-----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, JrPB2BesU7NxyY71zdrOEOK+MNwwBe0TXXMu2dNm/hlA53xGEf0okso8N+lHGqNj rtLQauHqW73cQNKgOp0rSA== 0000025191-99-000010.txt : 19990624 0000025191-99-000010.hdr.sgml : 19990624 ACCESSION NUMBER: 0000025191-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990528 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 99637781 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-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 13 - 2641992 (State of other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 4500 Park Granada, Calabasas, CA 91302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 225-3000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.05 Par Value New York Stock Exchange Pacific Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of May 3, 1999, there were 112,748,275 shares of Countrywide Credit Industries, Inc. Common Stock, $.05 par value, outstanding. Based on the closing price for shares of Common Stock on that date, the aggregate market value of Common Stock held by non-affiliates of the registrant was approximately $4,787,009,000. For the purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates. PART I ITEM 1. BUSINESS A. General Founded in 1969, Countrywide Credit Industries, Inc. (the "Company" or "CCI") is a holding company which, through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL"), is engaged primarily in the mortgage banking business, and as such originates, purchases, sells and services mortgage loans. The Company's mortgage loans are principally prime credit quality first-lien mortgage loans secured by single- (one-to-four) family residences ("prime credit quality first mortgages"). The Company also offers home equity loans both in conjunction with newly produced prime credit quality first mortgages and as a separate product. In addition, the Company offers sub-prime credit quality first-lien single-family mortgage loans ("sub-prime loans"). The Company, through its other wholly-owned subsidiaries, offers products and services complementary to its mortgage banking business. See "Business-Other Operations." Unless the context otherwise requires, references to the "Company" herein shall be deemed to refer to the Company and its consolidated subsidiaries. This Annual Report on Form 10-K 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 future 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, among others, could cause future 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 and capital markets operations; and (5) competition within the mortgage banking industry and capital markets industries; and (6) the ability of the Company to manage expenses. B. Mortgage Banking Operations The principal sources of revenue from the Company's mortgage banking business are: (i) loan origination fees; (ii) gains from the sale of loans, if any; (iii) interest earned on mortgage loans during the period that they are held by the Company pending sale, net of interest paid on funds borrowed to finance such mortgage loans; (iv) loan servicing fees; and (v) interest benefit derived from the custodial balances associated with the Company's servicing portfolio. Loan Production Segment The Company originates and purchases conventional mortgage loans, mortgage loans insured by the Federal Housing Administration ("FHA"), mortgage loans partially guaranteed by the Department of Veterans Affairs ("VA"), home equity loans and sub-prime loans. A majority of the conventional loans are conforming loans that qualify for inclusion in guarantee programs sponsored by the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The remainder of the conventional loans are non-conforming loans (i.e., jumbo loans with an original balance in excess of $240,000 or other loans that do not meet Fannie Mae or Freddie Mac guidelines). As part of its mortgage banking activities, the Company makes conventional loans with original balances of up to $1 million. The following table sets forth the number and dollar amount of the Company's prime credit quality first mortgage, home equity and sub-prime loan production for the periods indicated. Summary of the Company's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ----------- ----------------------------------------------------------------------- ------------------------------- ---- 1999 1998 1997 1996 1995 ------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------ Conventional Loans Number of Loans 529,345 231,595 190,250 191,534 175,823 Volume of Loans $69,026.1 $29,887.5 $22,676.2 $21,883.4 $20,958.7 Percent of Total Volume 74.3% 61.3% 60.0% 63.3% 75.2% FHA/VA Loans Number of Loans 190,654 162,360 143,587 125,127 72,365 Volume of Loans $19,137.5 $15,869.8 $13,657.1 $12,259.3 $6,808.3 Percent of Total Volume 20.6% 32.5% 36.1% 35.5% 24.4% Home Equity Loans Number of Loans 65,607 45,052 20,053 7,986 2,147 Volume of Loans $2,220.5 $1,462.5 $613.2 $220.8 $99.2 Percent of Total Volume 2.4% 3.0% 1.6% 0.6% 0.4% Sub-prime Loans Number of Loans 25,433 16,360 9,161 1,941 - Volume of Loans $2,496.4 $1,551.9 $864.3 $220.2 - Percent of Total Volume 2.7% 3.2% 2.3% 0.6% - Total Loans Number of Loans 811,039 455,367 363,051 326,588 250,335 Volume of Loans $92,880.5 $48,771.7 $37,810.8 $34,583.7 $27,866.2 Average Loan Amount $115,000 $107,000 $104,000 $106,000 $111,000 ------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
The significant increase in the number and dollar amount of loans produced in the year ended February 28, 1999 ("Fiscal 1999") was primarily due to an increase in the Company's market share, driven largely by the expansion of the Company's consumer markets and wholesale branch networks, combined with an increase in the overall mortgage market driven largely by refinances. For Fiscal 1999, 1998 and 1997, jumbo loans represented 23%, 20% and 12%, respectively, of the Company's total volume of mortgage loans produced. In addition, adjustable-rate mortgage loans ("ARMs") comprised approximately 5%, 23% and 26%, respectively, of the Company's total volume of mortgage loans produced. The decrease in the Company's percentage of ARM production was primarily a result of consumer preference for fixed-rate loans. For Fiscal 1999, 1998 and 1997, refinancing activity represented 57%, 41% and 33%, respectively, of the Company's total volume of mortgage loans produced. The increase in the percentage of refinance loans for Fiscal 1999 is indicative of the lower interest rate environment experienced during that year. The Company produces mortgage loans through three separate divisions of Countrywide Home Loans and another subsidiary, Full Spectrum Lending, Inc. (the "Divisions"). The Company maintains a staff of central office quality control personnel that performs audits of the loan production of the Divisions on a regular basis. In addition, the Divisions have implemented various procedures to control the quality of loans produced, as described below. The Company believes that its use of technology, benefits derived from economies of scale and a noncommissioned sales force allow it to produce loans at a low cost relative to its competition. Consumer Markets Division The Company's consumer markets division (the "Consumer Markets Division") originates primarily prime credit quality first mortgage and home equity loans through referrals from real estate agents and direct contact with consumers through its nationwide network of retail branch offices, its telemarketing centers and its Website. For calendar 1998, the Consumer Markets Division was ranked as the top retail originator, in terms of loans produced, among independent residential mortgage lenders and fourth among all residential mortgage lenders. During Fiscal 1999, the Consumer Markets Division added 81 retail branch offices, bringing the total to 415 Consumer Markets Division branch offices and 6 processing centers located in 48 states and the District of Columbia. Each of the Consumer Markets Division's branch offices is typically staffed by six to seven employees. They are connected to the Company's central office by a computer network. The Company operates three telemarketing centers that solicit potential borrowers and receive telephone calls placed by potential borrowers primarily in response to print or broadcast advertising. Loan counselors employed in the telemarketing centers provide information and take loan pre-applications, which are then electronically available to either a branch office or a processing center for processing and funding. Business from home construction companies is solicited through a nationwide network of builder account managers. Additionally, business is solicited through advertising; participation of branch management in local real estate related business functions and extensive use of direct mailings to borrowers and real estate brokers. The Company believes it offers a superior alternative to its customers through low cost loans, a broad product line which includes one-stop choice, direct access to the lender using the customer's preferred channel (a local branch, call centers or through the Internet) and local underwriting authority. Consumer Markets Division personnel are not paid a commission on loan production; however, they are paid a bonus based on various factors, including branch profitability. The Company believes that this approach allows it to originate high-quality loans at a comparatively low cost. The Consumer Markets Division uses continuous quality control audits of loans originated within to monitor compliance with the Company's underwriting criteria. The audits are performed by branch management and quality control personnel. The following table sets forth the number and dollar amount of the Consumer Markets Division's prime credit quality first mortgage, home equity and sub-prime loan production for the periods indicated. ------------------------------- ---------- ------------------------------------------------------------------------ Summary of the Consumer Markets Division's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------- 1999 1998 1997 1996 1995 ------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------- Conventional Loans Number of Loans 151,845 67,850 43,261 47,260 48,772 Volume of Loans $18,860.2 $8,377.7 $5,145.3 $5,271.8 $5,442.2 Percent of Total Volume 66.2% 62.8% 63.7% 70.7% 77.0% FHA/VA Loans Number of Loans 87,290 43,238 27,746 22,829 19,060 Volume of Loans $8,687.0 $4,114.0 $2,514.3 $2,025.4 $1,612.1 Percent of Total Volume 30.4% 30.8% 31.2% 27.1% 22.8% Home Equity Loans Number of Loans 31,725 27,198 14,028 6,000 297 Volume of Loans $947.8 $784.3 $384.7 $160.9 $11.4 Percent of Total Volume 3.3% 5.9% 4.8% 2.2% 0.2% Sub-prime Loans Number of Loans 130 737 303 - - Volume of Loans $13.1 $62.5 $27.0 - - Percent of Total Volume 0.1% 0.5% 0.3% - - Total Loans Number of Loans 270,990 139,023 85,338 76,089 68,129 Volume of Loans $28,508.1 $13,338.5 $8,071.3 $7,458.1 $7,065.7 Average Loan Amount $105,000 $96,000 $95,000 $98,000 $104,000 ------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Wholesale Division The Company's wholesale division (the "Wholesale Division") produces prime credit quality first mortgage, home equity and sub-prime loans through mortgage loan brokers and other financial intermediaries. As of February 28, 1999, the Wholesale Division operated 84 loan centers, 14 regional support centers and three sub-prime underwriting centers in various parts of the United States. For 1998, the Wholesale Division was ranked as the top wholesale originator, in terms of volume, among residential mortgage lenders. The Company attributes its success in this channel to providing a high level of service to loan brokers, which includes access to an extensive branch network. Prime credit quality first mortgage loans produced by the Wholesale Division comply with the Company's general underwriting criteria for loans originated through the Consumer Markets Division. Each such loan is approved by one of the Company's loan underwriters. Sub-prime loans are underwritten centrally by a specialized underwriting group and comply with the Company's underwriting criteria for such loans. In addition, quality control personnel review loans for compliance with the Company's underwriting criteria. The Wholesale Division has approximately 19,000 approved mortgage brokers and other third-party originators. Mortgage loan brokers are approved only after a review of their reputation and mortgage lending expertise, which includes a review of their references and financial statements. The following table sets forth the number and dollar amount of the Wholesale Division's prime credit quality first mortgage, home equity and sub-prime loan production for the periods indicated. ------------------------------- ----------- -------------------------------------------------------------------- Summary of the Wholesale Division's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- ----------- 1999 1998 1997 1996 1995 ------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- ----------- Conventional Loans Number of Loans 187,852 87,391 50,570 59,670 65,713 Volume of Loans $25,493.4 $11,860.9 $6,187.8 $6,766.9 $7,790.0 Percent of Total Volume 82.5% 75.4% 73.4% 84.0% 91.6% FHA/VA Loans Number of Loans 33,282 23,641 12,505 10,448 6,239 Volume of Loans $3,436.1 $2,362.3 $1,190.0 $1,016.2 $626.3 Percent of Total Volume 11.1% 15.0% 14.1% 12.6% 7.4% Home Equity Loans Number of Loans 18,172 11,073 6,017 1,937 1,836 Volume of Loans $687.2 $419.4 $227.7 $57.5 $86.9 Percent of Total Volume 2.2% 2.7% 2.7% 0.7% 1.0% Sub-prime Loans Number of Loans 13,274 11,721 8,568 1,941 - Volume of Loans $1,300.5 $1,088.1 $823.9 $220.2 - Percent of Total Volume 4.2% 6.9% 9.8% 2.7% - Total Loans Number of Loans 252,580 133,826 77,660 73,996 73,788 Volume of Loans $30,917.2 $15,730.7 $8,429.4 $8,060.8 $8,503.2 Average Loan Amount $122,000 $118,000 $109,000 $109,000 $115,000 ------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Correspondent Division Through its network of correspondent offices (the "Correspondent Division") the Company purchases loans from other mortgage bankers, commercial banks, savings and loan associations, credit unions and other financial intermediaries ("correspondents"). For 1998, the Correspondent Division was ranked as the third largest correspondent lender, in terms of volume, among residential mortgage lenders. The Company's correspondent offices are located in Pasadena, California, Dallas, Texas and Pittsburgh, Pennsylvania. The Correspondent Division has 1,300 approved financial intermediaries serving all 50 states and Guam. High quality financial intermediaries are approved after a review of the reputation, financial strength and mortgage lending expertise of such institutions, including a review of their references and financial statements. In addition, all Correspondents are reaffirmed annually based upon a review of their current audited financial statements and their historical production volumes and quality. The Company attributes its success in this channel to providing superior service in the form of a broad product line and advanced technological systems. Loans purchased by the Company through the Correspondent Division comply with the Company's general underwriting criteria for loans originated through the Consumer Markets Division. The division has monitoring systems in place to ensure that conventional loans of certain sellers and loans of certain credit quality grades are reviewed by a Company underwriter prior to purchase. Under this review process, Company underwriters reviewed approximately 21% of all conventional loans purchased during Fiscal 1999. An additional 34% of the conventional loans purchased were underwritten by contract underwriters whose work is insured against loss or through underwriting systems endorsed by Fannie Mae and Freddie Mac. For the home equity and sub-prime conventional loan products, Company underwriters reviewed 100% of loans purchased. To provide additional assurance against losses, the purchase agreement signed by all its correspondents provides the Company with recourse to the correspondent in the event of such occurrences as fraud or misrepresentation in the origination process. The following table sets forth the number and dollar amount of the Correspondent Division's prime credit quality first mortgage, home equity and sub-prime loan production for the periods indicated. ------------------------------- ------------------------------------------------------------------------------- -- Summary of the Correspondent Division's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- 1999 1998 1997 1996 1995 ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- Conventional Loans Number of Loans 189,648 76,354 96,419 84,604 61,338 Volume of Loans $24,672.5 $9,648.9 $11,343.1 $9,844.7 $7,726.5 Percent of Total Volume 75.3% 49.3% 53.2% 51.7% 62.8% FHA/VA Loans Number of Loans 70,082 95,481 103,336 91,850 47,066 Volume of Loans $7,014.4 $9,393.5 $9,952.8 $9,217.7 $4,570.0 Percent of Total Volume 21.4% 48.0% 46.7% 48.3% 37.2% Home Equity Loans Number of Loans 15,597 6,635 8 49 14 Volume of Loans $581.0 $252.4 $0.8 $2.4 $0.8 Percent of Total Volume 1.8% 1.3% 0.0% 0.0% 0.0% Sub-prime Loans Number of Loans 4,229 2,457 290 - - Volume of Loans $479.9 $267.5 $13.4 - - Percent of Total Volume 1.5% 1.4% 0.1% - - Total Loans Number of Loans 279,556 180,927 200,053 176,503 108,418 Volume of Loans $32,747.8 $19,562.3 $21,310.1 $19,064.8 $12,297.3 Average Loan Amount $117,000 $108,000 $107,000 $108,000 $113,000 ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Full Spectrum Lending, Inc. Full Spectrum Lending, Inc. ("FSLI"), a wholly-owned subsidiary of the Company, which commenced operations on September 1, 1997, originates sub-prime and home equity loans. FSLI operates a nationwide network of 38 retail branch offices located in 19 states in addition to three national sales centers which enables the Company to offer mortgages to a broader spectrum of consumers. Each of FSLI's branch offices is typically staffed by five to seven employees. Business is obtained primarily through direct mailings to borrowers, outbound telemarketing, referrals from other Divisions of the Company and other business partners. FSLI personnel are not paid a commission on sales, rather they are paid a bonus based on various factors, which includes branch profitability. Each loan approved by FSLI is reviewed by its centralized underwriting unit to ensure that standardized underwriting guidelines are met. In addition, FSLI performs quality control audits of the origination process on a continuous basis. The following table sets forth the number and dollar amount of FSLI's home equity and sub-prime loan production for the periods indicated. ------------------------------- ------------------------------------------------------------------------------- -- Summary of the Full Spectrum Lending's (Dollar amounts in millions, Home Equity and Sub-prime Loan Production Except average loan amount) Year Ended February 28(29), ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- 1999 1998 1997 1996 1995 ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- Home Equity Loans Number of Loans 113 146 - - - Volume of Loans $4.5 $6.4 - - - Percent of Total Volume 0.6% 4.6% - - - Sub-prime Loans Number of Loans 7,800 1,445 - - - Volume of Loans $702.9 $133.8 - - - Percent of Total Volume 99.4% 95.4% - - - Total Loans Number of Loans 7,913 1,591 - - - Volume of Loans $707.4 $140.2 - - - Average Loan Amount $89,000 $88,000 - - - ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Fair Lending Programs In conjunction with fair lending initiatives undertaken by both Fannie Mae and Freddie Mac and promoted by various government agencies, including the Department of Housing and Urban Development ("HUD"), the Company has established affordable home loan and fair lending programs for low-income, moderate-income and designated minority borrowers. These programs offer more flexible underwriting guidelines (consistent with guidelines adopted by Fannie Mae and Freddie Mac) than historical industry standards, thereby enabling more people to qualify for home loans than had qualified under such historical guidelines. Highlights of these flexible guidelines include lower down payment requirements, more liberal guidelines in areas such as credit and employment history, lower income requirements and no cash reserve requirements at the date of funding. House America(R) is the Company's affordable home loan program for low- and moderate-income borrowers. It offers loans that are eligible for purchase by Fannie Mae and Freddie Mac. During Fiscal 1999 and 1998, the Company produced approximately $312 million and $400 million, respectively, of mortgage loans under this program. The decline in House America production from Fiscal 1998 to Fiscal 1999 was the result of an improvement in the relative attractiveness of other loan products as an alternative means of providing home ownership to low- and moderate-income borrowers. House America personnel work with all of the Company's production Divisions to help properly implement the flexible underwriting guidelines for House America loan programs. In addition, an integral part of the program is the House America Counseling Center, a free educational service, which can provide consumers with a home buyer's educational program, pre-qualify them for a loan or provide a customized budget plan to help them obtain their goal of home ownership. Counselors are bilingual. They work with consumers providing counseling for up to one year. The Company also organizes and participates in local homebuyer fairs across the country. At these fairs, branch personnel and Counseling Center counselors discuss various loan programs, provide free pre-qualifications and distribute credit counseling and homebuyer education videos and workbooks. The Company's affordable housing outreach also includes participation in 150 local mortgage revenue bond programs that are available for first-time homebuyers. Federal law allows local government agencies to sell tax-exempt bonds to purchase mortgages securing loans made to first-time, low-income home buyers. These programs provide mortgages with below-market rates. The Company is approved to participate in over 400 Community Seconds Programs for first-time homebuyers and low- and moderate-income consumers. These programs are offered by city agencies and municipalities to assist with downpayment and closing costs. In addition, a selection of applications from some of the borrowers that are initially recommended for denial within the Company's Consumer Markets and Wholesale Divisions are reviewed by a manager of the Company to insure that denial is appropriate. The use of more flexible underwriting guidelines may carry a risk of increased loan defaults. However, because the loans in the Company's portfolio are generally serviced on a non-recourse basis, the exposure to credit loss resulting from increased loan defaults is substantially limited. Further, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. Loan Underwriting The Company's guidelines for underwriting FHA-insured and VA-guaranteed loans comply with the criteria established by those entities. The Company's guidelines for underwriting conventional conforming loans comply with the underwriting criteria employed by Fannie Mae and/or Freddie Mac. The Company's underwriting guidelines and property standards for conventional non-conforming loans are based on the underwriting standards employed by private investors for such loans. In addition, conventional loans having a loan to value ratio greater than 80% at origination, which are originated or purchased by the Company, are covered by primary mortgage insurance. The insurance may be paid for by the borrower or the lender. In conjunction with fair lending initiatives undertaken by both Fannie Mae and Freddie Mac, the Company has established affordable home loan programs for low- and moderate-income borrowers offering more flexible underwriting guidelines than historical industry standards. See "Business -Fair Lending Programs". The following describes the general underwriting criteria taken into consideration by the Company in determining whether to approve a prime credit quality first mortgage loan application. Borrowers who do not qualify for a prime credit quality first mortgage may qualify for a sub-prime loan. Employment and Income Under most loan programs, applicants must exhibit the ability to generate income on a regular basis, which would be sufficient to make the mortgage payment as well as any other debts they may have. The nature of the information that a borrower is required to disclose and whether such information is verified depends, in part, on the documentation program used in the origination process. Evidence of employment and income is obtained through written verification of employment with the current and prior employer(s) or by obtaining a recent pay stub and W-2 forms. Self-employed applicants are generally required to provide income tax returns, financial statements or other documentation to verify income. Sources of income to be considered include salary, bonus, overtime, commissions, retirement benefits, notes receivable, interest, dividends, unemployment benefits and rental income. The underwriter generally verifies the information contained in the application relating to employment, income, assets or mortgages. Debt-to-Income Ratios Generally, an applicant's monthly housing expense (loan payment, real estate taxes, hazard insurance and homeowner association dues, if applicable) should be 25% to 28% of their monthly gross income. Total fixed monthly obligations (housing expense plus other obligations such as car loans, credit card payments, etc.) generally should be 33% to 36% of monthly gross income. Other areas of financial strength, such as equity in the property, large cash reserves or a history of meeting prior home mortgage or rental obligations are considered to be compensating factors and may result in an adjustment of these ratio limitations. Credit History An applicant's credit history is examined for both favorable and unfavorable occurrences. An applicant who has made payments on outstanding or previous credit obligations according to the contractual terms may be considered favorably. Unfavorable items such as slow payment records, legal actions, judgments, bankruptcy, liens, foreclosure or garnishments are discussed with the applicant. In some instances, where the unfavorable items were due to extenuating circumstances beyond the applicant's control, the effect of such unfavorable items on the credit decision would be mitigated. Property Under most loan programs, the property's market value is assessed to ensure that the property provides adequate collateral for the loan. Generally, properties are appraised by licensed real estate appraisers. Automated or streamlined appraisal systems may also be used to confirm property values on some loan programs. Maximum Indebtedness to Appraised Value Generally, the maximum amount the Company will lend is 95% of the appraised value of the property and this percentage may be lower depending on certain factors such as the principal balance of the loan. Loan amounts in excess of 80% of the appraised value generally require primary mortgage insurance to protect against foreclosure loss. Funds for Closing Generally, applicants are required to have sufficient funds of their own to meet the down payment requirement. Funds for closing costs may come from the applicant or may be a gift from a family member. Certain loan programs require the applicant to have sufficient funds for a portion of the down payment and the remaining funds may be provided by a gift or an unsecured loan from a municipality or a non-profit organization. Certain programs require the applicant to have cash reserves after closing. Geographic Distribution The following table sets forth the geographic distribution of the Company's prime credit quality first mortgage, home equity and sub-prime loan production for the year ended February 28, 1999. ------------------------------------------------------------------------------------------------------- Geographic Distribution of the Company's Prime Mortgage, Home Equity and Sub-prime Loan Production ----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- --- Percentage of Number Principal Total Dollar (Dollar amounts in of Loans Amount Amount millions) ----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- --- California 161,764 $23,349.2 25.1% Michigan 49,306 5,177.3 5.6% Texas 45,865 4,470.3 4.8% Illinois 34,718 4,134.2 4.5% Colorado 32,933 4,111.1 4.4% Florida 42,940 3,835.0 4.1% Washington 25,694 3,160.2 3.4% Arizona 27,953 2,889.7 3.1% Massachusetts 21,033 2,881.5 3.1% Ohio 27,582 2,553.5 2.8% Georgia 22,055 2,322.2 2.5% New Jersey 15,594 2,034.0 2.2% Utah 16,877 1,978.0 2.1% Others (1) 286,725 29,984.3 32.3% ------------------ ----------------- ----------------- 811,039 $92,880.5 100.0% ================== ================= =================
(1) No other state constitutes more than 2.0% of the total dollar amount of loan production. California mortgage loan production as a percentage of total mortgage loan production (measured by principal balance) for Fiscal 1999, 1998 and 1997 was 25%, 26% and 25%, respectively. Loan production within California is geographically dispersed, which minimizes dependence on any individual local economy. As of February 28, 1999, 82% of the Consumer Markets Division branch offices, Wholesale Division loan centers and FSLI branches were located outside of California. The following table sets forth the distribution by county of the Company's California loan production for the year ended February 28, 1999. ------------------------------------------------------------------------------------------------------- Distribution by County of the Company's California Loan Production ----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ -- Percentage of Number Principal Total Dollar (Dollar amounts in Of Loans Amount Amount millions) ----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ -- Los Angeles 36,721 $5,703.3 24.4% Orange 18,412 2,904.3 12.4% San Diego 13,387 2,047.3 8.8% Santa Clara 7,738 1,496.8 6.4% Others (1) 85,506 11,197.5 48.0% ------------------ ----------------- ------------------ 161,764 $23,349.2 100.0% ================== ================= ==================
