-----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, RsJ1l/jACznrXBLaBgeZrSzcYMv3ViKteFPH6QqIkepHtOWPOT9gzbpxWWBYe6IE s4ipuGpGUxMpbnx2GuULYg== 0000025191-98-000010.txt : 19981016 0000025191-98-000010.hdr.sgml : 19981016 ACCESSION NUMBER: 0000025191-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981015 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 98726409 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 1 QUARTERLY FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1998 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 issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 14, 1998 ----- ------------------------------- Common Stock $.05 par value 111,863,353 Page 2 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollar amounts in thousands) ASSETS
August 31, February 28, 1998 1998 ------------------ ------------------- Cash $ 32,710 $ 10,707 Mortgage loans and mortgage-backed securities held for sale 5,503,396 5,292,191 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 260,031 226,330 Mortgage servicing rights, net 3,880,270 3,612,010 Other assets 4,574,856 3,077,943 ------------------ ------------------- Total assets $14,251,263 $12,219,181 ================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $4,521,343 $3,945,606 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $8,530,351 $7,475,221 Drafts payable issued in connection with mortgage loan closings 467,598 764,285 Accounts payable, accrued liabilities and other 1,411,934 518,648 Deferred income taxes 998,298 873,084 ------------------ ------------------- Total liabilities 11,408,181 9,631,238 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 shares of $0.05 par value; issued and outstanding, none - - Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and outstanding, 111,463,471 shares at August 31, 1998 and 109,205,579 shares at February 28, 1998 5,573 5,460 Additional paid-in capital 1,116,082 1,049,365 Accumulated other comprehensive income 23,871 3,697 Retained earnings 1,197,556 1,029,421 ------------------ ------------------- Total shareholders' equity 2,343,082 2,087,943 ------------------ ------------------- Total liabilities and shareholders' equity $14,251,263 $12,219,181 ================== =================== Borrower and investor custodial accounts $4,521,343 $3,945,606 ================== =================== The accompanying notes are an integral part of these statements.
Page 5 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands, except earnings per share)
Three Months Six Months Ended August 31, Ended August 31, 1998 1997 1998 1997 -------------- -------------- -------------- -------------- Revenues Loan origination fees $ 157,036 $ 65,155 $ 295,806 $ 118,654 Gain on sale of loans, net of commitment fees 171,805 95,396 330,832 185,631 -------------- -------------- -------------- -------------- Loan production revenue 328,841 160,551 626,638 304,285 Interest earned 188,289 103,682 368,241 185,862 Interest charges (178,662) (99,988) (347,082) (181,822) -------------- -------------- -------------- -------------- Net interest income 9,627 3,694 21,159 4,040 Loan servicing income 251,483 221,768 494,174 436,083 Amortization and impairment/recovery of mortgage servicing rights (440,962) (105,385) (590,304) (131,341) Servicing hedge benefit (expense) 289,230 33,462 289,861 (11,281) -------------- -------------- -------------- -------------- Net loan administration income 99,751 149,845 193,731 293,461 Commissions, fees and other income 43,938 33,685 90,894 64,634 Gain on sale of subsidiary - 57,381 - 57,381 -------------- -------------- -------------- -------------- Total revenues 482,157 405,156 932,422 723,801 Expenses Salaries and related expenses 161,753 100,544 308,240 188,585 Occupancy and other office expenses 66,140 41,422 128,817 79,488 Guarantee fees 45,354 42,812 90,021 85,388 Marketing expenses 15,589 10,322 30,104 20,642 Other operating expenses 37,457 30,172 70,599 55,111 -------------- -------------- -------------- -------------- Total expenses 326,293 225,272 627,781 429,214 -------------- -------------- -------------- -------------- Earnings before income taxes 155,864 179,884 304,641 294,587 Provision for income taxes 60,787 70,155 118,810 114,889 -------------- -------------- -------------- -------------- NET EARNINGS $ 95,077 $ 109,729 $ 185,831 $ 179,698 ============== ============== ============== ============== Earnings per share Basic $0.86 $1.03 $1.68 $1.69 Diluted $0.81 $0.98 $1.59 $1.63 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)
Six Months Ended August 31, 1998 1997 ---------------- ---------------- Cash flows from operating activities: Net earnings $ 185,831 $ 179,698 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Gain on sale of available-for-sale securities (14,846) - Gain on sale of subsidiary - (57,381) Amortization and impairment/recovery of mortgage servicing rights 590,304 131,341 Depreciation and other amortization 26,834 22,769 Deferred income taxes 118,810 114,574 Origination and purchase of loans held for sale (43,809,607) (19,921,289) Principal repayments and sale of loans 43,598,402 18,767,433 ---------------- ---------------- Increase in mortgage loans and mortgage-backed securities held for sale (211,205) (1,153,856) Increase in other assets (1,506,858) (686,831) Increase in accounts payable and accrued liabilities 893,286 382,884 ---------------- ---------------- Net cash provided (used) by operating activities 82,156 (1,066,802) ---------------- ---------------- Cash flows from investing activities: Additions to mortgage servicing rights (858,564) (473,653) Purchase of property, equipment and leasehold improvements - net (53,036) (32,290) Proceeds from sale of available-for-sale securities 49,676 - ---------------- ---------------- Net cash used by investing activities (861,924) (505,943) ---------------- ---------------- Cash flows from financing activities: Net (decrease) increase in warehouse debt and other short-term borrowings (921,976) 1,319,563 Issuance of long-term debt 1,824,315 365,000 Repayment of long-term debt (143,896) (336,732) Issuance of Company obligated mandatorily redeemable securities of subsidiary trusts holding company guaranteed related subordinated debt - 200,000 Issuance of common stock 61,024 41,292 Cash dividends paid (17,696) (17,071) ---------------- ---------------- Net cash provided by financing activities 801,771 1,572,052 ---------------- ---------------- Net increase (decrease) in cash 22,003 (693) Cash at beginning of period 10,707 18,269 ================ ================ Cash at end of period $ 32,710 $ 17,576 ================ ================ Supplemental cash flow information: Cash used to pay interest $ 371,491 $ 188,589 Cash used to pay income taxes $ 1,279 $ 52 Noncash financing activities: Unrealized gain (loss) on available-for-sale securities, net of tax $ 20,174 $ (427) 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 Six Months Ended August 31, Ended August 31, 1998 1997 1998 1997 -------------- ------------- -------------- ------------- NET EARNINGS $95,077 $109,729 $185,831 $179,698 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period 19,809 8,746 29,230 (427) Less: reclassification adjustment for gains included in net earnings (7,600) - (9,056) - -------------- ------------- -------------- ------------- Other comprehensive income 12,209 8,746 20,174 (427) -------------- ------------- -------------- ------------- COMPREHENSIVE INCOME $107,286 $118,475 $206,005 $179,271 ============== ============= ============== =============
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 quarter ended August 31, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 1999. 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, 1998 of Countrywide Credit Industries, Inc. (the "Company"). Certain amounts reflected in the consolidated financial statements for the six-months period ended August 31, 1997 have been reclassified to conform to the presentation for the six-months period ended August 31, 1998. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows.
--------------------------------------------- ---------------------- ----------------------- Six Months Ended (Dollar amounts in thousands) August 31, 1998 --------------------------------------------- -- ---------------- -- ------------------- --- Mortgage Servicing Rights Balance at beginning of period $3,653,318 Additions 858,564 Scheduled amortization (268,986) Hedge losses (gains) applied (317,267) ------------------- Balance before valuation reserve at end of period 3,925,629 ------------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (41,308) Reductions (additions) (4,051) ------------------ Balance at end of period (45,359) ================== Mortgage Servicing Rights, net $3,880,270 ================== --------------------------------------------- -- ---------------- -- ------------------ ----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Page 7 NOTE C - OTHER ASSETS Other assets consisted of the following.
------------------------------------------------------------------ -------------------- ------------------------- (Dollar amounts in thousands) August 31, 1998 February 28, 1998 ------------------------------------------------------------------ -------------------- ------------------------- Servicing hedge instruments $ 1,266,694 $ 801,335 Trading securities 972,666 255,216 Receivables related to broker-dealer activities 586,282 148,976 Mortgage-backed securities retained in securitization 460,055 466,259 Rewarehoused FHA and VA loans 326,269 426,407 Servicing related advances 197,029 231,437 Loans held for investment 102,977 115,713 Accrued interest 96,814 84,601 Equity securities 89,598 96,152 Other 476,472 451,847 ----------------- ---------------- $4,574,856 $3,077,943 ================= ================ ------------------------------------------------------------------ -- ----------------- --- ---------------- ----
NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows.
