7,512 $6,738 $160,608 Segment assets $8,688,629 $6,465,712 $982,718 $65,784 $16,202,843 - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- - -------------------------------------------------------------------------------------------------------------------- For the Nine months ended November 30, 1998 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $943,346 $359,522 $40,521 $74,953 $1,418,342 Interest earned 527,482 202,648 20,867 32 751,029 Interest charges (441,299) (264,848) (16,394) (211) (722,752) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 86,183 (62,200) 4,473 (179) 28,277 ----------- ----------- ------------ ------------ ------------ Total revenue $1,029,529 $297,322 $44,994 $74,774 $1,446,619 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $424,046 $1,886 $19,546 $19,771 $465,249 Segment assets $8,688,629 $6,465,712 $982,718 $65,784 $16,202,843 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE K - SUBSEQUENT EVENTS On December 3, 1999, CHL entered into $1.1 billion committed mortgage loan facility. This facility will expire on November 21, 2000. On December 20, 1999, the Company declared a cash dividend of $0.10 per common share payable January 31, 2000 to shareholders of record on January 12, 2000. NOTE L - EARNINGS PER SHARE Basic earnings per share is determined using net income divided by the weighted average shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The following table presents basic and diluted EPS for the three and nine month periods ended November 30, 1999 and 1998. - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Three Months Ended November 30, -- -- ----- ------------------------------------ -- ----- ---- 1999 1998 --------- --------- --------- ---------- --------- --------- (Dollar amounts in thousands, except per Net Per-Share Net Per-Share share data) Earnings Shares Amount Earnings Shares Amount - ------------------------ --------- --------- --------- --------- --------- --------- Net earnings $100,564 $97,971 ========= ========== Basic EPS Net earnings available to common shareholders $100,564 113,236 $0.89 $97,971 111,923 $ 0.88 Effect of dilutive stock options - 2,881 - 5,071 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $100,564 116,117 $0.87 $97,971 116,994 $ 0.84 ========= ========= ========= ========== ========= --------- - ------------------------ --------- --------- --------- - ---------- --------- --------- - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Nine Months Ended November 30, -- -- ----- ------------------------------------ -- ----- ---- 1999 1998 --------- --------- --------- ---------- --------- --------- (Dollar amounts in Per-Share Per-Share thousands, except per Net Amount Net Amount share data) Earnings Shares Earnings Shares - ------------------------ -------- --------- --------- ----------- --------- --------- Net earnings $310,446 $283,802 ========= ========== Basic EPS Net earnings available to common shareholders $310,446 112,992 $2.75 $283,802 111,065 $ 2.56 Effect of dilutive stock options - 4,053 - 5,749 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $310,446 117,045 $2.65 $283,802 116,814 $ 2.43 ========= ========= ========= ========== ========= --------- - ------------------------ --------- --------- --------- - ---------- --------- ---------
NOTE M - RELATED PARTY TRANSACTIONS During the nine months ended November 30, 1999, the Company sold 780,000 shares of IndyMac Mortgage Holdings, Inc. common stock, which resulted in a pre-tax gain of $0.4 million. NOTE N - ACQUISITION OF BALBOA LIFE AND CASUALTY GROUP On November 30, 1999, the Company acquired all of the outstanding shares of common stock of Balboa Life and Casualty Group for a cash price of $425 million, subject to adjustment based on a post closing audit. NOTE N - ACQUISITION OF BALBOA LIFE AND CASUALTY GROUP (Continued) The acquisition of Balboa Life and Casualty Group was accounted for using the purchase method of accounting. Accordingly, a portion of the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair market value at the date of acquisition. The fair value of identifiable assets acquired and liabilities assumed was $898 million and $473 million, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 17 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements that 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," "should" 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, capital markets operations, and insurance services; and (5) competition within the mortgage banking industry, capital markets industries, and insurance services; and (6) the ability of the Company to manage expenses. RESULTS OF OPERATIONS Quarter Ended November 30, 1999 Compared to Quarter Ended November 30, 1998 Revenues for the quarter ended November 30, 1999 decreased 4% to $491.8 million, down from $514.2 million for the quarter ended November 30, 1998. Net earnings increased 3% to $100.6 million for the quarter ended November 30, 1999, up from $98.0 million for the quarter ended November 30, 1998. The decrease in revenues for the quarter ended November 30, 1999 compared to the quarter ended November 30, 1998 was primarily due to a decline in prime loan originations attributable to a decline in loan refinancings, largely offset by increased revenue from the loan servicing segment, along with increased production of non traditional loan products (home equity and sub-prime loans). The increase in net earnings in the quarter ended November 30, 1999 compared to the quarter ended November 30, 1998 was attributed to expense reductions, primarily in the production divisions, in response to the decline in loan production which offset the decline in revenues. The total volume of loans produced by the Company decreased 47% to $12.7 billion for the quarter ended November 30, 1999, down from $24.0 billion for the quarter ended November 30, 1998. The decrease in loan production was primarily due to a decrease in the mortgage origination market, driven largely by a reduction in refinances. Total loan production volume by purpose and by interest rate type is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Purchase $9,696 $ 9,757 Refinance 3,019 14,246 ============= ================ Total Loan Volume $12,715 $24,003 ============= ================ ------------- ---------------- Fixed Rate $10,374 $ 22,933 Adjustable Rate 2,341 1,070 ============= ================ Total Loan Volume $12,715 $24,003 ============= ================ - --------------------------------------------------------------------------------------------- Total loan production volume by Division is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Consumer Markets Division $3,658 $ 8,037 Wholesale Lending Division 3,530 7,601 Correspondent Lending Division 5,175 8,185 Full Spectrum Lending, Inc. 352 180 ============= ================ Total Loan Volume $12,715 $24,003 ============= ================ - ---------------------------------------------------------------------------------------------