(1) No other county in California constitutes more than 5.0% of the total dollar amount of California loan production. Sale of Loans As a mortgage banker, the Company customarily sells substantially all loans that it originates or purchases. Substantially all prime credit quality first mortgage loans sold by the Company are sold without recourse, subject in the case of VA loans to the limits of the VA guaranty described below. Conforming conventional loans are generally pooled by the Company and exchanged for securities guaranteed by Fannie Mae or Freddie Mac. These securities are then sold to national or regional broker-dealers. Substantially all conventional loans securitized through Fannie Mae or Freddie Mac are sold, subject to certain representations and warranties on the part of the Company, on a non-recourse basis, whereby foreclosure losses are generally a liability of Fannie Mae and Freddie Mac and not the Company. The Company securitizes substantially all of its FHA-insured and VA-guaranteed mortgage loans through the Government National Mortgage Association ("Ginnie Mae"), Fannie Mae, or Freddie Mac. The Company is insured against foreclosure loss by the FHA or partially guaranteed against foreclosure loss by the VA (at present, generally 25% to 50% of the loan, up to a maximum amount of $50,750, depending upon the amount of the loan). For Fiscal 1999, 1998 and 1997, the aggregate loss experience of the Company on VA loans in excess of the VA guaranty was approximately $13.2 million, $18.5 million and $9.3 million, respectively. To guarantee timely and full payment of principal and interest on Fannie Mae, Freddie Mac and Ginnie Mae securities, the Company pays guarantee fees to these agencies. The Company sells its non-conforming conventional loan production on a non-recourse basis. These loans can be sold either on a whole-loan basis or in the form of "private-label" securities which generally have the benefit of some form of credit enhancement, such as insurance, letters of credit, payment guarantees or senior/subordinated structures. Home equity and sub-prime loans may be sold on a whole-loan basis or in the form of securities backed by pools of these loans. In connection with the securitization of its home equity and sub-prime loans, the Company retains a subordinated residual interest. The Company has exposure to credit losses on the loans to the extent of this residual interest. As of February 28, 1999, the Company had investments in such subordinated residual interests amounting to $273.9 million, which represented less than 2% of total assets. In connection with the sale and securitization of mortgage loans, the Company makes customary representations and warranties relating to, among other things, compliance with laws and the underwriting rules of the buyer or guarantor. In the event of a breach of such representations and warranties, the Company may be required to indemnify the purchaser against losses suffered as a result of the breach and repurchase the affected mortgage loan. In such event, any subsequent credit loss on the mortgage loan will be borne by the Company. In order to mitigate the risk that a change in interest rates will result in a decline in the value of the Company's current loan commitments the ("Committed Pipeline") or closed loans and mortgage backed securities held in inventory (the "Inventory"), the Company enters into hedging transactions. The Company's Inventory is hedged with forward contracts for the sale of loans and net sales of mortgage-backed securities ("MBS"), including options to sell MBS where the Company can exercise the option on or prior to the anticipated settlement date of the MBS. Due to the variability of closings in the Company's Committed Pipeline, which is driven primarily by interest rates, the Company's hedging policies require that substantially all of the Committed Pipeline be hedged with a combination of options for the purchase and sale of MBS and treasury futures and forward contracts for the sale of MBS. The correlation between the Inventory and Committed Pipeline and the hedge instruments is very high due to their similarity. The Company is generally not exposed to significant losses nor will it realize significant gains related to its Inventory and Committed Pipeline due to changes in interest rates, net of gains or losses on associated hedge positions. However, the Company is exposed to the risk that the actual closings in the Committed Pipeline may deviate from the estimated closings for a given change in interest rates. Although interest rates are the primary determinant, the actual loan closings from the Committed Pipeline are influenced by many factors, including the composition of the Committed Pipeline and remaining commitment periods. The Company's estimated closings are based on historical data of loan closings as influenced by recent developments. Loan Servicing Segment The Company services on a non-recourse basis substantially all of the mortgage loans that it originates or purchases pursuant to servicing agreements with Fannie Mae, Freddie Mac, Ginnie Mae and various investors. In addition, the Company periodically purchases bulk servicing contracts, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. Servicing contracts acquired through bulk purchases accounted for 10% of the Company's mortgage servicing portfolio as of February 28, 1999. Servicing mortgage loans includes collecting and remitting loan payments, responding to borrower inquires, making advances when required, accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and hazard insurance, making any physical inspections of the property, counseling delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults and generally administering the loans. The Company receives a fee for servicing mortgage loans ranging generally from 1/4% to 1/2% annually on the declining principal balances of the loans. The Company strives to balance its loan servicing and loan production segments, which are counter-cyclical in nature. In general, earnings from the loan servicing segment increase as interest rates increase and decline as interest rates decline, which is normally the opposite of the loan origination segment. Generally, in an environment of increasing interest rates, the rate of current and projected future loan prepayments decreases, resulting in a decreased rate of amortization of mortgage servicing rights ("MSRs"). Conversely, in an environment of declining interest rates, the rate of current and projected future prepayments increases, resulting in an increased rate of amortization and potential impairment of MSRs. To further mitigate the impact of MSR impairment on earnings, the Company has devoted substantial management expertise and resources to the development and maintenance of a financial hedge (the "Servicing Hedge"). In addition, the Company believes it is becoming increasingly effective at recapturing loans that are refinanced from its portfolio. To maximize the value of its investment in MSRs, the Company has endeavored to cross-sell various services and financial products to its portfolio of over two million borrowers. In particular, the Company has been able to cross-selling homeowners, fire, flood, earthquake, auto, home warranty, life and disability insurance, as well as annuities, through its insurance agency, Countrywide Insurance Services ("CIS"). CIS is a national, full-service, multi-line insurance agency and brokerage, with over three hundred thousand policies currently in force with portfolio and non-portfolio customers alike. In addition, through telemarketing and direct mail solicitations, the Company has offered home equity lines of credit to its existing borrowers. As of February 28, 1999, the Company had 59,710 home equity lines in place, up from 45,679 as of February 29,1998. The Company has vertically integrated several loan-servicing functions that are commonly out-sourced by other loan servicers. These functions include monitoring and processing property tax bills, tracking and ensuring adequate insurance to protect the investor's interest in the property securing each loan, trustee services, Real Estate Owned ("REO") management and liquidation services, and property field inspection services. The Company believes the integration of these functions give it a competitive edge by lowering costs and enabling the Company to provide an enhanced overall level of service. Through a separate subsidiary, the Company earns a portion of the private mortgage insurance premiums associated with loans in the servicing portfolio by providing a layer of non-catastrophic reinsurance coverage to primary mortgage insurance companies that underwrite primary mortgage insurance. The Company's servicing portfolio is subject to reduction by scheduled principal payments, prepayments and foreclosures. In addition, the Company has elected in the past to sell a portion of its MSRs as well as newly originated loans on a servicing-released basis, and may do so in the future. Nonetheless, the Company's overall strategy is to build and retain its servicing portfolio. Loans are serviced from facilities located in Simi Valley, California and Plano, Texas (see "Properties"). The Company has developed systems and processes that enable it to service mortgage loans efficiently and therefore enhance earnings from its investment in MSRs. Some of these systems and processes are highlighted in the following paragraphs. All data elements pertaining to each individual loan are transferred from the various loan origination systems to the loan servicing system without manual intervention. Customer service representatives in both servicing facilities have access to on-line screens containing all pertinent data about a borrower's account, thus eliminating the need to refer to paper files and shortening the average time per call. The Company's telephone system controls the flow of calls to each servicing site and has a "Smart Call Routing" filter. This filter is designed to match the originating phone number to phone numbers in the Company's database. Having identified the borrower, the Company can communicate topical loan information electronically without requiring the caller to enter information. The caller can get more detailed information through an Interactive Voice Response application or can speak with a customer service representative. The Company also features an Internet site for existing borrowers wherein the borrower can obtain current account status, history, answers to frequently asked questions and a dictionary to help the borrower understand industry terminology. The Company issues monthly statements to its borrowers. This allows the Company to provide personalized home loan information in a more timely manner while simultaneously providing a vehicle for the Company to market other products. Monthly statement information is also available to borrowers electronically through the Company's Website. The Company's high speed payment processing equipment enables the Company to deposit virtually all checks on the day of receipt, thereby maximizing cash availability. The collection department utilizes its collection management system in conjunction with its predictive dialing system to track and maximize each individual collector's performance as well as to track the success of each collection campaign. The Company tracks its foreclosure activity through its default processing system ("DPS"). DPS is a client-server-based application that allows each foreclosure to be assigned to a state/investor specific workflow template. The foreclosure processor is automatically guided through each function required to successfully complete a foreclosure in any state and for any investor. The following table sets forth certain information regarding the servicing segment's portfolio of single-family mortgage loans, including loans and securities held for sale and loans subserviced for others, for the periodsindicated. ------------------------------------ -- ------------------------------------------------------------------------- (Dollar amounts in millions) Year Ended February 28(29), ------------------------------------ -- ------------------------------------------------------------------------- Composition of Servicing Portfolio 1999 1998 1997 1996 1995 ----------- -- ------------ -- ----------- -- ----------- -- ------------ At Period End: FHA-Insured Mortgage Loans $38,707.0 $ 37,241.3 $ 30,686.3 $ 23,206.5 $ 17,587.5 VA-Guaranteed Mortgage Loans 15,457.7 14,878.7 13,446.4 10,686.2 7,454.3 Conventional Mortgage Loans 155,999.4 127,344.0 112,685.4 102,417.0 87,998.2 Home Equity Loans 2,806.3 1,656.5 689.9 204.5 31.3 Sub-prime Loans 2,502.3 1,744.2 1,048.9 289.1 - ----------- ------------ ----------- ----------- ------------ Total Servicing Portfolio $215,472.7 $182,864.7 $158,556.9 $136,803.3 $113,071.3 =========== ============ =========== =========== ------------ Beginning Servicing Portfolio $182,864.7 $158,556.9 $136,803.3 $113,071.3 $ 84,624.9 Add: Loan Production 92,880.5 48,771.7 37,810.8 34,583.7 27,866.2 Bulk Servicing and Subservicing 6,644.6 3,761.6 2,808.1 6,428.5 17,888.1 Acquired Less: Servicing Transferred (1) (7,398.6) (110.6) (70.8) (53.5) (6,287.4) Runoff (2) (59,518.5) (28,114.9) (18,794.5) (17,226.7) (11,020.5) =========== ============ =========== =========== ------------ Ending Servicing Portfolio $215,472.7 $182,864.7 $158,556.9 $136,803.3 $113,071.3 =========== ============ =========== =========== ------------ Delinquent Mortgage Loans and Pending Foreclosures at Period End (3): 30 days 2.52% 2.68% 2.26% 2.13% 1.80% 60 days 0.53% 0.58% 0.52% 0.48% 0.29% 90 days or more 0.50% 0.65% 0.66% 0.59% 0.42% ----------- ----------- ------------ ----------- ------------ Total Delinquencies 3.55% 3.91% 3.44% 3.20% 2.51% =========== =========== ============ =========== ------------ Foreclosures Pending 0.31% 0.45% 0.71% 0.49% 0.29% ----------- ----------- ------------ ----------- ------------ ------------------------------------ -- ----------- -- ----------- -- ------------ -- ----------- -- ------------
(1) When servicing rights are sold from the servicing portfolio, the Company generally subservices such loans from the sales contract date to the transfer date. (2) Runoff refers to scheduled principal repayments on loans and unscheduled prepayments (partial prepayments or total prepayments due to refinancing, modifications, sale, condemnation or foreclosure). (3) Expressed as a percentage of the total number of loans serviced excluding subserviced loans. At February 28, 1999, the Company's servicing portfolio of single-family mortgage loans was stratified by interest rate as follows. ---- -------------------------- -- -------------------------------------------------------------------------------- (Dollar amounts in Total Portfolio at February 28, 1999 millions) ---- -------------------------- -- -------------------------------------------------------------------------------- Weighted Interest Principal Percent Average MSR Rate Balance of Total Maturity (Years) Balance ---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- -- 7% and under $ 73,284.4 34.0% 24.8 $ 1,647.6 7.01-8% 109,322.9 50.8% 26.1 2,301.2 8.01-9% 26,813.4 12.4% 25.8 454.1 9.01-10% 4,037.2 1.9% 24.2 76.1 over 10% 2,014.8 0.9% 21.6 17.4 =============== ============== ===================== =============== $215,472.7 100.0% 25.5 $4,496.4 =============== ============== ===================== =============== ---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
The weighted average interest rate of the single-family mortgage loans in the Company's servicing portfolio as of February 28, 1999 was 7.5% and 7.8% as of February 28, 1998. As of February 28, 1999, 90% of the loans in the servicing portfolio bore interest at fixed rates. The weighted average net service fee of the loans in the portfolio was 0.405% as of February 28, 1999. The weighted average interest rate of the fixed-rate loans in the servicing portfolio was 7.4%. The following table sets forth the geographic distribution of the Company's servicing portfolio of single-family mortgage loans, including loans and securities held for sale and loans subserviced for others, as of February 28, 1999. ----------------------------------------------------------- -- ----------------------------- Percentage of Principal Balance Serviced ----------------------------------------------------------- -- ----------------------------- California 30.3% Texas 5.1% Florida 4.8% Illinois 3.7% Colorado 3.6% Michigan 3.5% Washington 3.4% Ohio 2.9% Arizona 2.9% New York 2.7% Georgia 2.6% Virginia 2.5% Massachusetts 2.5% New Jersey 2.4% Maryland 2.3% Other (1) 24.8% ============== 100.0% ==============
(1) No other state contains more than 2.0% of the properties securing loans in the Company's servicing portfolio. Financing of Mortgage Banking Operations The Company's principal financing needs are the financing of its mortgage loan inventory and the investment in MSRs. To meet these needs, the Company currently utilizes commercial paper supported by CHL's revolving credit facility, medium-term notes, mortgage repurchase agreements, pre-sale funding facilities, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities and cash flow from operations. The Company estimates that it had available committed and uncommitted credit facilities aggregating approximately $10.4 billion as of February 28, 1999. 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 CHL's revolving credit facility and public offerings of common and preferred stock. For further information on the material terms of the borrowings utilized by the Company to finance its inventory of mortgage loans and MBS and its investment in servicing rights, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." 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 that are designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. 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. C. Information Technology The Company employs both proprietary and publicly available technology throughout the enterprise and continually searches for new and better ways of both providing services to its customers and of maximizing the efficiency of its operations. Technology is viewed as part of the Company's competitive advantage. By implementing highly integrated systems into its lines of business, the Company believes it has been successful in the rapid start-up of new business enterprises. The Company views technology as a key driver to maintaining world class productivity levels in its operations. The deployment of Internet technologies, integrated client server systems, as well as advanced messaging systems such as Lotus Notes, interactive voice response and call management systems. These all represent examples where management believes technology has played a role in improving or maintaining productivity and efficiency. Proprietary systems currently in use by the Company include CLUESTM, an artificial intelligence system that is designed to expedite the review of applications, credit reports and property appraisals. The Company believes that CLUES increases underwriters' productivity, reduces costs and provides greater consistency to the underwriting process. As a result, the Company believes it achieves efficiencies in the Company's overall business processes and in the level of customer service (improved pricing, approval and funding speed). Other systems currently in use by the production Divisions are the EDGE (primarily used by the Consumer Markets, Wholesale Lending Division and Full Spectrum Lending, Inc.) and GEMS (primarily used by the Correspondent Lending Division) systems, which are loan origination systems that are designed to reduce the time and cost associated with the loan application and funding process. These front-end systems were internally developed for the Company's exclusive use and are integrated with the Company's loan servicing, sales, accounting, treasury and other systems. The Company believes that both the EDGE and GEMS systems improve the quality of its loan products and customer service by: (i) reducing the risk of deficient loans; (ii) facilitating accurate and customized pricing; (iii) promptly generating loan documents with the use of laser printers; (iv) providing for electronic communication with credit bureaus, financial institutions, HUD and other third parties; and (v) generally minimizing manual data input. Another system developed and implemented by the Company is the MORTGAGE LOAN COUNSELOR. The MORTGAGE LOAN COUNSELOR is designed for telemarketing and production branches and is currently being used by the telemarketing unit in conjunction with its Customer Contact Management System ("CCMS"). (See discussion in the following paragraph.) MORTGAGE LOAN COUNSELOR provides the telemarketing unit with the ability to: (i) pre-qualify a prospective applicant; (ii) provide "what if" scenarios to help find the appropriate loan product; (iii) obtain on-line price quotes; (iv) take applications; (v) request credit reports electronically through LandSafe, Inc.; (vi) issue a LOCK 'N SHOP (R) certificate; and (vii) transmit a loan pre-application to the production units for processing. CCMS is a telemarketing application designed to provide enterprise-wide information on both current and prospective customers. CCMS helps the production divisions identify prospective customers to solicit for specific products or services and obtain the results of any solicitation as well as facilitate customer contact management. Management believes that CCMS will provide the Company the opportunity to (i) reduce the loss of customers who prepay their loans and (ii) obtain new loans from other sources and generate additional revenue by cross-selling other products and services. The Company is currently beta testing in 100 branches a new software application called "AdvantEdge". AdvantEdge is a reusable object oriented contact management and loan origination system which can be used separately or integrated with EDGE. This application has been designed to assist the Consumer Markets Division, Wholesale Lending Division and FSLI in improving loan production. Additionally, the loan origination modules of AdvantEdge provide functionality similar to MORTGAGE LOAN COUNSELOR, access to CLUESTM and the ability to generate disclosure documents. AdvantEdge assists production employees to individually manage each customer or business partner relationship. Once a loan application is ready to be funded, the loan information is transferred to EDGE, resulting in time saved and enhanced customer service. The Company believes that AdvantEdge will allow the production divisions to convert more leads, increase business partner referrals and cross-sell additional products (e.g. mortgage insurance, property insurance, etc.) throughout the loan process. By maintaining a database of customer contact information (realtors, individual customers, loan brokers, builders or other business partners), the Company believes it will be able to improve the customer relationship and profitability. AdvantEdge will be introduced into the Company's telemarketing operations in June 1999 and rolled out to the balance of its retail branch network beginning in the second quarter. The Company is a dominant Internet retail home lender. The Company believes that the Internet provides a unique medium to deliver mortgage services at a cost significantly lower than the cost incurred in conventional marketing methods. There are several business units linked to the Company's primary Website. These include sites that allow our potential customers, current borrowers and business partners to explore current loan products, insurance products, REO properties, electronic services, investment services, credit card services and business partner directories. The Company's goal is to allow the customer (consumer or business partner) to be able to utilize the Company's various web sites in an integrated fashion with its existing infrastructure to provide consumers with competitive pricing as well as convenient and efficient service. The Company's websites will continue to evolve in depth and breadth as the Company develops online partnerships to enhance the "Home-Centric" nature of its site. The Company is also developing customized, interactive web pages for each of its 400+ branches to leverage its local knowledge and expertise to the consumer. The Company believes this strategy provides it with a distinct advantage over its newer online competitors. A component of the Company's new strategy is to integrate the closing services required in the loan process (title, appraisal, home inspection and credit reporting) through its LandSafe subsidiary. This will provide a "one-stop" solution to the individual consumer and to the Company's business partners. The customer links are: (1) "Home Financing - Mortgage and Equity Lines" which provides potential customers with the ability to pre-qualify for a loan, calculate maximum home price, loan amount and monthly payments, review loan products and current price, submit loan applications on-line, determine if refinancing is advantageous and obtain answers to frequently asked questions; (2) "Current Customers" which provides current borrowers the ability to review their current loan status, account history, insurance information, investment options, and subscription services. This link also includes information on the "Mortgage Pay on the Web" service, an internally developed product that allows the customer to make mortgage payments online; (3) "Insurance Solutions " provides insurance information concerning homeowners, automobile, home warranty, life, annuities and disability insurance. This link provides calculators to help customers determine coverage amounts and premiums including instant on-line quotes. In addition, it provides customers the ability to contact our customer service department to change existing coverage, review terms, conditions and status of existing policies, file a claim, make a complaint, renew an existing policy, make changes to method of billing and update or change personal information; (4) "Company Information" which contains information about the Company background, description of products and services offered, a president's letter, information on the Company's Year 2000 Project, available career opportunities, press releases, investor information and annual reports. The Internet sites that enhance business partner relationships are within the "Countrywide's Partners" site which include the "Realtor's Advantage", "Builder's Advantage", and "Wholesale Lending Division" sites. The Realtor's Advantage allows realtors to register in our resource directory, obtain a Lock N' Shop to guarantee rates and offers real estate agents tools for their clients. Builder's Advantage is a site that allows builders to register with Countrywide, learn about the Company's Builder Advantage program and builder services and links to builder industry web sites. The Wholesale Lending site allows brokers to track the status of their loans. In addition, a similar site is available for correspondent lenders, to view pricing and product information, as well as loan status. The Company believes that the Internet provides a unique medium to deliver mortgage services at a cost significantly lower than the incurred in conventional marketing methods. D. Capital Markets Segment The Company's Capital Markets Segment consists of Countrywide Capital Markets ("CCM"), a wholly-owned subsidiary of the Company. CCM has two principal operating subsidiaries: Countrywide Securities Corporation ("CSC") and Countrywide Servicing Exchange ("CSE"). CSC is a registered broker-dealer and a member of both the National Association of Securities Dealers, Inc. and the Securities Investor Protection Corporation. CSC primarily trades mortgage-related and other securities, including pass through certificates issued by Ginnie Mae, Fannie Mae and Freddie Mac, callable agency debt and collateralized mortgage obligations. CSC also trades certificates of deposit issued by banks, the deposits of which are insured by the Bank Insurance Fund. CSC participates in the underwriting of securities for CHL and for unrelated entities. CSC also arranges the purchase and sale of mortgage loans for CHL and others. CSC trades with institutional investors, such as investment managers, pension fund companies, insurance companies, depositories, and other broker-dealers. CSC does not maintain retail accounts. The principal office of CSC is located in Calabasas, California. CSC also maintains a sales office in New York, New York. CSE is among the leading national mortgage servicing brokerage and consulting firms. CSE, as an agent, facilitates the purchase and sale of bulk servicing contracts. CSE's principal office is located in Calabasas, California with a sales office in Rochester, New York. E. Other Operations The Company provides various loan-closing services to its loan production divisions and to others through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal, credit reporting, flood zone determination and home inspection services. In addition, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. Countrywide Financial Services, Inc. ("CFSI") operates as a fund manager and service provider for unaffiliated mutual funds, broker-dealers, investment advisors and fund managers. CFSI currently has approximately $1.4 billion in funds under management and services accounts aggregating over $13.4 billion for other fund management companies. F. Segments and Related Information Information regarding the Company's segments appears in the Notes to the Consolidated Financial Statements, and is incorporated by this reference. G. Regulation The Company's mortgage banking business is subject to the rules and regulations of, and examination by, HUD, FHA, VA, Fannie Mae, Freddie Mac, Ginnie Mae and state regulatory authorities with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, impose licensing obligations on the Company, establish standards for originating and servicing mortgage loans, prohibit unlawful discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, fix maximum interest rates, fees and other loan amounts. Moreover, FHA lenders such as the Company are required annually to submit to the Federal Housing Commissioner audited financial statements, and Ginnie Mae requires the maintenance of specified net worth levels (which vary depending on the amount of Ginnie Mae securities issued by the Company). The Company's affairs are also subject to examination by the Federal Housing Commissioner at all times to assure compliance with the FHA regulations, policies and procedures. In addition to other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act, and the regulations promulgated thereunder. These laws prohibit unlawful discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. Securities broker-dealer and mutual fund operations are subject to federal and state securities laws, as well as the rules of both the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Insurance agency and title insurance operations are subject to insurance laws of each of the states in which the Company conducts such operations. H. Competition The mortgage banking industry is highly competitive and fragmented. The Company competes with other financial intermediaries (such as mortgage bankers, commercial banks, savings and loan associations, credit unions and insurance companies) and mortgage banking subsidiaries or divisions of diversified companies. Generally, the Company competes by offering products with competitive features, by emphasizing the quality of its service and by pricing its range of products at competitive rates. During the 1990's, the aggregate share of the United States market for residential mortgage loans that is served by mortgage bankers has risen, principally due to the decline in the savings and loan industry. According to industry statistics, mortgage bankers' aggregate share of this market increased from approximately 19% during calendar year 1989 to approximately 52% during calendar year 1998. The Company believes that it has benefited from this trend. I. Employees At February 28, 1999, the Company employed 11,378 persons, 6,341 of whom were engaged in production activities, 1,830 were engaged in loan administration activities and 3,207 were engaged in other activities. None of these employees is represented by a collective bargaining agent. J. Year 2000 Compliance A discussion of the Year 2000 issue is included in Item 7. - - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 2. PROPERTIES The primary executive and administrative offices of the Company and its subsidiaries are located in Calabasas, California. The headquarters facility consists of approximately 225,000 square feet and is situated on 20.1 acres of land. The Company currently leases a 90,000 square foot facility in Calabasas, California, which primarily houses part of the Company's data processing operations. In approximately June 1999, some business units will relocate to a newly constructed 88,000 square foot office building in Calabasas, which the Company has leased with an option to purchase. In September 1998, the Company entered into a 10-year sublease of a 215,000 square foot facility in Rosemead, California, which houses loan production and subsidiary operations. The Company owns an office facility of approximately 300,000 square feet located on 43.5 acres in Simi Valley, California, which is used primarily to house a portion of the Company's loan servicing and data processing operations. In July 1998, the Company purchased the adjoining 14-acre parcel and is converting the existing structure on that parcel to a 206,000 square foot office building for loan servicing operations and the executive and administrative offices of its Correspondent Lending Division. In December 1998, the Company purchased a 200,500 square foot building in Rosemead, California, which houses the Company's document custodian and collateral documents, as well as the Company's document management operations. The Company also owns a 253,000 square foot building situated on a 21.5 acres in Plano, Texas, which houses additional loan servicing, loan production and data processing operations. In order to accommodate its expanding loan servicing and related business operations, the Company is constructing two office buildings totaling approximately 500,000 square feet on the 17-acre parcel of land adjacent to the existing Plano facility. Additional space located in Pasadena, Moorpark and Simi Valley, California and Dallas, Texas is currently under lease for certain subsidiaries, loan servicing, loan production and data processing operations. These leases provide an additional 500,000 square feet on varying terms. In addition, the Company leases space for its branch offices throughout the country. ITEM 3. LEGAL PROCEEDINGS The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange (Symbol: CCR). The following table sets forth the high and low sales prices (as reported by the NYSE) for the Company's common stock and the amount of cash dividends declared for the fiscal years ended February 28, 1999 and 1998. ------- --------------- ------------------------- --- ------------------------- --- -------------------------------- Fiscal 1999 Fiscal 1998 Fiscal 1999 Fiscal 1998 ------- --------------- ------------ ------------ --- ------------ ------------ --- -------------------------------- Quarter High Low High Low Cash Dividends Declared ------- --------------- ------------ ------------ --- ------------ ------------ --- -------------------------------- First $54.50 $44.25 $29.50 $24.38 $0.08 $0.08 Second 56.25 37.00 35.25 26.75 0.08 0.08 Third 50.75 28.63 41.88 31.50 0.08 0.08 Fourth 51.44 36.75 48.50 39.25 0.08 0.08 ------- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- ---------------
