-----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, QShNQmsy3+SY5nCtNQDbRTNv7Zbak10ogXNXqRzp8hNAVal0AwSmfFLTZJRjEn8L 7Pvn8KQ6f5JkUCm0l1EJ1A== 0000025191-99-000002.txt : 19990423 0000025191-99-000002.hdr.sgml : 19990423 ACCESSION NUMBER: 0000025191-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99506696 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 10-Q Page 3 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 November 30, 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 January 13, 1999 ----- ------------------------------- Common Stock $.05 par value 112,566,729 Page 2 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollar amounts in thousands) A S S E T S November 30, February 28, 1998 1998 ------------------ ------------------- Cash $ 52,330 $ 10,707 Mortgage loans and mortgage-backed securities held for sale 7,779,742 5,292,191 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 282,097 226,330 Mortgage servicing rights, net 3,732,003 3,612,010 Other assets 4,356,671 3,041,973 ------------------ ------------------- Total assets $16,202,843 $12,183,211 ================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $5,444,408 $3,945,606 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $10,002,891 $7,475,221 Drafts payable issued in connection with mortgage loan closings 1,089,045 764,285 Accounts payable, accrued liabilities and other 1,156,852 482,678 Deferred income taxes 1,034,079 873,084 ------------------ ------------------- Total liabilities 13,282,867 9,595,268 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, 111,957,095 shares at November 30, 1998 and 109,205,579 shares at February 28, 1998 5,598 5,460 Additional paid-in capital 1,138,878 1,049,365 Accumulated other comprehensive income (11,075) 3,697 Retained earnings 1,286,575 1,029,421 ------------------ ------------------- Total shareholders' equity 2,419,976 2,087,943 ------------------ ------------------- Total liabilities and shareholders' equity $16,202,843 $12,183,211 ================== =================== Borrower and investor custodial accounts $5,444,408 $3,945,606 ================== ===================
The accompanying notes are an integral part of these statements. Page 3 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands, except earnings per share) Three Months Nine Months Ended November 30, Ended November 30, 1998 1997 1998 1997 -------------- -------------- -------------- -------------- Revenues Loan origination fees $166,934 $ 78,907 $462,740 $ 197,561 Gain on sale of loans, net of commitment fees 186,241 103,323 517,073 288,954 -------------- -------------- -------------- -------------- Loan production revenue 353,175 182,230 979,813 486,515 Interest earned 184,869 119,743 556,294 305,605 Interest charges (177,751) (110,113) (528,017) (291,935) -------------- -------------- -------------- -------------- Net interest income 7,118 9,630 28,277 13,670 Loan servicing income 261,349 234,499 755,523 670,582 Amortization and impairment/recovery of mortgage servicing rights (243,726) (1,271,231) (375,067) (680,927) Servicing hedge benefit 533,030 161,506 822,891 150,225 -------------- -------------- -------------- -------------- Net loan administration income 113,452 152,279 307,183 445,740 Commissions, fees and other income 40,452 31,002 131,346 95,636 Gain on sale of subsidiary - - - 57,381 -------------- -------------- -------------- -------------- Total revenues 514,197 375,141 1,446,619 1,098,942 Expenses Salaries and related expenses 176,015 110,458 484,255 299,043 Occupancy and other office expenses 73,391 49,179 202,208 128,667 Guarantee fees 45,634 43,467 135,655 128,855 Marketing expenses 17,085 9,711 47,189 30,353 Other operating expenses 41,464 30,878 112,063 85,989 -------------- -------------- -------------- -------------- Total expenses 353,589 243,693 981,370 672,907 -------------- -------------- -------------- -------------- Earnings before income taxes 160,608 131,448 465,249 426,035 Provision for income taxes 62,637 51,265 181,447 166,154 -------------- -------------- -------------- -------------- NET EARNINGS $97,971 $ 80,183 $283,802 $ 259,881 ============== ============== ============== ============== Earnings per share Basic $0.88 $0.75 $2.56 $2.43 Diluted $0.84 $0.71 $2.43 $2.34
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Nine Months Ended November 30, 1998 1997 ---------------- ---------------- Cash flows from operating activities: Net earnings $ 283,802 $ 259,881 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Gain on sale of available-for-sale securities (56,820) - Gain on sale of subsidiary - (57,381) Amortization and impairment/recovery of mortgage 1,271,231 375,065 servicing rights Depreciation and other amortization 41,418 32,559 Deferred income taxes 181,848 181,509 Origination and purchase of loans held for sale (67,812,248) (32,654,304) Principal repayments and sale of loans 65,324,697 30,740,856 ---------------- ---------------- Increase in mortgage loans and mortgage-backed securities held for sale (2,487,551) (1,913,448) Increase in other assets (1,526,884) (1,191,679) Increase in accounts payable and accrued liabilities 674,181 231,705 ---------------- ---------------- Net cash provided (used) by operating activities (1,618,775) (2,081,789) ---------------- ---------------- Cash flows from investing activities: Additions to mortgage servicing rights (1,391,224) (785,057) Purchase of property, equipment and leasehold improvements - net (85,483) (52,922) Proceeds from sale of available-for-sale securities 231,555 - ---------------- ---------------- Net cash used by investing activities (1,245,152) (837,979) ---------------- ---------------- Cash flows from financing activities: Net (decrease) increase in warehouse debt and other short-term borrowings (64,844) 1,580,560 Issuance of long-term debt 3,062,070 1,192,513 Repayment of long-term debt (144,796) (86,732) Issuance of Company obligated mandatorily redeemable securities of subsidiary trusts holding company guaranteed related subordinated debt - 200,000 Issuance of common stock 79,768 58,302 Cash dividends paid (26,648) (25,706) ---------------- ---------------- Net cash provided by financing activities 2,905,550 2,918,937 ---------------- ---------------- Net increase (decrease) in cash 41,623 (831) Cash at beginning of period 10,707 18,269 ================ ================ Cash at end of period $ 52,330 $ 17,438 ================ ================ Supplemental cash flow information: Cash used to pay interest $ 422,788 $ 286,310 Cash used to pay income taxes $ $ 1,367 50 Noncash financing activities: Unrealized gain (loss) on available-for-sale securities, net of tax $ (14,772) $ 24,083
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollar amounts in thousands) Three Months Nine Months Ended November 30, Ended November 30, 1998 1997 1998 1997 -------------- ------------- -------------- ------------- NET EARNINGS $97,971 $80,183 $283,802 $259,881 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period (9,342) 24,510 19,888 24,083 Less: reclassification adjustment for gains included in net earnings (25,604) - (34,660) - ------------- -------------- ------------- -------------- ------------- Other comprehensive income (34,946) 24,510 (14,772) 24,083 -------------- ------------- ------------- ============== ============= ============== COMPREHENSIVE INCOME $63,025 $104,693 $269,030 $283,964 ============== ============= ============== =============
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 nine-month period ended November 30, 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 nine-month period ended November 30, 1997 have been reclassified to conform to the presentation for the nine-month period ended November 30, 1998. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows. --------------------------------------------- ---------------------- -------------------------- Nine Months Ended (Dollar amounts in thousands) November 30, 1998 --------------------------------------------- -- ---------------- -- ----------------------- -- Mortgage Servicing Rights Balance at beginning of period $3,653,318 Additions 1,391,224 Scheduled amortization (416,425) Hedge losses (gains) applied (804,279) ----------------------- Balance before valuation reserve at end of period 3,823,838 ----------------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (41,308) Reductions (additions) (50,527) ----------------------- Balance at end of period (91,835) ======================= Mortgage Servicing Rights, net $3,732,003 ======================= --------------------------------------------- -- ---------------- -- ----------------------- --
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) NOTE C - OTHER ASSETS Other assets consisted of the following. ------------------------------------------------------------------ -------------------- ------------------------- (Dollar amounts in thousands) November 30, 1998 February 28, 1998 ------------------------------------------------------------------ -------------------- ------------------------- Servicing hedge instruments $1,270,684 $ 801,335 Trading securities 831,260 243,947 Receivables related to broker-dealer activities 191,370 148,976 Mortgage-backed securities retained in securitization 484,686 466,259 Rewarehoused FHA and VA loans 435,148 426,407 Servicing related advances 207,940 231,437 Short term investment 175,000 - Loans held for investment 120,051 115,713 Accrued interest 101,002 84,601 Equity securities 79,798 96,152 Other 459,732 427,146 ----------------- ---------------- $4,356,671 $3,041,973 ================= ================
NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows. In October 1998, mortgage-backed securities retained in securitization were reclassified as available for sale securities; see note I. -------------------------------- ---------------- - ------------------------------------ -- ---------------- --- November 30, 1998 ---------------- - ------------------------------------ -- ---------------- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value -------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $509,464 $ 265 ($25,043) $484,686 CMOs 32,380 4,504 - 36,884 Equity Securities 7,315 2,117 - 9,432 ---------------- ================ ================= ================ $549,159 $ 6,886 ($25,043) $531,002 ================ ================= ================ ================
-------------------------------- ---------------- - ------------------------------------ -- ---------------- --- 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) November 30, February 28, 1998 1998 ------------------------------------------------------------------ -------------------- ------------------------- Commercial paper $1,982,631 $2,119,330 Medium-term notes, Series A, B, C, D, E, F, G and Euro 6,982,255 4,137,185 Repurchase agreements 762,139 181,121 Subordinated notes 200,000 200,000 Unsecured notes payable 75,000 835,000 Other notes payable 866 2,585 ================= ================ $10,002,891 $7,475,221 ================= ================