The factors which affect the relative volume of production among the Company's Divisions include the price competitiveness of each Division's various product offerings, the level of mortgage lending activity in each Division's market and the success of each Division's sales and marketing efforts. Non traditional loan production volume (which is included in the Company's total volume of loans produced) is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Sub-prime $ 969 $ 603 Home Equity Loans 886 625 ============= ================ Total Non Traditional Loan Volume $1,855 $1,228 ============= ================ - ---------------------------------------------------------------------------------------------
As of November 30, 1999 and 1998, the Company's pipeline of loans in process was $8.2 billion and $16.2 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process have funded. In addition, as of November 30, 1999, the Company had committed to make loans in the amount of $2.0 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). As of November 30, 1998, the LOCK 'N SHOP (R) Pipeline was $1.2 billion. During the quarters ended November 30, 1999 and 1998, the Company received 184,914 and 331,903 new loan applications, respectively, at an average daily rate of $295 million and $596 million, respectively. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production Divisions' loan processing efficiency and loan pricing decisions. Loan origination fees decreased in the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998 primarily due to lower production and a change in the Divisional mix. The Consumer Markets and Wholesale Lending Divisions (which, due to their cost structures, charge higher origination fees per dollar loaned than the Correspondent Division), comprised a lower percentage of total production in the quarter ended November 30, 1999 than in the quarter ended November 30, 1998. Gain on sale of loans decreased in the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998 primarily due to decreased production and lower margins on prime credit quality mortgages partially offset by increased sales during the quarter ended November 30, 1999 of higher margin home equity and sub-prime loans. The sale of home equity loans contributed $23.2 million and $13.5 million to gain on sale of loans in the quarter ended November 30, 1999 and the quarter ended November 30, 1998, respectively. Sub-prime loans contributed $44.1 million to the gain on sale of loans in the quarter ended November 30, 1999 and $20.6 million in the quarter ended November 30, 1998. In general, loan origination fees and gain on sale of loans are affected by numerous factors including the volume and mix of loans produced and sold, loan pricing decisions, interest rate volatility and the general direction of interest rates. Net interest income (interest earned net of interest charges) increased to $12.9 million for the quarter ended November 30, 1999, up from $7.1 million for the quarter ended November 30, 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($33.4 million and $24.4 million for the quarter ended November 30, 1999 and the quarter ended November 30, 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($77.0 million and $88.9 million for the quarters ended November 30, 1999 and November 30, 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($51.8 million and $70.0 million for the quarters ended November 30, 1999 and November 30, 1998, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its inventory. The increase in net interest income from the mortgage loan inventory was primarily attributable to a higher net earnings rate combined with a longer warehousing period during the quarter ended November 30, 1999. The decrease in interest expense related to the investment in servicing rights resulted primarily from 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") as a result of a decrease in the amount of prepayments. The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances also caused by a decrease in the amount of prepayments. During the quarter ended November 30, 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. As of November 30, 1999, the Company serviced $244 billion of loans (including $2.4 billion of loans subserviced for others), up from $205.4 billion (including $2.3 billion of loans subserviced for others) as of November 30, 1998, a 19% increase. The growth in the Company's servicing portfolio since November 30, 1998 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization. During the quarter ended November 30, 1999, the annual prepayment rate of the Company's servicing portfolio was 9%, compared to 30% for the quarter ended November 30, 1998. 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 housing market. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of November 30, 1999 was 7.5% compared to 7.6% as of November 30, 1998. The Company recorded MSR amortization net of impairment recovery for the quarter ended November 30, 1999 totaling $51.3 million (consisting of amortization amounting to $109.2 million reduced by recovery of previous impairment of $57.9 million), compared to $680.9 million of amortization and impairment (consisting of amortization amounting to $147.4 million and impairment of $533.5 million) for the quarter ended November 30, 1998. The primary factors affecting the amount of amortization and impairment of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). In the quarter ended November 30, 1999, the Company recognized a net expense of $24.7 million from its Servicing Hedge. The net expense included unrealized net losses of $11.9 million and realized net expense of $12.8 million from premium amortization and the sale of various financial instruments that comprise the Servicing Hedge. In the quarter ended November 30, 1998, the Company recognized a net benefit of $533.0 million from its Servicing Hedge. The net benefit included unrealized gains of $174.7 million and net realized gains of $358.3 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. The financial instruments that comprised the Servicing Hedge include options on interest rate futures, interest rate futures, interest rate floors, interest rate swaps, interest rate swaps with