-------------------------------- ---------------- - ------------------------------------ -- ---------------- --- August 31, 1998 ---------------- - ------------------------------------ -- ---------------- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value -------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- CMOs $171,766 $27,215 - $198,981 Equity Securities 7,315 11,917 - 19,232 ================ ================= ================ ================ $179,081 $39,132 - $218,213 ================ ================= ================ ================ -------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
-------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 28, 1998 ---------------- - ------------------------------------ -- ---------------- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value -------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- CMOs $204,234 - ($12,411) $191,823 Equity Securities 7,315 18,471 - 25,786 ================ ================= ================ ================ $211,549 $18,471 ($12,411) $217,609 ================ ================= ================ ================ -------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE E - NOTES PAYABLE Notes payable consisted of the following.
------------------------------------------------------------------ -------------------- ------------------------- (Dollar amounts in thousands August 31, 1998 February 28, 1998 ------------------------------------------------------------------ -------------------- ------------------------- Commercial paper $1,884,208 $2,119,330 Medium-term notes, Series A, B, C, D, E, F, G and Euro 5,819,500 4,137,185 Repurchase agreements 625,954 181,121 Subordinated notes 200,000 200,000 Unsecured notes payable - 835,000 Other notes payable 689 2,585 ================= ================ $8,530,351 $7,475,221 ================= ================ ------------------------------------------------------------------ -- ----------------- --- ---------------- ----
Revolving Credit Facility and Commercial Paper As of August 31, 1998, Countrywide Home Loans, Inc. ("CHL"), the Company's mortgage banking subsidiary, had an unsecured credit agreement (revolving credit facility) with forty-five commercial banks permitting CHL to borrow an aggregate maximum amount of $4.0 billion. This revolving credit facility consists of a five year facility of $3.0 billion, which expires on September 24, 2002, and a one year facility of $1.0 billion which was extended on September 23, 1998 to September 22, 1999. The facility contains various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. On April 15, 1998, CHL entered into an additional one year unsecured credit agreement (revolving credit facility), which expires April 14, 1999, with sixteen of the forty-five banks referenced above for total commitments of $1.3 billion. This facility contains terms consistent with the $4.0 billion revolving credit facility and as consideration for the facility, CHL pays annual commitment fees of $1.05 million. The purpose of the revolving credit facilities is to provide liquidity back-up for CHL's $5.3 billion commercial paper program. No amount was outstanding under either revolving credit facility at August 31, 1998. The interest rate on direct borrowings is based on a variety of sources, including the prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies, depending on CHL's credit ratings. The weighted average borrowing rate on commercial paper borrowings for the six months ended August 31, 1998 was 5.59%. The weighted average borrowing rate on commercial paper outstanding as of August 31, 1998 was 5.59%. NOTE E - NOTES PAYABLE (Continued) Medium-Term Notes As of August 31, 1998, 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 $ - $ 173,500 $ 173,500 7.29 % 8.79 % Mar. 1999 Mar. 2002 Series B - 351,000 351,000 6.08 % 6.98 % Jul. 1999 Aug. 2005 Series C 208,000 197,000 405,000 5.27 % 8.43 % Apr. 1999 Mar. 2004 Series D 75,000 385,000 460,000 6.00 % 6.88 % Aug. 2000 Sep. 2005 Series E 310,000 690,000 1,000,000 5.75 % 7.45 % Feb. 2000 Oct. 2008 Series F 656,000 1,344,000 2,000,000 5.59 % 7.00 % Oct. 1999 May 2013 Series G 550,000 25,000 575,000 5.66 % 7.00 % Jul. 1999 Aug. 2018 Euro Notes 855,000 - 855,000 5.69 % 6.16 % Jul. 1999 Aug. 2008 ------------------------------------------ Total $ 2,654,000 $ 3,165,500 $ 5,819,500 ==========================================
- -------------------------------------------------------------------------------- As of August 31, 1998, 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 six months ended August 31, 1998, including the effect of the interest rate swap agreements, was 6.08%. Repurchase Agreements As of August 31, 1998, the Company had entered into short-term financing arrangements to sell mortgage-backed securities ("MBS") under agreements to repurchase. The weighted average borrowing rate for the six months ended August 31, 1998 was 5.64%. The weighted average borrowing rate on repurchase agreements outstanding as of August 31, 1998 was 5.69%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers, and all agreements are to repurchase the same or substantially identical MBS. NOTE E - NOTES PAYABLE (Continued) Pre-Sale Funding Facilities As of August 31, 1998, 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. Interest rates are based on LIBOR, federal funds and/or the prevailing rates for MBS repurchase agreements. The weighted average borrowing rate for all such facilities for the six months ended August 31, 1998 was 5.70%. As of August 31, 1998, the Company had no outstanding borrowings under any of these facilities. NOTE F - FINANCIAL INSTRUMENTS The following summarizes the notional amounts of Servicing Hedge derivative contracts.
- ------------------------------------- ------------------- -------------------- ------------------- --------------------- (Dollar amounts in millions) Balance, Balance, February 28, 1998 Dispositions/ August 31, Additions Expirations 1998 - ------------------------------------- ------------------- -------------------- ------------------- --------------------- Interest Rate Floors $33,000 7,500 (5,500) $35,000 Long Call Options on Interest Rate Futures $79,400 26,520 (42,720) $63,200 Long Put Options on Interest Rate Futures $ 9,800 15,350 (1,350) $23,800 Short Call Options on Interest Rate Futures $ - 20,000 (16,000) $ 4,000 Interest Rate Futures $ 5,000 10,000 - $15,000 Capped Swaps $ 1,000 - - $ 1,000 Interest Rate Swaps $ 3,900 7,500 - $11,400 Interest Rate Cap $ 4,500 - - $ 4,500 Swaptions $ 1,850 17,500 - $19,350 Options on Callable Pass-through Certificates $ 2,561 800 - $ 3,361 - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
NOTE G - LEGAL PROCEEDINGS For a discussion of Briggs v. Countrywide, et. al and two similar cases, see the Company's report on Form 10Q for the quarter ended May 31, 1998. The Company and certain subsidiaries are defendants in various lawsuits involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for CHL was as follows.
-- ----------------------------------------- ---- ------------------------------------------------- --------- (Dollar amounts in thousands) August 31, 1998 February 28, 1998 -- ---------------------------------------------- --------------------------- -- ---------------------------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $ 5,503,396 $ 5,292,191 Other assets 7,024,914 6,216,382 ============== ============== Total assets $12,528,310 $11,508,573 ============== ============== Debt $ 8,964,797 $ 8,747,794 Other liabilities 1,366,228 1,027,884 Equity 2,197,285 1,732,895 ============== ============== Total liabilities and equity $12,528,310 $11,508,573 ============== ============== -- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
--- ----------------------------------------- --- -------------------------------------------------- -------- (Dollar amounts in thousands) Six Months Ended August 31, --------------- ---------- --------------- 1998 1997 --- --------------------------------------------- ------- --------------- ---------- --------------- -------- Statements of Earnings: Revenues $790,473 $587,995 Expenses 542,574 387,833 Provision for income taxes 96,681 77,747 =============== =============== Net earnings $151,218 $122,415 =============== =============== --- --------------------------------------------- ------- --------------- ---------- --------------- --------
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"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. 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, 2001. The Company has not yet determined the impact on the Consolidated Financial Statements upon adoption of this Standard. NOTE J - SUBSEQUENT EVENTS On September 23, 1998, CHL entered into an extension of its one year revolving credit facility which extended that facility to September 22, 1999. On September 23, 1998, the Company declared a cash dividend of $0.08 per common share payable November 2, 1998 to shareholders of record on October 15, 1998. NOTE K - EARNINGS PER SHARE On February 28, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"), which supersedes Accounting Principles Board Opinion No. 15 of the same name. SFAS No. 128 simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international standards. SFAS No.128 was effective for financial statements issued for periods ending after December 15, 1997, with earlier applicationnot permitted. Upon adoption, all prior EPS data was restated. Basic EPS 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 six month periods ended August 31, 1998 and 1997, computed under the provisions of SFAS No. 128.