Revolving Credit Facility and Commercial Paper As of November 30, 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 expires on 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 commercial paper program. No amount was outstanding under either revolving credit facility at November 30, 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 nine months ended November 30, 1998 was 5.56%. The weighted average borrowing rate on commercial paper outstanding as of November 30, 1998 was 5.36%. NOTE E - NOTES PAYABLE (Continued) Medium-Term Notes As of November 30, 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. Aug. 2005 1999 Series C 208,000 197,000 405,000 3.88% 8.43% Apr. Mar. 2004 1999 Series D 75,000 385,000 460,000 5.57% 6.88% Aug. 2000 Sep. 2005 Series E 310,000 690,000 1,000,000 5.37% 7.45% Feb. 2000 Oct. 2008 Series F 656,000 1,344,000 2,000,000 5.09% 7.00% Oct. 1999 May 2013 Series G 919,000 581,000 1,500,000 5.19% 7.00% Jul. 1999 Nov. 2018 Euro Notes 1,019,600 73,155 1,092,755 5.22% 6.30% Jul 1999 Aug. 2008 ------------------------------------------ Total $3,187,600 $3,794,655 $6,982,255 ==========================================
As of November 30, 1998, principally all of the outstanding fixed-rate notes had been effectively converted through interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the nine months ended November 30, 1998, including the effect of the interest rate swap agreements, was 6.01%. See Note J. On October 30, 1998, the Company filed a $2.0 billion shelf registration with the Securities and Exchange Commission ("SEC") covering Series H Medium-Term Notes. The Company intends to use the proceeds from the sale of the medium-term notes for general corporate purposes, which may include retirement of indebtedness of the Company and investment in servicing rights through the current production of loans and the bulk acquisition of contracts to service loans. Repurchase Agreements As of November 30, 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 nine months ended November 30, 1998 was 5.56%. The weighted average borrowing rate on repurchase agreements outstanding as of November 30, 1998 was 5.20%. 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) In addition, on November 25, 1998, CHL entered into a $1.5 billion committed mortgage loan repurchase facility, with four commercial banks. The facility has a maturity date of November 24, 1999. As consideration for this facility, CHL pays annual commitment fees of $1.9 million. CHL may sell, subject to an obligation to repurchase, conforming and non-conforming mortgage loans under the mortgage loan repurchase agreement. There were no outstanding amounts under this facility as of November 30, 1998. Pre-Sale Funding Facilities As of November 30, 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 both facilities for the nine months ended November 30, 1998 was 5.65%. As of November 30, 1998, the Company had no outstanding borrowings under 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/ November 30, Additions Expirations 1998 - - ------------------------------------- ------------------- -------------------- ------------------- --------------------- Interest Rate Floors $33,000 9,500 (18,000) $24,500 Long Call Options on Interest Rate Futures $79,400 38,320 (107,420) $10,300 Long Put Options on Interest Rate Futures $ 9,800 64,880 (19,180) $55,500 Short Call Options on Interest Rate Futures $ - 41,800 (41,500) $ 300 Short Put Options on Interest Rate Futures $ - 5,030 (2,030) $ 3,000 Interest Rate Futures $ 5,000 36,425 (18,925) $22,500 Capped Swaps $ 1,000 - $ 1,000 - Interest Rate Swaps $ 3,900 7,500 (500) $10,900 Interest Rate Cap $ 4,500 - $ 4,500 - Swaptions $ 1,850 28,500 (1,800) $28,550 Options on Callable Pass-through $ 2,561 1,800 - $ 4,361 Certificates
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) November 30, 1998 February 28, 1998 -- ---------------------------------------------- --------------------------- -- ---------------------------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $ 7,779,742 $ 5,292,191 Other assets 7,339,737 6,216,382 ============== ============== Total assets $15,119,479 $11,508,573 ============== ============== Debt $10,859,223 $ 8,747,794 Other liabilities 2,004,542 1,027,884 Equity 2,255,714 1,732,895 ============== ============== Total liabilities and equity $15,119,479 $11,508,573 ============== ==============
--- ----------------------------------------- --- -------------------------------------------------- -------- (Dollar amounts in thousands) Nine Months Ended November 30, --------------- ---------- --------------- 1998 1997 --- --------------------------------------------- ------- --------------- ---------- --------------- -------- Statements of Earnings: Revenues $1,224,689 $914,084 Expenses 844,303 603,599 Provision for income taxes 148,351 120,774 =============== =============== Net earnings $232,035 $189,711 =============== ===============
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 upon adoption of this standard on the Consolidated Financial Statements. In October 1998, the Financial Accounting Standards Board issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for sale by a Mortgage Banking Enterprise ("SFAS No. 134"). SFAS No. 134 is an amendment of SFAS No.65, Accounting for Certain Mortgage Banking Activities. It requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities and other retained interest based on its ability and intent to sell or hold those instruments. The Company adopted this statement in October 1998 and, as a consequence, reclassified mortgage-backed securities retained in securitization as available for sale securities. NOTE J - SUBSEQUENT EVENTS On December 16, 1998, the Company declared a cash dividend of $0.08 per common share payable on February 1, 1999 to shareholders of record on January 15, 1999. On December 7, 1998, CHL entered into a committed short-term financing arrangement to sell conforming mortgage loans under agreement to repurchase. The facility has a maturity date of December 6, 1999. As consideration for this facility, CHL paid annual commitment fees of $0.2 million. On December 15, 1998, CHL issued DM 1,000 million, 5 1/4% Deutsche Mark Notes due in 2005. CHL utilized a cross-currency swap to convert the fixed-rate Deutsche Mark borrowing into floating US dollars. On December 15, 1998, the DM 1,000 million was converted into $593 million. 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. 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 the computation of basic and diluted EPS for the three and nine month periods ended November 30, 1998 and 1997, under the provisions of SFAS No. 128. - - ----------------------- -- -- ----- ------------------------------------ -- ----- ------ Three Months Ended November 30, -- -- ----- ------------------------------------ -- ----- ------ 1998 1997 ----------- -------- --------- --------- --------- ---------- (Dollar amounts in Per-Share Per-Share thousands, except per Net Amount Net Amount share data) Earnings Shares Earnings Shares - - -------------------------------------------------------- ------------------------------ Net earnings $97,971 $ 80,183 =========== ========= Basic EPS Net earnings available to common shareholders $ 97,971 111,923 $ 0.88 $ 80,183 107,572 $0.75 Effect of dilutive stock options - 5,071 - 4,918 ----------- -------- --------- --------- Diluted EPS Net earnings available to common shareholders $ 97,971 116,994 $ 0.84 $ 80,183 112,490 $0.71 =========== ======== ========= ========= ======== ========
- - - - - ------------------------ -- -- ----- ------------------------------------ -- ----- ------ Nine Months Ended November30, -- -- ----- ------------------------------------ -- ----- ------ 1998 1997 ----------- -------- --------- ---------- -------- ---------- (Dollar amounts in Per-Share Per-Share thousands, except per Net Amount Net Amount share data) Earnings Shares Earnings Shares - - ------------------------------------------------------- ------------------------------ Net earnings $283,802 $ 259,881 =========== ========== Basic EPS Net earnings available to common shareholders $ 283,802 111,065 $ 2.56 $ 259,881 107,111 $ 2.43 Effect of dilutive stock options - 5,749 - 4,062 ----------- -------- ---------- -------- Diluted EPS Net earnings available to common shareholders $ 283,802 116,814 $ 2.43 $ 259,881 111,173 $ 2.34 =========== ======== ========= ========== ======= ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 November 30, 1998 Compared to Quarter Ended November 30, 1997 Revenues for the quarter ended November 30, 1998 increased 37% to $514.2 million from $375.1 million for the quarter ended November 30, 1997. Net earnings increased 22% to $98.0 million for the quarter ended November 30, 1998 from $80.2 million for the quarter ended November 30, 1997. The increase in revenues and net earnings for the quarter ended November 30, 1998 compared to the quarter ended November 30, 1997 was primarily attributable to higher loan production volume for the quarter ended November 30, 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 November 30, 1998 compared to the quarter ended November 30, 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 November 30, 1998 over the quarter ended November 30, 1997. The total volume of loans produced increased 89% to $24.0 billion for the quarter ended November 30, 1998 from $12.7 billion for the quarter ended November 30, 1997. The increase in loan production was primarily due to increased loan refinance activity, driven by generally lower interest rates that prevailed during the quarter ended November 30, 1998 compared to the quarter ended November 30, 1997, as well as to the continued expansion of the Company's Consumer Markets and Wholesale Lending Divisions. Refinancings totaled $14.2 billion, or 59% of total fundings, for the quarter ended November 30, 1998, as compared to $5.1 billion, or 40% of total fundings, for the quarter ended November 30, 1997. Fixed-rate mortgage loan production totaled $22.9 billion, or 96% of total fundings, for the quarter ended November 30, 1998, as compared to $9.9 billion, or 77% of total fundings, for the quarter ended November 30, 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 November 30, - - ------------------------------------------- ------------------------------------ 1998 1997 ------------- ------------ Consumer Markets Division $8,037 $ 3,437 Wholesale Lending Division 7,601 4,194 Correspondent Lending Division 8,185 5,041 Full Spectrum Lending, Inc. 180 61 ============= ============= Total Loan Volume $24,003 $12,733 ============= ============= Electronic Commerce (1) $848 $26