the Company's maximum payment capped ("Capped Swaps"), options on interest rate swaps ("Swaptions"), interest rate caps, principal only securities ("P/O securities") and options on callable pass-through certificates ("options on CPCs"). With the Capped Swaps, 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 Rate for U.S. dollar deposits ("LIBOR") and has a specified maximum or "cap". With Swaps, the Company receives and pays interest on a specified amount. The Company has entered into Swaps in which the rate received is fixed and the rate paid is adjustable and is indexed to LIBOR ("Receiver Swap") as well as Swaps in which the rate paid is fixed and the rate received is adjustable and is indexed to LIBOR ("Payor Swap") The Swaptions consist of options to enter into a receive-fixed, pay-floating interest swap ("Receiver Swaption") and options to enter into a pay-fixed, receive-floating interest rate swap ("Payor Swaption") at a future date or to settle the transaction for cash. The P/O securities consist of certain tranches of collateralized mortgage securities ("CMOs"), mortgage trust principal only securities and treasury principal only strips. These securities have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs and mortgage trust principal only securities should increase. This results 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 and mortgage trust principal only securities should decrease. This would result in an increase in the average lives of the P/O Securities and a decrease in the present values of their cashflows. The prices of the treasury principal only Strips are determined by the discount rate used to determine their present value, as interest rates decline the discount rate applied to the maturity principal payment declines, resulting in an increase in the price. An option on CPCs gives the holder the right to call a mortgage-backed security at par and receive the remaining cash flows from the particular pool. This option has a one year lockout, meaning it cannot be exercised until the end of the first year. After the lockout period, the option can be exercised at any time. The Servicing Hedge is designed to protect the value of the MSRs 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 MSRs increases while the value of the hedge instruments declines. With respect to the floors, options, caps, Swaptions, options on CPC and P/O Securities, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. The Company's exposure to loss on futures is related to changes in the LIBOR rate over the life of the contract. The Company was not a party to any futures contracts at November 30, 1999. With respect to the Interest Rate Swaps contracts entered into by the Company as of November 30, 1999, the Company estimates that its maximum exposure to loss over the contractual term is $1 million. With respect to the Capped Swaps contracts entered into by the Company as of November 30, 1999, the Company estimates that its maximum exposure over the contractual term is $9 million. Salaries and related expenses are summarized below for the quarters ended November 30, 1999 and 1998. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $55,324 $16,168 $26,475 $13,375 $111,342 Incentive Bonus 18,245 595 4,917 5,675 29,432 Payroll Taxes and Benefits 8,906 3,165 4,711 1,519 18,301 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $82,475 $19,928 $36,103 $20,569 $159,075 ============ ============= ============= ============= ------------ Average Number of Employees 5,308 2,320 2,164 638 10,430 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $56,175 $13,502 $23,347 $10,124 $ 103,148 Incentive Bonus 41,148 529 5,500 5,570 52,747 Payroll Taxes and Benefits 12,664 3,048 2,893 1,515 20,120 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $109,987 $17,079 $31,740 $17,209 $176,015 ============ ============= ============= ============= ------------ Average Number of Employees 5,849 2,026 1,885 695 10,455 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998 as a result of the Company's growth in servicing and other subsidiaries offset by a reduction in the production areas due to the decline in loan originations. Incentive bonuses earned during the quarter ended November 30, 1999 decreased primarily due to the decline in production volume. Occupancy and other office expenses for the quarter ended November 30, 1999 decreased to $67.9 million from $71.5 million for the quarter ended November 30, 1998. This was primarily due to a reduction in temporary personnel expense as a result of decreased production. Guarantee fees are paid to Fannie Mae, Freddie Mac, and Ginnie Mae ("GSEs") to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For the quarter ended November 30, 1999, guarantee fees expense increased 9% to $49.9 million, up from $45.6 million for the quarter ended November 30, 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated at the time of loan sales. Marketing expenses for the quarter ended November 30, 1999 decreased 7% to $15.9 million as compared to $17.1 million for the quarter ended November 30, 1998. Other operating expenses were $34.4 million for the quarter ended November 30, 1999 as compared to $43.4 million November 30, 1998. The decline was primarily due to lower loan production and reduced reserves for bad debts. The Company's pre-tax earnings by segment is summarized below. - -------------------------------------------- --------------------------------------- -------- Three months ended (Dollar amounts in millions) November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Loan Production $ 25,309 $141,465 Loan Servicing 127,684 4,893 Capital Markets 8,141 7,512 Other Activities 3,606 6,738 ============= ================ Pre-tax Earnings $164,740 $160,608 ============= ================ - ---------------------------------------------------------------------------------------------