- ------------------------ -- -- ----- ------------------------------------ -- ----- ------ Three Months Ended August 31, -- -- ----- ------------------------------------ -- ----- ------ 1998 1997 ----------- -------- --------- --------- --------- ---------- (Dollar amounts in thousands, except per Net Per-Share Net Per-Share share data) Earnings Shares Amount Earnings Shares Amount - ------------------------ -------- -------- --------- --------- -------- ---------- Net earnings $ 95,077 $109,729 =========== ========= Basic EPS Net earnings available to common shareholders $ 95,077 111,153 $ 0.86 $109,729 107,052 $1.03 Effect of dilutive stock options - 6,207 - 4,271 ----------- -------- --------- --------- Diluted EPS Net earnings available to common shareholders $ 95,077 117,360 $ 0.81 $109,729 111,323 $0.98 =========== ======== ========= ========= ========= ----------
- ------------------------ ----------- -------- --------- -- --------- ---------
- ------------------------ -- -- ----- ------------------------------------ -- ----- ------ Six Months Ended August 31, -- -- ----- ------------------------------------ -- ----- ------ 1998 1997 ----------- -------- --------- ---------- -------- ---------- (Dollar amounts in thousands, except per Net Per-Share Net Per-Share share data) Earnings Shares Amount Earnings Shares Amount - ------------------------ --------- -------- --------- --------- -------- ---------- Net earnings $ 185,831 $ 179,698 =========== ========== Basic EPS Net earnings available to common shareholders $ 185,831 110,640 $ 1.68 $ 179,698 106,655 $1.69 Effect of dilutive stock options - 6,260 - 3,588 ----------- -------- ---------- -------- Diluted EPS Net earnings available to common shareholders $ 185.831 116,900 $ 1.59 $ 179,698 110,243 $1.63 =========== ======== ========= ========== ======== ----------
- ------------------------ ----------- -------- --------- -- ---------- -------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 21 FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain 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; and (5) competition within the mortgage banking industry. RESULTS OF OPERATIONS Quarter Ended August 31, 1998 Compared to Quarter Ended August 31, 1997 Revenues from ongoing operations for the quarter ended August 31, 1998 increased 39% to $482.2 million from $347.8 million for the quarter ended August 31, 1997. Net earnings from ongoing operations increased 27% to $95.1 million for the quarter ended August 31, 1998 from $74.7 million for the quarter ended August 31, 1997. Both revenues and net earnings from ongoing operations for the quarter ended August 31, 1997 exclude a nonrecurring pre-tax gain of $57.4 million on the sale of a subsidiary. The increase in revenues and net earnings from ongoing operations for the quarter ended August 31, 1998 compared to the quarter ended August 31, 1997 was primarily attributable to higher loan production volume for the quarter ended August 31, 1998. An increase in the size of the Company's servicing portfolio also contributed to the increase in revenues and net earnings for the quarter ended August 31, 1998 compared to the quarter ended August 31, 1997. These positive factors were partially offset by an increase in amortization of the servicing asset and an increase in expenses for the quarter ended August 31, 1998 over the quarter ended August 31, 1997. The total volume of loans produced increased 117% to $22.9 billion for the quarter ended August 31, 1998 from $10.6 billion for the quarter ended August 31, 1997. The increase in loan production was primarily due to generally lower interest rates that prevailed during the quarter ended August 31, 1998 compared to the quarter ended August 31, 1997, as well as to the continued expansion of the Company's Consumer Markets and Wholesale Lending Divisions. Refinancings totaled $11.4 billion, or 50% of total fundings, for the quarter ended August 31, 1998, as compared to $3.0 billion, or 28% of total fundings, for the quarter ended August 31, 1997. Fixed-rate mortgage loan production totaled $21.7 billion, or 95% of total fundings, for the quarter ended August 31, 1998, as compared to $7.3 billion, or 70% of total fundings, for the quarter ended August 31, 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total loan volume in the Company's production Divisions is summarized below.
- -------------------------------------------- ------------------------------------ -------- (Dollar amounts in millions) Three Months Ended August 31, - -------------------------------------------- ------------------------------------ -------- 1998 1997 ------------- ------------- Consumer Markets Division $ 7,258 $ 3,025 Wholesale Lending Division 7,527 3,169 Correspondent Lending Division 7,962 4,367 Full Spectrum Lending, Inc. 187 - ============= ============= Total Loan Volume $22,934 $10,561 ============= =============
- -------------------------------------------- ------------- -------- ----------- The factors that affect the relative volume of production among the Company's Divisions include the price competitiveness of each Division's product offerings, the level of mortgage lending activity in each Division's market and the success of each Division's sales and marketing efforts. Included in the Company's total volume of loans produced is $613 million of home equity loans funded in the quarter ended August 31, 1998 and $377 million funded in the quarter ended August 31, 1997. Sub-prime loan production, which is also included in the Company's total production volume, was $872 million in the quarter ended August 31, 1998 and $388 million in the quarter ended August 31, 1997. At August 31, 1998 and 1997, the Company's pipeline of loans in process was $13.1 billion and $6.0 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process has funded. In addition, at August 31, 1998, the Company had committed to make loans in the amount of $1.3 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). At August 31, 1997, the LOCK 'N SHOP Pipeline was $1.2 billion. For the quarters ended August 31, 1998 and 1997, the Company received 287,748 and 153,223 new loan applications, respectively, at an average daily rate of $499 million and $252 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 increased during the quarter ended August 31, 1998 as compared to the quarter ended August 31, 1997 due to higher production and a change in the Divisional mix. The Consumer Markets and Wholesale Lending Divisions (which, due to their higher cost structure, charge higher origination fees per dollar loaned) comprised a greater percentage of total production in the quarter ended August 31, 1998 than in the quarter ended August 31, 1997. Gain on sale of loans improved in the quarter ended August 31, 1998 as compared to the quarter ended August 31, 1997 primarily due to higher loan production volume during the quarter ended August 31, 1998. The sale of home equity loans contributed $17.3 million and $16.1 million to gain on sale of loans in the quarters ended August 31, 1998 and 1997, respectively. Sub-prime loans contributed $26.9 million and $18.2 million to the gain on sale of loans for the quarters ended August 31, 1998 and 1997, respectively. In general, loan origination fees and gain (loss) 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 $9.6 million for the quarterended August 31, 1998 from $3.7 million for the quarter ended August 31, 1997. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($31.8 million and $18.3 million for the quarters ended August 31, 1998 and 1997, respectively); (ii) interest expense related to the Company's investment in servicing rights ($88.5 million and $51.5 million for the quarters ended August 31, 1998 and 1997, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($66.3 million and $34.5 million for the quarters ended August 31, 1998 and 1997, 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 higher production levels. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio and an increase in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). The increase in net interest income earned from the custodial balances was related to an increase in the average custodial balances (caused by growth of the servicing portfolio and an increase in the amount of prepayments) from the quarter ended August 31, 1997 to the quarter ended August 31, 1998. During the quarter ended August 31, 1998, loan servicing income was positively affected by the continued growth of the loan servicing portfolio. At August 31, 1998, the Company serviced $195 billion of loans (including $2.4 billion of loans subserviced for others) compared to $169 billion (including $5.3 billion of loans subserviced for others) at August 31, 1997, a 15% increase. The growth in the Company's servicing portfolio during the quarter ended August 31, 1998 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, scheduled amortization of mortgage loans and the transfer out of $6.5 billion of subservicing. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at August 31, 1998 and 1997 was 7.7% and 7.8%, respectively. It is the Company's strategy to build and retain its servicing portfolio because of the returns the Company can earn from such investment and because the Company believes that servicing income is counter-cyclical to loan production income. See "Prospective Trends - Market Factors." During the quarter ended August 31, 1998, the annual prepayment rate of the Company's servicing portfolio was 26% compared to 13% for the quarter ended August 31, 1997. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, and activity in the home purchase market. The increase in the prepayment rate from the quarter ended August 31, 1997 to the quarter ended August 31, 1998 was primarily attributable to the increase in refinance activity caused by lower interest rates during the quarter ended August 31, 1998 than during the quarter ended August 31, 1997. The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong production capability and a growing servicing portfolio. In addition, to mitigate the effect on earnings of 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"). These financial instruments include options on interest rate futures and MBS, 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, certain tranches of collateralized mortgage obligations ("CMOs") and options on callable pass-through certificates ("options on CPC"). 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 Rates for U.S. dollar deposits ("LIBOR") and has a specified maximum or "cap". With Swaps, the Company receives and pays interest on a specified notional amount. The rate received is fixed; the rate paid is adjustable and is indexed to LIBOR. With the Swaptions, the Company has the option to enter into a receive-fixed, pay-floating interest rate swap at a future date or to settle the transaction for cash. The CMOs, which consist primarily of P/O securities, have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs should increase. This should result in a decline in the average lives of the P/O securities and a corresponding increase in the present values of their cash flows. Conversely, as interest rates increase, prepayments on the collateral underlying the CMOs should decrease. These changes should result in an increase in the average lives of the P/O securities and a decrease in the present values of their cash flows. An option on CPC 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 anytime. The Servicing Hedge is designed to protect the value of the investment in mortgage servicing rights ("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 CMOs, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. The Company's exposure to loss on futures is related to changes in the Eurodollar rate over the life of the contract. The Company estimates that its maximum exposure to loss over the contractual term is $41.0 million. With respect to the Capped Swaps contracts entered into by the Company as of August 31, 1998, the Company estimates that its maximum exposure to loss over the contractual term is $29.9 million. With respect to the Swap contracts entered into by the Company as of August 31, 1998, the Company estimates that its maximum exposure to loss over the contractual term is $229.0 million. In the quarter ended August 31, 1998, the Company recognized a net benefit of $289.2 million from its Servicing Hedge. The net benefit included unrealized net gains of $268.0 million and net realized gains of $21.2 million from premium amortization and the sale of various financial instruments that comprise the Servicing Hedge. In the quarter ended August 31, 1997, the Company recognized a net benefit of $33.5 million from its Servicing Hedge. The net benefit included unrealized gains of $30.6 million and net realized gains of $2.9 million from premium amortization and the sale of various financial instruments that comprise the Servicing Hedge. There can be no assurance that the Servicing Hedge will generate gains in the future, or if gains are generated, that they will fully offset impairment of the MSRs. The Company recorded amortization and impairment of its MSRs in the quarter ended August 31, 1998 totaling $441.0 million (consisting of amortization amounting to $136.1 million and impairment of $304.9 million), compared to $105.4 million of amortization and impairment (consisting of amortization amounting to $71.2 million and impairment of $34.2 million) in the quarter ended August 31, 1997. The factors affecting the amount of amortization and impairment or recovery of the MSRs recorded in an accounting period include the level of prepayments during the period, the change in estimated future prepayments and the amount of Servicing Hedge gains or losses.