The Company has declared and paid cash dividends on its common stock quarterly since 1982. For the fiscal years ended February 28, 1999 and 1998, the Company declared quarterly cash dividends aggregating $0.32 per share. On March 24, 1999, the Company declared a quarterly cash dividend of $0.10 per common share, which was paid on April 30, 1999. The ability of the Company to pay dividends in the future is limited by various restrictive covenants in the debt agreements of the Company, the earnings, cash position and capital needs of the Company, general business conditions and other factors deemed relevant by the Company's Board of Directors. The Company is prohibited under certain of its debt agreements, including its guarantee of CHL's revolving credit facility, from paying dividends on any capital stock (other than dividends payable in capital stock or stock rights), except that so long as no event of default or potential event of default under the agreements exists at the time, the Company may pay dividends in an aggregate amount not to exceed the greater of: (i) the after-tax net income of the Company, determined in accordance with generally accepted accounting principles, for the fiscal year to the end of the quarter to which the dividends relate and (ii) the aggregate amount of dividends paid on common stock during the immediately preceding year. The primary source of funds for payments to stockholders by the Company is dividends received from its subsidiaries. Accordingly, such payments by the Company in the future also depend on various restrictive covenants in the debt obligations of its subsidiaries, the earnings, the cash position and the capital needs of its subsidiaries, as well as laws and regulations applicable to its subsidiaries. Unless the Company and CHL each maintain specified minimum levels of net worth and certain other financial ratios, dividends cannot be paid by the Company and CHL in compliance with certain of CHL's debt obligations (including its revolving credit facility). See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." As of May 3, 1999, there were 2,382 shareholders of record of the Company's common stock, with 112,748,275 common shares outstanding. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA ---------------------------------------------- ----------------------------------------------------------------- Years ended February 28(29), ---------------------------------------------- ------------ ------------- ------------ ------------ ------------ (Dollar amounts in thousands, except per 1999 1998 1997 1996 1995 share data) ---------------------------------------------- ------------ ------------- ------------ ------------ ------------ Statement of Earnings Data (1): Revenues: Loan origination fees $623,531 $301,389 $193,079 $199,724 $203,426 Gain (loss) on sale of loans 699,433 417,427 247,450 92,341 (41,342) ------------ ------------- ------------ ------------ ------------ Loan production revenue 1,322,964 718,816 440,529 292,065 162,084 Interest earned 1,029,066 584,076 457,005 364,531 311,781 Interest charges (983,829) (568,359) (423,447) (337,655) (267,685) ------------ ------------- ------------ ------------ ------------ Net interest income 45,237 15,717 33,558 26,876 44,096 Loan servicing income 1,023,700 907,674 773,715 620,835 460,351 Amortization and impairment/recovery of mortgage servicing rights (1,013,578) (561,804) (101,380) (342,811) (95,768) Servicing hedge benefit (expense) 412,812 232,959 (125,306) 200,135 (40,030) Less write-off of servicing hedge - - - - (25,600) ------------ ------------- ------------ ------------ ------------ Net loan administration income 422,934 578,829 547,029 478,159 298,953 138 91,346 Commissions, fees and other income 187,867 138,217 91,346 63,642 40,650 Gain on sale of subsidiary - 57,381 - - - Gain on sale of servicing - - - - 56,880 ------------ ------------- ------------ ------------ ------------ Total revenues 1,979,002 1,508,960 1,112,462 860,742 602,663 ------------ ------------- ------------ ------------ ------------ Expenses: Salaries and related expenses 669,686 424,321 286,884 229,668 199,061 Occupancy and other office expenses 277,921 184,338 129,877 106,298 102,193 Guarantee fees 181,117 172,692 159,360 121,197 85,831 Marketing expenses 64,510 42,320 34,255 27,115 23,217 Other operating expenses 153,963 119,743 80,188 50,264 37,016 Branch and administrative office - - - - 8,000 consolidation costs ------------ ------------- ------------ ------------ ------------ Total expenses 1,347,197 943,414 690,564 534,542 455,318 ------------ ------------- ------------ ------------ ------------ 421,898 Earnings before income taxes 631,805 565,546 421,898 326,200 147,345 Provision for income taxes 246,404 220,563 164,540 130,480 58,938 ------------ ------------- ------------ ------------ ------------ ============ ============= ============ ============ ------------ Net earnings $385,401 $344,983 $257,358 $195,720 $88,407 ============================================== ============ ============= ============ ============ ------------ ---------------------------------------------- ============ ============= ============ ============ ------------ Per Share Data (2): Basic (3) $3.46 $3.21 $2.50 $1.99 $0.97 Diluted (3) $3.29 $3.09 $2.44 $1.95 $0.96 Cash dividends per share $0.32 $0.32 $0.32 $0.32 $0.32 Weighted average shares outstanding: Basic 111,414,000 107,491,000 103,112,000 98,352,000 91,240,000 Diluted 117,045,000 111,526,000 105,677,000 100,270,000 92,087,000 ============================================== ============ ============= ============ ============ ------------ ---------------------------------------------- ============ ============= ============ ============ ------------ Selected Balance Sheet Data at End of Period (1): Total assets $15,648,256 $12,183,211 $7,689,090 $8,321,652 $5,589,138 Short-term debt $5,065,934 $4,043,774 $2,567,420 $4,423,738 $2,664,006 Long-term debt $5,953,324 $4,195,732 $2,367,661 $1,911,800 $1,499,306 Common shareholders' equity $2,518,885 $2,087,943 $1,611,531 $1,319,755 $ 942,558 ============================================== ============ ============= ============ ============ ------------ ---------------------------------------------- ============ ============= ============ ============ ------------ Operating Data (dollar amounts in millions): Loan servicing portfolio (4) $215,489 $182,889 $158,585 $136,835 $113,111 Volume of loans originated $92,881 $48,772 $ 37,811 $ 34,584 $ 27,866 ============================================== ============ ============= ============ ============ ============
(1) Certain amounts in the Consolidated Financial Statements have been reclassified to conform to current year presentation. (2) Adjusted to reflect subsequent stock dividends and splits. (3) Earnings per share for Fiscal 1998 include a $57.4 million gain on sale of subsidiary. Excluding the non-recurring gain on sale of subsidiary, basic and diluted earnings per share would have been $2.88 and $2.78, respectively. (4) Includes warehoused loans and loans under subservicing agreements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's business strategy is primarily focused on four areas: loan production, loan servicing, capital markets and businesses ancillary to mortgage lending. Loan production and loan servicing comprise the Company's mortgage banking business. See "Business--Mortgage Banking Operations", "Business--Capital Markets" and "Business--Other Operations." The Company intends to continue its efforts to expand its operations in each segment focus area. A strong production capability and a growing servicing portfolio are the primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates because the effect of interest rate changes on loan production income is counter cyclical to their effect on servicing income. The operations of the capital markets segment include trading mortgage-backed securities ("MBS") and other mortgage-related assets as well as brokering service contracts and bulk purchases and sales of whole loans. Finally, the Company is involved in business activities complementary to its mortgage banking business. These services include acting as agent in the sale of insurance, including homeowners, fire, flood, earthquake, life and disability, providing various title insurance agent and escrow services and offering appraisal and credit reporting services. The Company's results of operations historically have been influenced primarily by the level of demand for mortgage loans, which is affected by such external factors as the level and direction of interest rates, and the strength of the overall economy and the economy in each of the Company's lending markets. The fiscal year ended February 28, 1997 ("Fiscal 1997") was a period in which interest rates were somewhat volatile. The rates during Fiscal 1997 were generally higher than during the previous fiscal year; however, they remained at levels that were conducive to refinance and home purchase activity. The Company's earnings increased 31% from the fiscal year ended February 29, 1996 ("Fiscal 1996"). Loan production increased to $37.8 billion, up from $34.6 billion in the prior year. The Company attributed the increase in production to: (i) the generally strong economy and home purchase market; (ii) the continued implementation of a national advertising campaign, which was aimed at developing a brand identity for Countrywide and reaching the consumer directly; and (iii) the integration of home equity and sub-prime lending into the Company's product offerings and production capacity. For calendar 1996, the Company ranked second in the amount of single-family mortgage originations nationwide. The Company's market share for both calendar 1996 and 1995 was approximately 4.8% of the estimated $800 billion and $650 billion, respectively, single-family mortgage origination market. During Fiscal 1997, the Company's loan servicing portfolio grew to $158.6 billion, up from $136.8 billion at the end of Fiscal 1996. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions that amounted to $1.4 billion. The increase was partially offset by prepayments, partial prepayments and scheduled amortization of $18.8 billion. The prepayment rate in the servicing portfolio was 11%, slightly down from the prior year due to the higher mortgage interest rate environment in Fiscal 1997. The fiscal year ended February 28, 1998 ("Fiscal 1998") was a record year from ongoing operations in revenues and net earnings for the Company. Loan production increased to $48.8 billion, up from $37.8 billion in the prior year. The Company attributed the increase in production to: (i) lower interest rates; (ii) the generally strong economy and home purchase market; (iii) the continued implementation of a national advertising campaign aimed at developing a brand identity for Countrywide and reaching the consumer directly; and (iv) increased expansion of the Consumer Markets and Wholesale branch networks, including the new retail sub-prime branches. For calendar 1997, the Company ranked second in the amount of single-family mortgage originations nationwide. For calendar 1997, the Company's market share increased to approximately 5.1% of the estimated $850 billion single-family mortgage origination market, up from approximately 4.8% of the estimated $800 billion single-family mortgage origination market for 1996. During Fiscal 1998, the Company's loan servicing portfolio grew to $182.9 billion, up from $158.6 billion at the end of Fiscal 1997. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $1.0 billion. The increase was partially offset by prepayments, partial prepayments and scheduled amortization of $24.3 billion. The prepayment rate in the servicing portfolio was 15%, up from the prior year due to the lower mortgage interest rate environment in Fiscal 1998. On July 1, 1997, the Company and IndyMac Mortgage Holdings, Inc. (formerly INMC Mortgage Holdings, Inc.) ("INMC") concluded the restructuring of their business relationship. In substance, INMC acquired the assets, operations and employees of its former manager Countrywide Asset Management Corporation ("CAMC"), formerly a wholly-owned subsidiary of the Company. INMC no longer pays management fees to CAMC. In return, the Company received 3,440,800 newly issued common shares of INMC. These shares are subject to resale restrictions which apply to the shares from the date of issuance through up to three years. The transaction was structured as a merger of CAMC with and into INMC. The fiscal year ended February 28, 1999 ("Fiscal 1999") was a record year from ongoing operations in revenues and net earnings for the Company. Loan production increased to $92.9 billion, up from $48.8 billion in the prior year. The Company attributed the increase in production to: (i) an increase in the overall mortgage market driven largely by refinances; (ii) the generally strong economy and home purchase market; and (iii) an increase in the Company's market share, driven largely by the expansion of its Consumer Markets and Wholesale branch networks, including the new retail sub-prime branches. For calendar 1998, the Company ranked second in the amount of single-family mortgage originations nationwide. During calendar 1998, the Company's market share increased to approximately 6.1% of the estimated $1.4 trillion single-family mortgage origination market, up from approximately 5.1% of the estimated $850 billion market in calendar 1997. During Fiscal 1999, the Company's loan servicing portfolio grew to $215.5 billion, up from $182.9 billion at the end of Fiscal 1998. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $4.6 billion. This growth was partially offset by prepayments, partial prepayments and scheduled amortization of $53.2 billion and the transfer out of $6.5 billion of subservicing. The prepayment rate in the servicing portfolio was 28%, up from the prior year due to the lower mortgage interest rate environment in Fiscal 1999. RESULTS OF OPERATIONS Fiscal 1999 Compared with Fiscal 1998 Revenues from ongoing operations for Fiscal 1999 increased 36% to $1,979.0 million, up from $1,451.6 million for Fiscal 1998. Net earnings from ongoing operations increased 24% to $385.4 million for Fiscal 1999, up from $310.0 million for Fiscal 1998. Revenues and net earnings from ongoing operations for Fiscal 1998 exclude a nonrecurring pre-tax gain of $57.4 million on the sale of CAMC. The increase in revenues and net earnings from ongoing operations for Fiscal 1999 compared to Fiscal 1998 was primarily attributed to higher loan production volume, an increase in the size of the Company's servicing portfolio and an increase in the income of the non-mortgage banking subsidiaries. These positive factors were partially offset by an increase in amortization of the servicing asset and an increase in expenses in Fiscal 1999 over Fiscal 1998. The total volume of loans produced by the Company increased 90% to $92.9 billion for Fiscal 1999, up from $48.8 billion for Fiscal 1998. The increase in loan production was primarily due to an increase in the Company's market share, driven largely by the expansion of the Company's consumer markets and wholesale branch networks, including the retail sub-prime branches, combined with an increase in the overall mortgage market driven largely by refinances. Refinancings totaled $53.2 billion, or 57% of total fundings, for Fiscal 1999 as compared to $19.8 billion, or 41% of total fundings, for Fiscal 1998. Fixed-rate mortgage loan production totaled $88.3 billion, or 95% of total fundings, for Fiscal 1999 as compared to $37.5 billion, or 77% of total fundings, for Fiscal 1998. Total loan volume in the Company's production Divisions is summarized below. - -------------------------------------------- ----------------------------------- (Dollar amounts in millions) Loan Production - -------------------------------------------- ----------------------------------- Fiscal 1999 Fiscal 1998 ------------- ------------ Consumer Markets Division $28,508 $13,339 Wholesale Lending Division 30,917 15,731 Correspondent Lending Division 32,748 19,562 Full Spectrum Lending, Inc. 708 140 ============= ============ Total Loan Volume $92,881 $48,772 ============= ============ Electronic Commerce (1) $2,201 $87
(1) This category includes loans sourced through the Company's website of $648 million and $87 million for Fiscal 1999 and Fiscal 1998, respectively, as well as loans submitted to the Correspondent Lending Division via its correspondent website of $1,553 million for Fiscal 1999. - -------------------------------------------------------------------------------- The factors which 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 are $2.2 billion of home equity loans funded in Fiscal 1999 and $1.5 billion funded in Fiscal 1998. Sub-prime loan production, which is also included in the Company's total production volume, was $2.5 billion in Fiscal 1999 and $1.6 billion in Fiscal 1998. As of February 28, 1999 and 1998, the Company's pipeline of loans in process was $14.6 billion and $12.6 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process have funded. In addition, as of February 28, 1999, the Company had committed to make loans in the amount of $2.1 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). As of February 28, 1998, the LOCK 'N SHOP (R) Pipeline was $1.4 billion. During Fiscal 1999 and Fiscal 1998, the Company received 1,194,833 and 714,668 new loan applications, respectively, at an average daily rate of $540 million and $306 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 in Fiscal 1999 as compared to Fiscal 1998 primarily due to higher production. In addition, the Consumer Markets and Wholesale Lending Divisions (which, due to their higher cost structure, charge higher origination fees per dollar loaned) comprised a greater percentage of total production in Fiscal 1999 than in Fiscal 1998. Gain on sale of loans also increased in Fiscal 1999 as compared to Fiscal 1998 primarily due to higher production volume. This positive factor was partially offset by reduced margins on home equity and sub-prime loans. The sale of home equity loans contributed $65 million and $62 million to gain on sale of loans in Fiscal 1999 and Fiscal 1998, respectively. Sub-prime loans contributed $92 million to the gain on sale of loans in Fiscal 1999 and $70 million in Fiscal 1998. In general, loan origination fees and gain (loss) on sale of loans are affected by numerous factors including the volume and mix of loans produced and sold, loan pricing decisions, interest rate volatility and the general direction of interest rates. Net interest income (interest earned net of interest charges) increased to $45.2 million for Fiscal 1999, up from $15.7 million for Fiscal 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($118.2 million and $74.5 million for Fiscal 1999 and Fiscal 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($351.4 million and $219.7 million for Fiscal 1999 and Fiscal 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($270.4 million and $151.0 million for Fiscal 1999 and Fiscal 1998, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from the mortgage loan warehouse was primarily attributable to 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. During Fiscal 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. As of February 28, 1999, the Company serviced $215.5 billion of loans (including $2.2 billion of loans subserviced for others), compared to $182.9 billion (including $6.7 billion of loans subserviced for others) as of February 28, 1998, which was an 18% increase. The growth in the Company's servicing portfolio during Fiscal 1999 was the result of increased loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments, scheduled amortization of mortgage loans and the transfer back to INMC of $6.5 billion of subservicing. During Fiscal 1999, the annual prepayment rate of the Company's servicing portfolio was 28%, compared to 15% for Fiscal 1998. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, and activity in the home purchase market. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of February 28, 1999 was 7.5% compared to 7.8% as of February 28, 1998. The Company recorded amortization and net impairment of its MSRs for Fiscal 1999 totaling $1,013.6 million (consisting of amortization amounting to $556.4 million and impairment of $457.2 million), compared to $561.8 million of amortization and impairment (consisting of amortization amounting to $300.3 million and impairment of $261.5 million) for Fiscal 1998. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge").The factors affecting the amount of amortization and impairment 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. In Fiscal 1999, the Company recognized a net benefit of $412.8 million from its Servicing Hedge. The net benefit included unrealized net gains of $26.1 million and realized net gains of $386.7 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In Fiscal 1998, the Company recognized a net benefit of $233.0 million from its Servicing Hedge. The net benefit included unrealized gains of $182.2 million and net realized gains of $50.8 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. 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 financial instruments that comprised the Servicing Hedge include options on interest rate futures and MBS, interest rate futures, interest rate floors, interest rate swaps, interest rate swaps with the Company's maximum payment capped ("Capped Swaps"), options on interest rate swaps ("Swaptions"), interest rate caps, certain tranches of collateralized mortgage obligations ("CMOs") and options on callable pass-through certificates ("options on CPC"). With the Capped Swaps, the Company receives and pays interest on a specified notional amount. The rate received is fixed. The rate paid is adjustable, is indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR") and has a specified maximum or "cap". With Swaps, the Company receives and pays interest on a specified notional amount. The rate received is fixed; the rate paid is adjustable and is indexed to LIBOR. With the Swaptions, the Company has the option to enter into a receive-fixed, pay-floating interest rate swap at a future date or to settle the transaction for cash. The CMOs, which consist of principal-only ("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 results in a decline in the average lives of the P/O securities and a corresponding increase in the present values of their cash flows. Conversely, as interest rates increase, prepayments on the collateral underlying the CMOs should decrease. This would result in an increase in the average lives of the P/O securities and a decrease in the present values of their cash flows. An option on CPC gives the holder the right to call a mortgage-backed security at par and receive the remaining cash flows from the particular pool. This option has a one year lockout, meaning it cannot be exercised until the end of the first year. After the lockout period, the option can be exercised at anytime. The Servicing Hedge is designed to protect the value of the investment in mortgage servicing rights ("MSRs") from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the MSRs increases while the value of the hedge instruments declines. With respect to the floors, options, caps, Swaptions, options on CPC and CMOs, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. The Company's exposure to loss on futures is related to changes in the LIBOR rate over the life of the contract. The Company estimates that its maximum exposure to loss over the contractual terms is $88.0 million. With respect to the Capped Swaps contracts entered into by the Company as of February 28, 1999, the Company estimates that its maximum exposure to loss over the contractual terms is $19.5 million. With respect to the Swap contracts entered into by the Company as of February 28, 1999, the Company estimates that its maximum exposure to loss over the contractual terms is $382.0 million. During Fiscal 1999, the Company acquired bulk servicing rights for loans with principal balances aggregating $4.6 billion at a price of 1.21% of the aggregate outstanding principal balances. During Fiscal 1998, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.0 billion at a price of 1.13% of the aggregate outstanding principal balances. Salaries and related expenses are summarized below for Fiscal 1999 and Fiscal 1998. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $212,591 $52,577 $90,953 $38,218 $394,339 Incentive Bonus 147,695 1,916 20,706 19,042 189,359 Payroll Taxes and Benefits 52,821 12,131 15,170 5,866 85,988 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $413,107 $66,624 $126,829 $63,126 $669,686 ============ ============= ============= ============= ------------ Average Number of 5,512 1,966 1,823 646 9,947 Employees
---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $134,776 $44,911 $70,305 $24,512 $274,504 Incentive Bonus 76,854 1,196 16,570 10,361 104,981 Payroll Taxes and Benefits 22,956 8,476 10,581 2,823 44,836 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $234,586 $54,583 $97,456 $37,696 $424,321 ============ ============= ============= ============= ------------ Average Number of 3,132 1,630 1,370 434 6,566 Employees
---- --------------------------- -- ------------ -- ------------- -- ---------- The amount of salaries increased during Fiscal 1999 reflecting the Company's strategy of expanding and enhancing its Consumer Markets and Wholesale branch networks, including new retail sub-prime branches. In addition, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries also contributed to the increase. Incentive bonuses earned during Fiscal 1999 increased primarily due to higher production and a change in production mix. Occupancy and other office expenses for Fiscal 1999 increased to $277.9 million from $184.3 million for Fiscal 1998. This was primarily due to: (i) the continued effort by the Company to expand its Consumer Markets and Wholesale branch networks, including new retail sub-prime branches; (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 Fannie Mae, Freddie Mac, and Ginnie Mae in order for these Government Sponsored Entities ("GSE") to agree to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For Fiscal 1999, guarantee fees increased 5% to $181.1 million, up from $172.7 million for Fiscal 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio sold to GSE and terms negotiated at the time of loan sales. Marketing expenses for Fiscal 1999 increased 52% to $64.5 million which was up from $42.3 million for Fiscal 1998, reflecting the increased mortgage market and the Company's continued implementation of a marketing plan to increase its consumer brand awareness. Other operating expenses for Fiscal 1999 increased from Fiscal 1998 by $34.2 million, or 29%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased systems development and growth in the Company's non-mortgage banking subsidiaries in Fiscal 1999 as compared to Fiscal 1998. Profitability of Loan Production Segment In Fiscal 1999, pre-tax earnings from loan production segment activities (which include loan origination and purchases, warehousing and sales) were $556.2 million. In Fiscal 1998, comparable pre-tax earnings were $245.1 million. The increase of $311.1 million was primarily attributable to increased production and a shift in production towards the Consumer Markets and Wholesale Divisions. These positive results were partially offset by higher production costs. Profitability of Servicing Segment In Fiscal 1999, pre-tax income from loan servicing segment 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 $24.3 million as compared to $215.5 million in Fiscal 1998. The decrease of $191.2 million was primarily attributed to increased amortization of the servicing asset, increased Interest Costs Incurred on Payoffs due to an increase in prepayments from Fiscal 1998 to Fiscal 1999 and a reduction in the performance of interests retained in securitization. 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 Capital Markets Segment In Fiscal 1999, pre-tax earnings from the capital markets segment were $26.7 million. In Fiscal 1998, comparable pre-tax earnings were $19.7 million. The increase of $7.0 million was primarily due to increased trading volumes. Profitability of Other Activities In addition to loan production, loan servicing and capital markets, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting and home inspection services. During Fiscal 1999, LandSafe, Inc., through a subsidiary, began providing flood zone determination services. In addition, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For Fiscal 1999, LandSafe Inc. contributed $25.2 million to the Company's pre-tax income compared to $10.1 million for Fiscal 1998. The increase in the profitability of LandSafe Inc. resulted primarily from expanded services and increased loan production. The Company's other activities also include the operations of its holding company, Countrywide Credit Industries, Inc. ("CCI") and Countrywide Financial Services, Inc.. The operations of other activities, excluding LandSafe Inc., incurred pre-tax losses of $0.6 million during Fiscal 1999 compared to pre-tax income of $17.7 million during Fiscal 1998. This decrease in pre-tax income primarily resulted from: (i) a decrease in CCI net interest income related to a receivable from CHL that was eliminated by a capital contribution during Fiscal 1999 and (ii) the discontinuance of management fees received prior to the sale of a subsidiary. During Fiscal 1998, 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 3,440,800 newly issued common shares of INMC stock. These shares are subject to resale restrictions which apply to the shares from the date of issuance through up to three years. The sale resulted in a $57.4 million pre-tax gain. Fiscal 1998 Compared with Fiscal 1997 Revenues from ongoing operations for Fiscal 1998 increased 30% to $1,451.6 million, up from $1,112.5 million for Fiscal 1997. Net earnings from ongoing operations increased 20% to $ 310.0 million for Fiscal 1998, up from $257.4 million for Fiscal 1997. Both revenues and net earnings from ongoing operations for Fiscal 1998 exclude a nonrecurring pre-tax gain of $57.4 million on the sale of a subsidiary. The increase in revenues and net earnings from ongoing operations for Fiscal 1998 compared to Fiscal 1997 was primarily due to higher loan production, including home equity and sub-prime loans, improved pricing margins on prime credit quality first mortgages, an increase in the size of the Company's servicing portfolio and an increase in the income of the non-mortgage banking subsidiaries. These positive factors were partially offset by an increase in amortization of MSRs and an increase in expenses in Fiscal 1998 over Fiscal 1997. The total volume of loans produced increased 29% to $48.8 billion for Fiscal 1998, up from $37.8 billion for Fiscal 1997. The increase in loan production was primarily due to an increase in the overall mortgage market, driven primarily by refinances, as well as to the continuing expansion of the Company's Consumer Markets and Wholesale Lending divisions, including the new retail sub-prime branches. Refinancings totaled $19.8 billion, or 41% of total fundings, for Fiscal 1998, as compared to $12.3 billion, or 33% of total fundings, for Fiscal 1997. Fixed-rate mortgage loan production totaled $37.5 billion, or 77% of total fundings, for Fiscal 1998, as compared to $27.9 billion, or 74% of total fundings, for Fiscal 1997. Total loan volume in the Company's production Divisions is summarized below. - -------------------------------------------- ----------------------------------- (Dollar amounts in millions) Loan Production - -------------------------------------------- ----------------------------------- Fiscal 1998 Fiscal 1997 ------------- ------------ Consumer Markets Division $13,339 $ 8,071 Wholesale Lending Division 15,731 8,430 Correspondent Lending Division 19,562 21,310 Full Spectrum Lending, Inc. 140 - ============= ============ Total Loan Volume $48,772 $37,811 ============= ============
- -------------------------------------------- ------------- -------- ------------ The factors which 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 $1.5 billion of home equity loans funded in Fiscal 1998 and $613 million funded in Fiscal 1997. Sub-prime loan production, which is also included in the Company's total production volume, was $1.6 billion in Fiscal 1998 and $864 million in Fiscal 1997. As of February 28, 1998 and 1997, the Company's pipeline of loans in process was $12.6 billion and $4.7 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process have funded. In addition, as of February 28, 1998, the Company had committed to make loans in the amount of $1.4 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). As of February 28, 1997, the LOCK 'N SHOP (R) Pipeline was $1.8 billion. In Fiscal 1998 and Fiscal 1997, the Company received 714,668 and 499,861 new loan applications, respectively, at an average daily rate of $306 million and $206 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 in Fiscal 1998 as compared to Fiscal 1997 due to higher production. In addition, the Consumer Markets and Wholesale Lending Divisions (which, due to their higher cost structure, charge higher origination fees per dollar loaned) comprised a greater percentage of total production in Fiscal 1998 than in Fiscal 1997. Gain on sale of loans improved in Fiscal 1998 as compared to Fiscal 1997 primarily due to increased production and improved margins. Home equity and sub-prime loans contributed $132 million and $92 million to gain on sale of loans in Fiscal 1998 and Fiscal 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 $15.7 million for Fiscal 1998 from $33.6 million for Fiscal 1997. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($74.5 million and $61.6 million for Fiscal 1998 and Fiscal 1997, respectively); (ii) interest expense related to the Company's investment in MSRs ($219.7 million and $148.3 million for Fiscal 1998 and Fiscal 1997, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($151.0 million and $116.9 million for Fiscal 1998 and Fiscal 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 the mortgage loan warehouse was primarily attributable to higher production levels partially resulting from aggregating home equity and sub-prime loans (which generally bear interest at higher rates than prime credit quality first mortgages) prior to their sale or securitization. The increase in interest expense on the investment in MSRs 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), combined with an increase in the earnings rate from Fiscal 1997 to Fiscal 1998. During Fiscal 1998, loan administration income before amortization increased due primarily to growth of the loan servicing portfolio. As of February 28, 1998, the Company serviced $182.9 billion of loans (including $6.7 billion of loans subserviced for others), compared to $158.6 billion (including $3.9 billion of loans subserviced for others) at February 28, 1997, a 15% increase. The growth in the Company's servicing portfolio during Fiscal 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. During Fiscal 1998, the prepayment rate of the Company's servicing portfolio was 15%, compared to 11% for Fiscal 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 Fiscal 1997 to Fiscal 1998 was primarily due to the increase in refinance activity caused by lower interest rates during Fiscal 1998 than during Fiscal 1997. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at both February 28, 1998 and 1997 was 7.8%. The Company recorded amortization and net impairment of its MSRs for Fiscal 1998 totaling $561.8 million (consisting of amortization amounting to $300.3 million and impairment of $261.5 million), compared to $101.4 million of amortization and net impairment (consisting of amortization amounting to $220.1 million and recovery of previous impairment of $118.7 million) for Fiscal 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. In Fiscal 1998, the Company recognized a net benefit of $233.0 million from its Servicing Hedge. The net benefit included unrealized net gains of $182.2 million and realized gains of $50.8 million from the sale of various financial instruments that comprise the Servicing Hedge and premium amortization. In Fiscal 1997, the Company recognized a net expense of $125.3 million from its Servicing Hedge. The net expense included unrealized losses of $56.9 million and net realized losses of $68.4 million from the sale of various financial instruments that comprise the Servicing Hedge and premium amortization. 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. During Fiscal 1998, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.0 billion at a price of 1.13% of the aggregate outstanding principal balances. During Fiscal 1997, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.4 billion at a price of 1.60% of the aggregate outstanding principal balances. Salaries and related expenses are summarized below for Fiscal 1998 and Fiscal 1997. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $134,776 $44,911 $70,305 $24,512 $274,504 Incentive Bonus 76,854 1,196 16,570 10,361 104,981 Payroll Taxes and Benefits 22,956 8,476 10,581 2,823 44,836 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $234,586 $54,583 $97,456 $37,696 $424,321 ============ ============= ============= ============= ------------ Average Number of 3,132 1,630 1,370 434 6,566 Employees