Profitability of Loan Production Segment Loan production segment activities include loan origination and purchases, warehousing and sales. The decline in pre-tax earnings of $116.2 million was primarily attributable to decreased production combined with reduced margins on prime credit quality mortgages which in turn was attributable to the decline in refinance activity. These factors were partially offset by increased production and sales of higher margin home equity and subprime loans. Profitability of Loan Servicing Segment Loan servicing segment activities 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. The increase in pre-tax earnings of $122.8 million was primarily due to an increase in servicing revenues resulting from servicing portfolio growth and a reduction in MSR amortization and recovery of previous impairment both attributable to the decline in refinance activity. These positive factors were partially offset by higher servicing expenses driven by the growth in the servicing portfolio. Profitability of Capital Markets Segment Capital Markets segment activities include primarily the operations of Countrywide Securities Corporation ("CSC"), a registered broker dealer specializing in the secondary mortgage market. The increase in pre-tax earnings of $0.6 million was primarily due to CSC's increased trading volumes. Profitability of Other Activities In addition to loan production, loan servicing and capital markets, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting, and home inspection and flood zone determination services. In addition, through its subsidiaries, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For the quarter ended November 30, 1999, LandSafe Inc. contributed $0.6 million to the Company's pre-tax income compared to $7.8 million for the quarter ended November 30, 1998. The decrease in the profitability of LandSafe Inc. resulted primarily from decreased title business attributable to the decline in refinance activity. The operations of other activities, excluding LandSafe Inc., consist primarily of the holding company. These operations incurred pre-tax earnings of $3.0 million during the quarter ended November 30, 1999 compared to pre-tax loss of $1.1 million during the quarter ended November 30, 1998. The increase in pre-tax earnings was primarily due to the sale of Countrywide Financial Services, Inc. which resulted in a $4.4 million pre-tax gain. RESULTS OF OPERATIONS Nine months ended November 30, 1999 Compared to Nine months ended November 30, 1998 Revenues for the nine months ended November 30, 1999 increased 8% to $1.57 billion, up from $1.45 billion for the nine months ended November 30, 1998. Net earnings increased 9% to $310.4 million for the nine months ended November 30, 1999, up from $283.8 million for November 30, 1998. The increase in revenues and net earnings for the nine months ended November 30, 1999 compared to the nine months ended November 30, 1998 was primarily attributable to improved profitability in the loan servicing segment, together with an increased production contribution from non traditional loan products (home equity and sub-prime loans). This was partially offset by a decline in earnings from the Company's traditional prime loan origination business, attributable to the market-wide decline in loan refinancings. The total volume of loans produced by the Company decreased 18% to $55.5 billion for the nine months ended November 30, 1999, down from $67.8 billion for the nine months ended November 30, 1998. The decrease in loan production was primarily due to a decrease in the mortgage origination market, driven largely by a reduction in refinances. Total loan production volume by purpose and by interest rate type is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Purchase $35,131 $30,233 Refinance 20,402 37,579 ============= ================ Total Loan Volume $55,533 $67,812 ============= ================ ------------- ---------------- Fixed Rate $48,794 $64,033 Adjustable Rate 6,739 3,779 ============= ================ Total Loan Volume $55,533 $67,812 ============= ================ - --------------------------------------------------------------------------------------------- Total loan production volume by Division is summarized below. - -------------------------------------------- -------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine months ended November 30, - -------------------------------------------- -------------------------------------- -------- 1999 1998 ------------- --------------- Consumer Markets Division $16,747 $ 21,294 Wholesale Lending Division 16,110 22,590 Correspondent Lending Division 21,621 23,434 Full Spectrum Lending, Inc. 1,055 494 ============= =============== Total Loan Volume $55,533 $ 67,812 ============= =============== - -------------------------------------------- ------------- -------- --------------- --------
The factors which affect the relative volume of production among the Company's Divisions include the price competitiveness of each Division's various product offerings, the level of mortgage lending activity in each Division's market and the success of each Division's sales and marketing efforts. Non traditional loan production volume (which is included in the Company's total volume of loans produced) is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Sub-prime $3,056 $1,996 Home Equity Loans 2,757 1,690 ============= ================ Total Non Traditional Loan Volume $5,813 $3,686 ============= ================ - ---------------------------------------------------------------------------------------------
Loan origination fees decreased in the nine months ended November 30, 1999 as compared to the nine months ended November 30, 1998 primarily due to lower production and a change in the divisional mix. The Consumer Markets and Wholesale Lending Divisions (which, due to their cost structures, charge higher origination fees per dollar loaned than the Correspondent Division), comprised a lower percentage of total production in the nine months ended November 30, 1999 than in the nine months ended November 30, 1998. Gain on sale of loans also decreased in the nine months ended November 30, 1999 as compared to the nine months ended November 30, 1998 primarily due to lower production volume and reduced margins on prime credit quality mortgages partially offset by increased sales during the nine months ended November 30, 1999 of higher margin home equity and sub-prime loans. Net interest income (interest earned net of interest charges) increased to $71.9 million for the nine months ended November 30, 1999, up from $28.3 million for the nine months ended November 30, 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($128.1 million and $86.2 million for the nine months November 30, 1999 and the nine months ended November 30, 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($235.7 million and $263.1 million for the quarter ended November 30, 1999 and the nine months ended November 30, 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($164.4 million and $200.9 million for the nine months ended November 30, 1999 and the nine months ended November 30, 1998, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in inventory. The increase in net interest income from the mortgage loan inventory was primarily attributable to an increase in inventory levels as a result of a longer warehouse period combined with a higher net earnings rate during the nine months ended November 30, 1999. The decrease in interest expense related to the investment in servicing rights resulted primarily from a decrease in Interest Costs Incurred on Payoffs. The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances caused by a decrease in the amount of prepayments. During the nine months ended November 30, 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. The growth in the Company's servicing portfolio since November 30, 1998 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments and scheduled amortization. During the nine months ended November 30, 1999, the annual prepayment rate of the Company's servicing portfolio was 15%, compared to 28% for the nine months ended November 30, 1998. 