(1) Includes loans sourced through the Company's website of $205 million and $26 million for the quarters ended November 30, 1998 and November 30, 1997 respectively, as well as loans submitted to the Correspondent Lending Division via its correspondent website of $643 million for the quarter ended November 30, 1998. - - -------------------------------------------------------------------------------- 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 $625 million of home equity loans funded in the quarter ended November 30, 1998 and $372 million funded in the quarter ended November 30, 1997. Sub-prime loan production, which is also included in the Company's total production volume, was $603 million in the quarter ended November 30, 1998 and $427 million in the quarter ended November 30, 1997. At November 30, 1998 and 1997, the Company's pipeline of loans in process was $16.2 billion and $7.9 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process have funded. In addition, at November 30, 1998, the Company had committed to make loans in the amount of $1.2 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). At November 30, 1997, the LOCK 'N SHOP Pipeline was $1.1 billion. For the quarters ended November 30, 1998 and 1997, the Company received 331,903 and 180,702 new loan applications, respectively, at an average daily rate of $596 million and $315 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 November 30, 1998 as compared to the quarter ended November 30, 1997 due to higher production and a change in the Divisional mix. The Consumer Markets Division (which, due to its higher cost structure, charges higher origination fees per dollar loaned) comprised a greater percentage of total production in the quarter ended November 30, 1998 than in the quarter ended November 30, 1997. Gain on sale of loans improved in the quarter ended November 30, 1998 as compared to the quarter ended November 30, 1997 primarily due to higher loan production volume during the quarter ended November 30, 1998. The sale of home equity loans contributed $13.5 million and $17.8 million to gain on sale of loans in the quarters ended November 30, 1998 and 1997, respectively. Sub-prime loans contributed $20.6 million and $13.0 million to the gain on sale of loans for the quarters ended November 30, 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) decreased to $7.1 million for the quarter ended November 30, 1998 from $9.6 million for the quarter ended November 30, 1997. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($24.4 million and $21.4 million for the quarters ended November 30, 1998 and 1997, respectively); (ii) interest expense related to the Company's investment in servicing rights ($88.9 million and $56.2 million for the quarters ended November 30, 1998 and 1997, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($70.0 million and $41.9 million for the quarters ended November 30, 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 November 30, 1997 to the quarter ended November 30, 1998. During the quarter ended November 30, 1998, loan servicing income was positively affected by the continued growth of the loan servicing portfolio. At November 30, 1998, the Company serviced $205.4 billion of loans (including $2.3 billion of loans subserviced for others) compared to $175.2 billion (including $6.2 billion of loans subserviced for others) at November 30, 1997, a 17% increase. The growth in the Company's servicing portfolio during the quarter ended November 30, 1998 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments and scheduled amortization of mortgage loans. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at November 30, 1998 and 1997 was 7.6% 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 November 30, 1998, the annual prepayment rate of the Company's servicing portfolio was 30% compared to 16% for the quarter ended November 30, 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 November 30, 1997 to the quarter ended November 30, 1998 was primarily attributable to the increase in refinance activity caused by lower interest rates during the quarter ended November 30, 1998 than during the quarter ended November 30, 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 areceive-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 subject to certain restrictions on the minimum price of the underlying security in some cases. 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 $73.0 million. With respect to the Capped Swaps contracts entered into by the Company as of November 30, 1998, the Company estimates that its maximum exposure to loss over the contractual term is $21.0 million. With respect to the Swap contracts entered into by the Company as of November 30, 1998, the Company estimates that its maximum exposure to loss over the contractual term is $237.0 million. In the quarter ended November 30, 1998, the Company recognized a net benefit of $533.0 million from its Servicing Hedge. The net benefit included unrealized net gains of $174.7 million and net realized gains of $358.3 million from the sale of various financial instruments that comprise the Servicing Hedge and premium amortization. In the quarter ended November 30, 1997, the Company recognized a net benefit of $161.5 million from its Servicing Hedge. The net benefit included unrealized gains of $148.0 million and net realized gains of $13.5 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 November 30, 1998 totaling $680.9 million (consisting of amortization amounting to $147.4 million and impairment of $533.5 million), compared to $243.7 million of amortization and impairment (consisting of amortization amounting to $76.8 million and impairment of $166.9 million) in the quarter ended November 30, 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 November 30, 1998 and 1997. -- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 1998 thousands) ------------------------------ -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $56,175 $13,502 $23,347 $10,124 $103,148 Incentive Bonus 41,148 529 5,500 5,570 52,747 Payroll Taxes and Benefits 12,664 3,048 2,893 1,515 20,120 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $109,987 $17,079 $31,740 $17,209 $176,015 ============ ============= ============= ============= ------------ Average Number of 5,849 2,026 1,885 695 10,455 Employees
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 1997 thousands) -------------------------------- -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $35,462 $11,262 $17,853 $6,514 $71,091 Incentive Bonus 20,826 316 4,096 2,606 27,844 Payroll Taxes and Benefits 5,373 2,138 3,440 572 11,523 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $61,661 $13,716 $25,389 $9,692 $110,458 ============ ============= ============= ============= ------------ Average Number of Employees 3,452 1,669 1,431 488 7,040
The amount of salaries increased during the quarter ended November 30, 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 November 30, 1998 increased primarily due to higher production and a change in production mix. Occupancy and other office expenses for the quarter ended November 30, 1998 increased to $73.4 million from $49.2 million for the quarter ended November 30, 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 November 30, 1998, guarantee fees increased 5% to $45.6 million from $43.5 million for the quarter ended November 30, 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 November 30, 1998 increased 76% to $17.1 million from $9.7 million for the quarter ended November 30, 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 November 30, 1998 increased from the quarter ended November 30, 1997 by $10.6 million, or 34%. This increase was due primarily to higher loan production and growth in the Company's non-mortgage banking subsidiaries in the quarter ended November 30, 1998 as compared to the quarter ended November 30, 1997. Profitability of Loan Production and Servicing Activities In the quarter ended November 30, 1998, the Company's pre-tax earnings from its loan production activities (which include loan origination and purchases, warehousing and sales) were $141.5 million. In the quarter ended November 30, 1997, the Company's comparable pre-tax earnings were $62.9 million. The increase of $78.6 million was primarily attributable to increased production and a shift in production mix towards the Consumer Markets Division. These positive results were partially offset by higher production costs. In the quarter ended November 30, 1998, the Company's pre-tax earnings from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer) was $4.9 million as compared to pre-tax income of $58.4 million in the quarter ended November 30, 1997. The decrease of $53.5 million was primarily attributed to the increased amortization of the servicing asset and Interest Costs Incurred on Payoffs due to declining interest rates and an increase in prepayments from the quarter ended November 30, 1997 to the quarter ended November 30, 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 and flood insurance, escrow services, home appraisals, credit reporting, securities brokerage and servicing rights brokerage. For the quarter ended November 30, 1998, these activities contributed $14.2 million to the Company's pre-tax income compared to $10.2 million for the quarter ended November 30, 1997. This increase in pre-tax income primarily results from improved performance of the title insurance, flood insurance, escrow and Capital Markets business. Nine Months Ended November 30, 1998 Compared to Nine Months Ended November 30, 1997 Revenues from ongoing operations for the nine months ended November 30, 1998 increased 39% to $1.4 billion from $1.0 billion for the nine months ended November 30, 1997. Net earnings from ongoing operations increased 26% to $283.8 million for the nine months ended November 31, 1998 from $224.9 million for the nine months ended November 30, 1997. Both revenues and net earnings from ongoing operations for the nine months ended November 30, 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 nine months ended November 30, 1998 compared to the nine months ended November 30, 1997 was primarily attributable to higher loan production for the nine months ended November 30, 1998. This positive factor was partially offset by an increase in amortization and net impairment of the servicing asset and an increase in expenses for the nine months ended November 30, 1998 over the nine months ended November 30, 1997. The total volume of loans produced increased 108% to $67.8 billion for the nine months ended November 30, 1998 from $32.7 billion for the nine months ended November 30, 1997. Refinancings totaled $37.6 billion, or 55% of total fundings, for the nine months ended November 30, 1998, as compared to $10.9 billion, or 33% of total fundings, for the nine months ended November 30, 1997. Fixed-rate loan production totaled $64.0 billion, or 94% of total fundings, for the nine months ended November 30, 1998, as compared to $23.6 billion, or 72% of total fundings, for the nine months ended November 30, 1997. Included in the Company's total volume of loans produced are $1.7 billion of home equity loans funded in the nine months ended November 30, 1998 and $1.0 billion funded in the nine months ended November 30, 1997. Sub-prime credit quality loan production, which is also included in the Company's total production volume, was $2.0 billion for the nine months ended November 30, 1998 and $1.1 billion during the nine months ended November 30, 1997. Total loan volume in the Company's production divisions is summarized below. - - -------------------------------------------- ----------------------------------- (Dollar amounts in millions) Nine Months Ended November 30, - - -------------------------------------------- ----------------------------------- 1998 1997 ------------- ------------ Consumer Markets Division $21,294 $ 8,752 Wholesale Lending Division 22,590 10,024 Correspondent Lending Division 23,434 13,760 Full Spectrum Lending, Inc. 494 118 ------------- ------------ Total Loan Volume $67,812 $32,654 ============= ============ Electronic Commerce (1) $1,403 $33