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1997 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $91,054 $41,806 $54,244 $12,852 $199,956 Incentive Bonus 34,501 763 14,820 6,799 56,883 Payroll Taxes and Benefits 15,105 7,747 5,389 1,804 30,045 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $140,660 $50,316 $74,453 $21,455 $286,884 ============ ============= ============= ============= ------------ Average Number of 2,303 1,555 1,107 251 5,216 Employees
The amount of salaries increased during Fiscal 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, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries also contributed to the increase. Incentive bonuses earned during Fiscal 1998 increased primarily due to higher production and a change in divisional production mix. Occupancy and other office expenses for Fiscal 1998 increased to $184.3 million, up from $129.9 million for Fiscal 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 Fannie Mae, Freddie Mac and Ginnie Mae in order for these GSE to agree to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For Fiscal 1998, guarantee fees increased 8% to $172.7 million from $159.4 million for Fiscal 1997. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio sold to GSE and terms negotiated at the time of loan sales. Marketing expenses for Fiscal 1998 increased 24% to $42.3 million, which was up from $34.3 million for Fiscal 1997, reflecting the increase in the mortgage market and the Company's continued implementation of a marketing plan to increase its consumer brand awareness. Other operating expenses for Fiscal 1998 increased from Fiscal 1997 by $39.6 million, or 49%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased reserves for bad debt, increased systems development and growth in the Company's non-mortgage banking subsidiaries in Fiscal 1998 as compared to Fiscal 1997. Profitability of Loan Production Segment In Fiscal 1998, pre-tax earnings from the loan production segment (which includes loan origination and purchases, warehousing and sales) were $245.1 million. In Fiscal 1997, comparable pre-tax earnings were $141.9 million. The increase of $103.2 million was primarily due to increased production, greater sales of higher-margin home equity and sub-prime loans at significantly higher margins than prime credit quality first mortgages and improved pricing margins on prime credit quality first mortgages. These positive results were partially offset by higher production costs. Profitability of Servicing Segment In Fiscal 1998, pre-tax earnings from the loan servicing segment (which includes administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer) were $215.5 million as compared to $254.2 million in Fiscal 1997. The decrease of $38.7 million was primarily attributed to increased amortization of MSRs and Interest Costs Incurred on Payoffs due to increased prepayments from Fiscal 1997 to Fiscal 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 Capital Markets Segment In Fiscal 1998, pre-tax earnings from the capital markets segment were $19.7 million. In Fiscal 1997, comparable pre-tax earnings were $12.9 million. The increase of $6.8 million was primarily the result of increased trading volumes. Profitability of Other Activities In addition to loan production, loan servicing and capital markets, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting services. During Fiscal 1998, LandSafe, Inc., through a subsidiary, began providing home inspection services. In addition, LandSafe Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For Fiscal 1998, LandSafe Inc. contributed $10.1 million to the Company's pre-tax income compared to $1.2 million for Fiscal 1997. The increase in LandSafe Inc. pre-tax income primarily resulted from expanded services and increased loan production. Additionally, the Company's other activities include the operations of CCI and Countrywide Financial Services, Inc. The operations of other activities, excluding LandSafe Inc., contributed $17.7 million to the Company's pre-tax income for Fiscal 1998 compared to $11.7 million for Fiscal 1997. The increase in pre-tax income primarily resulted from an increase in CCI dividend income. During Fiscal 1998, Countrywide Asset Management Corporation, a subsidiary of the Company, was sold to (INMC) a publicly traded real estate investment trust for 3,440,800 newly issued common shares of INMC stock. These shares are subject to resale restrictions which apply to the shares from the date of issuance through up to three years. The sale resulted in a $57.4 million pre-tax gain. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination and loan servicing business segments, which are counter cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory and MBS held for sale, MSRs, mortgage-backed securities retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk. As part of its interest rate risk management process, the Company performs various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses incorporate scenarios including selected hypothetical (instantaneous) parallel shifts in the yield curve. Various modeling techniques are employed to value the financial instruments. For mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread ("OAS") model is used. The primary assumptions used in this model are the implied market volatility of interest rates and prepayment speeds. For options and interest rate floors, an option-pricing model is used. The primary assumption used in this model is implied market volatility of interest rates. MSRs and residual interests are valued using discounted cash flow models. The primary assumptions used in these models are prepayment rates, discount rates and credit losses. Utilizing the sensitivity analyses described above, as of February 28, 1999, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $0.4 million after-tax gain related to its trading securities and a $11.5 million after-tax loss related to its other financial instruments. As of February 28, 1999, the Company estimates that this combined after-tax loss of $11.1 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 should not be viewed as a forecast. An additional market risk facing the Company is foreign currency risk. During Fiscal 1999, the Company issued foreign currency denominated medium-term notes (See Note F). The Company manages the foreign currency risk associated with such medium-term notes by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into the Company's reporting currency (i.e., U.S. dollars) thereby eliminating the associated foreign currency risk. As a result, hypothetical changes in the exchange rates of foreign currencies denominating such medium-term notes would not have a net financial impact on future earnings, fair values or cash flows. Inflation Inflation affects the Company most significantly in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production decreases, particularly from loan refinancings. Although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio and reducing amortization and impairment of the MSRs, decreasing Interest Costs Incurred on Payoffs and because the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings primarily due to increased amortization and impairment of the MSRs, a decreased rate of interest earned from the custodial balances and increased Interest Costs Incurred on Payoffs. The impacts of changing interest rates on servicing-related earnings are reduced by performance of the Servicing Hedge, which is designed to mitigate the impact on earnings of higher amortization and impairment that may result from declining interest rates. Seasonality The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. Liquidity and Capital Resources The Company's principal financing needs are the financing of its mortgage loan inventory and its investment in MSRs. To meet these needs, the Company currently utilizes commercial paper supported by the revolving credit facility, medium-term notes, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from the revolving credit facility and public offerings of common and preferred stock. Certain of the debt obligations of the Company and Countrywide Home Loans, Inc. ("CHL") contain various provisions that may affect the ability of the Company and CHL to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CHL to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells the mortgage loans it originates and purchases to investors but generally retains the right to service the loans, thereby increasing the Company's investment in MSRs. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In Fiscal 1999, the Company's operating activities used cash of approximately $1.0 billion on a short-term basis primarily to support the increase in its mortgage loans and MBS held for sale. In Fiscal 1998, operating activities used approximately $2.5 billion on a short-term basis primarily to support the increase in its mortgage loans and MBS held for sale. In Fiscal 1997, the Company's operating activities provided cash of approximately $2.0 billion. 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 $1.8 billion for Fiscal 1999, $1.1 billion for Fiscal 1998 and $0.9 billion for Fiscal 1997. Financing Activities Net cash provided by financing activities amounted to $2.8 billion for Fiscal 1999. Net cash provided by financing activities amounted to $3.6 billion for Fiscal 1998. Net cash used by financing activities amounted to $1.0 billion for Fiscal 1997. The increase or decrease in cash flow from financing activities was primarily the result of the change in the Company's mortgage loan inventory and investment in MSRs. Prospective Trends Applications and Pipeline of Loans in Process During Fiscal 1999, the Company received new loan applications at an average daily rate of $540 million. As of February 28, 1999, the Company's pipeline of loans in process was $14.6 billion. This compares to a daily application rate in Fiscal 1998 of $306 million and a pipeline of loans in process as of February 28, 1998 of $12.6 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 as of February 28, 1999 was $2.1 billion and as of February 28, 1998 was $1.4 billion. For the month ended March 31, 1999, the average daily rate of applications received was $537 million, and as of March 31, 1999, the pipeline of loans in process was $14.2 billion and the LOCK `N SHOP Pipeline was $2.5 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage loans, the level of competition in the market, the direction of interest rates, seasonal factors and general economic conditions. Market Factors Loan production increased 90% from Fiscal 1998 to Fiscal 1999. This increase was primarily due to three factors. First, the Company's market share increased, driven largely by the expansion of the Company's consumer markets and wholesale branch networks, including the new retail sub-prime branches. Second, mortgage interest rates generally decreased during Fiscal 1999, driving an increase in refinances. Third, new and existing home sales were stronger during Fiscal 1999 than in Fiscal 1998. The prepayment rate in the servicing portfolio increased from Fiscal 1998 to Fiscal 1999. This was due primarily to increased refinances. 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 the acquisition of formerly independent mortgage banking companies or through consolidation. The Company believes that these transactions and activities have not had a material impact on the overall level of competition in the market. The Company's California mortgage loan production (as measured by principal balance) constituted 25% of its total production during Fiscal 1999 and 26% during Fiscal 1998. The Company is continuing its efforts to expand its production capacity outside of California. Some regions in which the Company operates have experienced slower economic growth, and real estate financing activity in these regions has been impacted negatively. The Company has striven to diversify its mortgage banking activities geographically to mitigate such effects. The delinquency rate in the Company's servicing portfolio, excluding sub-servicing, decreased to 3.55% as of February 28, 1999 from 3.91% as of February 28, 1998. The Company believes that this decrease was primarily the result of changes in portfolio mix and aging. The proportion of government loans and high loan-to-value conventional loans (which tend to experience higher delinquency rates than low loan-to-value conventional loans) was 44% and 48% of the portfolio as of February 28, 1999 and February 28, 1998, respectively. In addition, the weighted average age of the portfolio was 26 months at February 28, 1999, down from 31 months as of February 28, 1998. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. However, because the loans in the portfolio are generally serviced on a non-recourse basis, the Company's exposure to credit loss resulting from increased delinquency rates is substantially limited. Furthermore the, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. The percentage of loans in the Company's servicing portfolio, excluding sub-servicing, that are in foreclosure decreased to 0.31% as of February 28, 1999 from 0.45% as of February 28, 1998. Generally, the Company is not exposed to credit risk. Because the Company services substantially all conventional loans on a non-recourse basis, foreclosure losses are generally the responsibility of the investor or insurer and not the Company. While the Company does not generally retain credit risk with respect to the prime credit quality first mortgage loans it sells, it does have potential liability under representations and warranties made to purchasers and insurers of the loans. In the event of a breach of these representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent loss on the mortgage loan may be borne by the Company. Similarly, government loans serviced by the Company (25% of the Company's servicing portfolio as of February 28, 1999) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Administration. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Administration is inadequate to cover the total credit losses incurred. The Company retains credit risk on the home equity and sub-prime loans it securitizes, through retention of a subordinated interest. As of February 28, 1999, the Company had investments in such subordinated interests amounting to $273.9 million. Servicing Hedge As previously discussed, the Company's Servicing Hedge is designed to protect the value of its investment in MSRs from the effects of increased prepayment activity that generally results from declining interest rates. In periods of increasing interest rates, the value of the Servicing Hedge generally declines and the value of MSRs generally increases. There can be no assurance that, in periods of increasing interest rates, the increase in value of the MSRs will offset the decline in value of the Servicing Hedge. Likewise, there can be no assurance that, in periods of declining interest rates, that the Servicing Hedge will generate gains, or if gains are generated, that they will fully offset impairment of the MSRs. Implementation of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize the fair value of all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement will become effective in the fiscal year ended February 28, 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 interests 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 four 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 by testing the function and accuracy of the reprogrammed fields, implementing the revised code and forward-date testing of the more than 17,000 production programs on the AS/400. Many of the Company's Client Server applications have been developed in-house and in a Year 2000 compliant format. The majority of these applications interface with the AS/400. The Company 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 Company estimates that forward-date testing of the one remaining mission critical Client Server application and most of its less critical applications will be completed by June 30, 1999. Newly-developed Client Server applications are forward-date tested before they are implemented into production. 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. The Company has fewer than 125 computers and related hardware which are not Year 2000 compliant, and they will be upgraded or replaced before December 31, 1999. As part of the Infrastructure Project, the Company also identified "shrink-wrapped" and desktop software used company-wide, as well as desktop software supporting individuals and individual business units, in order to determine whether the vendor is bringing its products into compliance. This Project also monitors websites and other available information concerning software and hardware vendors and disseminates the latest available information to those business units relying on the product. In the event that the products are not, or will not be compliant, the Company is assessing its need for these 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, corrected and forward-date tested the Company's mission critical wide area network components, telecommunications systems and unique business systems. Additionally, the Infrastructure Project personnel, along with personnel from the Company's Facilities 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 contact information in the database regarding their respective business partners, vendors and suppliers. 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. The Company has successfully completed company-wide testing of electronic interfaces with Freddie Mac, Fannie Mae and Ginnie Mae. 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 Freddie Mac, Fannie Mae and Ginnie Mae, 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. Documentation of the Year 2000 aspect of business recovery planning for the Company's mission critical business functions is complete. 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, vendors and suppliers, external and internal interfaces and business partners. Costs The total cost associated with the Company's Year 2000 efforts is not expected to be material to the Company's financial position. The Company is expensing these costs during the period in which they are incurred. The estimated total cost of the Year 2000 Project is approximately $43.0 million, of which $24.7 million had been incurred through February 28, 1999. However, the Company's expectations about future costs associated with the Year 2000 are subject to uncertainties that could cause the actual results to differ materially from the Company's expectations. Factors that could influence the amount and timing of future costs include the success of the Company in identifying systems and programs that are not year 2000 compliant, the nature and amount of programming required to replace or upgrade each of the affected programs, the availability, rate and magnitude of related labor and consulting costs and the success of the Company's business partners, vendors and clients in addressing Year 2000 issues. 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. Furthermore, the Company cannot be assured that the 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. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In response to this Item, the information set forth on page 29 and Note A of this Form 10-K is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this Item 8 is hereby incorporated by reference from the Company's Financial Statements and Auditors' Report beginning at page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS The information required by this Item 11 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS The information required by this Item 12 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) - Financial Statement Schedules. The information called for by this section of Item 14 is set forth in the Financial Statements and Auditors' Report beginning at page F-1 of this Form 10-K. The index to Financial Statements and Schedules is set forth at page F-2 of this Form 10-K. (3) - Exhibits Exhibit No. Description 2.1* Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc., Countrywide Asset Management Corporation and Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 10-K dated February 28, 1997). 3.1* Certificate of Amendment of Restated Certificate of Incorporation of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). 3.2* Restated Certificate of Incorporation of Countrywide Credit Industries, Inc.(incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). 3.3* Bylaws of Countrywide Credit Industries, Inc., as amended and restated (incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 10, 1988). 3.3.1* Amendment to Bylaws of Countrywide Credit Industries, Inc. dated January 28, 1998(incorporated by reference to Exhibit 3.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). 3.3.2* Amendment to Bylaws of Countrywide Credit Industries, Inc.dated February 3, 1998 (incorporated by reference to Exhibit 3.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). 4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Form 8-A filed pursuant to Section 12 of the Securities Exchange Act of 1934 on February 12, 1988). 4.1.1* Amendment No. 1 to Rights Agreement dated as March 24, 1992 (incorporated by reference to Exhibit 1 to the Company's Form 8 filed with the SEC on March 27, 1992). 4.2* Specimen Certificate of the Company's Common Stock(incorporated by reference to Exhibit 4.2 to the Current Company's Report on Form 8-K dated February 6, 1987). 4.3* Specimen Debenture Certificate (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated February 6, 1987). 4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide Funding Corporation (now known as Countrywide Home Loans, Inc.) ("CHL") (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-3(File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). 4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the Company's registration statement on Form S-3(File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). 4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-3(File No. 33-51816) filed with the SEC on September 9, 1992). 4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the Company's registration statement on Form S-3(File No. 33-51816) filed with the SEC on September 9, 1992). 4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated by reference to Exhibit 4.2 to the registration statement on Form S-3 of CHL and the Company (File Nos.33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). 4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). 4.10*Indenture dated as of January 1, 1992 among CHL, the Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). 4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to the Indenture dated as of January 1, 1992, among CHL, the Company, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). 4.11*Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). 4.12*Form of Medium-Term Notes, Series D (floating-rate) of CHL (incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). 4.13*Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2, 1996). 4.14*Form of Medium-Term Notes, Series E (floating rate) of CHL (incorporated by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2, 1996). 4.15*Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers Trustee Company Limited, as Trustee for Euro Medium Notes of CHL (incorporated by reference to Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). 4.16 First Supplemental Trust Deed dated 16th December, 1998, modifying the provisions of a Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers Trustee Company Limited, as Trustee for Euro Medium Notes of CHL. 4.16.1* Form of Medium-Term Notes, Series F (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. 333-31529 and 333-31529-01) filed with the SEC on July 29, 1997). 4.16.2* Form of Medium-Term Notes, Series F (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. 333-31529 and 333-31529-01) filed with the SEC on July 29, 1997). 4.17*Form of Medium-Term Notes, Series G (fixed-rate) of CHL (incorporated by reference to Exhibit 4.10 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and 333-58125-01) filed with the SEC on June 30, 1998). 4.18*Form of Medium-Term Notes, Series G (floating-rate) of CHL (incorporated by reference to Exhibit 4.11 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and 333-58125-01) filed with the SEC on June 30, 1998). 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). + 10.1* Indemnity Agreements with Directors and Officers of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K dated February 6, 1987). + 10.2* Restated Employment Agreement for David S. Loeb dated March 26, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-Q dated August 31, 1996). + 10.2.1 Third Restated Employment Agreement by and between the Company and David S. Loeb in effect as of March 1, 1999. + 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26, 1996 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). + 10.3.1* Amendment Number One to Restated Employment Agreement for Angelo R. Mozilo (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). + 10.3.2* Amendment Number Two to Restated Employment Agreement for Angelo R. Mozilo (incorporated by reference to Exhibit 10.3.2 to the Company's Annual Report on Form 10-K dated February 28, 1998). + 10.4* Employment Agreement for Stanford L. Kurland dated May 7, 1996 (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-Q dated August 31, 1996). + 10.4.1 Employment Agreement by and between the Company and Stanford L. Kurland, dated as of March 1, 1999. + 10.5* Countrywide Credit Industries, Inc. Deferred Compensation Agreement for Non-Employee Directors (incorporated by reference to Exhibit 5.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). + 10.5.1* Supplemental Form of Countrywide Credit Industries, Inc. Deferred Compensation Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.5.1 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 10.6* Countrywide Credit Industries, Inc. Deferred Compensation Plan for Key Management Employees dated April 15, 1992 (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.7* Countrywide Credit Industries, Inc. Deferred Compensation Plan Amended and Restated Effective January 1, 1998 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated February 28, 1998). + 10.7.1 First Amendment to Countrywide Credit Industries, Inc. Deferred Compensation Plan Amended and Restated effective January 1, 1999. 10.8*Revolving Credit Agreement dated as of the 24th day of September, 1997, by and among Countrywide Home Loans, Inc., Bankers Trust Company, The First National Bank of Chicago, The Bank of New York, Chase Securities Inc., The Chase Manhattan Bank and the Lenders Party thereto. (incorporated by reference to Exhibit 10.8 to the Company's Quarterly report on Form 10-Q dated August 31, 1997). 10.8.1* Revolving Credit Agreement dated as of the 15th day of April, 1998, by and among Countrywide Home Loans, Inc., Royal Bank of Canada, The Bank of New York, Morgan Guaranty Trust Company of New York, Credit Lyonnais, San Francisco Branch and the Lenders Party Thereto. 10.8.2* Short Term Facility Extension Amendment dated as of the 23rd day of September 1998 by and among CHL, the Short Term Lenders under the Revolving Credit Agreement dated as of September 24, 1997 and Bankers Trust Company, as Credit Agent (incorporated by reference to Exhibit 10.8.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 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 (incorporated by reference to Exhibit 10.8.3 to the Company's Quarterly Report on Form 10-Q dated November 30, 1998). 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 (incorporated by reference to Exhibit 10.8.4 to the Company's Quarterly Report on Form 10-Q dated November 30, 1998). 10.8.5 Second Amendment to Revolving Credit Agreement dated as of the 14th day of April, 1999 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. +10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988). + 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988). + 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated February 28, 1989). + 10.11.1* First Amendment to the 1987 Stock Option Plan as Amended and Restated. (incorporated by reference to Exhibit 10.11.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.11.2* Second Amendment to the 1987 Stock Option Plan as Amended and Restated. (incorporated by reference to Exhibit 10.11.2 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.11.3* Third Amendment to the 1987 Stock Option Plan as Amended and Restated (incorporated by reference to Exhibit 10.11.3 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.11.4* Fourth Amendment to the 1987 Stock Option Plan as Amended and Restated (incorporated by reference to Exhibit 10.11.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.16* Amended and Restated Stock Option Financing Plan (incorporated by reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). 10.17* 1995 Amended and Extended Management Agreement, dated as of May 15, 1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset Management Corporation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 1995). 10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15, 1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated February 28, 1990). 10.19* 1995 Amended and Restated Loan Purchase and Administrative Services Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1995). + 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K dated February 29, 1992). + 10.20.1* First Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.2* Second Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.3* Third Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated February 28, 1995). + 10.20.6* Sixth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.6 to the Company's Annual Report on Form 10-Q dated November 30, 1997). + 10.20.7* Seventh Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.7 to the Company's Annual Report on Form 10-Q dated November 30, 1997). + 10.20.8* Eighth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.8 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 10.21* 1992 Stock Option Plan dated as of Decembe 22, 1992 (incorporated by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.21.1* First Amendment to the 1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.21.2* Second Amendment to the 1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.2 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.21.3* Third Amendment to the 1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.3 to the Company's Quarterly Report on Form 10-Q dated May 31,1998). + 10.22* Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated August 31,1996). + 10.22.1* First Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). +10.22.2* Second Amendment to the Amended and Restated 1993 StockOption Plan. (incorporated by reference to Exhibit 10.22.2 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.22.3* Third Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.22.3 to the Company's Annual Report on Form 10-K dated February 28, 1998). + 10.22.4* Fourth Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.22.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 10.22.5* Fifth Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.22.5 to the Company's Quarterly Report on Form 10-Q dated August 31, 1998). + 10.23* Supplemental Executive Retirement Plan effective March 1, 1994 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). + 10.23.1* Amended and Restated Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.23.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). +10.23.2 First Amendment, effective January 1, 1999, to the Company's Supplemental Executive Retirement Plan 1998 Amendment and Restatement. +10.24* Split-Dollar Life Insurance Agreement(incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). +10.24.1* Amended and Restated Split-Dollar Life Insurance Agreement (incorporated by reference to Exhibit 10.24.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1998). +10.25* Split-Dollar Collateral Assignment (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). +10.26* Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). +10.27* Change in Control Severance Plan. +10.27.1* First Amendment to Change in Control Severance Plan (incorporated by reference to Exhibit 10.27.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1998). 11.1 Statement Regarding Computation of Earnings Per Share. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 21 List of subsidiaries. 23 Consent of Grant Thornton LLP. 27 Financial Data Schedules (included only with the electronic filing with the SEC). * Incorporated by reference +Constitutes a management contract or compensatory plan or arrangement SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ ANGELO R. MOZILO ------------------------------------- Angelo R. Mozilo, Chairman and Chief Executive Officer Dated: May 6, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signatures Title Date /S/ANGELO R.MOZILO Chief Executive Officer, Chairman of the May 6, 1999 ----------------- Board of Directors and Director Angelo R. Mozilo (Principal Executive Officer) /s/ DAVID S. LOEB President and Director May 6, 1999 ------------------- David S. Loeb /s/ STANFORD L. KURLAND Senior Managing Director and Chief May 6, 1999 --------------------- Operating Officer Stanford L. Kurland /s/ CARLOS M. GARCIA Managing Director; Chief Financial May 6, 1999 - --------------------- Officer and Chief Accounting Officer Carlos M. Garcia (Principal Financial Officer and Principal Accounting Officer) /s/ JEFFREY M. CUNNINGHAM Director May 6, 1999 - -------------------------- Jeffrey M. Cunningham /s/ ROBERT J. DONATO Director May 6, 1999 - ------------------------- Robert J. Donato /s/ Director May 6, 1999 - ---------------------------- Michael E. Dougherty /s/ BEN M. ENIS Director May 6, 1999 - --------------------------- Ben M. Enis /s/ EDWIN HELLER Director May 6, 1999 - ----------------------------- Edwin Heller /s/ HARLEY W. SNYDER Director May 6, 1999 - -------------------------- Harley W. Snyder COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS For Inclusion in Form 10-K Annual Report Filed with Securities and Exchange Commission February 28, 1999 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES February 28, 1999 Page --------------- Report of Independent Certified Public Accountants................................................. F-3 Financial Statements Consolidated Balance Sheets................................................................... F-4 Consolidated Statements of Earnings........................................................... F-5 Consolidated Statement of Common Shareholders' Equity......................................... F-6 Consolidated Statements of Cash Flows......................................................... F-7 Consolidated Statements of Comprehensive Income............................................... F-8 Notes to Consolidated Financial Statements.................................................... F-9 Schedules Schedule I - Condensed Financial Information of Registrant.................................... F-35 Schedule II - Valuation and Qualifying Accounts............................................... F-39