Salaries and related expenses are summarized below for the quarters ended August 31, 1998 and 1997. -- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended August 31, 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- -- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $49,618 $11,475 $22,414 $10,361 $93,868 Incentive Bonus 37,658 151 4,769 5,030 47,608 Payroll Taxes and Benefits 12,121 2,499 4,048 1,609 20,277 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $99,397 $14,125 $31,231 $17,000 $161,753 ============ ============= ============= ============= ------------ Average Number of 5,122 1,750 1,764 744 9,380 Employees
-- --------------------------- -- ------------ -- ------------- -- ---------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended August 31, 1997 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- -- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $31,601 $10,920 $17,169 $5,646 $ 65,336 Incentive Bonus 18,681 319 4,196 2,908 26,104 Payroll Taxes and Benefits 4,961 1,967 1,648 528 9,104 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $55,243 $13,206 $23,013 $9,082 $100,544 ============ ============= ============= ============= ------------ Average Number of 3,093 1,619 1,369 422 6,504 Employees -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during the quarter ended August 31, 1998 reflecting the Company's strategy of expanding and enhancing its Consumer Markets and Wholesale branch networks, including new retail sub-prime branches. In addition, growth in the Company's non-mortgage banking subsidiaries and a larger servicing portfolio contributed to the increase. Incentive bonuses earned during the quarter ended August 31, 1998 increased primarily due to higher production and a change in production mix. Occupancy and other office expenses for the quarter ended August 31, 1998 increased to $66.1 million from $41.4 million for the quarter ended August 31, 1997 primarily due to: (i) the continued effort by the Company to expand its retail branch network, particularly outside of California; (ii) higher loan production; (iii) a larger servicing portfolio; and (iv) growth in the Company's non-mortgage banking activities. Guarantee fees represent fees paid to guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio. For the quarter ended August 31, 1998, guarantee fees increased 6% to $45.4 million from $42.8 million for the quarter ended August 31, 1997. The increase resulted from an increase in the servicing portfolio, changes in the mix of permanent investors and terms negotiated at the time of loan sales. Marketing expenses for the quarter ended August 31, 1998 increased 51% to $15.6 million from $10.3 million for the quarter ended August 31, 1997, reflecting the increased level of mortgage originations, particularly refinances, as well as the Company's continued implementation of a marketing plan to increase consumer brand awareness of the Company in the residential mortgage market. Other operating expenses for the quarter ended August 31, 1998 increased from the quarter ended August 31, 1997 by $7.3 million, or 24%. This increase was due primarily to higher loan production and growth in the Company's non-mortgage banking subsidiaries in the quarter ended August 31, 1998 as compared to the quarter ended August 31, 1997. Profitability of Loan Production and Servicing Activities In the quarter ended August 31, 1998, the Company's pre-tax earnings from its loan production activities (which include loan origination and purchases, warehousing and sales) were $146.6 million. In the quarter ended August 31, 1997, the Company's comparable pre-tax earnings were $49.6 million. The increase of $97.0 million was primarily attributable to increased production and a shift in production mix towards the Consumer Markets and Wholesale Divisions. These positive results were partially offset by higher production costs. In the quarter ended August 31, 1998, the Company's pre-tax loss from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer) was $2.4 million as compared to pre-tax income of $60.6 million in the quarter ended August 31, 1997. The decrease of $63.0 million was primarily attributed to the increased amortization of the servicing asset and Interest Costs Incurred on Payoffs due to declining interest rates and increase in prepayments from the quarter ended August 31, 1997 to the quarter ended August 31, 1998. These negative factors were partially offset by the increase in servicing fees, miscellaneous income and interest earned on escrow balances derived by the larger servicing portfolio. Profitability of Other Activities In addition to loan production and loan servicing, the Company offers ancillary products and services related to its mortgage banking activities. These include title insurance and escrow services, home appraisals, securities brokerage and servicing rights brokerage. For the quarter ended August 31, 1998, these activities contributed $11.7 million to the Company's pre-tax income compared to $12.3 million for the quarter ended August 31, 1997. During the quarter ended August 31, 1997, Countrywide Asset Management Corporation, a subsidiary of the Company, was sold to INMC Mortgage Holdings, Inc. ("INMC"), a publicly traded real estate investment trust for 3.44 million shares of INMC stock. The impact of this sale on earnings was a $57.4 million gain on sale recorded in the second quarter of fiscal 1998. Six Months Ended August 31, 1998 Compared to Six Months Ended August 31, 1997 Revenues from ongoing operations for the six months ended August 31, 1998 increased 40% to $932.4 million from $666.4 million for the six months ended August 31, 1997. Net earnings from ongoing operations increased 28% to $185.8 million for the six months ended August 31, 1998 from $144.7 million for the six months ended August 31, 1997. Both revenues and net earnings from ongoing operations for the six months ended August 31, 1997 exclude a nonrecurring pre-tax gain of $57.4 million from the sale of a subsidiary. The increase in revenues and net earnings from ongoing operations for the six months ended August 31, 1998 compared to the six months ended August 31, 1997 was primarily attributable to higher loan production for the six months ended August 31, 1998. These positive factors were partially offset by an increase in amortization and net impairment of the servicing asset and an increase in expenses for the six months ended August 31, 1998 over the six months ended August 31, 1997. The total volume of loans produced increased 120% to $43.8 billion for the six months ended August 31, 1998 from $19.9 billion for the six months ended August 31, 1997. Refinancings totaled $23.3 billion, or 53% of total fundings, for the six months ended August 31, 1998, as compared to $5.8 billion, or 29% of total fundings, for the six months ended August 31, 1997. Fixed-rate loan production totaled $41.1 billion, or 94% of total fundings, for the six months ended August 31, 1998, as compared to $13.7 billion, or 69% of total fundings, for the six months ended August 31, 1997. Included in the Company's total volume of loans produced are $1.1 billion of home equity loans funded in the six months ended August 31, 1998 and $673 million funded in the six months ended August 31, 1997. Sub-prime credit quality loan production, which is also included in the Company's total production volume, was $1.4 billion for the six months ended August 31, 1998 and $670 million during the six months ended August 31, 1997. Total loan volume in the Company's production divisions is summarized below.