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 housing market. The Company recorded MSR amortization net of impairment recovery for the nine months ended November 30, 1999 totaling $90.5 million (consisting of amortization amounting to $354.2 million reduced by recovery of previous impairment of $263.7 million), compared to $1.3 billion of amortization and impairment (consisting of amortization amounting to $416.4 million and impairment of $854.8 million) for the nine months ended November 30, 1998. The primary factors affecting the amount of amortization and impairment of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). In the nine months ended November 30, 1999, the Company recognized a net expense of $261.8 million from its Servicing Hedge. The net expense included unrealized net losses of $231.8 million and realized net expense of $30.0 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In the nine months ended November 30, 1998, the Company recognized a net benefit of $822.9 million from its Servicing Hedge. The net benefit included unrealized gains of $447.4 million and net realized gains of $375.5 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. Salaries and related expenses are summarized below for the nine months ended November 30, 1999 and 1998. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Nine months ended November 30, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $180,732 $46,500 $78,157 $40,560 $345,949 Incentive Bonus 81,199 2,090 15,989 18,102 117,380 Payroll Taxes and Benefits 36,299 9,575 14,461 5,166 65,501 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $298,230 $58,165 $108,607 $63,828 $528,830 ============ ============= ============= ============= ------------ Average Number of Employees 5,921 2,221 2,161 760 11,063 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Nine months ended November 30, 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $149,277 $38,370 $65,972 $26,859 $ 280,478 Incentive Bonus 112,344 1,462 15,392 13,787 142,985 Payroll Taxes and Benefits 36,848 8,667 11,214 4,063 60,792 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $298,469 $48,499 $92,578 $44,709 $484,255 ============ ============= ============= ============= ------------ Average Number of Employees 5,189 1,917 1,757 603 9,466 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during the nine months ended November 30, 1999 reflecting the continued expansion of the consumer branch network. This was partially offset by a reduction in loan processing personnel resulting from the decline in refinance activity. In addition, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries also contributed to the increase. Incentive bonuses earned during the nine months ended November 30, 1999 decreased primarily due to the reduction in loan production. Occupancy and other office expenses for the nine months ended November 30, 1999 increased to $211.2 million from $196.8 million for the nine months ended November 30, 1998. The increase was primarily due to: (i) the continued expansion of the consumer branch network; (ii) a larger servicing portfolio; and (iii) growth in the Company's non-mortgage banking activities. Guarantee fees are paid to Fannie Mae, Freddie Mac, and Ginnie Mae to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For the nine months ended November 30, 1999, guarantee fees expense increased 6% to $143.7 million, up from $135.7 million for the nine months ended November 30, 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated at the time of loan sales. Marketing expenses for the nine months ended November 30, 1999 increased 20% to $56.5 million compared to from $47.2 million for the nine months ended November 30, 1998. This increase supported the larger consumer branch network. Other operating expenses for the nine months ended November 30, 1999 decreased by 1% from the nine months ended November 30, 1998. This decrease was due primarily to a reduction in reserves for bad debt offset by the expansion of the consumer branch network, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries in the nine months ended November 30, 1999 as compared to the nine months ended November 30, 1998. The Company's pre-tax earnings by segment is summarized below. - -------------------------------------------- --------------------------------------- -------- Nine months ended (Dollar amounts in millions) November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Loan Production $251,467 $424,046 Loan Servicing 221,434 1,886 Capital Markets 23,493 19,546 Other Activities 12,415 19,771 ============= ================ Pre-tax Earnings $508,809 $465,249 ============= ================ - ---------------------------------------------------------------------------------------------
Profitability of Loan Production Segment Loan production segment activities include loan origination and purchases, warehousing and sales. The decrease of $172.5 million was primarily attributable to lower production, higher production costs and reduced margins on prime credit quality mortgages. These factors were partially offset by increased production and sales of higher margin home equity and subprime loans. Profitability of Loan Servicing Segment Loan servicing segment activities 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. The increase of $219.5 million is primarily due to an increase in servicing revenues resulting from servicing portfolio growth combined with a reduction in the MSR amortization and recovery of previous MSR impairment attributable to the decline in refinance activity. These positive factors were partially offset by higher servicing costs driven by the increase in the servicing portfolio. Profitability of Capital Markets Segment Capital Markets segment activities include primarily the