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Countrywide Credit Industries, Inc. We have audited the accompanying consolidated balance sheets of Countrywide Credit Industries, Inc. and Subsidiaries as of February 28, 1999 and 1998, and the related consolidated statements of earnings, common shareholders' equity, cash flows and comprehensive income for each of the three years in the period ended February 28, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Countrywide Credit Industries, Inc. and Subsidiaries as of February 28, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended February 28, 1999, in conformity with generally accepted accounting principles. In October 1998, the Company adopted Financial Accounting Standards Board Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This change is discussed in Note R of the Notes to Consolidated Financial Statements. We have also audited Schedules I and II for each of the three years in the period ended February 28, 1999. In our opinion, such schedules present fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Los Angeles, California April 21, 1999 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 28, (Dollar amounts in thousands, except per share data) A S S E T S 1999 1998 < ------------------- ------------------- Cash $ 58,748 $ 10,707 Mortgage loans and mortgage-backed securities held for sale 6,231,220 5,292,191 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 311,741 226,330 Mortgage servicing rights, net 4,496,439 3,612,010 Other assets 4,550,108 3,041,973 ------------------- ------------------- Total assets $15,648,256 $12,183,211 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $4,020,998 $3,945,606 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $9,935,759 $7,475,221 Drafts payable issued in connection with mortgage loan closings 1,083,499 764,285 Accounts payable, accrued liabilities and other 517,937 482,678 Deferred income taxes 1,092,176 873,084 ------------------- ------------------- Total liabilities 12,629,371 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, 112,619,313 shares in 1999 and 109,205,579 shares in 1998 5,631 5,460 Additional paid-in capital 1,153,673 1,049,365 Accumulated other comprehensive (loss) income 3,697 (19,593) Retained earnings 1,379,174 1,029,421 ------------------- ------------------- Total shareholders' equity 2,518,885 2,087,943 ------------------- ------------------- Total liabilities and shareholders' equity $15,648,256 $12,183,211 =================== =================== Borrower and investor custodial accounts $4,020,998 $3,945,606 =================== ===================
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year ended February 28, (Dollar amounts in thousands, except per share data) 1999 1998 1997 --------------- -------------- -------------- Revenues Loan origination fees $ 623,531 $ 301,389 $ 193,079 Gain on sale of loans, net of commitment fees 699,433 417,427 247,450 --------------- -------------- -------------- Loan production revenue 1,322,964 718,816 440,529 Interest earned 1,029,066 584,076 457,005 Interest charges (983,829) (568,359) (423,447) --------------- -------------- -------------- Net interest income 45,237 15,717 33,558 Loan servicing income 1,023,700 907,674 773,715 Amortization and impairment/recovery of mortgage servicing rights (1,013,578) (561,804) (101,380) Servicing hedge benefit (expense) 412,812 232,959 (125,306) --------------- -------------- -------------- Net loan administration income 422,934 578,829 547,029 Commissions, fees and other income 187,867 138,217 91,346 Gain on sale of subsidiary - 57,381 - --------------- -------------- -------------- Total revenues 1,979,002 1,508,960 1,112,462 Expenses Salaries and related expenses 669,686 424,321 286,884 Occupancy and other office expenses 277,921 184,338 129,877 Guarantee fees 181,117 172,692 159,360 Marketing expenses 64,510 42,320 34,255 Other operating expenses 153,963 119,743 80,188 --------------- -------------- -------------- Total expenses 1,347,197 943,414 690,564 --------------- -------------- -------------- Earnings before income taxes 631,805 565,546 421,898 Provision for income taxes 246,404 220,563 164,540 --------------- -------------- -------------- NET EARNINGS $385,401 $ 344,983 $ 257,358 =============== ============== ============== Earnings per share Basic $3.46 $3.21 $2.50 Diluted $3.29 $3.09 $2.44
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY Three years ended February 28, 1999 (Dollar amounts in thousands) Accumulated Additional Other Number Common Paid-in- Comprehensive Retained of Shares Stock Capital Income (Loss) Earnings Total -------------- ----------- ----------------------------------------------------------- Balance at February 29, 1996 102,242,329 $5,112 $820,183 - $494,460 $1,319,755 Cash dividends paid - common - - - - (32,989) (32,989) Stock options exercised 1,000,798 50 15,337 - - 15,387 Tax benefit of stock options exercised - - 3,656 - - 3,656 Dividend reinvestment plan 2,198,563 110 60,040 - - 60,150 401(k) Plan contribution 79,878 4 2,038 - - 2,042 Issuance of common stock in business - acquisition 573,990 29 16,688 - - 16,717 Other comprehensive loss, net of tax - - - (30,545) - (30,545) Net earnings for the year - - - - 257,358 257,358 - ------------------------------------------------------------------- ----------------------------------------------------------- Balance at February 28, 1997 106,095,558 5,305 917,942 (30,545) 718,829 1,611,531 Cash dividends paid - common - - - - (34,391) (34,391) Stock options exercised 839,479 42 14,645 - - 14,687 Tax benefit of stock options exercised - - 5,378 - - 5,378 Dividend reinvestment plan 2,179,939 109 108,511 - - 108,620 401(k) Plan contribution 90,603 4 2,889 - - 2,893 Other comprehensive income, net of tax - - - 34,242 - 34,242 Net earnings for the year - - - - 344,983 344,983 - ------------------------------------------------------------------------------------------------------------------------------- Balance at February 28, 1998 109,205,579 5,460 1,049,365 3,697 1,029,421 2,087,943 Cash dividends paid - common - - - - (35,648) (35,648) Stock options exercised 1,239,662 62 20,047 - - 20,109 Tax benefit of stock options exercised - - 11,456 - - 11,456 Dividend reinvestment plan 2,048,062 103 66,669 - - 66,772 401(k) Plan contribution 126,010 6 6,136 - - 6,142 Other comprehensive loss, net of tax - - - (23,290) - (23,290) Net earnings for the year - - - - 385,401 385,401 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------- ----------------------------------------------------------- Balance at February 28, 1999 112,619,313 $5,631 $1,153,673 ($19,593) $1,379,174 $2,518,885 ===============================================================================================================================
The accompanying notes are an integral part of this statement. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash Year ended February 28 (Dollar amounts in thousands) 1999 1998 1997 ----------------- ----------------- ----------------- Cash flows from operating activities: Net earnings $385,401 $344,983 $ 257,358 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Gain on sale of subsidiary - (57,381) - Gain on sale of available-for-sale securities (56,801) (16,749) (4,339) Amortization and impairment/recovery of mortgage servicing rights 1,013,578 561,804 101,380 Depreciation and other amortization 49,210 44,930 40,378 Deferred income taxes 246,404 220,563 164,540 Origination and purchase of loans held for sale (92,880,538) (48,771,673) (37,810,761) Principal repayments and sale of loans 91,941,509 46,059,454 39,970,876 ----------------- ----------------- ----------------- Decrease (increase) in mortgage loans and mortgage- backed securities held for sale (939,029) (2,712,219) 2,160,115 Increase in other assets (1,737,487) (1,144,103) (856,499) Increase in accounts payable and accrued liabilities 35,259 302,404 96,712 ----------------- ----------------- ----------------- Net cash provided (used) by operating activities (1,003,465) (2,455,768) 1,959,645 ----------------- ----------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (1,898,007) (1,149,988) (858,912) Purchase of property, equipment and leasehold Improvements, net (119,507) (70,896) (77,294) Proceeds from sale of available-for-sale securities 231,555 72,747 27,001 ----------------- ----------------- ----------------- Net cash used by investing activities (1,785,959) (1,148,137) (909,205) ----------------- ----------------- ----------------- Cash flows from financing activities: Net (decrease) increase in warehouse debt and other short-term borrowings (1,122,273) 1,513,974 (1,924,308) Issuance of long-term debt 4,044,121 1,973,198 637,624 Repayment of long-term debt (142,096) (182,747) (113,773) Issuance of Company - obligated mandatorily redeemable capital trust pass-through securities of subsidiary trust holding solely a Company guaranteed related subordinated debt - 200,000 300,000 Issuance of common stock 93,361 126,309 84,831 Cash dividends paid (35,648) (34,391) (32,989) ----------------- ----------------- ----------------- Net cash (used) provided by financing activities 2,837,465 3,596,343 (1,048,615) ----------------- ----------------- ----------------- Net increase (decrease) in cash 48,041 (7,562) 1,825 Cash at beginning of period 10,707 18,269 16,444 ================= ================= ================= Cash at end of period $ 58,748 $ 10,707 $ 18,269 ================= ================= ================= Supplemental cash flow information: Cash used to pay interest $ 876,236 $ 422,969 $ 309,575 Cash used to pay (refund from) income taxes $ 1,407 $ (1,645) $ 15 Noncash financing activities: Issuance of common stock in business acquisition $ - $ - $ 16,717 Unrealized gain (loss) on available-for-sale securities, net of tax $ (23,290) $ 34,242 $( 30,545)
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended February 28, (Dollar amounts in thousands) 1999 1998 1997 ---------------- ----------------- --------------- NET EARNINGS $385,401 $344,983 $257,358 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period 11,358 44,459 (27,899) Less: reclassification adjustment for gains included in net earnings (34,648) (10,217) (2,646) ----------------- ---------------- ----------------- --------------- Other comprehensive (loss) income (23,290) 34,242 (30,545) ---------------- ----------------- ================ ================= =============== COMPREHENSIVE INCOME $362,111 $379,225 $226,813 ================ ================= ===============
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Countrywide Credit Industries, Inc. (the "Company") is a holding company, which through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL"), is engaged primarily in the mortgage banking business and as such originates, purchases, sells and services mortgage loans throughout the United States. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Principles of Consolidation The consolidated financial statements include the accounts of the parent and all wholly-owned subsidiaries that are required to be consolidated under generally accepted accounting principles. All material intercompany accounts and transactions have been eliminated. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of cost or market, which is computed by the aggregate method (unrealized losses are offset by unrealized gains). The cost of mortgage loans and the carrying value of mortgage-backed securities ("MBS") held for sale in the near term are adjusted by gains and losses generated from corresponding hedging transactions entered into to protect the value of the mortgage loans and MBS held for sale from increases in interest rates. Hedging transactions also are entered into to protect the value of the Company's short-term rate and point commitments to fund mortgage loan applications in process (the "Committed Pipeline") from increases in interest rates. Gains and losses generated from such hedging transactions are deferred. Hedging losses are recognized currently if deferring such losses would result in mortgage loans and MBS held for sale and the Committed Pipeline being effectively valued in excess of their estimated net realizable value. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Leasehold improvements are amortized over the lesser of the life of the lease or service lives of the improvements using the straight-line method. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Mortgage Servicing Rights, Amortization and Impairment The Company recognizes as separate assets the rights to service mortgage loans for others, whether the servicing rights are acquired through a separate purchase or through loan origination by allocating total costs incurred between the loan and the servicing rights retained based on their relative fair values. Amortization of mortgage servicing rights ("MSRs") is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the MSRs. Projected net servicing income is in turn determined by the estimated future balance of the underlying mortgage loan portfolio, which declines over time from prepayments and scheduled loan amortization. The Company estimates future prepayment rates based on current interest rate levels, other economic conditions and market forecasts, as well as relevant characteristics of the servicing portfolio, such as loan types, note rate stratification and recent prepayment experience. MSRs are periodically evaluated for impairment, which is recognized in the statement of earnings during the applicable period through additions to an impairment reserve. For purposes of performing its impairment evaluation, the Company stratifies its servicing portfolio on the basis of certain risk characteristics including loan type (fixed or adjustable) and note rate. To mitigate the effect on earnings of higher amortization and impairment of MSRs resulting from increased prepayment activity that generally occurs when interest rates decline, the Company acquires financial instruments, including derivatives, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). These financial instruments include interest rate floors, options on interest rate futures and MBS, interest rate futures, interest rate swaps with the Company's maximum payment capped ("Capped Swaps"), interest rate swaps, interest rate caps, options on interest rate swaps ("Swaptions"), options on callable pass-through certificates ("options on CPCs") and certain tranches of collateralized mortgage obligations ("CMOs"). The value of the interest rate floors, options on interest rate futures, Capped Swaps, interest rate caps, Swaptions, and options on CPC is derived from an underlying instrument or index; however, the notional or contractual amount is not recognized on the balance sheet. The cost of these instruments is charged to expense (and deducted from net loan administration income) over the life of the contract. Unamortized costs are included in Other Assets on the balance sheet. The basis of the MSRs is adjusted for realized and unrealized gains and losses in the derivative financial instruments that qualify for hedge accounting. Qualitative Disclosures About Market Risk The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination and loan servicing business segments, which are counter-cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its Committed Pipeline, mortgage loan inventory and MBS held for sale, MSRs, mortgage-backed securities retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) To qualify for hedge accounting, the derivative contract positions must be designated as a hedge and be effective in reducing the market risk of an existing asset, liability or Committed Pipeline. The effectiveness of the derivative contracts is evaluated on an initial and ongoing basis using quantitative measures of correlation. If a derivative contract no longer qualifies as a hedge, any subsequent changes in fair value are recognized currently in earnings. If a derivative contract that qualifies as a hedge is sold, matures or is terminated, any resulting intrinsic gain or loss adjusts the basis of the underlying item. Unamortized premiums associated with the time value of such contracts are recognized in income. If a designated underlying item is no longer held, any previously unrecognized gain or loss on the related derivative is recognized in earnings and the derivative contract is subsequently accounted for at fair value. Trading Securities The Company's MBS held for sale in the near term are classified as trading securities and are included with mortgage loans on the consolidated balance sheet. Trading securities are recorded at fair value, with the change in fair value during the period included in earnings. The fair value of MBS held for sale in the near term is based on quoted market prices. Financial instruments held by the Company's broker-dealer subsidiary are included in Other Assets. These financial instruments, including derivative contracts, are recorded at fair value on a trade date basis, and gains and losses, both realized and unrealized, are included in Gain on Sale of Loans. Available for Sale Securities The Company has designated its investments in certain tranches of CMOs, certain other equity securities and mortgage-backed securities retained in the Company's securitizations as available for sale securities, which are included in Other Assets. Mortgage-backed securities retained in the Company's securtizations consist of sub-prime and home equity residual interests ("Residuals") and interest-only and principal-only certificates on prime credit quality first mortgage loans. The timing and amount of cash flows on these securities are significantly influenced by prepayments on the underlying loans and estimated foreclosure losses to the extent the Company has retained the risk of such losses. The fair value of these securities is determined by discounting future cash flows using discount rates that approximate current market rates. As of February 28, 1999, the Company used discount rates for sub-prime and home equity mortgage-backed residuals of 25% and 18%, respectively; annual prepayment estimates of 22% to 49% and 30%, respectively; and lifetime credit loss estimates of 1.0% to 6.1% and 1.3% of the original principal balances of the underlying loans, respectively. The available for sale securities are measured at fair value. Unrealized gains or losses, net of deferred income taxes, are excluded from earnings and reported as a separate component of shareholders' equity until realized. Realized gains and losses on sales of securities are computed by the specific identification method at the time of disposition and are recorded in earnings. Unrealized losses that are other than temporary are recognized in earnings. Loan Origination Fees Loan fees, discount points and certain direct origination costs are recorded as an adjustment of the cost of the loan and are recorded in earnings when the loan is sold. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Deferred Commitment Fees Deferred commitment fees, included in Other Assets, primarily consist of put and call option fees on MBS. Option fees are amortized over the life of the option to reflect the decline in its time value. Any unamortized option fees are charged to income when the related option is exercised. Investment In Non-Consolidated Subsidiaries The Company has an investment in CWHL Funding, Inc., a bankruptcy remote, wholly-owned subsidiary. This subsidiary was established to facilitate the sale of certain defaulted mortgage loans repurchased in the ordinary course of business from Ginnie Mae MBS serviced by the Company. As of February 28, 1999, the Company's investment in CWHL Funding, Inc. was $73.7 million. As of February 28, 1998, the Company's investment in CWHL Funding, Inc. was $56.4 million. Interest Income Recognition Interest income is accrued as earned. Loans are placed on non-accrual status when any portion of principal or interest is ninety days past due or earlier when concern exists as to the ultimate collectibility of principal or interest. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible. Loan Servicing Income Loan servicing income represents fees earned for servicing residential mortgage loans for investors and related ancillary income, including late charges. Servicing income is recognized as earned, unless collection is doubtful. Interest Rate Swap Agreements The amount to be received or paid under the interest rate swap agreements associated with the Company's debt and custodial accounts is accrued and is recognized as an adjustment to net interest income. The related amount payable to or receivable from counterparties is included in accounts payable and accrued liabilities. Advertising Costs The Company generally charges to expense the production costs of advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over the expected period of future benefits. Advertising expense was $46.0 million, $32.6 million and $26.6 million for the years ended February 28, 1999, 1998 and 1997, respectively. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company recognizes compensation cost related to its stock option plans only to the extent that the fair value of the shares at the grant date exceeds the exercise price. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes The Company utilizes an asset and liability approach in its accounting for income taxes. This approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement and tax basis carrying amounts of assets and liabilities. Earnings Per Share Basic earnings per share ("EPS") is determined using net income divided by the weighted average shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The following table presents basic and diluted EPS for the years ended February 28, 1999, 1998 and 1997. - ------------------------ --------- --------- --------- -- - ----------------------------- -- -- ------- ---------- ----- Years ended February 28, --------- --------- --------- -- - ----------------------------- -- -- ------- ---------- ----- 1999 1998 1997 --------- --------- --------- ---------- --------- --------- --------- --------- --------- Per-Share Per-Share Per-Share (Amounts in thousands, Net Amount Net Amount Net Amount except per share data) Earnings Shares Earnings Shares Earnings Shares - ------------------------ --------- --------- --------- --------- --------- --------- ========= ========== ========= Net earnings $385,401 $344,983 $257,358 ========= ========== =========
Basic EPS Net earnings available to common shareholders $385,401 111,414 $3.46 $344,983 107,491 $3.21 $257,358 103,112 $2.50 Effect of Dilutive Stock Options - 5,631 - 4,035 - 2,565 --------- --------- ---------- --------- --------- --------- Diluted EPS Net earnings available to common shareholders $385,401 117,045 $3.29 $344,983 111,526 $3.09 $257,358 105,677 $2.44 ========= ========= ========== ========= ========= ========= - ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- --------- ---------
Financial Statement Reclassifications and Restatement Certain amounts reflected in the Consolidated Financial Statements for the years ended February 28, 1998 and 1997 have been reclassified to conform to the presentation for the year ended February 28, 1999. NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consisted of the following. --------------------------------------------- -------------------------------------------------------------------- February 28, ----------------- -- -------------- ----- (Dollar amounts in thousands) 1999 1998 --------------------------------------------------------------------- -- ----------------- -- -------------- ----- Buildings $ 97,339 $ 84,526 Office equipment 305,092 223,792 Leasehold improvements 42,578 28,136 ----------------- -------------- 445,009 336,454 Less: accumulated depreciation and amortization (167,449) (133,353) ----------------- -------------- 277,560 203,101 Land 34,181 23,229 ================= ============== $311,741 $226,330 ================= ============== --------------------------------------------------------------------- -- ----------------- -- -------------- -----
Depreciation and amortization expense amounted to $40.3 million, $31.8 million and $29.0 million for the years ended February 28, 1999,1998 and 1997, respectively. NOTE C - MORTGAGE SERVICING RIGHTS Entries to mortgage servicing rights for the years ended February 28, 1999, 1998 and 1997 were as follows. ----------------------------------------------- -- ------------------------------------------------------------- February 28, ---------------- --- ---------------- --- ---------------- -- (Dollar amounts in thousands) 1999 1998 1997 ----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- -- Mortgage Servicing Rights Balance at beginning of period $3,653,318 $3,026,494 $2,385,299 Additions, net 1,898,007 1,149,988 858,912 Scheduled amortization (556,373) (300,312) (220,099) Hedge losses (gains) applied (403,761) (222,852) 59,753 Reclassification of rights in excess of Minimum contractually specified Servicing fees - - (57,371) ---------------- ---------------- ---------------- Balance before valuation reserve at end of period 4,591,191 3,653,318 3,026,494 ---------------- ---------------- ---------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (41,308) (2,668) (61,634) Reductions (additions) (53,444) (38,640) 58,966 ---------------- ---------------- ---------------- Balance at end of period (94,752) (41,308) ( 2,668) ================ ================ ================ Mortgage Servicing Rights, net $4,496,439 $3,612,010 $3,023,826 ================ ================ ================ ----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
The estimated fair value of mortgage servicing rights was $4.7 billion and $3.7 billion as of February 28, 1999 and 1998, respectively. The fair value was determined by discounting estimated net future cash flows from mortgage servicing activities using discount and prepayment rates that approximate current market rates. NOTE D - OTHER ASSETS Other assets as of February 28, 1999 and 1998 included the following. ------------------------------------------------------------ ----------------------------------------------------- February 28, ----------------- --- ---------------- --- (Dollar amounts in thousands) 1999 1998 -------------------------------------------------------------------- -- ----------------- --- ---------------- --- Trading securities $ 1,460,446 $ 243,947 Servicing hedge instruments 991,401 801,335 Mortgage-backed securities retained in securitization 500,631 466,259 Receivables related to broker-dealer activities 401,232 148,976 Rewarehoused FHA and VA loans 216,598 426,407 Servicing related advances 199,143 231,437 Loans held for investment 125,236 115,713 Accrued interest 102,093 84,601 Equity securities 59,875 96,152 Other 493,453 427,146 ----------------- ---------------- $4,550,108 $3,041,973 ================= ================
-------------------------------------------------------------------- -- ------- NOTE E - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities as of February 28, 1999 and 1998 were as follows. In October 1998, mortgage-backed securities retained in securitization were reclassified as available for sale securities; see note R. ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 28, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $519,321 - ($18,690) $500,631 CMOs 32,514 312 - 32,826 Equity securities 42,498 3,098 (16,904) 28,692 ================ ================= ================ ================ $594,333 $3,410 ($35,594) $562,149 ================ ================= ================ ================
---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- 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 F - NOTES PAYABLE Notes payable consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- February 28, ----------------- --- ---------------- --- (Dollar amounts in thousands) 1999 1998 -------------------------------------------------------------------- -- ----------------- --- ---------------- --- Commercial paper $176,559 $2,119,330 Medium-term notes, Series A, B, C, D, E, F, G, H and Euro Notes 8,039,824 4,137,185 Repurchase agreements 1,517,405 181,121 Subordinated notes 200,000 200,000 Unsecured notes payable - 835,000 Other notes payable 1,971 2,585 ================= ================ $9,935,759 $7,475,221 ================= ================
Commercial Paper and Backup Credit Facilities As of February 28, 1999, CHL, the Company's mortgage banking subsidiary, had unsecured credit agreements (revolving credit facilities) with consortiums of commercial banks permitting CHL to borrow an aggregate maximum amount of $5.3 billion. The facilities included a $4.0 billion revolving credit facility with forty-four commercial banks consisting of: (i) a five-year facility of $3.0 billion, which expires on September 24, 2002, and (ii) a one-year facility of $1.0 billion which expires on September 22, 1999. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. There is an additional one-year facility, which expired April 14, 1999, with sixteen of the forty-four banks referenced above for total commitments of $1.3 billion. As consideration for the facility, CHL pays annual commitment fees of $1.0 million. CHL renewed this facility. See Note O - "Subsequent Events". In addition, on November 25, 1998, CHL entered into a $1.5 billion committed mortgage loan conduit facility, with four commercial banks. The facility has a maturity date of November 24, 1999. As a consideration for this facility, CHL pays annual commitment fees of $1.9 million. Loans made under this facility are secured by conforming and non-conforming mortgage loans. These facilities contain various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. The purpose of these credit facilities is to provide liquidity backup for CHL's commercial paper program. No amount was outstanding under these revolving credit facilities at February 28, 1999. The weighted average borrowing rate on commercial paper borrowings for the year ended February 28, 1999 was 5.47%. The weighted average borrowing rate on commercial paper outstanding as of February 28, 1999 was 5.24%. NOTE F - NOTES PAYABLE (Continued) Medium-Term Notes As of February 28, 1999, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission or issued by CHL pursuant to its Euro medium-term note program were as follows. - --------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ---------------------- ---------------------------- ------------------------------------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- -------------- ------------- Series A - $173,500 $173,500 7.29% 8.79% Mar. 1999 Mar. 2002 Series B - 351,000 351,000 6.08% 6.98% Jul. 1999 Aug. 2005 Series C 208,000 197,000 405,000 4.56% 8.43% Apr. 1999 Mar. 2004 Series D 75,000 385,000 460,000 5.35% 6.88% Aug. 2000 Sep. 2005 Series E 310,000 690,000 1,000,000 5.12% 7.45% Feb. 2000 Oct. 2008 Series F 656,000 1,344,000 2,000,000 4.99% 7.00% Oct. 1999 May 2013 Series G 919,000 581,000 1,500,000 4.94% 7.00% Jul. 1999 Nov. 2018 Series H 114,500 300,000 414,500 4.99% 7.00% Dec. 1999 Dec. 2018 Euro Notes 1,019,600 716,224 1,735,824 4.97% 6.00% Jul. 1999 Jan. 2009 ------------------------------------------- Total $3,302,100 $4,737,724 $8,039,824 ===========================================