- -------------------------------------------- ------------------------------------ -------- (Dollar amounts in millions) Six Months Ended August 31, - -------------------------------------------- ------------------------------------ 1998 1997 ------------- ------------- Consumer Markets Division $13,259 $ 5,372 Wholesale Lending Division 14,989 5,831 Correspondent Lending Division 15,249 8,718 Full Spectrum Lending, Inc. 313 - ------------- ------------- Total Loan Volume $43,810 $19,921 ============= ============= - -------------------------------------------- ------------- -------- ------------- --------
Loan origination fees increased during the six months ended August 31, 1998 as compared to the six months ended August 31, 1997 due to higher production and change in the Divisional mix. The Consumer Markets Division and the Wholesale Lending Division (which, due to their cost structures, charge higher origination fees per dollar loaned than the Correspondent Division), comprised a greater percentage of total production in the six months ended August 31, 1998 than in the six months ended August 31, 1997. Gain on sale of loans improved during the six months ended August 31, 1998 as compared to the six months ended August 31, 1997 primarily due to higher production. Net interest income (interest earned net of interest charges) increased to $21.2 million for the six months ended August 31, 1998 from $4.0 million for the six months ended August 31, 1997. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($61.8 million and $32.1 million for the six months ended August 31, 1998 and 1997, respectively); (ii) interest expense related to the Company's investment in servicing rights ($174.2 million and $96.1 million for the six months ended August 31, 1998 and 1997, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($130.9 million and $64.1 million for the six months ended August 31, 1998 and 1997, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio and an increase in interest costs incurred on payoffs. The increase in net interest income earned from the custodial balances was related to an increase in the average custodial balances (caused by growth of the servicing portfolio and an increase in the amount of prepayments) from the six months ended August 31, 1997 to the six months ended August 31, 1998. During the six months ended August 31, 1998, loan servicing income was positively affected by the continued growth of the loan servicing portfolio. The growth in the Company's servicing portfolio during the six months ended August 31, 1998 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, scheduled amortization of mortgage loans and the transfer out of $6.5 billion of subservicing. The annual prepayment rate of the Company's servicing portfolio was 27% for the six months ended August 31, 1998 compared to 12% for the six months ended August 31, 1997. The increase in the prepayment rate from the six months ended August 31, 1997 to the six months ended August 31, 1998 was primarily attributable to the increase in refinance activity caused by lower interest rates during the six months ended August 31, 1998 than during the six months ended August 31, 1997. During the six months ended August 31, 1998, the Company recognized a net benefit of $289.9 million from its Servicing Hedge. The net benefit included unrealized gains of $272.7 million and net realized gains of $17.2 million from the amortization and sale of various financial instruments that comprise the Servicing Hedge. During the six months ended August 31, 1997, the Company recognized a net expense of $11.3 million from its Servicing Hedge. The net expense included unrealized losses of $8.7 million and net realized losses of $2.6 million from the amortization and sale of various financial instruments that comprise the Servicing Hedge. The Company recorded amortization and impairment of its MSRs in the six months ended August 31, 1998 totaling $590.3 million (consisting of normal amortization amounting to $269.0 million and impairment of $321.3 million), compared to amortization and net recovery of its MSRs of $131.3 million (consisting of normal amortization amounting to $136.9 million and net recovery of $5.6 million) in the six months ended August 31, 1997. Salaries and related expenses are summarized below for the six months ended August 31, 1998 and 1997.
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- ----- (Dollar amounts in Six Months Ended August 31, 1998 thousands) -- --------- ------------------------------------------------- -- --- --- ----- -- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- ------------- Base Salaries $ 93,103 $23,435 $42,625 $18,168 $177,331 Incentive Bonus 71,196 481 9,892 8,669 90,238 Payroll Taxes and Benefits 24,183 5,325 8,321 2,842 40,671 ------------ ------------- ------------- ------------- ------------- Total Salaries and Related Expenses $188,482 $29,241 $60,838 $29,679 $308,240 ============ ============= ============= ============= ------------- Average Number of 4,859 1,795 1,693 625 8,972 Employees -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
-- --------------------------- -- -- --------- ----------------------------- (Dollar amounts in Six Months Ended August 31, 1997 thousands) -- --------- ------------------------------
Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- ------------- Base Salaries $ 60,164 $ 21,675 $ $ 10,902 $ 125,967 33,226 Incentive Bonus 30,373 585 8,445 4,970 44,373 Payroll Taxes and Benefits 9,905 4,082 3,206 1,052 18,245 ------------ ------------- ------------- ------------- ------------- Total Salaries and Related Expenses $100,442 $ $ $ 16,924 $ 188,585 26,342 44,877 ============ ============= ============= ============= ------------- Average Number of 2,972 1,621 1,330 408 6,331 Employees -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
The amount of salaries increased during the six months ended August 31, 1998 from the six months ended August 31, 1997 primarily due to an increased number of employees resulting from expansion of the Consumer Markets and Wholesale division branch networks, including new retail sub-prime branches. In addition, a larger servicing portfolio and growth in the Company's non-mortgage banking activities also contributed to the increase. The increase in incentive bonuses was due primarily to the increased production. Occupancy and other office expenses for the six months ended August 31, 1998 increased to $128.8 million from $79.5 million for the six months ended August 31, 1997, primarily due to: (i) the continued effort by the Company to expand its retail branch network, particularly outside California; (ii) higher loan production; (iii) a larger servicing portfolio; and (iv) growth in the Company's non-mortgage banking activities. Guarantee fees for the six months ended August 31, 1998 increased 5% to $90.0 million from $85.4 million for the six months ended August 31, 1997. This increase resulted from an increase in the servicing portfolio, changes in the mix of permanent investors and terms negotiated at the time of loan sales. Marketing expenses for the six months ended August 31, 1998 increased 46% to $30.1 million from $20.6 million for the six months ended August 31, 1997, reflecting the increased level of mortgage originations, particularly refinances, as well as the Company's continued implementation of a marketing plan to increase brand awareness of the Company in the residential mortgage market. Other operating expenses for the six months ended August 31, 1998 increased from the six months ended August 31, 1997 by $15.5 million, or 28%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased systems development and growth in the Company's non-mortgage banking subsidiaries in the six months ended August 31, 1998 as compared to the six months ended August 31, 1997. Profitability of Loan Production and Servicing Activities In the six months ended August 31, 1998, the Company's pre-tax income from its loan production activities (which include loan origination and purchases, warehousing and sales) was $282.6 million. In the six months ended August 31, 1997, the Company's comparable pre-tax income was $95.3 million. The increase of $187.3 million was primarily attributable to increased production and a shift in production mix towards the Consumer Markets and Wholesale Divisions. These positive results were partially offset by higher production costs. In the six months ended August 31, 1998, the Company's pre-tax loss from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent and marketing foreclosed properties) was $3.0 million as compared to an income of $120.3 million in the six months ended August 31, 1997. The decrease of $123.3 million was principally attributed to the increased amortization and impairment of the servicing asset and Interest Costs Incurred on Payoffs due to declining interest rates and increase in prepayments from August 31, 1997 to August 31, 1998. These negative factors were partially offset by an increase in servicing fees, miscellaneous income and interest earned on escrow balances derived by the larger servicing portfolio. Profitability of Other Activities In addition to loan production and loan servicing, the Company offers ancillary products and services related to its mortgage banking activities. These include title insurance and escrow services, home appraisals, securities brokerage and servicing rights brokerage. For the six months ended August 31, 1998, these activities contributed $25.0 million to the Company's pre-tax income compared to $21.5 million during the six months ended August 31, 1997. This increase in pre-tax income primarily results from improved performance of the title insurance, escrow and Capital Markets businesses. QUANTITATIVE 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, MBS retained in securitizations 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 the quarter ended August 31, 1998, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $10.4 million after-tax loss related to its trading securities and a $3.2 million after-tax gain related to its other financial instruments, for the fiscal year ended February 28, 1999. The Company estimates that this combined after-tax loss of $7.2 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 and do not incorporate other factors that would impact the Company's financial performance in such a scenario. Consequently, the preceding estimates are not and should not be viewed as a forecast. INFLATION Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio thereby reducing amortization and impairment of the MSRs. In addition, Interest Costs Incurred on Payoffs decline and 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 impact of changing interest rates on servicing-related earnings are reduced by performance of the Servicing Hedge, which is designed to mitigate the impact on earnings of impairment that may result from declining interest rates. SEASONALITY The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's principal financing needs are the financing of loan funding activities and the investment in servicing rights. To meet these needs, the Company currently utilizes commercial paper supported by the revolving credit facility, medium-term notes, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, unsecured short-term bank loans, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities 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. Current conditions in the global financial markets have made it more difficult for corporations, in particular financial institutions, to raise capital on terms similar to that realized in the recent past. In general, corporate debt investors are requiring higher spreads between corporate bonds and U.S. treasury securities and are less inclined to invest on a long-term basis. As a result, the Company has experienced some widening in spreads on its short-term and long-term debt. The Company does not expect these current conditions to have a material adverse impact either on its financial condition or results of operations. 