(1) Includes loans sourced through the Company's website of $440 million and $33 million for the nine months ended November 30, 1998 and November 30, 1997, respectively, as well as loans submitted to the Correspondent Lending Division via its correspondent website of $963 million for the nine months ended November 30, 1998. - - -------------------------------------------------------------------------------- Loan origination fees increased during the nine months ended November 30, 1998 as compared to the nine months ended November 30, 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 nine months ended November 30, 1998 than in the nine months ended November 30, 1997. Gain on sale of loans improved during the nine months ended November 30, 1998 as compared to the nine months ended November 30, 1997 primarily due to higher production. Net interest income (interest earned net of interest charges) increased to $28.3 million for the nine months ended November 30, 1998, from $13.7 million for the nine months ended November 30, 1997. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($86.2 million and $53.4 million for the nine months ended November 30, 1998 and 1997, respectively); (ii) interest expense related to the Company's investment in servicing rights ($263.1 million and $152.4 million for the nine months ended November 30, 1998 and 1997, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($200.9 million and $106.0 million for the nine months ended November 30, 1998 and 1997, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from mortgage loan inventory was primarily attributable to increased production. The increase in interest expense related to 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 nine months ended November 30, 1997 to the nine months ended November 30, 1998. During the nine months ended November 30, 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 nine months ended November 30, 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 28% for the nine months ended November 30, 1998 compared to 13% for the nine months ended November 30, 1997. The increase in the prepayment rate from the nine months ended November 30, 1997 to the nine months ended November 30, 1998 was primarily attributable to the increase in refinance activity caused by lower interest rates during the nine months ended November 30, 1998 than during the nine months ended November 30, 1997. During the nine months ended November 30, 1998, the Company recognized a net benefit of $822.9 million from its Servicing Hedge. The net benefit included unrealized gains of $447.4 million and net realized gains of $375.5 million from the sale of various financial instruments that comprise the Servicing Hedge and premium amortization. During the nine months ended November 30, 1997, the Company recognized a net benefit of $150.2 million from its Servicing Hedge. The net benefit included unrealized gains of $139.2 million and net realized gains of $11.0 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 nine months ended November 30, 1998 totaling $1.3 billion (consisting of normal amortization amounting to $416.4 million and impairment of $854.8 million), compared to amortization and impairment of its MSRs of $375.1 million (consisting of normal amortization amounting to $213.8 million and impairment of $161.3 million) in the nine months ended, November 30, 1997. Salaries and related expenses are summarized below for the nine months ended November 30, 1998 and 1997. -- --------------------------- -- -- --------- ------------------------------ (Dollar amounts in Nine months Ended November 30, 1998 thousands) -------------- ------------------------------------------------- -- --- --- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- ------------- Base Salaries $149,277 $38,370 $65,972 $26,859 $280,478 Incentive Bonus 112,344 1,462 15,392 13,787 142,985 Payroll Taxes and Benefits 36,848 8,667 11,214 4,063 60,792 ------------ ------------- ------------- ------------- ------------- Total Salaries and Related Expenses $298,469 $48,499 $92,578 $44,709 $484,255 ============ ============= ============= ============= ------------- Average Number of Employees 5,189 1,917 1,757 603 9,466
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- ----- (Dollar amounts in Nine months Ended November 30, 1997 thousands) - - -- --------- ------------------------------------------------- -- --- --- ----- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- ------------- Base Salaries $ 95,626 $ 32,936 $ 51,079 $ 17,417 $ 197,058 Incentive Bonus 51,199 901 12,541 7,576 72,217 Payroll Taxes and Benefits 15,279 6,220 6,645 1,624 29,768 ------------ ------------- ------------- ------------- ------------- Total Salaries and Related Expenses $162,104 $40,057 $70,265 $ 26,617 $ 299,043 ======== ============ ============= ============= ============= Average Number of Employees 3,132 1,637 1,364 434 6,567
The amount of salaries increased during the nine months ended November 30, 1998 from the nine months ended November 30, 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 nine months ended November 30, 1998 increased to $202.2 million from $128.7 million for the nine months ended November 30, 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 nine months ended November 30, 1998 increased 5% to $135.7 million from $128.9 million for the nine months ended November 30, 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 nine months ended November 30, 1998 increased 55% to $47.2 million from $30.4 million for the nine months ended November 30, 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 nine months ended November 30, 1998 increased from the nine months ended November 30, 1997 by $26.1 million, or 30%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased reserves for bad debts, increased systems development and growth in the Company's non-mortgage banking subsidiaries in the nine months ended November 30, 1998 as compared to the nine months ended November 30, 1997. Profitability of Loan Production and Servicing Activities In the nine months ended November 30, 1998, the Company's pre-tax income from its loan production activities (which include loan origination and purchases, warehousing and sales) was $424.0 million. In the nine months ended November 30, 1997, the Company's comparable pre-tax income was $158.1 million. The increase of $265.9 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 nine months ended November 30, 1998, the Company's pre-tax earnings from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent and marketing foreclosed properties) was $1.9 million as compared to $178.8 million in the nine months ended November 30, 1997. The decrease of $176.9 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 the nine months ended November 30, 1997 to the nine months ended November 30, 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 and flood insurance, escrow services, home appraisals, credit reporting securities brokerage and servicing rights brokerage. For the nine months ended November 30, 1998, these activities contributed $39.3 million to the Company's pre-tax income compared to $31.8 million during the nine months ended November 30, 1997. This increase in pre-tax income primarily results from improved performance of the title insurance, and flood insurance, escrow and Capital Markets businesses. During the nine months ended November 30, 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 principal impact of this sale on earnings was a $57.4 million gain on sale recorded in the second quarter of fiscal 1998. 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 November 30, 1998, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $0.2 million after-tax gain related to its trading securities and a $34.5 million after-tax loss related to its other financial instruments, for the fiscal year ended February 28, 1999. The Company estimates that this combined after-tax loss of $34.3 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 backed by revolving credit facilities, 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. 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 nine months ended November 30, 1998, the Company's operating activities used cash of approximately $1.6 billion. In the nine months ended November 30, 1997, operating activities used approximately $2.1 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 $1.2 billion for the nine months ended November 30, 1998 and $0.8 billion for the nine months ended November 30, 1997. Financing Activities Net cash provided by financing activities amounted to $2.9 billion for the nine months ended November 30, 1998. Net cash provided by financing activities amounted to $2.9 billion for the nine months ended November 30, 1997. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process For the month ended December 31, 1998, the Company received new loan applications at an average daily rate of $569 million and at December 31, 1998, the Company's pipeline of loans in process was $15.5 billion. This compares to a daily application rate in the month end December 31, 1997 of $303 million and a pipeline of loans in process at December 31, 1997 of $7.6 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 December 31, 1998 was $1.1 billion and at December 31, 1997 was $769.1 million. 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 89% from quarter ended November 30, 1997 to quarter end November 30, 1998. This increase was due to several factors. First, mortgage interest rates generally were lower in the quarter ended November 30, 1998. This drove a 179% increase in refinance loan production in the quarter ended November 30, 1998 as compared to the quarter ended November 30,1997. In addition, home purchase market activity was stronger during the quarter ended November 30, 1998 than in the quarter ended November 30, 1997. On top of the increase in the loan origination market, the Company increased its market share from the quarter ended November 30, 1997 to the quarter ended November 30, 1998, in arge part due to its ongoing expansion of the Consumer Markets and Wholesale Divisions. The annual prepayment rate in the servicing portfolio increased from 16% for the quarter ended November 30, 1997 to 30% for the quarter ended November 30, 1998 due to lower interest rates in the quarter ended November 30, 1998 than in the quarter ended November 30, 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 several 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 23% of its total production during the quarter ended November 30, 1998 and 26% during the quarter ended November 30, 1997. The Company is continuing its efforts to expand its production capacity outside of California. Some regions in which the Company operates may have experienced slower economic growth, and real estate financing activity in these regions may have 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 3.61% at November 30, 1998 from 4.29% at November 30, 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 46% and 49% of the portfolio at November 30, 1998 and November 30, 1997, respectively. The weighted average age of the portfolio is 27 months at November 30, 1998 and November 30, 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 November 30, 1998 from 0.62% at November 30, 1997 primarily due to the sale of $347 million of mortgage loans in foreclosure as of November 30, 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 November 30, 1998, the Company had investments in such subordinated interests amounting to $261 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 such mortgage loan would 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 November 30, 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 decline in value of the Servicing Hedge; 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. In October 1998, the Financial Accounting Standards Board issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for sale by a Mortgage Banking Enterprise ("SFAS No. 134"). SFAS No. 134 is an amendment of SFAS No.65, Accounting for Certain Mortgage Banking Activities. It requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities and other retained interest based on its ability and intent to sell or hold those instruments. The Company adopted this statement in October 1998 and reclassified mortgage-backed securities retained in securitization as available for sale securities. 