As of February 28, 1999, substantially all of the outstanding fixed-rate notes had been effectively converted through interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the year ended February 28, 1999, including the effect of the interest rate swap agreements, was 5.92%. During Fiscal 1999, CHL issued $666.2 million foreign currency denominated fixed-rate notes pursuant to its Euro medium-term note program. Such notes are denominated in Deutsche marks, French Francs and Portuguese Escudos. The Company manages the associated foreign currency risk by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars. Repurchase Agreements The Company routinely enters into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the year ended February 28, 1999 was 5.36%. The weighted average borrowing rate on repurchase agreements outstanding as of February 28, 1999 was 4.95%. NOTE F - NOTES PAYABLE (Continued) The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers. All agreements are to repurchase the same or substantially identical MBS. Subordinated Notes The 8.25% subordinated notes are due July 15, 2002. Interest is payable semi-annually on each January 15 and July 15. The subordinated notes are not redeemable prior to maturity and are not subject to any sinking fund requirements. Pre-Sale Funding Facilities As of February 28, 1999, CHL had uncommitted revolving credit facilities with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. The weighted average borrowing rate for all such facilities for the year ended February 28, 1999 was 5.68%. As of February 28, 1999, the Company had no outstanding borrowings under any of these facilities. Maturities of notes payable are as follows. ------------------ ------------------------------------------- ---------------------------------------------- Year ending February 28(29), (Dollar amounts in thousands) ------------------ ------------------------------------------- ---------------------------------------------- 2000 $3,982,435 2001 922,000 2002 522,000 2003 938,500 2004 863,000 Thereafter 2,707,824 ================= $9,935,759 ================= ------------------ ------------------------------------------- -------- ------------------- -----------------
NOTE G - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS On December 11, 1996, Countrywide Capital I (the "Subsidiary Trust I"), a subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through Securities (the "8% Capital Securities"). In connection with the Subsidiary Trust I issuance of the 8% Capital Securities, CHL issued to the Subsidiary Trust I, $309 million of its 8% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debt Securities I"). The Subordinated Debt Securities I are due on December 15, 2026 with interest payable semi-annually on June 15 and December 15 of each year. The Company has the right to redeem at par, plus accrued interest, the 8% Capital Securities any time on or after December 15, 2006. The sole assets of the Subsidiary Trust I are, and will be, the Subordinated Debt Securities I. On June 4, 1997, Countrywide Capital III (the "Subsidiary Trust III"), a subsidiary of the Company, issued $200 million of 8.05% Subordinated Capital Income Securities, Series A (the "8.05% Capital Securities"). In connection with the Subsidiary Trust III issuance of 8.05% Capital Securities, CHL issued to the Subsidiary Trust NOTE G - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS (Continued) III, $206 million of its 8.05% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debt Securities III"). The Subordinated Debt Securities III are due on June 15, 2027 with interest payable semi-annually on June 15 and December 15 of each year. The sole assets of the Subsidiary Trust III are, and will be, the Subordinated Debt Securities III. On December 24, 1997, Subsidiary Trust III completed an exchange offer pursuant to which newly issued capital securities (the "New 8.05% Capital Securities") were exchanged for all of the outstanding 8.05% Capital Securities. The New 8.05% Capital Securities are identical in all material respects to the 8.05% Capital Securities, except that the New 8.05% Capital Securities have been registered under the Securities Act of 1933, as amended. In relation to Subsidiary Trusts I and III, CHL has the right to defer payment of interest by extending the interest payment period, from time to time, for up to 10 consecutive semi-annual periods. If interest payments on the Debentures are so deferred, the Company and CHL may not declare or pay dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock. NOTE H - INCOME TAXES Components of the provision for income taxes were as follows. ---- ------------------------------ ------------------------------------------------------------ -------- Year ended February 28, ---------------- -- ------------- -- ------------- --- ---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --- ---------------- -- ------------- -- ------------- --- (Dollar amounts in thousands) 1999 1998 1997 ---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --- Federal expense - deferred $204,186 $181,228 $135,991 State expense - deferred 42,218 39,335 28,549 ================ ============= ============= $246,404 $220,563 $164,540 ================ ============= =============
The following is a reconciliation of the statutory federal income tax rate to the effective income tax rate as reflected in the consolidated statements of earnings. ---- ------------------------------ ------------------------------------------------------------ -------- Year ended February 28, --------------- -- -------------- --- ------------ --- 1999 1998 1997 ---- ----------------------------------------- --- --------------- -- -------------- --- ------------ --- Statutory federal income tax rate 35.0% 35.0% 35.0% State income and franchise taxes, net of federal tax effect 4.0 4.0 4.0 =============== ============== ============ Effective income tax rate 39.0% 39.0% 39.0% =============== ============== ============ ---- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
NOTE H - INCOME TAXES (Continued) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below. ----- ------------------------------------------- -------------------------------------------------- ----- February 28, -------------------------------------------------- ----- (Dollar amounts in thousands) 1999 1998 ---------------------------------------------------------------------------------------------------------- Deferred income tax assets: Net operating losses $ 198,204 $152,279 State income and franchise taxes 59,752 49,649 Reserves, accrued expenses and other 41,898 28,033 --------------- --------------- Total deferred income tax assets 299,854 $229,961 --------------- --------------- Deferred income tax liabilities: Mortgage servicing rights 1,368,349 1,079,364 Gain on sale of subsidiary 23,681 23,681 --------------- --------------- Total deferred income tax liabilities 1,392,030 1,103,045 --------------- --------------- Deferred income taxes $1,092,176 $873,084 =============== ===============
As of February 28, 1999, the Company had net operating loss carryforwards for federal income tax purposes totalling $542.7 million that expire as follows: $12.3 million in 2003, $19.7 million in 2004, $3.2 million in 2006, $5.1 million in 2008, $131.4 million in 2009, $74.0 million in 2010, $41.0 million in 2011, $84.1 million in 2012, and $72.0 million in 2013, and $99.9 million in 2019. NOTE I - FINANCIAL INSTRUMENTS Derivative Financial Instruments The Company utilizes a variety of derivative financial instruments to manage interest-rate risk. These instruments include interest rate floors, MBS mandatory forward sale and purchase commitments, options to sell or buy MBS, treasury futures and interest rate futures, options on CPC, interest rate caps, Capped Swaps, Swaptions, interest rate futures and interest rate swaps. These instruments involve, to varying degrees, elements of interest-rate and credit risk. In addition, the Company manages foreign currency exchange rate risk with foreign currency swaps. Substantially all of the Company's derivative financial instruments are held or issued for purposes other than trading. The Company has potential exposure to credit loss in the event of nonperformance by the counterparties to the various over-the-counter instruments. The Company manages this credit risk by selecting only well established, financially strong counterparties, spreading the credit risk amongst many such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any one counterparty. The Company's exposure to credit risk in the event of default by a counterparty is the current cost of replacing the contracts net of any available margins retained by the Company, a custodian or the Mortgage-Backed Securities Clearing Corporation (the "MBSCC"), which is an independent clearing agent. NOTE I - FINANCIAL INSTRUMENTS (Continued) The total amount of counterparty credit exposure as of February 28, 1999, before and after applicable margin accounts held, was as follows: - --------------------------------------------------------------- ------------------------------------------ (Dollar amounts in millions) As of February 28, 1999 - --------------------------------------------------------------- ------------------------------------------ Interest rate floors $402.1 Swaptions 271.1 MBS mandatory delivery and purchase commitments 199.8 Interest rate swaps 93.2 Interest rate caps 40.4 Capped swaps 3.1 ------------------ Total credit exposure before margin accounts held 1,009.7 Less: Margin accounts held (542.6) ================== Net unsecured credit exposure $467.1 ==================
Hedge of Committed Pipeline and Mortgage Loan Inventory As of February 28, 1999, the Company had $6.2 billion of closed mortgage loan and MBS held in inventory, including $5.9 billion fixed-rate and $0.3 billion adjustable-rate (the "Inventory"). In addition, as of February 28, 1999, the Company had short-term rate and point commitments amounting to approximately $7.5 billion (including $7.0 billion fixed-rate and $0.5 billion adjustable-rate) to fund mortgage loan applications in process and an additional $2.1 billion of mortgage loan applications in process subject to property identification and borrower qualification (the "Committed Pipeline"). Substantially all of these commitments are for periods of 60 days or less. (After funding and sale of the mortgage loans, the Company's exposure to credit loss in the event of nonperformance by the mortgagor is limited as described in Note J). In order to mitigate the risk that a change in interest rates will result in a decline in the value of the Company's Committed Pipeline or Inventory, the Company enters into hedging transactions. The Inventory is hedged with forward contracts for the sale of loans and net sales of MBS, including options to sell MBS where the Company can exercise the option on or prior to the anticipated settlement date of the MBS. Due to the variability of closings in the Company's Committed Pipeline, which is driven primarily by interest rates, the Company's hedging policies require that substantially all of the Committed Pipeline be hedged with a combination of options for the purchase and sale of MBS and treasury futures in addition to forward contracts for the sale of MBS. As of February 28, 1999, the notional amount of options to purchase and sell MBS aggregated $2.0 billion and $6.8 billion, respectively. In addition, as of February 28, 1999, the notional amount of options to purchase and sell treasury futures aggregated $0.2 billion and $0.1 billion, respectively. The Company had net forward contracts to sell MBS that amounted to $6.8 billion (including forward contracts to sell MBS of $15.4 billion and to purchase MBS of $8.6 billion). The MBS that are to be delivered under these contracts and options are either fixed or adjustable-rate, and are generally corresponding with the composition of the Company's Inventory and Committed Pipeline. The Company is generally not exposed to significant losses nor will it realize significant gains related to its Inventory or Committed Pipeline due to changes in interest rates, net of gains or losses on associated hedge positions. The correlation between the Inventory, and the Committed Pipeline and the associated hedge instruments is very high due to their similarity. However, the Company is exposed to the risk that the actual closings in the Committed Pipeline may deviate from the estimated closings for a given change in interest rates. Although interest rates are the primary determinant, the actual loan closings from the Committed Pipeline are influenced by many factors, including the composition of the Committed Pipeline and remaining commitment periods. The Company's estimated closings are based on historical data of loan closings as influenced by recent developments. NOTE I - FINANCIAL INSTRUMENTS (Continued) Servicing Hedge The Company manages its exposure to interest rate risk primarily through balancing its loan production and loan servicing operations which are counter cyclical in nature. In order to further mitigate the effect on earnings of higher amortization and impairment of MSRs resulting from increased prepayment activity that generally occurs when interest rates decline, the Company maintains a portfolio of financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the Servicing Hedge). The financial instruments that form the Servicing Hedge include options on interest rate futures and MBS, interest rate floors, interest rate swaps, interest rate caps, Capped Swaps, Swaptions, options on CPC, interest rate futures and certain tranches of CMOs. The CMOs, which consist primarily of principal-only ("P/O") securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase which should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows. As of February 28, 1999, the carrying value of CMOs included in the Servicing Hedge was approximately $32.8 million. The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge. - -------------------------------------- -------------------- -------------------- ------------------ --------------------- (Dollar amounts in millions) Balance, Dispositions/ Balance, February 28, 1998 Additions Expirations February 28, 1999 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- Interest Rate Floors $33,000 19,000 (19,000) $33,000 Long Call Options on Interest Rate Futures $79,400 60,320 (107,720) $32,000 Long Put Options on Interest Rate Futures $9,800 65,880 (21,080) $54,600 Short Call Options on Interest Rate Futures - 63,800 (41,800) $22,000 Short Put Options on - Interest Rate Futures 6,750 (6,030) $720 Interest Rate Futures $5,000 36,425 (18,925) $22,500 Capped Swaps $1,000 - - $1,000 Interest Rate Swaps $3,900 11,750 (500) $15,150 Interest Rate Cap $4,500 - - $4,500 Swaptions $1,850 32,500 (1,800) $32,550 Options on Callable Pass-through Certificates $2,561 2,000 - $4,561 - -------------------------------------- -------------------- -------------------- ------------------ ---------------------
The Servicing Hedge is intended to protect the value of the investment in MSRs from the effects of increased prepayment activity that generally results from declining interest rates. Should interest rates increase, the value of the MSRs generally will increase while the value of the Servicing Hedge will decline. With respect to the options, Swaptions, floors, caps, options on CPC and CMOs included in the Servicing Hedge, the Company is not exposed to loss beyond its initial outlay to acquire the instruments plus any unrealized gains recognized to date. With respect to the Capped Swaps contracts entered into by the Company as of February 28, 1999, the Company estimates that its maximum exposure to loss over the contractual term is $19.5 million. With respect to the Swap contracts entered into by the Company as of February 28, 1999, the Company estimates that its maximum exposure to loss over the contractual term is $382.0 million. The Company's exposure to loss on futures is related to changes in the London Interbank Offered Rate("LIBOR") rate over the life of the contract. The Company estimates that its maximum exposure to loss over the contractual term is $88.0 million. NOTE I - FINANCIAL INSTRUMENTS (Continued) 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. Interest Rate Swaps As of February 28, 1999, CHL had interest rate swap contracts, in addition to those included in the Servicing Hedge, with certain financial institutions having notional principal amounts totaling $5.7 billion. The effect of these contracts is to enable CHL to convert its fixed-rate long term debt borrowings to LIBOR-based floating-rate cost borrowings (notional amount $3.7 billion), to convert its foreign currency denominated fixed rate medium-term notes to U.S. dollar LIBOR-based floating-rate cost borrowings (notional amount $0.7 billion), to convert a portion of its commercial paper and medium-term note borrowings from one floating-rate index to another (notional amount $0.4 billion) and to convert the earnings rate on the custodial accounts held by CHL from floating to fixed (notional amount $0.9 billion). Payments are due periodically through the termination date of each contract. The agreements expire between March 1999 and June 2027. The interest rate swap agreements related to debt had an average fixed rate (receive rate) of 5.68% and an average floating rate indexed to 3-month LIBOR (pay rate) of 5.29% on February 28, 1999. The interest rate swap agreements related to custodial accounts had an average fixed rate (receive rate) of 7.11% and an average floating rate indexed to 1 to 3-month LIBOR (pay rate) of 5.03% on February 28, 1999. Broker-Dealer Financial Instruments Countrywide Securities Corporation utilizes a variety of financial instruments for trading purposes and to manage interest-rate risk. These instruments include MBS mandatory forward sale and purchase commitments as well as short sales of cash market U.S. Treasury securities. Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of February 28, 1999 and 1998 is made by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. NOTE I - FINANCIAL INSTRUMENTS (Continued) ---- ------------------------------------------------- --------------------------------- --- ---------------------------- February 28, 1999 February 28, 1998 --------------------------------- --- ---------------------------- Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount fair value amount fair value ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- ------------- Assets: Mortgage loans and mortgage-backed securities held for sale $6,231,220 $6,231,220 $5,292,191 $5,292,191 Items included in other assets: Trading securities 1,460,446 1,460,446 243,947 243,947 Loans held for investment 125,236 125,236 115,713 115,713 Receivables related to broker-dealer activiti401,232 401,232 148,976 148,976 Reverse repurchase agreements 76,246 76,246 53,560 53,560 CMOs purchased 32,826 32,826 191,823 191,823 Mortgage-backed securities retained in Securitizations 500,631 500,631 466,259 466,259 Equity Securities - restricted and unrestricte59,875 46,971 96,152 116,322 Rewarehoused FHA and VA loans 216,598 216,598 426,407 426,407 Liabilities: Notes payable 9,935,759 9,883,859 7,475,221 7,589,593 Securities sold not yet purchased 84,775 84,775 83,445 83,445 Derivatives: Interest rate floors 426,838 402,061 378,023 373,964 Forward contracts on MBS 12,775 120,709 - (5,719) Options on MBS 34,883 62,475 33,290 24,125 Options on interest rate futures 18,261 15,729 32,093 13,546 Options on callable pass-through certificates 55,593 36,460 34,451 44,278 Interest rate caps 77,508 40,437 83,512 41,319 Capped Swaps 8,470 3,092 5,405 ( 1,795) Swaptions 337,703 271,073 27,213 27,213 Interest rate futures 57,280 57,280 ( 3,359) ( 3,359) Interest rate swaps 43,570 93,205 44,717 155,229 Short-term commitments to extend credit - 26,400 - 38,525 ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of February 28, 1999 and 1998 are based on pertinent information that was available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. The following describes the methods and assumptions used by the Company in estimating fair values. Mortgage Loans and Mortgage-Backed Securities Held for Sale Fair value is estimated using the quoted market prices for securities backed by similar types of loans and dealer commitments to purchase loans on a servicing-retained basis. Collateralized Mortgage Obligations Fair value is estimated using quoted market prices and by discounting future cash flows using discount rates that approximate current market rates and market consensus prepayment rates. NOTE I - FINANCIAL INSTRUMENTS (Continued) Mortgage-backed securities retained in securitization Fair value is estimated by discounting future cash flows using discount rates that approximate current market rates and market consensus prepayment rates. Derivatives Fair value is defined as the amount that the Company would receive or pay to terminate the contracts at the report date. Market or dealer quotes are available for many derivatives; otherwise, pricing or valuation models are applied to utilizing current market information to estimate fair value. Notes Payable Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. NOTE J - COMMITMENTS AND CONTINGENCIES Legal Proceedings The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. Commitments to Buy or Sell Mortgage-Backed Securities and Other Derivatives Contracts In connection with its open commitments to buy or sell MBS and other derivative contracts, the Company may be required to maintain margin deposits. With respect to the MBS commitments, these requirements are generally greatest during periods of rapidly declining interest rates. With respect to other derivative contracts, margin requirements are generally greatest during periods of increasing interest rates. Lease Commitments The Company leases office facilities under lease agreements extending through December, 2011. Future minimum annual rental commitments under these non-cancelable operating leases with initial or remaining terms of one year or more are as follows. ----- ------------------------------------------ ----------------------------------- Year ending February 28(29), (Dollar amounts in thousands) ----- ------------------------------- -------------------- -------------- ---------- 2000 $31,200 2001 25,627 2002 21,483 2003 16,042 2004 9,351 Thereafter 44,743 ============== $148,446 ==============
Rent expense was $44.7 million, $30.2 million and $22.3 million for the years ended February 28, 1999, 1998 and 1997, respectively. NOTE J - COMMITMENTS AND CONTINGENCIES (Continued) Restrictions on Transfers of Funds The Company and certain of its subsidiaries are subject to regulatory and/or credit agreement restrictions which limit their ability to transfer funds to the Company through intercompany loans, advances or dividends. Pursuant to the revolving credit facilities as of February 28, 1999, the Company is required to maintain $1.3 billion in consolidated net worth and CHL is required to maintain $1.2 billion of net worth, as defined in the credit agreement. Loan Servicing As of February 28, 1999, 1998 and 1997, the Company serviced loans totaling approximately $215.5 billion, $182.9 billion and $158.6 billion, respectively. Included in the loans serviced as of February 28, 1999, 1998 and 1997 were loans being serviced under subservicing agreements with total principal balances of $2.2 billion, $6.7 billion and $3.9 billion, respectively. The loans are serviced under a variety of servicing contracts. In general, these contracts include guidelines and procedures for servicing the loans, remittance requirements and reporting requirements, among other provisions. Conforming conventional loans serviced by the Company (60% of the servicing portfolio as of February 28, 1999) are primarily included in either Fannie Mae MBS or Freddie Mac participation certificates ("PCs"). Such servicing is done on a non-recourse basis, whereby credit losses are generally borne by Fannie Mae or Freddie Mac and not the Company. The government loans serviced by the Company are included in either Ginnie Mae MBS, Fannie Mae MBS, or Freddie Mac PCs. The government loans are either insured against loss by the Federal Housing Administration (18% of the servicing portfolio as of February 28, 1999) or partially guaranteed against loss by the Department of Veterans Affairs (7% of the servicing portfolio as of February 28, 1999). In addition, jumbo mortgage loans (15% of the servicing portfolio as of February 28, 1999) are primarily included in "private label" MBS and serviced on a non-recourse basis. Properties securing the mortgage loans in the Company's servicing portfolio are geographically dispersed throughout the United States. As of February 28, 1999, approximately 30% and 5% of the mortgage loans (measured by unpaid principal balance) in the Company's servicing portfolio are secured by properties located in California and Texas, respectively. No other state contains more than 5% of the properties securing mortgage loans. Generally, the Company is not exposed to credit risk. Because the Company services substantially all conventional loans on a non-recourse basis, credit losses are normally borne by the investor or insurer and not the Company. The Company retains primary credit risk on the home equity and sub-prime loans it securitizes through retention of a subordinated interest. As of February 28, 1999, the Company had investments in such subordinated interests that amounted to $274 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 loss on the mortgage loan may be borne by the Company. Similarly, government loans serviced by the Company (25% of the Company's servicing portfolio as of February 28, 1999) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Affairs. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Affairs is inadequate to cover the total credit losses incurred. NOTE K - EMPLOYEE BENEFITS Stock Option Plans The Company has stock option plans (the "Plans") that provide for the granting of both qualified and non-qualified options to employees and directors. Options are generally granted at the average market price of the Company's common stock on the date of grant and are exercisable beginning one year from the date of grant and expire up to eleven years from the date of grant. Stock options transactions under the Plans were as follows. - ---------------------------------------------------------------------------------------------------------------- Year ended February 28, ------------------------------------------------------ 1999 1998 1997 - ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- -- Number of Shares: Outstanding options at beginning of year 11,151,799 10,241,862 6,911,180 Options granted 1,648,647 1,836,169 4,516,237 Options exercised (1,239,662) (839,479) (1,000,798) Options expired or cancelled (63,740) (86,753) (184,757) ============== ============== ============== Outstanding options at end of year 11,497,044 11,151,799 10,241,862 ============== ============== ============== Weighted Average Exercise Price: Outstanding options at beginning of year $20.57 $19.03 $15.67 Options granted 46.71 27.09 23.14 Options exercised 15.90 16.07 14.26 Options expired or canceled 25.11 21.17 19.38 -------------- -------------- -------------- Outstanding options at end of year $24.81 $20.57 $19.03 Options exercisable at end of year 6,514,039 5,407,177 3,862,565 Options available for future grant 5,840,713 1,920,487 3,078,591 - ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- --
NOTE K - EMPLOYEE BENEFITS (Continued) Status of the outstanding stock options under the Plans as of February 28, 1999 was as follows: - ---------------------------------------------------------------------------------------------------------------- Outstanding Options Exercisable Options --------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Contractual Exercise Exercise Price Range Life Number Price Number Price ------------------- --------------- -------------- ------------- ------------- ------------- $2.80 - $16.19 3.4 years 1,537,774 $13.33 1,537,774 $13.33 $16.81 - $18.56 5.6 1,838,787 17.72 1,595,926 17.59 $19.50 - $23.06 5.8 1,392,921 22.19 1,028,329 21.96 $23.19 - $26.63 7.3 3,415,440 23.23 1,962,467 23.25 $27.06 - $45.98 8.3 1,687,304 27.22 388,793 27.13 $46.72 - $53.00 9.3 1,624,818 46.75 750 47.44 =================== =============== ============== ============= ============= ------------- $2.80 - $53.00 6.8 years 11,497,044 $24.81 6,514,039 $19.55 =================== =============== ============== ============= ============= ------------- - ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- -------------
Had the estimated fair value of the options granted during the period been included in compensation expense, the Company's net earnings and earnings per share would have been as follows: - ------------------------------------------- ---------------------------------------------------- (Dollar amounts in thousands, Year ended February 28, ---------------------------------------------------- except per share data) 1999 1998 1997 - ------------------------------------------- ----------------- ---------------- ----------------- Net Earnings As reported $385,401 $344,983 $257,358 Pro forma $366,118 $335,043 $241,115 Basic Earnings Per Share As reported $3.46 $3.21 $2.50 Pro forma $3.29 $3.12 $2.34 Diluted Earnings Per Share As reported $3.29 $3.09 $2.44 Pro forma $3.13 $3.00 $2.28 - ------------------------------------------- ----------------- ---------------- -----------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model that has been modified to consider cash dividends to be paid. The following weighted-average assumptions were used for grants in Fiscal 1999, 1998 and 1997, respectively: dividend yield of 0.72%, 1.18% and 1.38%; expected volatility of 40%, 28% and 26%; risk-free interest rates of 5.5%, 6.5% and 6.6% and expected lives of five years for options granted in all three years. The average fair value of options granted during Fiscal 1999, 1998 and 1997 was $19.20, $8.89 and $7.15, respectively. Pension Plan The Company has a defined benefit pension plan (the "Plan") covering substantially all of its employees. The Company's policy is to contribute the amount actuarially determined to be necessary to pay the benefits under the Plan, and in no event to pay less than the amount necessary to meet the minimum funding standards of ERISA. NOTE K - EMPLOYEE BENEFITS (Continued) The following table sets forth the Plan's funded status and amounts recognized in the Company's financial statements. ---- ----------------------------------------- ---- ------------------------------------------------------ --- Year ended February 28, ---- ----------------------------------------- ---- ------------------------------------------------------ --- -- ------------- --- ------------ (Dollar amounts in thousands) 1999 1998 ---- ------------------------------------------------------------------- -- ------------- --- ------------ --- Change in benefit obligation Benefit obligation at beginning of year $23,933 $18,504 Service cost 4,715 3,241 Interest cost 1,772 1,273 Actuarial loss (gain) 549 (1,497) Benefits paid (364) (334) Change in discount rate (828) 2,746 ============= ============ Benefit obligation at end of year $29,777 $23,933 ============= ============ Change in plan assets Fair value of plan assets at beginning of year $18,152 $13,677 Actual return on plan assets 1,948 2,525 Employer contribution 3,039 2,284 Benefits paid (364) (334) ============= ============ Fair value of plan assets at end of year $22,775 $18,152 ============= ============ Funded status at end of year ($ 7,002) ($ 5,781) Unrecognized net actuarial loss 151 809 Unrecognized prior service cost 1,024 1,123 Unrecognized transaction asset (212) (283) ------------- ------------ Net amount recognized ($ 6,039) ($4,132) ============= ============ ---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
The following table sets forth the components of net periodic benefit cost for 1999 and 1998. -------------------------------------------------------------------------------------------------------------- Year ended February 28, -------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) 1999 1998 --- ------------------------------------------------- -- -------------- -- --------------- -- ------------- -- Service cost $4,715 $3,241 Interest cost 1,772 1,273 Expected return on plan assets (1,569) (1,182) Amortization of prior service cost 99 99 Amortization of unrecognized transition asset (70) (70) --------------- ------------- Net periodic benefit cost $4,947 $3,361 =============== =============