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, current ratio and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CHL to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its 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 to investors the mortgage loans it originates and purchases but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In the six months ended August 31, 1998, the Company's operating activities provided cash of approximately $0.1 billion. In the six months ended August 31, 1997, operating activities used approximately $1.1 billion, primarily to support the increase in its mortgage loans and MBS held for sale. Investing Activities The primary investing activity for which cash was used by the Company was the investment in MSRs. Net cash used by investing activities was $0.9 billion for the six months ended August 31, 1998 and $0.5 billion for the six months ended August 31, 1997. Financing Activities Net cash provided by financing activities amounted to $0.8 billion for the six months ended August 31, 1998. Net cash provided by financing activities amounted to $1.6 billion for the six months ended August 31, 1997. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process For the month ended September 30, 1998, the Company received new loan applications at an average daily rate of $625 million and at September 30, 1998, the Company's pipeline of loans in process was $15.9 billion. This compares to a daily application rate in the month end September 30, 1997 of $295 million and a pipeline of loans in process at September 30, 1997 of $6.8 billion. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 77% of the pipeline of loans in process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline at September 30, 1998 was $1.5 billion and at September 30, 1997 was $1.1 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage credit, the extent of price competition in the market, the direction of interest rates, seasonal factors and general economic conditions. Market Factors Loan production increased 117% from quarter ended August 31, 1997 to quarter ended August 31, 1998. This increase was due to several factors. First, mortgage interest rates generally were lower in the quarter ended August 31, 1998. This drove a 285% increase in refinance loan production in the quarter ended August 31, 1998 as compared to the quarter ended August 31,1997. In addition, home purchase market activity was stronger during the quarter ended August 31, 1998 than in the quarter ended August 31, 1997. On top of the increase in the loan origination market, the Company increased its market share from the quarter ended August 31, 1997 to the quarter ended August 31, 1997, in larger part, due to its ongoing expansion of the Consumer Markets and Wholesale Divisions. The annual prepayment rate in the servicing portfolio increased from 13% for the quarter ended August 31, 1997 to 26% for the quarter ended August 31, 1998 due to lower interest rates in the quarter ended August 31, 1998 than in the quarter ended August 31, 1997. The Company's primary competitors are commercial banks, savings and loans, mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Over the past three years, certain commercial banks have expanded their mortgage banking operations through acquisition of formerly independent mortgage banking companies and through internal growth. The Company believes that these transactions and activities have not had a material impact on the Company or on the degree of competitive pricing in the market. The Company's California mortgage loan production (measured by principal balance) constituted 25% of its total production during the quarter ended August 31, 1998 and 24% during the quarter ended August 31, 1997. The Company is continuing its efforts to expand its production capacity outside of California. Some regions in which the Company operates have experienced slower economic growth, and real estate financing activity in these regions has been negatively impacted. To the extent the Company's loan production is concentrated in a particular geographic region, the Company's operations will be adversely affected if that region experiences slow or negative economic growth resulting in decreased residential real estate lending activity. The delinquency rate in the Company-owned servicing portfolio decreased to 3.64% at August 31, 1998 from 4.25% at August 31, 1997. The proportion of government and high loan-to-value conventional loans, which tend to experience higher delinquency rates than low loan-to-value conventional loans, was 47% and 49% of the portfolio at August 31, 1998 and August 31, 1997, respectively. The weighted average age of the portfolio is 29 months at August 31, 1998 and August 31, 1997. Delinquency rates tend to increase as loans age, generally 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 is substantially limited. Further, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. The percentage of loans in the Company's owned servicing portfolio that are in foreclosure decreased to 0.36% at August 31, 1998 from 0.63% at August 31, 1997 primarily due to the sale of $314 million of mortgage loans in foreclosure as of August 31, 1998. Because the Company services substantially all conventional and FHA loans on a non-recourse basis, foreclosure losses are generally the responsibility of the investor or insurer and not the Company. The Company retains credit risk on the home equity and sub-prime loans it securitizes through retention of a subordinated interest. At August 31, 1998, the Company had investments in such subordinated interests amounting to $260 million. While the Company generally does not 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 the representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent credit loss on the mortgage loan may be borne by the Company. In addition, the Company is exposed to credit losses on loans partially guaranteed by the Department of Veterans Administration ("VA") for any amount of loss above such partial guarantee. Loans which are partially guaranteed by the VA totaled 8.0% of the Company's servicing portfolio at August 31, 1998. 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 offset the amount of Servicing Hedge expense; or in periods of declining interest rates, that the Company's Servicing Hedge will generate gains, or if gains are generated, that they will fully offset impairment of the 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 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, 2001. The impact of the adoption of this statement on the Company's financial statements is not known at this time. Year 2000 Update The Company has five distinct Year 2000 Projects, each of which focuses 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 September 1998, the Company has reprogrammed and re-engineered the system to incorporate four-digit century date fields, tested the function and accuracy of the reprogrammed fields and implemented the revised code in more than 17,000 programs on the AS/400. The Company has begun forward-date testing and estimates that it will be completed before December 31, 1998. Unanticipated systems incompatibilities, testing complexities or scheduling conflicts could result in complications and delays of forward-date testing. Many of the Company's Client Server applications have been developed in-house and in a Year 2000 compliant format. The majority of those applications interface with the AS/400. The Company is reviewing each of its mission critical Client Server applications to confirm their Year 2000 readiness. Additionally, as part of this project, the Company is testing the interfaces between the individual mission critical Client Server applications and the AS/400 to confirm that accurate data is exchanged with the revised AS/400 programs. The Company estimates that 60% of its mission critical Client Server applications have been forward-date tested. The Company presently anticipates that all mission critical Client Server applications will be remediated by November 30, 1998 and that forward-date testing of those applications will be completed by December 31, 1998. The Company's Infrastructure Project is responsible for inventorying the personal computers used by the Company's employees nationwide to determine the Year 2000 readiness of the hardware of each. This process is approximately 85% complete. Where necessary, older computers and related hardware which are not Year 2000 compliant will be replaced before December 31, 1999. As part of the Infrastructure Project, the Company is also identifying "shrink-wrapped" and desktop software purchased company-wide, as well as desktop software supporting individuals and individual business units, in order to determine whether the vendor is bringing its products into compliance. This Project also monitors websites and other available information of software and hardware vendors and disseminates the latest available information to those business units relying on the product. In the event the products are not or will not be compliant, the Company is assessing its needs for the applications. With respect to non-compliant software, the Company will either seek alternative sources of similar applications, develop its own applications or attempt to obtain the source code and the vendor's