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 December 31, 1998 the Company has substantially reprogrammed and re-engineered the system to incorporate four-digit century date fields or appropriate widowing techniques, tested the function and accuracy of the reprogrammed fields, implemented the revised code and forward-date tested the more than 17,000 production programs on the AS/400. Programming errors discovered in the forward-date testing process are being corrected, and the Company anticipates that the revisions will be forward-date tested before January 31, 1999. Many of the Company's Client Server applications have been developed in-house and in a Year 2000 compliant format. The majority of these applications interface with the AS/400. The Company has reviewed each of its mission critical Client Server applications to confirm their Year 2000 readiness. Additionally, as part of this project, the Company has tested 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. All but one of the Company's mission critical Client Server applications have been forward-date tested. The programming errors discovered in the forward-date testing process are being corrected, and the Company anticipates that the revisions will be forward-date tested before January 31, 1999. The Company estimates that forward-date testing of the remaining mission critical Client Server applications and most of its less critical applications will be completed by June 30, 1999. The Company's Infrastructure Project has inventoried the personal computers used by the Company's employees nationwide to determine the Year 2000 readiness of these computers. Where necessary, older computers and related hardware which are not Year 2000 compliant will be upgraded or replaced before December 31, 1999. As part of the Infrastructure Project, the Company also identified "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, and approximately 95% of those systems have been forward-date tested. The Company anticipates that the remaining systems and components will be forward-date tested prior to February 28, 1999. Additionally, the Infrastructure Project personnel, along with personnel from the Company's Facilities and Property Management Departments, have evaluated 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. Where necessary, non-compliant systems or components will be upgraded or replaced before December 31, 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. In December 1998, the Company successfully completed company-wide testing of electronic interfaces with FHLMC. Similar testing with FNMA is scheduled for January 1999. 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 $20 million has been incurred through November 30, 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 13 of this Form 10Q. 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 4.19 Form of Medium-Term Notes, Series H (fixed rate) of CHL (incorporated by reference to Exhibit 4.3 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed with the SEC on October 30, 1998). 4.20 Form of Medium-Term Notes, Series H (floating rate) of CHL (incorporated by reference to Exhibit 4.4 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed with the SEC on October 30, 1998). 10.8.3 Amendment to Revolving Credit Agreement dated as of the 25th day of November,1998 by and among CHL, the Lenders under (as that term is defined in)the Revolving Credit Agreement dated as of September 24, 1997, and Bankers Trust Company as Credit Agent. 10.8.4 Amendment to Revolving Credit Agreement dated as of the 20th day of November, 1998 by and among CHL, the Lenders under (as that term is defined in) the Revolving Credit Agreement dated as of April 15, 1998 and Royal Bank of Canada, as lead administrative agent for the Lenders. 10.24.1 Amended and Restated Split-Dollar Life Insurance Agreement. 10.27.1 First Amendment to Change in Control Severance Plan. (b) Reports on Form 8-K. None. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COUNTRYWIDE CREDIT INDUSTRIES, INC. (Registrant) DATE: January 14, 1999 ------------------------ Stanford L. Kurland Senior Managing Director and Chief Operating Officer DATE: January 14, 1999 ------------------------ 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: January 14, 1999 /s/ Stanford L. Kurland ------------------------ Senior Managing Director and Chief Operating Officer DATE: January 14, 1999 /s/ Carlos M. Garcia ------------------------ Managing Director; Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) EXHIBIT INDEX Exhibit Number Document Description 4.19 Form of Medium-Term Notes, Series H (fixed rate) of CHL (incorporated by reference to Exhibit 4.3 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed with the SEC on October 30, 1998). 4.20 Form of Medium-Term Notes, Series H (floating rate) of CHL (incorporated by reference to Exhibit 4.4 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed with the SEC on October 30, 1998). 10.8.3 Amendment to Revolving Credit Agreement dated as of the 25th day of November,1998 by and among CHL, the Lenders under (as that term is defined in)the Revolving Credit Agreement dated as of September 24, 1997, and Bankers Trust Company as Credit Agent. 10.8.4 Amendment to Revolving Credit Agreement dated as of the 20th day of November, 1998 by and among CHL, the Lenders under (as that term is defined in) the Revolving Credit Agreement dated as of April 15, 1998 and RoyalBank of Canada, as lead administrative agent for the Lenders. 10.24.1 Amended and Restated Split-Dollar Life Insurance Agreement. 10.27.1 First Amendment to Change in Control Severance Plan. EX-10 2 AMENDMENT TO REVOLVING CREDIT AGREEMENT AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment") is made and dated as of the 25th day of November, 1998 by and among COUNTRYWIDE HOME LOANS, INC. (the "Company"), the 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, the Credit Agent and others (as amended, extended and replaced from time to time, the "Revolving Credit Agreement"), the Lenders agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. B. The Company has requested that the Lenders currently party to the Revolving Credit Agreement agree to amend the Revolving Credit Agreement in certain respects as provided more particularly 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. Amendment of Negative Covenant. To reflect the agreement of the Lenders to exclude certain of the Company's Advances to Affiliates from the limitations thereon set forth in the Revolving Credit Agreement, Paragraph 10(g) of the Revolving Credit Agreement is hereby amended to read in its entirety as follows: "10(g) Investments; Advances; Receivables. Make or commit to make any advance, loan or extension of credit ("Advances") to, or hold any receivable ("Receivable") of, or make or commit to make any capital contribution to, or purchase any stock, bonds, notes, debentures or other securities ("Investments") of, or make any other investment in, any Person, except: (1) Advances constituting Mortgage Loans made in the ordinary course of the Company's business and (2) Investments in, unsecured and secured Advances to, and Receivables of, any Affiliate (and Servicing Pass-Through Ventures which are not otherwise Affiliates) in an aggregate amount not to exceed ten percent (10%) of the net worth of the Company determined in accordance with GAAP; provided, however, that: (i) any unsecured Advances made by the Company to any Affiliate must be funded with equity of the Company, (ii) any secured Advances made by the Company to any Affiliate must be fully secured on a first priority, perfected basis, by readily marketable securities pledged by such Affiliate, and (iii) for purposes of determining the Company's compliance with the requirements of subparagraph (2) above Advances to Affiliates shall not include Advances made by the Company to any of Countrywide Capital Markets, Inc. ("CCMI"), Countrywide Securities Corporation ("CSI") and/or Countrywide Servicing Exchange, Inc. ("CSEI") which Advances are secured on a first priority, perfected basis by Mortgage-Backed Securities owned by any of CCMI, CSC or CSEI." 2. 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. 3. 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. 4. 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. 5.Representations and Warranties. The Company hereby represents and warrants to the Credit Agent and each of the 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 takenall necessary corporate action to authorize the execution, delivery and performance of this Amendment. This Amendment has been duly executed anddelivered 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. 6. No Other Amendment. Except as expressly amended hereby, the Credit Documentsshall remain in full force and effect as written and amended to date. 7. 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 Name Title BANKERS TRUST COMPANY, as Credit Agent By Name Title THE ASAHI BANK, LTD., LOS ANGELES AGENCY, as a Lender By Name Title BANCA CRT S.p.A., as a Lender By Name Title By Name Title BANCA DI NAPOLI S.p.A., NEW YORK BRANCH, as a Lender By Name Title By Name Title BANCA DI ROMA, SAN FRANCISCO BRANCH, as a Lender By Name Title By Name Title BANCA MONTE DEI PASCHI DI SIENA S.p.A., NEW YORK BRANCH, as a Lender By Name Title By Name Title BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender By Name Title BANK OF HAWAII, as a Lender By Name Title BANK OF MONTREAL, as a Lender By Name Title THE BANK OF NEW YORK, as a Lender By Name Title BANK OF TOKYO - MITSUBISHI TRUST COMPANY, as a Lender By Name Title BANK ONE, TEXAS, N.A., as a Lender By Name Title BANKERS TRUST COMPANY, as a Lender By Name Title BANQUE NATIONALE DE PARIS, as a Lender By Name Title By Name Title PARIBAS, as a Lender By Name Title By Name Title BARCLAYS BANK PLC, as a Lender By Name Title THE DAI-ICHI KANGYO BANK, LTD., LOS ANGELES AGENCY, as a Lender By Name Title BAYERISCHE LANDESBANK GIROZENTRALE, CAYMAN ISLANDS BRANCH, as a Lender By ________________________________________________________ Name ______________________________________________________ Title _____________________________________________________ By ________________________________________________________ Name ______________________________________________________ Title _____________________________________________________ CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender By Name Title THE CHASE MANHATTAN BANK, as a Lender By Name Title CREDIT LYONNAIS, SAN FRANCISCO BRANCH, as a Lender By Name Title _____________________________________________________ DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a Lender By Name Title By Name Title THE FIFTH THIRD BANK, as a Lender By Name Title THE FIRST NATIONAL BANK OF CHICAGO, as a