operations of CSC, a registered broker dealer specializing in the secondary mortgage market. The increase of $4.0 million was primarily due to increased trading volumes. Profitability of Other Activities In addition to loan production, loan servicing and capital markets, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting, and home inspection and flood zone determination services. In addition, through its subsidiaries, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For the nine months ended November 30, 1999, LandSafe Inc. contributed $10.9 million to the Company's pre-tax income compared to $18.6 million for the nine months ended November 30, 1998. The decrease in the profitability of LandSafe Inc. resulted primarily from decreased title business attributable to the decline in refinance activity. The operations of other activities, excluding LandSafe Inc., consist primarily of the holding company. These operations incurred pre-tax income of $1.5 million during the nine months ended November 30, 1999 compared to pre-tax income of $1.2 million during the nine months ended November 30, 1998. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination and loan servicing business segments, which are counter cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory and MBS held for sale, MSRs, mortgage-backed securities retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk. As part of its interest rate risk management process, the Company performs various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses incorporate scenarios including selected hypothetical (instantaneous) parallel shifts in the yield curve. Various modeling techniques are employed to value the financial instruments. For mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread ("OAS") model is used. The primary assumptions used in this model are the implied market volatility of interest rates and prepayment speeds. For options and interest rate floors, an option-pricing model is used. The primary assumption used in this model is implied market volatility of interest rates. MSRs and residual interests are valued using discounted cash flow models. The primary assumptions used in these models are prepayment rates, discount rates and credit losses. Utilizing the sensitivity analyses described above, as of November 30, 1999, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $3.8 million after-tax loss related to its trading securities and that there would be no loss related to its other financial instruments. As of November 30, 1999, the Company estimates that this combined after-tax loss of $3.8 million is the largest such loss that would occur within the range of reasonably possible interest rate changes. These sensitivity analyses are limited by the fact that they are performed at a particular point in time, are subject to the accuracy of various assumptions used including prepayment speed forecasts, and do not incorporate other factors that would impact the Company's financial performance in such a scenario. Consequently, the preceding estimates should not be viewed as a forecast. An additional market risk facing the Company is foreign currency risk. The Company has issued foreign currency denominated medium-term notes (See Note E). The Company manages the foreign currency risk associated with such medium-term notes by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into the Company's reporting currency (i.e., U.S. dollars), thereby eliminating the associated foreign currency risk (subject to the performance of the various counterparties to the currency swaps). As a result, hypothetical changes in the exchange rates of foreign currencies denominating such medium-term notes would not have a net financial impact on future earnings, fair values or cash flows. Inflation Inflation affects the Company most significantly 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 decreases, particularly from loan refinancings. Although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio and reducing amortization and impairment of the MSRs, as well as Interest Costs Incurred on Payoffs, and because the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings primarily due to increased amortization and impairment of the MSRs, a decreased rate of interest earned from the custodial balances and increased Interest Costs Incurred on Payoffs. The servicing hedge is designed to mitigate the impact of changing interest rates on servicing-related earnings. 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 its mortgage loan inventory and its investment in MSRs. To meet these needs, the Company currently utilizes commercial paper supported by the revolving credit facility, medium-term notes, senior debt, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities, securitization of servicing fee income and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from the revolving credit facility and public offerings of common and preferred stock. Certain of the debt obligations of the Company and Countrywide Home Loans, Inc. ("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 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 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 the mortgage loans it originates and purchases to investors but generally retains the right to service the loans, thereby increasing the Company's investment in MSRs. 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, 1999, the Company's operating activities provided cash of approximately $2.5 billion. In the nine months ended November 30, 1998, operating activities used approximately $1.6 billion. The increase in cash provided by operating activities was due primarily to the reduction in mortgage loan inventory driven by the reduction in loan originations. Investing Activities The primary investing activity for which cash was used by the Company was the investment in MSRs and the acquisition of Balboa Life and Casualty Group. Net cash used by investing activities was $1.3 billion for the nine months ended November 30, 1999 and $1.2 billion for the nine months ended November 30, 1998. Financing Activities Net cash used by financing activities amounted to $1.1 billion for the nine months ended November 30, 1999. Net cash provided by financing activities amounted to $2.9 billion for the nine months ended November 30, 1998. The increase or decrease in cash flow from financing activities was primarily the result of the change in the Company's mortgage loan inventory and investment in MSRs. Prospective Trends Applications and Pipeline of Loans in Process For the month ended December 31, 1999, the Company