authorization to re-engineer it. The Infrastructure Project has inventoried, assessed and completed necessary corrective action with respect to the Company's mission critical wide area network components, telecommunications systems and unique business systems. These systems are scheduled for forward-date testing which the Company anticipates will be completed by December 31, 1998. Additionally, the Infrastructure Project personnel, along with personnel from the Company's Facilities and Property Management Departments, are evaluating building systems of the Company's corporate facilities to assess whether they will operate satisfactorily in the Year 2000 and beyond. These building systems include energy management, environmental, and safety and security systems. The Company estimates this process will be completed by June 1999. The Communications Project personnel have developed a database for collecting information regarding the Year 2000 status of the Company's strategic business partners and other vendors and suppliers. Individual business units identify in the database contact information regarding their respective business partners, vendors and suppliers, and the database tracks the inquiry made of each such entity, that entity's response to the Company's inquiry and the Company's response to each entity's inquiry. Analysis of the information contained in the database and development of additional features and functions of the database are ongoing. The goal is to achieve a reasonable understanding of the Year 2000 readiness and contingency plans of the Company's business partners, vendors and suppliers well in advance of the Year 2000. Additionally, the Communications Project personnel represent the Company in its participation as one of the leading mortgage banking companies involved in the Mortgage Bankers Association (MBA) inter-industry testing project. Other participants include GNMA, FNMA and FHLMC, as well as banks, insurance companies and credit bureaus. The MBA project involves inter-industry testing of transactions from loan origination, secondary marketing and loan servicing areas and its mission is to make sure the various interfaces work together across the entire industry. Contingency Planning The Company has retained a vendor specializing in business continuity planning to review its business continuity procedures on a company-wide basis and assist in its assessment of the contingency plans of each business unit, as well as those of mission critical business partners, vendors and suppliers. The Year 2000 aspect of this process is expected to be completed in early 1999. The business analysis aspect of the contingency planning process also serves as a means of verifying the Company's existing inventories of Client Server applications, Infrastructure hardware and software, business partners, vendors and suppliers and external and internal interfaces. Costs The total cost associated with the Company's Year 2000 efforts is not expected to be material to the Company's financial position. These costs are being expensed by the Company during the period in which they are incurred. The estimated total cost of the Year 2000 Project is approximately $36 million, of which $16 million has been incurred through August 31, 1998. 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 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 will rely on third party information which may be unreliable or unverifiable. The Company cannot be assured that third parties upon which it relies, including utilities and telecommunications service providers, will not have business interruptions which could have an adverse effect on the Company. Forward-looking statements contained in this Year 2000 Update should be read in conjunction with the Company's disclosures under the heading: "FORWARD-LOOKING STATEMENTS" which appears in Item 2 on page of this Form 10Q. Page 28 PART II. OTHER INFORMATION Item 5. Other Information Any proposal that a stockholder wishes to present for consideration at the 1999 Annual Meeting of Stockholders must be received by the Company no later than February 9, 1999 for inclusion in the 1999 Notice of Annual Meeting, Proxy Statement and Proxy. Any other proposal that a stockholder wishes to bring before the 1999 Annual Meeting of Stockholders must also be received by the Company no later than February 9, 1999. All proposals must comply with the applicable requirements or conditions established by the Securities and Exchange Commission and Article II, Section 13 of the Company's Bylaws, which requires among other things, certain information to be provided in connection with the submission of stockholder proposals. All proposals must be directed to the Secretary of the Company at 4500 Park Granada, MSN CH-19, Calabasas, California 91302. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.17 Form of Medium-Term Notes, Series G (fixed-rate) of CHL (incorporated by reference to Exhibit 4.10 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and 333-58125-01) filed with the SEC on June 30, 1998). 4.18 Form of Medium-Term Notes, Series G (floating-rate) of CHL (incorporated by reference to Exhibit 4.11 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and 333-58125-01) filed with the SEC on June 30, 1998). 10.8.1 Short Term Facility Extension Amendment dated as of the 23rd day of September 1998 by and among Countrywide Home Loans, Inc., the Short Term Lenders under the Revolving Credit Agreement dated as of September 24, 1997 and Bankers Trust Company, as Credit Agent. 10.22.5 Fifth Amendment to the Amended and Restated 1993 Stock Option Plan. (b) Reports on Form 8-K. None. Page 29 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: October 14, 1998 -------------------------------------- Stanford L. Kurland Senior Managing Director and Chief Operating Officer DATE: October 14, 1998 -------------------------------------- Carlos M. Garcia Managing Director; Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) 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: October 14, 1998 /s/ Stanford L. Kurland -------------------------------------- Senior Managing Director and Chief Operating Officer DATE: October 14, 1998 /s/ Carlos M. Garcia -------------------------------------- Managing Director; Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) Page 30 EXHIBIT INDEX Exhibit Number Document Description 4.17 Form of Medium-Term Notes, Series G (fixed-rate) of CHL (incorporated by reference to Exhibit 4.10 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and 333-58125-01) filed with the SEC on June 30, 1998). 4.18 Form of Medium-Term Notes, Series G (floating-rate) of CHL (incorporated by reference to Exhibit 4.11 to the registration statement on Form S-3 of the Company and CHL (File Nos.333-58125 and 333-58125-01) filed with the SEC on June 30, 1998). 10.8.1 Short Term Facility Extension Amendment dated as of the 23rd day of September 1998 by and among Countrywide Home Loans, Inc., the Short Term Lenders under the Revolving Credit Agreement dated as of September 24, 1997 and Bankers Trust Company, as Credit Agent. 10.22.5 Fifth Amendment to the Amended and Restated 1993 Stock Option Plan. EX-10 2 SHORT TERM FACILITY EXTENSION AMENDMENT SHORT TERM FACILITY EXTENSION AMENDMENT THIS SHORT TERM FACILITY EXTENSION AMENDMENT (the "Amendment") is made and dated as of the 23rd day of September, 1998 by and among COUNTRYWIDE HOME LOANS, INC. (the "Company"), the Short Term Lenders under (and as that term and capitalized terms not otherwise defined herein are defined in) the Revolving Credit Agreement described below) and BANKERS TRUST COMPANY, as Credit Agent (in such capacity, the "Credit Agent"). RECITALS A. Pursuant to that certain Revolving Credit Agreement dated as of September 24, 1997 by and among the Company, the Lenders party thereto, including, without limitation, the Short Term Lenders, the Credit Agent and others (as amended, extended and replaced from time to time, the "Revolving Credit Agreement"), the Short Term Lenders agreed to extend credit to the Company in the form of a 364-day revolving credit facility. B. The Company has requested that the Short Term Lenders currently party to the Revolving Credit Agreement agree to extend the Short Term Facility Maturity Date and certain of such Short Term Lenders have agreed to do so on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1.Extension of Maturity Date. To reflect the agreement of the Short Term Lenders to extend the Short Term Facility Maturity Date, effective as of the Amendment Effective Date (as defined in Paragraph 6 below), the definition of "Short Term Facility Maturity Date" set forth in the Glossary attached to the Revolving Credit Agreement is hereby amended to delete the date "September 23, 1998" appearing therein and to replace the same with the date "September 22, 1999". 2.Extension of Short Term Facility Fee Letter. To reflect the agreement of the Company to continue to pay to the Short Term Lenders a facility fee during the period from the current Short Term Facility Date to the Short Term Facility Maturity Date as extended hereunder, the Company hereby reaffirms the Short Term Facility Fee Letter dated as of September 24, 1997 and agrees that the "Short Term Facility Maturity Date" referred to therein shall mean the Short Term Facility Maturity Date as extended hereunder. 3.Revised Commitment Schedule. To reflect certain changes in the financial institutions which will be participating in the Short Term Facility as extended hereby and other modifications in the Short Term Facility Credit Limit and the Short Term Facility Percentage Shares of the Short Term Lenders participating in the Short Term Facility as extended hereby, the Commitment Schedule is hereby revised as of the Amendment Effective Date consistent with Amendment Schedule I attached hereto. 4.Reaffirmation of Loan Documents. The Company hereby affirms and agrees that (a) the execution and delivery by the Company of and the performance of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Credit Agent, the Lenders or any other Person under the Revolving Credit Agreement or any other Credit Document, (b) the term "Obligations" as used in the Credit Documents includes, without limitation, the Obligations of the Company under the Revolving Credit Agreement as amended hereby, and (c) the Revolving Credit Agreement as amended hereby and the other Credit Documents remain in full force and effect. 