Lender By Name Title FIRST UNION NATIONAL BANK, as a Lender By Name Title FLEET BANK, N.A., as a Lender By Name Title THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, as a Lender By Name Title THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY, as a Lender By Name Title KBC BANK N.V., as a Lender By Name Title By ________________________________________________________ Name ______________________________________________________ Title _____________________________________________________ LASALLE NATIONAL BANK, as a Lender By Name Title THE LONG TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as a Lender By Name Title MELLON BANK, N.A., as a Lender By Name Title THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY, as a Lender By Name Title MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Lender By Name Title NATIONSBANK, N.A., as a Lender By Name Title NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH, as a Lender By Name Title By Name Title ROYAL BANK OF CANADA, as a Lender By Name Title THE SAKUR BANK LIMITED, LOS ANGELES AGENCY, as a Lender By Name Title By Name Title STAR BANK, NATIONAL ASSOCIATION, as a Lender By Name Title THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender By Name Title THE TOYO TRUST AND BANKING CO., LTD., LOS ANGELES AGENCY, as a Lender By Name Title UNION BANK OF CALIFORNIA, N.A., as a Lender By Name Title U. S. BANK NATIONAL ASSOCIATION, formerly known as U.S. National Bank of Oregon, as a Lender, By Name Title WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS BRANCH, as a Lender By Name Title ACKNOWLEDGED and AGREED TO as of the date first written above: COUNTRYWIDE CREDIT INDUSTRIES, INC., a Delaware corporation By _______________________________________________ Name _____________________________________________ Title ____________________________________________ EX-10 3 AMENDMENT TO REVOLVING CREDIT AGREEMENT AMENDMENT TO REVOLVING CREDIT AGREEMENT __________________ THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment") is made and dated as of the 20th day of November, 1998 by and among COUNTRYWIDE HOME LOANS, INC. (the "Company") the Lenders under (and as that term and capitalized terms not otherwise defined herein are defined in) the Revolving Credit Agreement described below and ROYAL BANK OF CANADA, as lead administrative agent for the Lenders (in such capacity, the "Lead Agent"). RECITALS __________________ A. Pursuant to that certain Revolving Credit Agreement dated as of April 15, 1998 by and among the Company, the Lenders signatory thereto, the Lead Agent, The Bank of New York ("BNY"), as co-administrative agent, Morgan Guaranty Trust Company of New York ("MGTC"), as syndication agent, Credit Lyonnais, San Francisco Branch ("CL"), as documentation agent, RBC, as arranger, BNY, MGTC and CL, as co-arrangers and the Lenders acting as co-agents, as indicated on the signature pages thereof (as amended, extended and replaced from time to time, the "Revolving Credit Agreement"), the Lenders agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. __________________ B. The Company has requested that the Lenders currently party to the Revolving Credit Agreement agree to amend the Revolving Credit Agreement in certain respects as provided more particularly 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. Amendment of Negative Covenant. To reflect the agreement of the Lenders to exclude certain of the Company's Advances to Affiliates from the limitations thereon set forth in the Revolving Credit Agreement, Paragraph 10(g) of the Revolving Credit Agreement is hereby amended to read in its entirety as follows: "10(g) Investments; Advances; Receivables. Make or commit to make any advance, loan or extension of credit ("Advances") to, or hold any receivable ("Receivable") of, or make or commit to make any capital contribution to, or purchase any stock, bonds, notes, debentures or other securities ("Investments") of, or make any other investment in, any Person, except: (1) Advances constituting Mortgage Loans made in the ordinary course of the Company's business and (2) Investments in, unsecured and secured Advances to, and Receivables of, any Affiliate (and Servicing Pass-Through Ventures which are not otherwise Affiliates) in an aggregate amount not to exceed ten percent (10%) of the net worth of the Company determined in accordance with GAAP; provided, however, that: (i) any unsecured Advances made by the Company to any Affiliate must be funded with equity of the Company, (ii) any secured Advances made by the Company to any Affiliate must be fully secured on a first priority, perfected basis, by readily marketable securities pledged by such Affiliate, and (iii) for purposes of determining the Company's compliance with the requirements of subparagraph (2) above Advances to Affiliates shall not include Advances made by the Company to any of Countrywide Capital Markets, Inc. ("CCMI"), Countrywide Securities Corporation ("CSI") and/or Countrywide Servicing Exchange, Inc. ("CSEI") which Advances are secured on a first priority, perfected basis by Mortgage-Backed Securities owned by any of CCMI, CSC or CSEI." 2. 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 Lead 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. 3. 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 Lead 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. 4.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 Lead 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 Lead Agent may request. 5. Representations and Warranties. The Company hereby represents and warrants to the Lead Agent and each of the 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. 6. No Other Amendment. Except as expressly amended hereby, the Credit Documents shall remain in full force and effect as written and amended to date. 7. 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 Name Title ROYAL BANK OF CANADA, as Lead Administration Agent, Arranger and a Lender By Name Title THE BANK OF NEW YORK, as Co-Administrator Agent, a Co-Arranger, a Co-Agent a and Lender By Name Title MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Syndication Agent, a Co-Arranger, a Co-Agent and a Lender By Name Title CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent, a Co-Arranger, a Co-Agent and a Lender By Name Title ABN AMRO BANK, N.V., as a Co-Agent and a Lender By Name Title By Name Title _____________________________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Co-Agent and a Lender Agent By Name Title BARCLAYS BANK PLC, as a Co-Agent and a Lender By Name Title THE CHASE MANHATTAN BANK, as a Co-Agent and a Lender By Name Title DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a Co-Agent and a Lender By Name Title By Name Title NATIONSBANK OF TEXAS, N.A., as a Co-Agent and a Lender By Name Title BANQUE NATIONALE DE PARIS, as a Lender By Name Title By Name Title CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender By Name Title THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender By Name Title BANQUE PARIBAS, as a Lender By Name Title By Name Title BANK ONE, TEXAS, N.A., as a Lender By Name Title BANK OF HAWAII, as a Lender By Name Title ACKNOWLEDGED and AGREED TO as of the day and year first written above: COUNTRYWIDE CREDIT INDUSTRIES, INC., By _______________________________________________ Name _____________________________________________ Title ____________________________________________ EX-10 4 FIRST AMENDMENT LIFE INSURANCE AGREEMENT SPLIT DOLLAR LIFE INSURANCE AGREEMENT This Split Dollar Life Insurance Agreement ("Agreement") is made, as of ____________, 199__, by and between Countrywide Credit Industries, Inc., a Delaware corporation (the "Corporation"), and ____________ (the "Executive"). RECITALS A. The Executive desires to insure his or her life for the benefit and protection of his or her family or designated beneficiary under the Policy (as defined below); B. The Corporation desires to help the Executive provide certain insurance for the benefit and protection of his or her family or designated beneficiary by providing funds from time to time to pay the premiums due on the Policy in accordance with this Agreement; and C. The Executive, as Owner of the Policy, desires to assign certain rights and interests in the Policy to the Corporation, to the extent provided herein, as security for repayment of certain funds provided by the Corporation for the acquisition and/or maintenance of the Policy. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and the mutual agreements and covenants set forth below, the parties to this Agreement agree as follows: 1. Definitions. For purposes of this Agreement, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: (a) "Aggregate Premiums Paid" shall mean, at any time, an amount equal to (i) the cumulative premiums paid by the Corporation on the Policy, less (ii) any Policy loans to the Corporation and accrued and unpaid interest thereon, less (iii) any amounts, if any, received by the Corporation from the Executive for life insurance coverage provided under this Agreement. Despite the foregoing, Aggregate Premiums Paid shall not include extra benefit riders or agreements, other than those providing additional life insurance coverage on the insured, and shall not include premiums waived pursuant to the terms of any disability waiver of a premium rider. (b) "Base Annual Salary" shall mean the base annual compensation, excluding bonuses, commissions, overtime, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, paid to the Executive for employment services rendered to the Corporation, before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125 plans of the Corporation, in effect at the later of (1) March 1, 1997, (2) the date of an increase associated with a promotion to a higher corporate title, or (3) the date of entry into the Plan. (c) "Benefit Measurement Date" shall mean the date on which the first of any of the following events occurs: (i) The Executive's Termination of Employment; (ii) Termination of this Agreement in accordance with Section 9 below; or (iii) The Executive's death. (iv) The Executive's Retirement (d) "Cash Surrender Value" shall mean an amount that equals, at any specified time, the cash surrender value as determined under the terms of the Policy. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Collateral Assignment" shall mean an assignment made by the Executive in favor of the Corporation in a form mutually agreed to by the Corporation and the Executive and accepted by the Insurer. (g) "Collateral Interest" shall mean the Corporation's rights and interests in the Policy, as set forth in Section 6 below. (h) "Executive's Death Benefit" shall mean an amount that is equal to the result of multiplying the Executive's Base Annual Salary by two (2). (i) "Insurer" shall mean Aetna Life Insurance and Annuity Company and/or Manufacturers Life Insurance Company. (j) "Minimum Retirement Cash Value" shall mean, on the Benefit Measurement Date, the minimum amount of cash value that is needed in the Policy to maintain a death benefit that is equal to one half of the Executive's Death Benefit, determined on the Benefit Measurement Date, assuming that the Policy will be held without surrender, withdrawal or loan until the Executive reaches age 90 and that the fixed interest rate to be used to project earnings on the Policy up to the specified age is the Insurer's announced interest rate under the Policy on the Benefit Measurement Date. (k) "Plan" shall mean the plan described in Section 8(a) below. (l) "Policy" shall mean the following policy or policies on the life of the Executive that are issued by the Insurer: Policy Number Type of Policy Insurance Company ----------------------- ------------------- ----------------------------------- Universal Life Aetna Life Insurance and Annuity Company ------------------- ----------------------- ---------------------------------------------- Universal Life Manufacturers Life Insurance Company ----------------------- ------------------- ----------------------------------- (m) "Retirement" or "Retire" shall mean severance from employment from the Corporation for any reason other than an authorized leave of absence, death, or Termination of Employment, on or after the attainment of age sixty-five (65). (n) "Tax Limitation Date" shall mean the date on which the Policy will no longer be subject to those provisions of Section 7702(f)(7) of the Code that would cause any distribution or surrender from or under the Policy to be taxed under that Section (or Section 72 of the Code by reason of that Section). (o) "Termination of Employment" shall mean the ceasing of employment with the Corporation for any reason other than death, an authorized leave of absence or a disability that does not constitute a ceasing of employment under the Corporation's employment policies. 2. Acquisition of Policy; Ownership of Insurance. The parties to this Agreement shall cooperate in applying for and obtaining the Policy. The Policy shall be issued to the Executive, as the sole and exclusive owner of the Policy, subject to the rights and interests granted to the Corporation, as provided in this Agreement and the Collateral Assignment. 3. Premium Payments on Policy. (a) Payments and Reimbursements. Prior to the occurrence of the Benefit Measurement Date, the Corporation shall pay to the Insurer, on or before each applicable premium due date, all applicable premiums for the Policy. In the event that the Corporation fails to make any such payment, the Executive may make (but is not required to make) any such payment, and the Corporation shall immediately reimburse the Executive for any amount so paid. All such premium payments made by the Corporation under this Agreement shall constitute advances by the Corporation to the Executive for which the Executive shall be responsible for repayment in accordance with the terms of this Agreement, but only up to an amount equal to the Corporation's Collateral Interest. (b) Additional Compensation. Each calendar year, the Executive shall be considered to have taxable compensation income for that portion of the premiums paid by the Corporation that is equal in amount to the value of the "economic benefit" derived by the Executive from the Policy's life insurance protection, as determined for Federal income tax purposes under Revenue Rulings 64-328 and 66-110. The Corporation shall withhold from the Executive's Base Annual Salary, or other compensation paid to the Executive, in a manner determined by the Corporation, the Executive's share of FICA and other employment and income taxes relating to that taxable amount. 4. Corporation's Rights. The Corporation's rights and interests in and to the Policy shall be specifically limited to (i) the right to increase or decrease Policy death benefits annually in accordance with maintaining the "Executives Death Benefit" as defined in Section 1(h), (ii) the right to be paid its Collateral Interest in accordance with Section 6 below, (iii) the rights specified in the Collateral Assignment, and (iv) the right to obtain one or more loans or advances on the Policy, provided, however, that any such loans shall not, in the aggregate, exceed the Aggregate Premiums Paid by the Corporation at any specified date without the written consent of the Executive. 5. Executive's Rights. Subject to the terms of this Agreement and the Collateral Assignment, the Executive shall be the owner of the Policy, and shall be entitled to exercise all rights in the Policy while the Collateral Assignment is in effect, except for the following, which may be exercised only in accordance with Section 6: (a) To borrow against or pledge the Policy; (b) To surrender, cancel or assign the Policy; or (c) To take a distribution or withdrawal from the Policy. 6. Collateral Interest. (a) The Corporation's Collateral Interest in the Policy shall be paid as soon as is reasonably practical after the Benefit Measurement Date. (b) On the Benefit Measurement Date, the Corporation's interest in the Policy (the "Collateral Interest") shall be determined in the following manner: (i) If the Benefit Measurement Date occurs due to the Executive's Termination of Employment or the termination of this Agreement by either party in accordance with Section 9 below, the Corporation shall be entitled to receive from the Policy an amount equal to that portion of the Policy's Cash Surrender Value that does not exceed the Aggregate Premiums Paid. (ii) If the Benefit Measurement Date occurs due to the death of the Executive (except as provided in Section 6(b)(iii) below), the Corporation shall be entitled to that portion of the Policy's death proceeds that exceeds the Executive's Death Benefit. (iii) If the Benefit Measurement Date occurs due to the suicide of the Executive, and the proceeds from the Policy are limited by either a suicide or contestability provision under the Policy, the Corporation shall be entitled to that portion of the Policy's Cash Surrender Value and/or death proceeds that does not exceed the Aggregate Premiums Paid. (iv) If the Benefit Measurement Date occurs due to the Executive's Retirement, the Corporation shall be entitled to receive from the Policy an amount equal to that portion of the Policy's Cash Surrender Value that does not exceed the Aggregate Premiums Paid. Despite the foregoing, if, on the Benefit Measurement Date, the Policy's remaining Cash Surrender Value (after taking into account the Corporation's Collateral Interest described in the preceding sentence) is less than the Minimum Retirement Cash Value, then the Corporation's Collateral Interest specified in the preceding sentence shall be reduced by the amount that the Minimum Retirement Cash Value exceeds the remaining Cash Surrender Value. (c) If the Benefit Measurement Date is other than the date of the Executive's death, the Corporation's Collateral Interest in the Policy, as determined in Section 6(b)(i) and (iv) above, shall be paid to the Corporation in one of the following ways, as elected by the Executive in writing within 30 days after the date the Corporation first notifies the Executive in writing of the occurrence of the Benefit Measurement Date: (i) By the Executive's surrender or partial surrender of, or withdrawal from, the Policy in an amount equal to the Corporation's Collateral Interest and payment of the proceeds to the Corporation; (ii) By the Executive taking a loan out on the Policy in an amount equal to the Corporation's Collateral Interest, and payment of the loan proceeds to the Corporation, provided that the Corporation shall not be responsible for any interest that may accrue on any such loan; (iii) By the Executive's payment to the Corporation, from the Executive's separate funds, an amount equal to the Corporation's Collateral Interest; or (iv) By the Executive's transfer of the ownership of the Policy, and all rights thereunder, to the Corporation. (d) If the Benefit Measurement Date is the date of the Executive's death, the Corporation's Collateral Interest in the Policy, as determined in Section 6(b)(ii) above, shall be paid to the Corporation from the Policy's proceeds as soon as is reasonably practicable after the Executive's death. (e) Despite Section 6(c) above and Section 6(f) below, if, at the time of the Benefit Measurement Date, the Tax Limitation Date has not occurred, (i) the Corporation shall have the right, in its sole discretion, to require the Executive to elect to pay the Corporation's Collateral Interest in accordance with Section 6(c)(ii) above, and (ii) the Corporation's rights under Section 6(f) shall be limited to taking a loan in accordance with Section 6(f)(ii) below. (f) If the Executive fails to exercise any of the options under Section 6(c) above, by delivering written notice of such election to the Corporation no later than 30 days after the date the Corporation first notifies the Executive in writing of the occurrence of the Benefit Measurement Date, the Corporation shall be entitled to: (i) surrender the Policy and receive the Policy's Cash Surrender Value, to the extent of the Corporation's Collateral Interest, or (ii) take out a loan on the Policy in an amount equal to the Corporation's Collateral Interest, with the loan proceeds paid to the Corporation and the Corporation not responsible for any interest that may accrue on such loan, or (iii) transfer the ownership of and beneficial interest in the Policy to the Corporation. In the case of (i) or (iii) above, the Corporation shall pay to the Executive the Cash Surrender Value or death proceeds that remain after the Corporation has been paid its Collateral Interest. (g) The Corporation agrees to keep records of its premium payments and to furnish the Insurer with a statement of its Collateral Interest whenever the Insurer requires such statement. (h) Concurrent with the signing of this Agreement, the Executive will collaterally assign the Policy to the Corporation, in the form of the Collateral Assignment, as security for the payment of the Collateral Interest, which assignment shall not be altered or changed without the consent of the Corporation and the Executive. (i) Promptly following the Executive's death, the Corporation and the Executive's designated beneficiary under the Policy shall take all steps necessary to collect the death proceeds of the Policy by submitting the proper claims forms to the Insurer. The Corporation shall notify the Insurer of the amount of the Executive's Death Benefit (except when the Policy's proceeds are limited because of the Executive's death by suicide) and the Corporation's Collateral Interest in the Policy at the time of such death. Such amounts shall be paid, respectively, by the Insurer to the Executive's designated beneficiary and the Corporation. (j) If the Executive elects to retain the Policy in accordance with Section 6(c) above, the Corporation shall (i) assign its Collateral Interest in the Policy to the Executive, (ii) execute and file with the Insurer an appropriate release of the Corporation's Collateral Interest in the Policy and (iii) have no further interest in the Policy; provided that, in all instances, the Corporation receives payment in full for its Collateral Interest in the Policy. Further, the Executive hereby acknowledges, understands and agrees that, upon the release of the Corporation's Collateral Interest, the Corporation shall not have any responsibility for the future performance of the Policy and shall have no obligation to make any additional premium payments. (k) If the Executive elects to transfer the Policy to the Corporation, or the Corporation makes such an election in accordance with Section 6(f)(iii) above, the Executive agrees to execute within thirty (30) days of such election all documents necessary to transfer the Policy to the Corporation, and the Executive shall have no further interest in and to the Policy. Executive hereby appoints Corporation as its lawful attorney-in-fact to execute any document necessary to transfer the Policy to the Corporation and not executed by Executive within thirty (30) days of such election. (l) Upon payment to the Corporation of its Collateral Interest in accordance with this Section 6, this Agreement, and the Executive's participation in the Plan, shall terminate and neither party shall have any further rights or obligations under the Agreement or the Plan with respect to the Executive. (m) The Corporation shall cooperate in effecting any full or partial policy surrender, withdrawal or policy loan requested by the Executive related to the Executive's exercise of any options provided in Section 6(c) above, provided that the Corporation receives payment in full for its Collateral Interest in the Policy. Moreover, the Executive shall cooperate in effecting any right granted to the Corporation under this Agreement. 