received new loan applications at an average daily rate of $247 million. As of December 31, 1999, the Company's pipeline of loans in process was $7.0 billion. This compares to a daily application rate for the month ended in December 31, 1998 of $569 million and a pipeline of loans in process as of December 31, 1998 of $15.5 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 as of December 31, 1999 was $1.6 billion and as of December 31, 1998 was $1.1 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage loans, the level of competition in the market, the direction of interest rates, seasonal factors and general economic conditions. Market Factors Loan production decreased 47% from the quarter ended November 30, 1998 to the quarter ended November 30, 1999. This decrease was primarily due to a smaller mortgage origination market, driven by reduced refinances. Home purchase related loan production was essentially unchanged during the same period. The prepayment rate in the servicing portfolio decreased from 30% for the quarter ended November 30, 1998 to 9% for the quarter ended November 30, 1999. This was due primarily to a decrease in refinances. The loan origination segment has recently experienced increased pricing competition. The Company attributes this to excess capacity currently in the marketplace caused by the significant drop in refinance activity. This pricing competition is being exacerbated by increased consumer demand for adjustable rate mortgages, which certain banks and thrifts are currently pricing very competitively. The Company expects this heightened pricing competition to continue until remaining excess capacity in the marketplace is eliminated. The Company's California mortgage loan production (as measured by principal balance) constituted 20% of its total production during the quarter ended November 30, 1999 and 23% during the quarter ended November 30, 1998. 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 impacted negatively. The Company has striven to diversify its mortgage banking activities geographically to mitigate such effects. The delinquency rate in the Company's servicing portfolio, excluding sub-servicing, increased to 3.97% at November 30, 1999 from 3.61% as of November 30, 1998. The Company believes that this increase was primarily the result of changes in portfolio mix and aging. Sub-prime loans (which tend to experience higher delinquency rates than prime loans) represented approximately 3% of the total portfolio as of November 30, 1999, up from 1% as of November 30, 1998. In addition, the weighted average age of the government loans increased to 33 months at November 30, 1999 from 31 months in November 30, 1998. 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. Furthermore, 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 servicing portfolio, excluding sub-servicing, that are in foreclosure decreased to 0.33% as of November 30, 1999 from 0.36% as of November 30, 1998. Generally, the Company is not exposed to credit risk. Because the Company services substantially all conventional loans on a non-recourse basis, related foreclosure losses are generally the responsibility of the investor or insurer and not the Company. While the Company does not generally retain credit risk with respect to the prime credit quality first mortgage loans it sells, it does have potential liability under representations and warranties made to purchasers and insurers of the loans. In the event of a breach of these representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent loss on the mortgage loan may be borne by the Company. Similarly, government loans serviced by the Company (24% of the Company's servicing portfolio as of November 30, 1999) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Administration. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Administration is inadequate to cover the total credit losses incurred. The Company retains credit risk on the home equity and sub-prime loans it securitizes, through retention of a subordinated interest. As of November 30, 1999, the Company had investments in such subordinated interests amounting to $357.4 million. Servicing Hedge As previously discussed, the Company's Servicing Hedge is designed to protect the value of its investment in MSRs 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 MSRs generally increases. There can be no assurance that, in periods of increasing interest rates, the increase in value of the MSRs will fully offset the decline in value of the Servicing Hedge. Likewise, there can be no assurance that, in periods of declining interest rates, that the Servicing Hedge will generate gains, or if gains are generated, that they will fully offset impairment of the MSRs. Implementation of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize the fair value of all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement will become effective in the fiscal year ended February 28, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. Year 2000 Update The Company conducted tests of its systems and applications, including electronic interfaces with business partners, throughout the weekend of January 1 and 2, 2000. To date, the Company has not experienced any material issues associated with the date rollover into the year 2000. The Company continues to monitor its systems and applications for such issues in order to address them promptly, should any arise. The Company had four distinct Year 2000 Projects, each of which focused on a particular critical area. The Company's primary platform is the IBM AS/400 which contains all of the data relating to the origination and servicing of the home loans in the Company's portfolio. As of December 31, 1998 the Company had substantially reprogrammed and re-engineered the system to incorporate four-digit century date fields by testing the function and accuracy of the reprogrammed fields, implementing the revised code and forward-date testing of the more than 17,000 production programs on the AS/400. Many of the Company's Client Server applications have been developed in-house and in a Year 2000 compliant format. The majority of these applications interface with the AS/400. The Company reviewed and forward-date tested each of its mission critical and less critical Client Server applications to confirm their Year 2000 readiness. Additionally, as part of this project, the Company tested the interfaces between the individual critical Client Server applications and the AS/400 to confirm that accurate data is exchanged. Newly-developed Client Server applications were forward-date tested before they were