5.Reaffirmation of Guaranties. By executing this Amendment as provided below, the Parent acknowledges the terms and conditions of this Amendment and affirms and agrees that (a) the execution and delivery by the Company and the performance of its obligations under this Amendment shall not in any manner or to any extent affect any of the obligations of the Parent or the rights of the Credit Agent, the Lenders or any other Person under the Guaranty, the Subordination Agreement or any other document or instrument made or given by the Parent in connection therewith, (b) the term "Obligations" as used in the Guaranty and the Subordination Agreement includes, without limitation, the Obligations of the Company under the Revolving Credit Agreement as amended hereby, and (c) the Guaranty and the Subordination Agreement remain in full force and effect. 6.Amendment Effective Date. This Amendment shall be effective as of the day and year first above written upon the date (the "Amendment Effective Date") that there has been delivered to the Credit Agent: (a)A copy of this Amendment, duly executed by each party hereto and acknowledged by the Parent; and (b)Such corporate resolutions, incumbency certificates and other authorizing documentation as the Credit Agent may request. As required pursuant to Paragraph 13(b) of the Revolving Credit Agreement, following the Amendment Effective Date the Credit Agent shall provide a copy of this Amendment, including the Commitment Schedule effective as of the Amendment Effective Date, to all parties to the Credit Documents. 7.Representations and Warranties. The Company hereby represents and warrants to the Credit Agent and each of the Short Term Lenders that at the date hereof and at and as of the Amendment Effective Date: (a)Each of the Company and the Parent has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered on behalf of the Company and the Parent and constitutes the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms. (b)Both prior to and after giving effect hereto: (1) the representations and warranties of the Company and the Parent contained in the Credit Documents are accurate and complete in all respects, and (2) there has not occurred an Event of Default or Potential Default. 8.No Other Amendment. Except as expressly amended hereby, the Credit Documents shall remain in full force and effect as written and amended to date. 9.Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. COUNTRYWIDE HOME LOANS, INC., a New York corporation By /s/___________________________________ Name Thomas Keith McLaughlin Title Managing Director & Chief Financial Officer BANKERS TRUST COMPANY, as Credit Agent By Name Title BANCA CRT S.p.A., as a Short Term Lender By Name Title By Name Title BANCA DI NAPOLI S.p.A., NEW YORK BRANCH, as a Short Term Lender By Name Title By Name Title __________________________________________________________________________ BANCA DI ROMA, SAN FRANCISCO BRANCH, as a Short Term Lender By Name Title By Name Title __________________________________________________________________________ BANCA MONTE DEI PASCHI DI SIENA S.p.A., NEW YORK BRANCH, as a Short Term Lender By Name Title By Name Title BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Short Term Lender By Name Title BANK OF HAWAII, as a Short Term Lender By Name Title THE BANK OF NEW YORK, as a Short Term Lender By Name Title BANK ONE, TEXAS, N.A., as a Short Term Lender By Name Title BANKERS TRUST COMPANY, as a Short Term Lender By Name Title BANQUE NATIONALE DE PARIS, as a Short Term Lender By Name Title By Name Title PARIBAS, as a Short Term Lender By Name Title By Name Title BARCLAYS BANK PLC, as a Short Term Lender By Name Title BAYERISCHE LANDESBANK GIROZENTRALE, CAYMAN ISLANDS BRANCH,as a Short Term Lender By _____________________________________________________________________________ Name _____________________________________________________ _____________________ Title __________________________________________________________________________ By _____________________________________________________________________________ Name ___________________________________________________________________________ Title __________________________________________________________________________ CANADIAN IMPERIAL BANK OF COMMERCE, as a Short Term Lender By Name Title THE CHASE MANHATTAN BANK, as a Short Term Lender By Name Title CREDIT LYONNAIS, SAN FRANCISCO BRANCH, as a Short Term Lender By Name Title DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES,as a Short Term Lender By Name Title By Name Title THE FIFTH THIRD BANK, as a Short Term Lender By Name Title THE FIRST NATIONAL BANK OF CHICAGO, as a Short Term Lender By Name Title FIRST UNION NATIONAL BANK, as a Short Term Lender By Name Title FLEET NATIONAL BANK, as a Short Term Lender By Name Title THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, as a Short Term Lender By Name Title THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY,as a Short Term Lender By Name Title KBC BANK N.V., as a Short Term Lender By Name Title By _____________________________________________________________________________ Name ___________________________________________________________________________ Title __________________________________________________________________________ LASALLE NATIONAL BANK, as a Short Term Lender By Name Title MELLON BANK, N.A., as a Short Term Lender By Name Title THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY, as a Short Term Lender By Name Title MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Short Term Lender By Name Title NATIONSBANK, N.A., as a Short Term Lender By Name Title NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH, as a Short Term Lender By Name Title By Name Title ROYAL BANK OF CANADA, as a Short Term Lender By Name Title STAR BANK, NATIONAL ASSOCIATION, as a Short Term Lender By Name Title THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Short Term Lender By Name Title UNION BANK OF CALIFORNIA, N.A., as a Short Term Lender By Name Title U. S. BANK NATIONAL ASSOCIATION, formerly known as U.S. National Bank of Oregon, as a Short Term Lender, By Name Title WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS BRANCH, as a Short Term Lender By Name Title ACKNOWLEDGED and AGREED TO as of the date first written above: COUNTRYWIDE CREDIT INDUSTRIES, INC., a Delaware corporation By /s/____________________________________________ Name Thomas Keith McLaughlin Title Managing Director and Treasurer AMENDMENT SCHEDULE I COUNTRYWIDE HOME LOANS, INC. Revolving Credit Facilities Commitment Schedule as of September 23, 1998 [TO BE PROVIDED BY THE CREDIT AGENT] EX-10 3 FIFTH AMENDMENT TO THE 1993 STOCK OPTION PLAN AMENDMENT NUMBER FIVE COUNTRYWIDE CREDIT INDUSTRIES, INC. 1993 STOCK OPTION PLAN (AMENDED AND RESTATED AS OF MARCH 27, 1996) WHEREAS, Countrywide Credit Industries, Inc. ( the "Company" ) desires to amend its 1993 Stock Option Plan, amended and restated as of March 27, 1996, (the "Plan"), to allow for the increase of the maximum number of Shares that may be made the subject of Options granted; NOW, THEREFORE, the Plan shall be amended as follows effective May 7, 1998: 1. Section 4(a) shall be amended to read as follows: "(a) The maximum number of Shares that may be made the subject of Options granted under the Plan is sixteen million (16,000,000); provided, however, that the maximum number of Shares that may be the subject of Options granted to any Eligible Employee from and after March 27, 1996 and during the term of the Plan may not exceed three million (3,000,000). Upon a Change in Capitalization the maximum number of Shares shall be adjusted in number and kind pursuant to Section 8. The Company shall reserve for the purposes of the Plan, out of its authorized but unissued Shares or out of Shares held in the Company's treasury, or partly out of each, such number of Shares as shall be determined by the Board." IN WITNESS WHEREOF, the Company has caused this Fifth Amendment to be executed by its duly authorized officer this ____ day of September, 1998. Countrywide Credit Industries, Inc. By: _____________________ Anne McCallion Managing Director Attest: ------------------------ Susan Bow EVP Deputy General Counsel EX-11 4 STATEMENT REGARDING COMPUTATION OF EPS Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Six Months Ended August 31, 1998 1997 ---------------- ----------------- (Dollar amounts in thousands, except per share data) Basic Net earnings applicable to common stock $185,831 $179,698 ================ ================= Average shares outstanding 110,640 106,655 ---------------- ----------------- Per share amount $1.68 $1.69 ================ ================= Diluted Net earnings applicable to common stock $185,831 $179,698 ================ ================= Average shares outstanding 110,640 106,655 Net effect of dilutive stock options -- based on the treasury stock method using the closing market price, if higher than average market price. 6,260 3,588 ---------------- ----------------- Total average shares 116,900 110,243 ================ ================= Per share amount $1.59 $1.63 ================ =================
EX-12 5 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 six months ended August 31, 1998 and 1997 and for the five fiscal years ended February 28, 1998 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).
Six Months Ended August 31, Fiscal Years Ended February 29(28), ------------------------- ------------------------------------------------------------------ 1998 1997 1998 1997 1996 1995 1994 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Net earnings $185,831 $179,698 $344,983 $257,358 $195,720 $ 88,407 $179,460 Income tax expense 118,810 114,889 220,563 164,540 130,480 58,938 119,640 Interest charges 347,082 181,822 424,341 316,705 281,573 205,464 219,898 Interest portion of rental expense 3,436 2,306 10,055 7,420 6,803 7,379 6,372 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Earnings available to cover fixed charges $655,159 $478,715 $999,942 $746,023 $614,576 $360,188 $525,370 ============ ============ ============= ============ ============= ============ ============ Fixed charges Interest charges $347,082 $181,822 $424,341 $316,705 $281,573 $205,464 $219,898 Interest portion of rental expense 3,436 2,306 10,055 7,420 6,803 7,379 6,372 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Total fixed charges $350,518 $184,128 $434,396 $324,125 $288,376 $212,843 $226,270 ============ ============ ============= ============ ============= ============ ============ Ratio of earnings to fixed charges 1.87 2.60 2.30 2.30 2.13 1.69 2.32 ============ ============ ============= ============ ============= ============ ============
EX-27 6 ART.5 FDS 2ND 10-Q
5 1,000 6-MOS FEB-28-1999 Aug-31-1998 32,710 0 0 0 0 0 412,719 152,688 14,251,263 0 5,819,500 0 0 5,573 2,337,509 14,251,263 0 932,422 0 627,781 0 0 0 304,641 118,810 185,831 0 0 0 185,831 1.68 1.59
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