7. Insurer. (a) The Insurer is not a party to this Agreement, shall in no way be bound by or charged with notice of its terms, and is expressly authorized to act only in accordance with the terms of the Policy. The Insurer shall be fully discharged from any and all liability under the Policy upon payment or other performance of its obligations in accordance with the terms of the Policy. (b) The signature(s) required for the Insurer to recognize the exercise of a right under the Policy shall be specified in the Collateral Assignment. 8. Plan; Named Fiduciary; Claims Procedure. (a) This Agreement is part of the Countrywide Credit Industries, Inc. Split-Dollar Life Insurance Plan, which consists of all Countrywide Credit Industries, Inc. Split Dollar Life Insurance Agreements that so reference their association with the Plan. (b) The Corporation is the named fiduciary of the Plan for purposes of this Agreement. (c) The following claims procedure shall be followed in handling any benefit claim under this Agreement and the Plan: (i) The Executive, or his or her beneficiary, if he or she is dead (the "Claimant"), shall file a claim for benefits by notifying the Corporation in writing. If the claim is wholly or partially denied, the Corporation shall provide a written notice within 90 days specifying the reasons for the denial, the provisions of this Agreement on which the denial is based, and additional material or information, if any, that is necessary for the Claimant to receive benefits. Such written notice shall also indicate the steps to be taken by the Claimant if a review of the denial is desired. (ii) If a claim is denied, and a review is desired, the Claimant shall notify the Corporation in writing within 60 days after receipt of written notice of a denial of a claim. In requesting a review, the Claimant may review plan documents and submit any written issues and comments the Claimant feels are appropriate. The Corporation shall then review the claim and provide a written decision within 60 days of receipt of a request for a review. This decision shall state the specific reasons for the decision and shall include references to specific provisions of this Agreement, if any, upon which the decision is based. (iii) In no event shall the Corporation's liability under this Agreement exceed the amount of proceeds from the Policy. 9. Amendment of Agreement; Termination. This Agreement shall not be modified or amended except by a writing signed by the Corporation and the Executive. Either party may terminate this Agreement, and Executive's participation in the Plan, at any time provided that the obligations of the party terminating the Agreement and the Plan with respect to the Executive are performed in full under the Agreement as of the time of the termination. 10. Binding Agreement. This Agreement shall be binding upon the heirs, administrators, executors, successors and assigns of each party to this Agreement. This Agreement is not assignable by the Executive without the Corporation's consent. 11. State Law. This Agreement shall be subject to and be construed under the internal laws of the State of California, without regard to its conflicts of laws principles. 12. Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of this Agreement, but this Agreement shall be construed and enforced as if such illegal or invalid provision had never been inserted in this Agreement. 13. Not a Contract of Employment. The terms and conditions of this Agreement shall not be deemed to constitute a contract of employment between the Corporation and the Executive. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, with or without cause, unless expressly provided in a separate written employment agreement. Nothing in this Agreement shall be deemed to give the Executive the right to be retained in the service of the Corporation or to interfere with the right of the Corporation to discipline or discharge the Executive at any time. 14. Notice. Any notice or filing required or permitted to be given under this Agreement to the Executive or the Corporation shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: To the Executive: ______________________ Address: ___________________________ To the Corporation:Managing Director, Human Resources Countrywide Credit Industries, Inc. 4500 Park Granada Calabasas, CA 91302-1613 or to such other address as may furnished to the Executive or the Corporation, as the case may be, in writing in accordance with this notice provision. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to the Executive or the Executive's beneficiary under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive. 15. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with regard to the subject matter of this Agreement and supersedes all previous negotiations, agreements and commitments in respect thereto. No oral explanation or oral information by either of the parties to this Agreement shall alter the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first written above. "Corporation" Countrywide Credit Industries, Inc., a Delaware corporation By: Its: "Executive" EX-10 5 FIRST AMENDMENT TO SEVERANCE PLAN FIRST AMENDMENT TO COUNTRYWIDE CREDIT INDUSTRIES, INC. CHANGE IN CONTROL SEVERANCE PLAN (As Adopted September 12, 1996) WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to amend the Countrywide Credit Industries, Inc. Change in Control Severance Plan (As Adopted September 12, 1996) (the "Plan") to clarify the severance benefit that Eligible Employee Classification is entitled to receive upon participation. NOW, THEREFORE, APPENDIX A of the plan is hereby deleted in its entirety as enumerated in Appendix A of the Plan and New APPENDIX A, attached hereto as Exhibit A, is inserted in its place. IN WITNESS WHEREOF, the Company has caused this FIRST AMENDMENT to be executed this 30th day of September 1998. Countrywide Credit Industries, Inc. By ___________________________ Anne McCallion Managing Director Attest: ________________________ Susan Bow Assistant Secretary Exhibit A NEW APPENDIX A Eligible Employee Classifications Members A Managing Directors B Executive Vice Presidents and Operating Unit Presidents C Countrywide Home Loans ("CHL"), Senior Vice Presidents and Operating Unit Executive Vice Presidents D First Vice Presidents, Vice Presidents and Regional Vice Presidents E Branch Managers and all other Exempt Employees F All Non-Exempt Employees Salary Separation Payment The Salary Separation Payment to which a Participant is entitled shall be based on the Participant's employee classification as of the date immediately preceding the date of the Participant's Qualifying Termination or, if greater, as of the date on which the Change-in Control occurs, and shall equal the amount described in the table below; provided, however, that the Salary Separation Payment for each Participant who is a member of Employee Classification C, D, E or F shall also include an additional amount equal to one-quarter (1/4) of one month of Base Pay for each full year of service with the Company or Operating Unit in excess of five (5) years; provided, further, however, that such additional amount, if any, when added to the amount of Base Pay provided in the table below, shall not exceed twelve (12) months Base Pay. Employee Classification Salary Separation Payment A Two (2) years Base Pay (as defined in Section 6.1(a)) plus 200% of the Average Bonus (as defined in Section 6.1(a)). B One (1) year Base Pay plus 100% of the Average Bonus. C Six (6) months Base Pay plus 50% of the Average Bonus. D Four (4) months Base Pay plus 33% of the Average Bonus. E Three (3) months Base Pay plus 25% of the Average Bonus. F Two (2) months Base Pay plus 15% of the Average Bonus. EX-11 6 COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Nine Months Ended November 30, 1998 1997 ---------------- ----------------- (Dollar amounts in thousands, except per share data) Basic Net earnings applicable to common stock $283,802 $259,881 ================ ================= Average shares outstanding 111,065 107,111 ---------------- ----------------- Per share amount $2.56 $2.43 ================ ================= Diluted Net earnings applicable to common stock $283,802 $259,881 ================ ================= Average shares outstanding 111,065 107,111 Net effect of dilutive stock options -- based on the treasury stock method using the closing market price, if higher than average market price. 5,749 4,062 ---------------- ----------------- Total average shares 116,814 111,173 ================ ================= Per share amount $2.43 $2.34 ================ =================
EX-12 7 COMPUTATION OF RATIOS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the nine months ended November 30, 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). Nine Months Ended November 30, Fiscal Years Ended February 29(28), ------------------------- ------------------------------------------------------------------ 1998 1997 1998 1997 1996 1995 1994 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Net earnings $283,802 $259,881 $344,983 $257,358 $195,720 $ 88,407 $179,460 Income tax expense 181,447 166,154 220,563 164,540 130,480 58,938 119,640 Interest charges 528,017 291,935 424,341 316,705 281,573 205,464 219,898 Interest portion of rental Expense 3,914 2,703 10,055 7,420 6,803 7,379 6,372 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Earnings available to cover fixed charges $997,180 $720,673 $999,942 $746,023 $614,576 $360,188 $525,370 ============ ============ ============= ============ ============= ============ ============ Fixed charges Interest charges $528,017 $291,935 $424,341 $316,705 $281,573 $205,464 $219,898 Interest portion of rental expense 3,914 2,703 10,055 7,420 6,803 7,379 6,372 ------------ ------------ ------------- ------------ ------------- ------------ ------------ Total fixed charges $531,931 $294,638 $434,396 $324,125 $288,376 $212,843 $226,270 ============ ============ ============= ============ ============= ============ ============ Ratio of earnings to fixed charges 1.87 2.45 2.30 2.30 2.13 1.69 2.32 ============ ============ ============= ============ ============= ============ ============
EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS FEB-28-1999 Nov-30-1998 52,330 0 0 0 0 0 445,166 163,069 16,202,843 0 6,982,255 0 0 5,598 2,414,378 16,202,843 0 1,446,619 0 981,370 0 0 0 465,249 181,447 283,802 0 0 0 283,802 2.56 2.43
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