implemented into production. The Company's Infrastructure Project inventoried the personal computers used by the Company's employees nationwide to determine the Year 2000 readiness of these computers. As part of the Infrastructure Project, the Company also identified "shrink-wrapped" and desktop software used company-wide, as well as desktop software supporting individuals and individual business units, in order to determine whether the vendor's products were compliant. This Project also monitored websites and other available information concerning software and hardware vendors and disseminated the latest available information to those business units relying on the product. With respect to non-compliant software, the Company either sought alternative sources of similar applications or developed its own applications. The Infrastructure Project inventoried, assessed, corrected and forward-date tested the Company's mission critical wide area network components, telecommunications systems and unique business systems. Additionally, the Infrastructure Project personnel, along with personnel from the Company's Facilities Department, tested the energy management, environmental and safety ad security systems of the Company's corporate facilities to determine that they would operate satisfactorily in the Year 2000 and beyond. The Communications Project personnel developed a database for collecting information regarding the Year 2000 status of the Company's strategic business partners and other vendors and suppliers to achieve a reasonable understanding of the Year 2000 readiness and contingency plans of those entities in advance of the Year 2000. Contingency Planning With the assistance of a vendor specializing in business continuity planning, the Company reviewed and improved its business continuity procedures on a company-wide basis. The business analysis aspect of the contingency planning process also served as a means of verifying the Company's inventories of Client Server applications, Infrastructure hardware and software, vendors and suppliers, external and internal interfaces and business partners. All mission critical business units participated in a major disaster simulation to test the interaction of the business recovery plans of multiple business units. Costs The total cost associated with the Company's Year 2000 efforts is not material to the Company's financial position. The Company expensed these costs during the period in which they were incurred. [The estimated total cost of the Year 2000 Project is approximately $36 million, of which $34 million had been incurred through November 30, 1999.] Although the Company's expectations about future costs associated with the Year 2000 are subject to uncertainties, in light of the minimal issues occurring to date the Company believes that the actual costs will not differ materially from the Company's expectations. Risks Due to the global nature of the Year 2000 issue, the Company cannot determine all of the consequences the Year 2000 may have on its business and operations. The Company believes that in light of minimal issues occurring to date, the efforts of its Year 2000 Projects, including the Contingency Planning aspect, the possibility of material business interruptions is unlikely. However, there may be instances where the Company has relied on third party information, which proves to be unreliable and could have an adverse effect on the Company. Page 34 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 in the electronic filing with the SEC). (b) Reports on Form 8-K. None. 35 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 13, 2000 /s/ Stanford L. Kurland -------------------------------------- Senior Managing Director and Chief Operating Officer DATE: January 13, 2000 /s/ Carlos M. Garcia -------------------------------------- Managing Director; Finance, Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) EX-11 2 STATEMENT REGARDING COMPUTATION OF EPS Page 37 Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Nine Months Ended November 30, 1999 1998 ----------------- -- ---------------- (Amounts in thousands, except per share data) Basic Net earnings applicable to common stock $310,446 $283,802 ================ ================= Average shares outstanding 112,992 111,065 ================ ================= Per share amount $2.75 $2.56 ================ ================= Diluted Net earnings applicable to common stock $310,446 $283,802 ================ ================= Average shares outstanding 112,992 111,065 Net effect of dilutive stock options -- based on the treasury stock method using the average market price. 4,053 5,749 ---------------- ----------------- Total average shares 117,045 116,814 ================ ================= Per share amount $2.65 $2.43 ================ =================
EX-12 3 STATEMENT RE: COMPUTATION OF RATIOS 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, 1999 and 1998 and for the five fiscal years ended February 28, 1999 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), -------------------------- ------------------------------------------------------------------ 1999 1998 1999 1998 1997 1996 1995 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Net earnings $310,446 $283,802 $385,401 $344,983 $257,358 $195,720 $ 88,407 Income tax expense 198,363 181,447 246,404 220,563 164,540 130,480 58,938 Interest charges 700,836 722,752 983,829 568,359 423,447 337,655 267,685 Interest portion of rental Expense 14,180 10,457 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Earnings available to cover fixed charges $1,223,825 $1,198,458 $1,630,532 $1,143,960 $852,765 $670,658 $422,409 ============ ============= ============ ============= ============ ============ ============= Fixed charges Interest charges $700,836 $722,752 $983,829 $568,359 $423,447 $337,655 $267,685 Interest portion of rental Expense 14,180 10,457 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Total fixed charges $715,016 $733,209 $998,727 $578,414 $430,867 $344,458 $275,064 ============ ============= ============ ============= ============ ============ ============= Ratio of earnings to fixed Charges 1.71 1.63 1.63 1.98 1.98 1.95 1.54 ============ ============= ============ ============= ============ ============ =============
EX-27 4 FINANCIAL DATA SCHEDULE
5 0000025191 Countrywide Credit Industries 1,000 1.00 9-MOS FEB-28-2000 MAR-01-1999 NOV-30-1999 1.00 171,503 0 0 0 0 0 354,470 202,678 15,570,455 12,287,487 0 0 0 5,664 2,777,304 15,570,455 0 1,565,797 0 1,056,988 0 0 0 508,809 198,363 310,446 0 0 0 310,446 2.75 2.65
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