The weighted-average assumptions used in calculating the amounts above were: ---- ----------------------------------------- ---- ------------------------------------------------------ --- Year ended February 28, ---- ----------------------------------------- ---- ------------------------------------------------------ --- -- ------------- --- ------------ 1999 1998 ---- ------------------------------------------------------------------- -- ------------- --- ------------ --- Discount rate 7.40% 7.25% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 4.00% 4.00% ---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Pension expense for the years ended February 28, 1999, 1998 and 1997 was $4.9 million, $3.4 million and $2.5 million, respectively. The Company makes contributions to the Plan in amounts that are deductible in accordance with federal income tax regulations. NOTE L - SHAREHOLDERS' EQUITY In February 1988, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right ("Right") for each outstanding share of the Company's common stock. As a result of stock splits and stock dividends, 0.399 of a Right is presently associated with each outstanding share of the Company's common stock issued prior to the Distribution Date (as defined below). Each Right, when exercisable, entitles the holder to purchase from the Company one one-hundredth of a share of Series A Participating Preferred Stock, par value $0.05 per share, of the Company (the "Series A Preferred Stock"), at a price of $145, subject to adjustments in certain cases to prevent dilution. The Rights are evidenced by the common stock certificates and are not exercisable or transferable, apart from the common stock, until the date (the "Distribution Date") of the earlier of a public announcement that a person or group, without prior consent of the Company, has acquired 20% or more of the common stock ("Acquiring Person"), or ten days (subject to extension by the Board of Directors) after the commencement of a tender offer made without the prior consent of the Company. In the event a person becomes an Acquiring Person, then each Right (other than those owned by the Acquiring Person) will entitle its holder to purchase, at the then current exercise price of the Right, that number of shares of common stock, or the equivalent thereof, of the Company which, at the time of such transaction, would have a market value of two times the exercise price of the Right. The Board of Directors of the Company may delay the exercisability of the Rights during the period in which they are exercisable only for Series A Preferred Stock (and not common stock). In the event that, after a person has become an Acquiring Person, the Company is acquired in a merger or other business combination, as defined for the purposes of the Rights, each Right (other than those held by the Acquiring Person) will entitle its holder to purchase, at the then current exercise price of the Right, that number of shares of common stock, or the equivalent thereof, of the other party (or publicly-traded parent thereof) to such merger or business combination which at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights expire on the earlier of February 28, 2002, consummation of certain merger transactions or optional redemption by the Company prior to any person becoming an Acquiring Person. NOTE M - RELATED PARTY TRANSACTIONS On July 1, 1997, the Company sold the assets, operations and employees of Countrywide Asset Management Corporation ("CAMC"), a then wholly-owned subsidiary of the Company, to IndyMac Mortgage Holdings, Inc. (formerly INMC Mortgage Holdings, Inc.) ("INMC"). CAMC was formerly the manager of INMC. As consideration, the Company received 3,440,800 newly issued common shares of INMC. These shares are subject to resale restrictions which apply to the shares from the date of issuance through up to three years. The transaction was structured as a merger of CAMC with and into INMC. Prior to the sale, CAMC received certain management fees and incentive compensation. During the fiscal years ended February 28, 1998 and 1997, CAMC earned $0.6 million and $1.6 million, respectively, in base management fees from INMC and its subsidiaries. In addition, during the fiscal years ended 1998 and 1997, CAMC received $3.1 million and $8.6 million, respectively, in incentive compensation. Prior to the sale, CAMC incurred many of the expenses related to the operations of INMC and its subsidiaries, including personnel and related expenses, subject to reimbursement by INMC. During the fiscal years ended February 28, 1998 and 1997, the amount of expenses incurred by CHL which were allocated to CAMC and reimbursed by INMC totaled $16.0 million and $29.2 million, respectively. Subsequent to the sale, the Company entered into an agreement with INMC whereby the Company and certain affiliates agreed to provide certain services to INMC during a transition period. During Fiscal 1999, CHL received $2.6 million from INMC related to services provided in accordance with the agreement. Additionally, during Fiscal 1999, the Company received $3.0 million of net sublease income from INMC. NOTE M - RELATED PARTY TRANSACTIONS (Continued) INMC held an option to purchase conventional loans from CHL at the prevailing market price. During the years ended February 28, 1999, 1998 and 1997, INMC purchased $460.2 million, $2.9 million and $51.5 million, respectively, of conventional non-conforming mortgage loans from CHL pursuant to this option. Additionally, during Fiscal 1999, CHL purchased $76.4 million of loans from INMC. During Fiscal 1999, CHL entered into an agreement pursuant to which CHL assumed certain INMC recourse obligations with respect to the underlying mortgage loans that INMC had previously sold to Freddie Mac. In consideration of CHL's assumption of these recourse obligations, CHL received $6.0 million which Management believes will exceed the actual loss experience. A portion of the $6.0 million is subject to reimbursement to INMC based upon actual loss experience on the loans. During Fiscal 1999, CHL purchased servicing rights from INMC for $35.5 million related to a $2.7 billion portfolio of loans. Prior to August 1998, CHL serviced mortgage loans issued by subsidiaries of INMC. CHL received $1.7 million, $1.9 million and $0.6 million in subservicing fees for the years ended February 28, 1999, 1998 and 1997, respectively. As of February 28, 1999, CHL was no longer actively servicing mortgage loans issued by subsidiaries of INMC. NOTE N - SEGMENTS AND RELATED INFORMATION The Company has three major segments: Loan Production, Loan Servicing and Capital Markets. The Production segment is comprised of the Consumer Markets, Wholesale and Correspondent Divisions and Full Spectrum Lending, Inc. ("the Divisions"). The Loan Production segment originates and purchases conventional mortgage loans, mortgage loans insured by the FHA and VA, home equity and sub-prime loans and sells those loans to permanent investors. The Loan Servicing segment services on a primarily non-recourse basis substantially all of the mortgage loans originated and purchased by the Loan Production segment. In addition, the Loan Servicing segment purchases bulk servicing contracts, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. The Capital Markets segment trades securities, primarily mortgage-related securities, with broker-dealers and institutional investors and, as an agent, facilitates the purchase and sale of bulk servicing contracts. Included in the tables below labeled "Other" are the operating segments that provide ancillary services and certain reclassifications to conform management reporting to the consolidated financial statements. In addition, for Fiscal Year 1998, "Other" includes a $57.4 million pre-tax gain on the sale of a subsidiary. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (See Note A). - -------------------------------------------------------------------------------------------------------------------- For the fiscal year ended February 28, 1999 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $1,271,934 $506,258 $54,537 $101,036 $1,933,765 Interest earned 721,289 270,355 39,835 (2,413) 1,029,066 Interest charges (603,093) (351,397) (30,592) 1,253 (983,829) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 118,196 (81,042) 9,243 (1,160) 45,237 ----------- ----------- ------------ ------------ ------------ Total revenue $1,390,130 $425,216 $63,780 $99,876 $1,979,002 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $556,213 $24,340 $26,692 $24,560 $631,805 Segment assets $7,093,817 $6,589,224 $1,858,692 $106,523 $15,648,256 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE N - SEGMENT AND RELATED INFORMATION (Continued) - ---------------------------------------------------------------------------------------------------------------------- For the fiscal year ended February 28, 1998 - ------------------------------ ---- -- ------------ -- ----------- -- ----------- -- ------------- -- ------------- -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - ------------------------------ ---- -- ------------ -- ----------- -- ----------- -- ------------- -- ------------- -- Non-interest revenues $685,160 $642,498 $39,717 $125,868 $1,493,243 Interest earned 421,714 3,555 7,810 584,076 150,997 Interest charges (347,240) (608) (827) (568,359) (219,684) ------------ ----------- ----------- ------------- ------------- ------------ ----------- ----------- ------------- ------------- Net interest income (expense) 74,474 2,947 6,983 15,717 (68,687) ------------ ----------- ----------- ------------- ------------- ------------ ----------- ----------- ------------- ------------- Total revenue $759,634 $573,811 $42,664 $132,851 $1,508,960 ============ =========== =========== ============= ============= ============ =========== =========== ============= ============= Segment earnings (pre-tax) $245,121 $215,485 $19,737 $85,203 $565,546 Segment assets $5,969,661 $5,538,912 $295,270 $379,368 $12,183,211 - ------------------------------ ---- -- ------------ -- ----------- -- ----------- -- ------------- -- ------------- --
- -------------------------------------------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997 - ------------------------------ ---- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - ------------------------------ ---- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $420,944 $599,799 $28,236 $29,925 $1,078,904 Interest earned 336,771 116,937 1,603 1,694 457,005 Interest charges (275,153) (148,330) (109) 145 (423,447) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 61,618 (31,393) 1,494 1,839 33,558 ----------- ----------- ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ Total revenue $482,562 $568,406 $29,730 $31,764 $1,112,462 =========== =========== ============ ============ ============ =========== =========== ============ ============ ============ Segment earnings (pre-tax) $141,912 $254,227 $12,866 $12,893 $421,898 Segment assets $2,898,920 $4,516,131 $104,640 $169,400 $7,689,091 - ------------------------------ ---- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE O - SUBSEQUENT EVENTS On March 24, 1999, the Company declared a cash dividend of $.10 per common share payable April 30, 1999 to shareholders of record on April 14, 1999. On April 14, 1999, CHL renewed its one-year revolving credit facility with a revised limit of $1.0 billion. The new facility expires on April 12, 2000. On May 12, 1999 the Company announced that it had entered into a definitive agreement (the "Agreement") with Woolwich, plc ("Woolwich"), to form a joint venture (the "Joint Venture") which will provide fee-based mortgage services in Europe. Under the terms of the Agreement, the Company and Woolwich will each own approximately 50% of the Joint Venture and will each provide up to approximately $16 million to the initial capitalization of the Joint Venture. The Joint Venture is expected to begin operations in the second half of 1999. Woolwich will engage the Joint Venture to provide fee-based services to its loan portfolio, which is equivalent to $40 billion, and to its mortgage origination business, which produced approximately $10 billion in 1998. NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly data was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- -------- Three months ended (Dollar amounts in thousands, except per share dataMay 31 August 31 November 30 February 28 -------------- --------------- -------------- ---------------- ----------------------------------------------- -------------- --------------- -------------- ---------------- Year ended February 28, 1999 Revenue $450,265 $482,157 $514,197 $532,383 Expenses 301,488 326,293 353,589 365,827 Provision for income taxes 58,023 60,787 62,637 64,957 Net earnings 90,754 95,077 97,971 101,599 Earnings per share(1) Basic $0.82 $0.86 $0.88 $0.90 Diluted $0.78 $0.81 $0.84 $0.86 Year ended February 28, 1998 Revenue $318,645 $405,156 $375,141 $410,018 Expenses 203,942 225,272 243,693 270,507 Provision for income taxes 44,734 70,155 51,265 54,409 Net earnings $69,969 $109,729 $80,183 $85,102 Earnings per share(1) Basic $0.66 $1.03 $0.75 $0.78 Diluted $0.64 $0.98 $0.71 $0.74 ----------------------------------------------- -------------- --------------- -------------- ----------------
(1) Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share amounts may not equal the annual amount. This is caused by rounding and the averaging effect of the number of share equivalents utilized throughout the year, which changes with the market price of the common stock. NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Home Loans, Inc. was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- --------- February 28, -------------- ----------- -------------- --------- (Dollar amounts in thousands) 1999 1998 ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $ 6,231,220 $ 5,292,191 Mortgage servicing rights, net 4,496,439 3,612,010 Other assets 2,955,382 2,604,372 ============== ============== Total assets $13,683,041 $11,508,573 ============== ============== Short- and long-term debt $9,910,966 $ 8,747,794 Other liabilities 1,434,727 1,027,884 Equity 2,337,348 1,732,895 ============== ============== Total liabilities and equity $13,683,041 $11,508,573 ============== ============== ---- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (Continued) ----- ----------------------------------------- --- --------------------------------------------------- -------- Year ended February 28, --------------- ---------- --------------- --------- (Dollar amounts in thousands) 1999 1998 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $1,668,627 $1,260,657 Expenses 1,149,886 838,909 Provision for income taxes 202,308 164,166 =============== =============== Net earnings $ 316,433 $ 257,582 =============== ===============
NOTE R - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). It requires that an entity recognizes 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. - COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT COUNTRYWIDE CREDIT INDUSTRIES, INC. BALANCE SHEETS (Dollar amounts in thousands) February 28, -------------- -- -------------- 1999 1998 -------------- -------------- Assets Cash $ 852 $ - Intercompany receivable 225,333 278,966 Investment in subsidiaries at equity in net assets 2,515,614 1,846,298 Equipment and leasehold improvements 79 88 Other assets 190,178 207,005 -------------- -------------- Total assets $2,932,056 $2,332,357 ============== ============== Liabilities and Shareholders' Equity Intercompany payable $ 347,416 $ 133,240 Accounts payable and accrued liabilities 30,903 47,566 Deferred income taxes 23,681 56,039 -------------- -------------- Total liabilities 402,000 236,845 Common shareholders' equity Common stock 5,631 5,460 Additional paid-in capital 1,153,673 1,049,364 Unrealized gain on available-for-sale securities (8,422) 11,267 Retained earnings 1,379,174 1,029,421 -------------- -------------- Total shareholders' equity 2,530,056 2,095,512 -------------- -------------- Total liabilities and shareholders' equity $2,932,056 $2,332,357 ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF EARNINGS (Dollar amounts in thousands) Year ended February 28, -------------- -- -------------- -- -------------- 1999 1998 1997 -------------- -------------- -------------- Revenue Interest earned $ 1,261 $ 6,421 $ 1,148 Interest charges (4,151) - - -------------- -------------- -------------- Net interest income (2,890) 6,421 Gain on sale of subsidiary - 57,381 - Dividend income 8,287 10,350 1,550 -------------- -------------- -------------- 5,397 74,152 Expenses (3,772) (3,414) (3,398) -------------- -------------- -------------- Earnings (loss) before income tax (provision) benefit and equity in net earnings of subsidiaries 1,625 70,738 Income tax (provision) benefit (634) (27,588) 273 -------------- -------------- -------------- Earnings (loss) before equity in net earnings of subsidiaries 991 43,150 Equity in net earnings of subsidiaries 384,410 301,833 257,785 -------------- -------------- -------------- NET EARNINGS $385,401 $344,983 $257,358 ============== ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash (Dollar amounts in thousands) Year ended February 28, -------------- -- -------------- -- -------------- 1999 1998 1997 -------------- -------------- -------------- Cash flows from operating activities: Net earnings $385,401 $344,983 $257,358 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Earnings of subsidiaries (384,410) (301,833) (257,785) Depreciation and amortization 28 26 24 Decrease (Increase) in other receivables and other assets 9,370 (85,647) (1,644) (Decrease) Increase in accounts payable and accrued liabilities (50,154) 44,039 5,534 Gain on sale of subsidiary - (57,381) - Gain on sale of available-for-sale securities - (2,593) - -------------- -------------- -------------- Net cash provided (used) by operating activities (39,765) (58,406) 3,487 -------------- -------------- -------------- Cash flows from investing activities: Net change in intercompany receivables and payables 267,809 (53,066) (44,901) Investment in subsidiaries (284,906) 15,876 (6,832) Proceeds from available-for-sale securities - 3,678 - -------------- -------------- -------------- Net cash (used) provided by investing activities (17,097) (33,512) (51,733) -------------- -------------- -------------- Cash flows from financing activities: Issuance of common stock 93,362 126,309 81,235 Cash dividends paid (35,648) (34,391) (32,989) -------------- -------------- -------------- Net cash provided (used) by financing activities 57,714 91,918 48,246 -------------- -------------- -------------- Net change in cash 852 - - Cash at beginning of year - - - -------------- -------------- -------------- Cash at end of year $ 852 $ - $ - ============== ============== ============== Supplemental cash flow information: Cash used to pay interest $ 97 - - Cash used to pay income taxes - - - Noncash financing activities - issuance of common stock to acquire subsidiary - - $ 16,717 Unrealized gain (loss) on available-for-sale securities, net of tax $ (19,689) $ 11,267 -
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF COMPREHENSIVE INCOME Year Ended February 28, (Dollar amounts in thousands) Year ended February 28, -------------- -- -------------- 1999 1998 -------------- -------------- Net Earnings $385,401 $344,983 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities Unrealized holding gains (losses) arising during the period: (19,689) 11,267 Less: reclassification adjustment for gains included in net earnings - - -------------- -------------- Other comprehensive income (19,689) 11,267 ============== ============== COMPREHENSIVE INCOME $365,712 $356,250 ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Three years ended February 28, 1999 (Dollar amounts in thousands) Column A Column B Column C Column D Column E - ----------------------------------- -------------- --------------------------------- ----------------- -------------- Additions --------------------------------- Balance at Charged to Charged Balance beginning costs and to other at end of period expenses accounts Deductions (1) of period - ----------------------------------- -------------- --------------- ---------------- ------------------ ------------- Year ended February 28, 1999 Allowance for losses $34,678 $30,556 $ 346 $25,280 $40,300 Year ended February 28, 1998 Allowance for losses $24,749 $31,456 $ 296 $21,823 $34,678 Year ended February 28, 1997 Allowance for losses $15,635 $21,064 $ 242 $12,192 $24,749 - -----------------------------------
(1) Actual losses charged against reserve, net of recoveries and reclassification. Exhibit List Exhibit No. Description ---------- ------------------------------------------------------------ +4.16 First Supplemental Trust Deed dated 16th December, 1998, modifying the provisions of a Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers Trustee Company Limited, as Trustee for Euro Medium Notes of CHL. +10.2.1 Third Restated Employment Agreement by and between the Company and David S. Loeb in effect as of March 1, 1999. +10.4.1 Employment Agreement by and between the Company and Stanford L. Kurland, dated as of March 1, 1999. +10.7.1 First Amendment to Countrywide Credit Industries, Inc. Deferred Compensation Plan Amended and Restated effective January 1, 1999. +10.8.5 Second Amendment to Revolving Credit Agreement dated as of the 14th day of April, 1999 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. +10.23.2* Amended and Restated Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.23.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). 21 Subsidiaries of Registrant. 24.1 Consent of Grant Thornton LLP. 11.1 Statement Regarding Computation of Earnings Per Share. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). +Constitutes a management contract or compensatory plan or arrangement. EX-4 2 EMTN TRUST DEED THIS FIRST SUPPLEMENTAL TRUST DEED is made the 16th day of December, 1998 BETWEEN (1) COUNTRYWIDE HOME LOANS, INC., a company incorporated with limited liability in the State of New York, whose principal office is at 4500 Park Granada, Calabasas, California 91302, United States of America (the "Issuer"); (2) COUNTRYWIDE CREDIT INDUSTRIES, INC., a company incorporated with limited liability in the State of Delaware, whose principal office is at 4500 Park Granada aforesaid (the "Guarantor"); and (3) BANKERS TRUSTEE COMPANY LIMITED, a company incorporated with limited liability in England and Wales, whose registered office is at 1 Appold Street, Broadgate, London EC2A 2HE, England (the "Trustee", which expression shall, wherever the context so admits, include such company and all other persons or companies for the time being the trustee or trustees of these presents) as trustee for the Noteholders, the Receiptholders and the Couponholders. WHEREAS: (A) This First Supplemental Trust Deed is supplemental to the Trust Deed dated 1st May, 1998 (hereinafter called the "Principal Trust Deed") made between the Issuer, the Guarantor and the Trustee relating to the U.S.$2,000,000,000 Euro Medium Term Note Programme established by the Issuer. (B) On 16th December, 1998 the Issuer published modified and updated Listing Particulars relating to the Programme pursuant to which, inter alia, the amount of the Programme was increased from U.S.$2,000,000,000 to U.S.$4,000,000,000. (C) By virtue of Clause 19(B) of the Principal Trust Deed the Trustee may without the consent or sanction of the Noteholders, the Receiptholders or the Couponholders at any time and from time to time concur with the Issuer in making any modification to these presents which in the opinion of the Trustee is not materially prejudicial to the interests of the Noteholders. (D) The Issuer has requested the Trustee to concur in making modifications to the Principal Trust Deed to reflect the relevant modifications to the Listing Particulars referred to in Recital (B) above. (E) The Trustee, being of the opinion that the modifications referred to in Recital (D) above are not materially prejudicial to the interests of the Noteholders, has concurred with the Issuer in making such modifications and has agreed that notice of such modifications need not be given to the Noteholders. NOW THIS FIRST SUPPLEMENTAL TRUST DEED WITNESSETH AND IT IS HEREBY DECLARED as follows: 1. Subject as hereinafter provided and unless there is something in the subject matter or context inconsistent therewith, all words and expressions defined in the Principal Trust Deed shall have the same meanings in this First Supplemental Trust Deed. 2. The provisions of the Principal Trust Deed are hereby modified as follows: (i) by the deletion therefrom of all references to "U.S.$2,000,000,000" and the substitution therefor of references to"U.S.$4,000,000,000"; and (ii) by the deletion therefrom of all references to the address "Swiss Bank Corporation, Paradeplatz 6, CH-8010 Zurich" and the substitution therefor of "UBS AG, Bahnhofstrasse 45, CH-8098 Zurich". 3. The provisions of the Principal Trust Deed are hereby modified in relation only to all Notes issued on or after the date hereof other than any such Notes issued so as to be consolidated and form a single Series with any Notes issued prior to the date hereof as follows: (i) by the deletion of the definition of "Cedel Bank" in Clause 1(A) thereof and the substitution therefor of ""Cedelbank" means Cedelbank which is a limited liability company (a societe anonyme) organised under Luxembourg law;"; (ii) by the deletion of the words "Cedel Bank" wherever they occur therein and the substitution therefor of the word "Cedelbank"; (iii) by the deletion from the definition of "Dealers" in Clause 1(A) thereof of "Barclays de Zoete Wedd Limited" and the substitution therefor of "Barclays Bank PLC" and by the deletion therefrom of "Banque" where such word appears immediately before "Paribas"; (iv) by the insertion in Clause 3(D) thereof immediately after the words "and of all rights thereunder" of the words "as the absolute owner thereof"; and (v) by the deletion of the Terms and Conditions of the Notes set out in Schedule 1 thereto and the substitution therefor of the Terms and Conditions of the Notes set out in the Schedule hereto. 4. The Principal Trust Deed and this First Supplemental Trust Deed shall henceforth be read and construed together as one Trust Deed. 5. A memorandum of this First Supplemental Trust Deed shall be endorsed by the Trustee on the original of the Principal Trust Deed and by the Issuer on the duplicate of the Principal Trust Deed. 6. This First Supplemental Trust Deed may be executed in any number of counterparts, all of which, taken together, shall constitute one and the same First Supplemental Trust Deed and any party may enter into this First Supplemental Trust Deed by executing a counterpart. IN WITNESS whereof this First Supplemental Trust Deed has been executed as a deed by the Issuer, the Guarantor and the Trustee and delivered on the date first stated on Page 1 above. EXECUTED as a deed by ) COUNTRYWIDE HOME LOANS, INC. ) by JENNIFER SANDEFUR ) acting under the authority of that ) JENNIFER SANDEFUR company in the presence of: ) Witness's Signature: JANET HARRIGAN Name: JANET HARRIGAN Address: 4500 PARK GRANADA CALABASAS, CA 91302 Occupation: EXECUTIVE SECRETARY EXECUTED as a deed by ) COUNTRYWIDE CREDIT INDUSTRIES, ) INC. acting by THOMAS K. McLAUGHLIN ) acting under the authority of that ) company in the presence of: ) THOMAS K. McLAUGHLIN Witness's Signature: JANET HARRIGAN Name: JANET HARRIGAN Address: 4500 PARK GRANADA CALABASAS, CA 91302 Occupation: EXECUTIVE SECRETARY THE COMMON SEAL of BANKERS ) TRUSTEE COMPANY LIMITED ) was affixed to this deed in ) the presence of: ) SEAL Director MARK JONES Associate Director A. GILLESPIE DATED 16TH DECEMBER, 1998 COUNTRYWIDE HOME LOANS, INC. - and - COUNTRYWIDE CREDIT INDUSTRIES, INC. - and - BANKERS TRUSTEE COMPANY LIMITED --------------------------------------- FIRST SUPPLEMENTAL TRUST DEED modifying the provisions of a Trust Deed dated 1st May, 1998 relating to a U.S.$2,000,000,000 (now U.S.$4,000,000,000) Euro Medium Term Note Programme --------------------------------------- For Bankers Trustee Company Limited as to English law: ALLEN & OVERY One New Change London EC4M 9QQ CONFORMED COPY DATED 16TH DECEMBER, 1998 COUNTRYWIDE HOME LOANS, INC. - and - COUNTRYWIDE CREDIT INDUSTRIES, INC. - and - BANKERS TRUSTEE COMPANY LIMITED --------------------------------------- FIRST SUPPLEMENTAL TRUST DEED modifying the provisions of a Trust Deed dated 1st May, 1998 relating to a U.S.$2,000,000,000 (now U.S.$4,000,000,000) Euro Medium Term Note Programme --------------------------------------- For Bankers Trustee Company Limited as to English law: ALLEN & OVERY One New Change London EC4M 9QQ EX-10 3 EMPLOYMENT CONTRACT THIRD RESTATED EMPLOYMENT AGREEMENT THIS RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is in effect as of March 1, 1999 by and between Countrywide Credit Industries, Inc., a Delaware corporation ("Employer"), and David S. Loeb ("Officer"). W I T N E S S E T H: WHEREAS, Officer currently holds the offices of Chairman of the Board of Directors of Employer (the "Board") and President of Employer; and WHEREAS, effective as of March 1, 1999 (the "Effective Date") Officer desires to voluntarily resign as Chairman of the Board of Employer; and WHEREAS, from and after the Effective Date, Employer desires to obtain the benefit of continued services of Officer and Officer desires to continue to render services to Employer; and WHEREAS, the Board has determined that it is in Employer's best interest and that of its stockholders to recognize the substantial contribution that Officer has made and is expected to continue to make to the Company's business and to retain his services in the future; and WHEREAS, Employer and Officer most recently set forth the terms and conditions of Officer's employment with Employer under the Second Restated Employment Agreement as of March 26, 1996 (the "Second Restated Agreement"); and WHEREAS, Employer and Officer desire to set forth the continued terms and conditions of Officer's employment with Employer under this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: 1. Term. Employer agrees to employ Officer and Officer agrees to serve Employer, in accordance with the terms hereof, for a term beginning on the Effective Date and terminating on the first anniversary of the Effective Date; provided, however, that in the event that a "Change in Control" (as defined in Appendix A to this Agreement) shall occur prior to the first anniversary of the Effective Date, the term of Officer's employment under this Agreement shall automatically be extended until the second anniversary of the Effective Date. Notwithstanding anything contained in this Agreement to the contrary, Officer's employment with Employer may be terminated at any time in accordance with the provisions hereof. 2. Specific Position; Duties and Responsibilities. Effective as of the Effective Date, Officer shall cease to hold the office of Chairman of the Board of Employer and Employer and Officer hereby agree that during the term set forth in this Agreement, Employer will continue to employ Officer and Officer will continue to serve Employer as President. Employer agrees that Officer's duties hereunder shall be designated from time to time by the Board, and shall not be inconsistent with those customarily assigned to a senior executive having the status, experience and expertise of Officer. Officer shall have such executive power and authority as shall reasonably be required to enable him to discharge his duties in the offices which he may hold. All compensation paid to Officer by Employer or any of its subsidiaries shall be aggregated in determining whether Officer has received the benefits provided for herein. 3. Scope of this Agreement and Outside Affiliations. During the term of this Agreement, Officer shall devote such of his business time and energy as shall be necessary to discharge his duties hereunder, except as expressly provided below, to the business, affairs and interests of Employer and its subsidiaries, and matters related thereto, and shall use his best efforts and abilities to promote its interests. Officer agrees that he will diligently endeavor to promote the business, affairs and interests of Employer and its subsidiaries and perform services contemplated hereby, in accordance with the policies established by the Board, which policies shall be consistent with this Agreement. Officer agrees to serve without additional remuneration as a director and/or in such senior executive capacity not below the rank of President of one or more (direct or indirect) subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitation under applicable law. Officer's failure to discharge an order or perform a function because Officer reasonably and in good faith believes such would violate a law or regulation or be dishonest shall not be deemed a breach by him of his obligations or duties pursuant to any of the provisions of this Agreement, including without limitation pursuant to Section 5(b) hereof. During the course of Officer's employment hereunder, Officer shall not, without the consent of the Board, compete, directly or indirectly, with Employer in the businesses then conducted by Employer. Officer may serve as a director or in any other capacity of any business enterprise, including an enterprise whose activities may involve or relate to the business of Employer, provided that such service is expressly approved by the Board. Officer may make and manage personal business investments of his choice, serve in any capacity with any civic, educational or charitable organization, governmental entity or trade association, and continue his current activities in connection with Indymac Mortgage Holdings, Inc. and those certain activities in Reno, Nevada in which Officer engages as of the date hereof and may, in any geographic location, engage in activities that are the same or substantially similar to those certain activities in Reno, Nevada in which officer engages as of the date hereof, in each case without seeking or obtaining approval by the Board, provided such activities and services do not materially adversely affect the performance of his duties hereunder. 4. Compensation and Benefits. Base Salary. Employer shall pay to Officer a base salary at an annual rate of $650,000. (b) Incentive Compensation: Fiscal Year 1999. Employer shall pay to Officer for the Fiscal Year ending in 1999 an incentive compensation award in accordance with the provisions of Sections 4(b) of the Second Restated Agreement. (c) Incentive Compensation: Fiscal Year 2000. Employer shall pay to Officer for the Fiscal Year ending in 2000 an incentive compensation award in an amount equal to 25% of the amount of the incentive compensation award paid or payable to the Chairman of the Board in respect of such Fiscal Year. (d) Incentive Compensation: Fiscal Year 2001. In the event that the term of Officer's employment under this Agreement shall be extended until the second anniversary of the Effective Date as a result of the occurrence of a Change in Control, Employer shall pay to Officer for the Fiscal Year ending in 2001 an incentive compensation award in an amount equal to 25% of the incentive compensation award paid or payable to Officer in accordance with the provisions of Section 4(b) of this Agreement for the Fiscal Year ending in 1999. (e) Timing of Payment of Incentive Compensation Awards. Employer shall pay to Officer the incentive compensation awards described in Sections 4(b), 4(c) and 4(d) of this Agreement for each Fiscal Year as early as practicable after the end of the Fiscal Year to which each such incentive compensation award relates, but in no event more than 90 days after the end of such Fiscal Year; provided, however, that the incentive compensation awards described in Sections 4(b), 4(c) and 4(d) of this Agreement may be paid, in whole or in part, prior to the end of the Fiscal Year to which each such incentive compensation award relates, on such terms and conditions and at such times as may otherwise be mutually agreed upon by Employer and Officer. (f) Stock Options. Officer shall, at the same time during calendar year 2000 as Employer shall grant stock options to its senior executives generally (but in no event later than June 30, 2000), be granted stock options to purchase a number of shares of Employer's common stock equal to 25% of the number of shares of Employer's common stock subject to stock options granted to the Chairman of the Board of Employer at such time; provided, however, that in no event shall Officer be granted stock options to purchase more than 85,000 shares of Employer's common stock. All stock options granted in accordance with this Section 4(f) shall be granted pursuant to the Countrywide Credit Industries, Inc. 1993 Stock Option Plan, as amended (the "1993 Plan"), or such other stock option plan or plans as may be in or come into effect during the term of Officer's employment with Employer and shall have a per share exercise price equal to the fair market value (as defined in the 1993 Plan or such other applicable plan or plans) of the common stock at the time of grant. (g) Additional Benefits. Officer shall also be entitled to all rights and benefits for which he is otherwise eligible under any bonus plan, stock purchase plan, participation or extra compensation plan, executive compensation plan, pension plan, profit-sharing plan, deferred compensation plan, life or medical insurance policy, or other plans or benefits, which Employer or its subsidiaries may provide for him, or provided he is eligible to participate therein, for senior officers generally or for employees generally, during the term of Officer's employment with Employer (collectively, "Additional Benefits"). This Agreement shall not affect the provision of any other compensation, retirement or other benefit program or plan of Employer. 5. Termination. The compensation and benefits provided for herein and the employment of Officer by Employer shall be terminated only as provided for below in this Section 5: (a) Death. Officer's employment with Employer under thi Agreement shall immediately terminate upon Officer's death. (b) Cause. Employer may terminate Officer's employment under this Agreement for "Cause." A termination for Cause is a termination by reason of (i) a material breach of this Agreement by Officer (other than as a result of incapacity due to physical or mental illness) which is committed in bad faith or without reasonable belief that such breach is in the best interests of Employer and which is not remedied within a reasonable period of time after receipt of written notice from Employer specifying such breach, or (ii) Officer's conviction by a court of competent jurisdiction of a felony, or (iii) entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter removing Officer from office of Employer or its subsidiaries or permanently prohibiting him from participating in the conduct of the affairs of Employer or any of its subsidiaries. If Officer shall be convicted of a felony or shall be removed from office and/or temporarily prohibited from participating in the conduct of Employer's or any of its subsidiaries' affairs by any federal or state regulatory authority having jurisdiction in the matter, Employer's obligations under Sections 4(a), 4(b), 4(c), 4(d), 4(e) and 4(f) hereof shall be automatically suspended; provided, however, that if the charges resulting in such removal or prohibition are finally dismissed or if a final judgment on the merits of such charges is issued in favor of Officer, or if the conviction is overturned on appeal, then Officer shall be reinstated in full with back pay for the removal period plus accrued interest at the rate then payable on judgments. During the period that Employer's obligations under Sections 4(a), 4(b), 4(c), 4(d), 4(e) and 4(f) hereof are suspended, Officer shall continue to be entitled to receive Additional Benefits under Section 4(g), but only until the conviction of the felony or removal from office has become final and non-appealable. When the conviction of the felony or removal from office has become final and non-appealable, Officer's employment with Employer under this Agreement shall immediately terminate. (c) Other Termination. Officer's employment with Employer under this Agreement may be terminated other than by Employer for Cause or as a result of Officer's death at any time by either Employer or Officer. In the event of any such termination, Officer's employment with Employer under this Agreement shall terminate as of the Termination Date (as defined below) set forth in the Notice of Termination (as defined below) with respect to such termination. (d) Notice of Termination. Any purported termination by Employer or by Officer pursuant to this Section 5 (other than a termination as a result of Officer's death) shall be communicated in a writing (a "Notice of Termination") to the other party hereto. In the event that a purported termination of Officer's employment with Employer hereunder is by Employer for Cause, the Notice of Termination shall state that Employer is terminating Officer's employment for Cause and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such a termination. For purposes of this Agreement, no purported termination shall be effective without a Notice of Termination. The "Termination Date" shall mean the date specified in the Notice of Termination, which, except in the event of a termination by Employer for Cause, shall not be less than 30 nor more than 60 days from the date of the Notice of Termination. (e) Effect of a Termination. Upon any termination of Officer's employment with Employer under this Agreement, except as expressly set forth in subparagraphs (i) through (v) of this Section 5(e), all of Employer's obligations hereunder shall terminate. (i) Upon a termination of Officer's employment with Employer under this Agreement for any reason: (A) Employer shall pay Officer his full base salary through the Termination Date plus any Additional Benefits which have been earned or become payable, but which have not yet been paid as of such Termination Date; and (B) Officer, or in the event of Officer's death, such person or persons as Officer shall have designated in writing or, in the absence of such a written designation, Officer's estate (the "Beneficiaries"), shall be entitled to all benefits in which Officer shall have become vested or which shall otherwise be payable in respect of periods ending prior to termination (other than the Additional Benefits referred to in clause (A) of this subparagraph). (ii) Upon a termination, at any time, of Officer's employment with Employer under this Agreement forany reason other than by Employer for Cause or as a result of Officer's death,Employer shall, until Officer's death, continue to provide medical coverage to Officer and his spouse on a basis substantially equivalent to that on which Employer provided medical coverage to Officer and his spouse immediately prior to termination of Officer's employment with Employer (with such changes as may from time to time be applicable to Employer's other senior executives and their spouses generally), provided, however, that Officer and his spouse shall only be entitled to such medical coverage, if and to the extent that Officer or his spouse, as the case may be, is not entitled to comparable medical coverage from other employment. (iii) Upon a termination of Officer's employment with Employer under this Agreement other than (A) by Employer for Cause or (B) within one year following a Change in Control, voluntarily by Officer or by Employer other than for Cause, Employer shall, as soon as practicable following Employer's determination of the amount thereof, pay Officer or the Beneficiaries, as the case may be, the Pro Rata Bonus (as defined below). The "Pro Rata Bonus" shall mean the amount equal to the product of (A) the bonus or incentive award referred to in Section 4(b), 4(c) or 4(d) hereof, as the case may be, to which Officer would have been entitled in respect of the Fiscal Year in which the Termination Date shall have occurred had Officer continued in employment with Employer until the end of such Fiscal Year and (B) the fraction obtained by dividing (1) the number of days elapsed in such Fiscal Year through the Termination Date by (2) 365. (iv) Upon a termination, within one year following a Change in Control, of Officer's employment with Employer under this Agreement by Employer other than for Cause or voluntarily by Officer, Employer shall pay Officer an amount equal to three times the sum of (A) Officer's annual base salary at the Termination Date and (B) an amount equal to 25% of the incentive compensation award paid or payable to Officer in accordance with Section 4(b) of this Agreement for the Fiscal Year ending in 1999. (v) Notwithstanding anything to the contrary contained in any applicable plan of Employer or in any other agreement between Employer and Officer, upon a termination of Officer's employment with Employer under this Agreement as a result of Officer's death,all theretofore unvested or unexercisable options to purchase stock of Employer then held by Officer shall become vested and exercisable. (vi) Notwithstanding anything to the contrary contained in any applicable plan of Employer or in any other agreement between Employer and Officer, upon a termination of Officer's employment with Employer under this Agreement for Cause, all options to purchase stock of the Employer then held by Officer shall immediately be forfeited. (f) Payments. All cash payments (other than the Pro Rata Bonus, which shall be paid to Officer or the Beneficiaries, as the case may be, as soon as practicable following Employer's determination of the amount thereof) required under this Agreement as a result of the termination of Officer's employment hereunder shall be made within fifteen (15) days of the Termination Date or, if any portion is not then reasonably determinable, within five (5) days after such portion is so determinable. (g) Excise Tax. Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment or distribution by Employer or any other person or entity to or for the benefit of Officer (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with Employer or a change in ownership or effective control of Employer or a substantial portion of its assets (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), the Payments shall be reduced (but not below zero) if and to the extent that such reduction would result in Officer retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the imposition of the Excise Tax), than if Officer received all of the Payments. If the application of the preceding sentence should require a reduction in Payments or other "parachute payments" (within the meaning of Section 280G of the Code), unless Officer shall have designated otherwise, such reduction shall be implemented, first, by reducing any non-cash benefits to the extent necessary and, second, by reducing any cash benefits to the extent necessary. In each case, the reductions shall be made starting with the payment or benefit to be made on the latest date following the Termination Date and reducing payments or benefits in reverse chronological order therefrom. All determinations concerning the application of this paragraph shall be made by a nationally recognized firm of independent accountants, selected by Officer and satisfactory to Employer, whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants shall be borne by Employer. 6. Reimbursement of Business Expenses. During the term of Officer's employment with Employer as provided under this Agreement, Employer shall reimburse Officer promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs (including dues) of maintaining memberships at appropriate clubs), to the extent that such expenditures meet the requirements of the Code for deductibility by Employer for federal income tax purposes or are otherwise in compliance with the rules and policies of Employer and are substantiated by Officer as required by the Internal Revenue Service and rules and policies of Employer. 7. Indemnity. To the extent permitted by applicable law, the Certificate of Incorporation and the By-Laws of Employer (as from time to time in effect) and any indemnity agreements entered into from time to time between Employer and Officer, Employer shall indemnify Officer and hold him harmless for any acts or decisions made by him in good faith while performing services for Employer, and shall use reasonable efforts to obtain coverage for him under liability insurance policies now in force or hereafter obtained during the term of this Agreement covering the other officers or directors of Employer. 8. Miscellaneous. (a) Succession. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Officer, this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of the Employer or similar transaction. Employer shall not agree to any such transaction unless the successor to or assignee of the Company's business and/or assets in such transaction expressly assumes all obligations of the Employer hereunder. The obligations and duties of Officer hereby shall be personal and not assignable. (b) Notices. Any notices provided for in this Agreement shall be sent to Employer at 4500 Park Granada, Calabasas, California 91302, Attention: General Counsel/Secretary, with a copy to the Chairman of the Compensation Committee at the same address, or to such other address as Employer may from time to time in writing designate, and to Officer at such address as he may from time to time in writing designate (or his business address of record in the absence of such designation). All notices (i) shall be deemed to have been given two (2) business days after they have been deposited as certified mail, return receipt requested, postage paid and properly addressed to the designated address of the party to receive the notices and (ii) shall be deemed to have been given on the date of delivery if notice is given by means of Federal Express or other reputable overnight courier service. (c) Entire Agreement. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and it replaces and supersedes any prior agreements between the parties relating to said subject matter, including, but not limited to, the Second Restated Agreement; provided, however, that until this Agreement shall become effective, the Second Restated Agreement shall continue in full force and effect. No modifications or amendments of this Agreement (including but not limited to the provisions of Section 4 hereof) shall be valid unless made in writing and signed by the parties hereto. (d) Waiver. The waiver of the breach of any term or of any condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. (e) California Law. This Agreement shall be construed and interpreted in accordance with the laws of California. (f) Attorneys' Fees in Action on Contract. If any litigation shall occur between the Officer and Employer, which litigation arises out of or as a result of this Agreement or the acts of the parties hereto pursuant to this Agreement, or which seeks an interpretation of this Agreement, the prevailing party in such litigation, in addition to any other judgment or award, shall be entitled to receive such sums as the court hearing the matter shall find to be reasonable as and for the attorneys' fees of the prevailing party. (g) Confidentiality. Officer agrees that he will not divulge or otherwise disclose, directly or indirectly, any trade secret or other confidential information concerning the business or policies of Employer or any of its subsidiaries which he may have learned at any time as an employee, officer or director of or consultant to Employer or any of its subsidiaries, except to the extent such use or disclosure is (i) necessary or appropriate to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other sources, or (iv) authorized by Employer. The provisions of this subsection shall survive the expiration, suspension or termination, for any reason, of Officer's employment with Employer. (h) Remedies of Employer. Officer acknowledges that the services he is obligated to render under the provisions of this Agreement are of a special, unique, unusual, extraordinary and intellectual character, which gives this Agreement peculiar value to Employer. The loss of these services cannot be reasonably or adequately compensated in damages in an action at law and it would be difficult (if not impossible) to replace these services. By reason thereof, Officer agrees and consents that if he violates any of the material provisions of this Agreement, Employer, in addition to any other rights and remedies available under this Agreement or under applicable law, shall be entitled during the remainder of the term to seek injunctive relief, from a tribunal of competent jurisdiction, restraining Officer from committing or continuing any violation of this Agreement, or from the performance of services to any other business entity, or both. (i) Severability. If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. (j) No Obligation to Mitigate. Officer shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no payment hereunder (other than payments in respect of the medical coverage to be provided to Officer and his spouse pursuant to Section 5(e)(ii) hereof) shall be offset or reduced by the amount of any compensation or benefits provided to Officer in any subsequent employment. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COUNTRYWIDE CREDIT INDUSTRIES, INC. ATTEST: By: Secretary Title: OFFICER: David S. Loeb, in his individual capacity 235382.10 APPENDIX A To David Loeb Employment Agreement A "Change in Control" shall mean the occurrence, prior to the first anniversary of the Effective Date, of any one of the following events: (a) An acquisition (other than directly from Employer) of any common stock or other "Voting Securities" (as hereinafter defined) of Employer by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty five percent (25%) or more of the then outstanding shares of Employer's common stock or the combined voting power of Employer's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. For purposes of this Agreement, (1) "Voting Securities" shall mean Employer's outstanding voting securities entitled to vote generally in the election of directors and (2) a "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) Employer or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by Employer (for purposes of this definition, a "Subsidiary"), (ii) Employer or any of its Subsidiaries, or (iii) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of the Effective Date are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the -------- ------- election, or nomination for election by Employer's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided further, however, that no -------- ------- ------- individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) The consummation of: (i) A merger, consolidation or reorganization involving Employer, unless such merger, consolidation or reorganization is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a merger, consolidation or reorganization of Employer where: (A) the stockholders of Employer, immediately before such merger, consolidation or reorganization, own directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy percent (70%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger, consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or in the event that, immediately following the consummation of such transaction, a corporation beneficially owns, directly or indirectly, a majority of the Voting Securities of the Surviving Corporation, the board of directors of such corporation; and (C) no Person other than (i) Employer, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) maintained by Employer, the Surviving Corporation, or any Subsidiary, or (iv) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty five percent (25%) or more of the then outstanding Voting Securities or common stock of Employer, has Beneficial Ownership of twenty five percent (25%) or more of the combined voting power of the Surviving Corporation's then outstanding Voting Securities or its common stock; (ii) A complete liquidation or dissolution of Employer; or (iii) The sale or other disposition of all or substantially all of the assets of Employer to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding common stock or Voting Securities as a result of the acquisition of common stock or Voting Securities by Employer which, by reducing the number of shares of common stock or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons; provided, however, that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of common stock or Voting Securities by Employer, and after such share acquisition by Employer, the Subject Person becomes the Beneficial Owner of any additional common stock or Voting Securities which increases the percentage of the then outstanding common stock or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. EX-10 4 EMPLOYMENT CONTRACT KURLAND EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of March 1, 1999 by and between Countrywide Credit Industries, Inc., a Delaware corporation ("Employer"), and Stanford L. Kurland ("Officer"). W I T N E S S E T H: WHEREAS, Officer currently holds the offices of Senior Managing Director and Chief Operating Officer of Employer, and President and Chief Executive Officer of Countrywide Home Loans, Inc. ("Home Loans"), a wholly-owned subsidiary of Employer; and WHEREAS, Employer desires to obtain the benefit of continued services of Officer and Officer desires to continue to render services to Employer and its subsidiaries, including Home Loans; and WHEREAS, the Board of Directors of Employer (the "Board") has determined that it is in Employer's best interest and that of its stockholders to recognize the substantial contribution that Officer has made and is expected to continue to make to the Employer's business and to retain his services in the future; and WHEREAS, Employer and Officer desire to set forth the terms and conditions of Officer's employment with Employer under this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: 1. Term. Employer agrees to employ Officer and Officer agrees to serve Employer, in accordance with the terms hereof, for a term beginning on the Effective Date (as defined in Section 8(c) hereof) and ending on February 28, 2002, unless earlier terminated in accordance with the provisions hereof. 2. Specific Position; Duties and Responsibilities. Employer and Officer hereby agree that, subject to the provisions of this Agreement, Employer will employ Officer and Officer will serve Employer as Senior Managing Director and Chief Operating Officer of Employer and as President and Chief Executive Officer of Home Loans. Employer agrees that Officer's duties hereunder shall be the usual and customary duties of such offices or such other duties as may be designated from time to time by the Board consistent with his status as an executive officer of Employer; any such duties shall be consistent with the provisions of the charter documents of Employer or applicable law. Officer shall have such executive power and authority as shall reasonably be required to enable him to discharge his duties in the offices which he may hold. All compensation paid to Officer by Employer or any of its subsidiaries shall be aggregated in determining whether Officer has received the benefits provided for herein. 3. Scope of this Agreement and Outside Affiliations. During the term of this Agreement, Officer shall devote his full business time and energy, except as expressly provided below, to the business, affairs and interests of Employer and its subsidiaries, and matters related thereto, and shall use his best efforts and abilities to promote its interests. Officer agrees that he will diligently endeavor to promote the business, affairs and interests of Employer and its subsidiaries and perform services contemplated hereby, in accordance with the policies established by the Board, which policies shall be consistent with this Agreement. Officer agrees to serve without additional remuneration as an officer of one or more (direct or indirect) subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitation under applicable law. Officer's failure to discharge an order or perform a function because Officer reasonably and in good faith believes such would violate a law or regulation or be dishonest shall not be deemed a breach by him of his obligations or duties pursuant to any of the provisions of this Agreement, including without limitation pursuant to Section 5(c) hereof. During the course of Officer's employment as a full-time officer hereunder, Officer shall not, without the consent of the Board, compete, directly or indirectly, with Employer in the businesses then conducted by Employer or any of its subsidiaries. Officer may serve as a director or in any other capacity of any business enterprise, including an enterprise whose activities may involve or relate to the business of Employer, provided that such service is expressly approved by the Board. Officer may make and manage personal business investments of his choice and serve in any capacity with any civic, educational or charitable organization, or any governmental entity or trade association, without seeking or obtaining approval by the Board, provided such activities and services do not materially interfere or conflict with the performance of his duties hereunder. 4. Compensation and Benefits. (a) Base Salary. Employer shall pay to Officer a base salary after the Effective Date at the annual rate of $744,187.50 (the "Annual Rate"). In respect of the Fiscal Years ending in 2000, 2001 and 2002, the Compensation Committee of the Board (the "Compensation Committee") shall, based upon the recommendation of Angelo R. Mozilo (or, if he is no longer an officer of Employer, the Chairman of Employer), increase the Annual Rate by no less than 5% and no greater than 10% each year. Any such increase shall be effective not later than June 1 of the fiscal year in which the increase is granted. (b) Incentive Compensation. Employer shall pay to Officer for each of the Fiscal Years ending during the term of this Agreement an incentive compensation award in an amount determined pursuant to the terms and conditions of the Countrywide Credit Industries, Inc. Annual Incentive Plan (the "Annual Incentive Plan") and set out in the Incentive Matrix attached hereto as Appendix B; provided, however, that the effectiveness of the incentive compensation award for the final Fiscal Year ending during the term of this Agreement is subject to the approval by Employer's stockholders of an annual incentive plan containing substantially the terms of the Annual Incentive Plan on or before the Employer's 2001 Annual Meeting of Stockholders in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations promulgated thereunder. (c) Stock Options. Employer shall grant to Officer stock options in respect of each of the Fiscal Years ending during the term of this Agreement for such number of shares of Employer's common stock as the Compensation Committee in its sole discretion determines, taking into account Officer's and Employer's performance in each of such Fiscal Years and the competitive practices then prevailing regarding the granting of stock options; provided, however, that the number of shares in respect of each annual stock option grant shall be no less than 100,000 and no greater than 250,000. The numbers 100,000 and 250,000 in the preceding sentence shall be adjusted proportionately in the event Employer (A) declares a stock dividend on its common stock, (B) subdivides its outstanding common stock, (C) combines the outstanding shares of its capital stock into a smaller number of common stock, or (D) issues any shares of its capital stock in a reclassification of the common stock (including any such reclassification in connection with a consolidation or merger in which Employer is the continuing or surviving corporation). The stock options described in this Section 4(c) in respect of a Fiscal Year shall be granted at the same time as Employer grants stock options to its other senior executives in respect of such Fiscal Year (but in no event later than June 30 following the end of such Fiscal Year). All stock options granted in accordance with this Section 4(c): (i) shall be granted pursuant to the Countrywide Credit Industries, Inc. 1993 Stock Option Plan, as amended (the "1993 Plan"), or such other stock option plan or plans as may be or come into effect during the term of this Agreement, (ii) shall have a per share exercise price equal to the fair market value (as defined in the 1993 Plan or such other plan or plans) of the common stock at the time of grant, (iii) shall become exercisable in three equal installments on each of the first three anniversaries of the date of grant and (iv) shall be subject to such other terms and conditions as may be determined by the Compensation Committee and set forth in the agreement evidencing the award. The stock options granted pursuant to this Section shall consist of incentive stock options to the extent permitted by law or regulation. (d) Additional Benefits. Officer shall also be entitled to all rights and benefits for which he is otherwise eligible under any bonus plan, stock purchase plan, participation or extra compensation plan, executive compensation plan, pension plan, profit-sharing plan, life and medical insurance policy, or other plans or benefits, which Employer or its subsidiaries may provide for him, or provided he is eligible to participate therein, for senior officers generally or for employees generally, during the term of this Agreement (collectively, "Additional Benefits"). This Agreement shall not affect the provision of any other compensation, retirement or other benefit program or plan of Employer. (e) Continuation of Benefits. If Officer's employment is terminated hereunder pursuant to Section 5(a), 5(b) or 5(d), Employer shall continue for the period specified in Section 5(a), 5(b) or 5(d) hereof to provide benefits substantially equivalent to Additional Benefits (other than qualified pension or profit sharing plan benefits and option, equity or stock appreciation or other incentive plan benefits as distinguished from health, disability and welfare type benefits) to Officer and his dependents and beneficiaries which were being provided to them immediately prior to Officer's Termination Date, but only to the extent that Officer is not entitled to comparable benefits from other employment. (f) Deferral of Amounts Payable Hereunder. In the event Officer should desire to defer receipt of any cash payments to which he would otherwise be entitled hereunder, he may present such a written request to the Compensation Committee which, in its sole discretion, may enter into a separate deferred compensation agreement with Officer. 5. Termination. The compensation and benefits provided for herein and the employment of Officer by Employer shall be terminated only as provided for below in this Section 5: (a) Disability. In the event that Officer shall fail, because of illness, injury or similar incapacity ("Disability"), to render for four (4) consecutive calendar months, or for shorter periods aggregating eighty (80) or more business days in any twelve (12) month period, services contemplated by this Agreement, Officer's full-time employment hereunder may be terminated, by written Notice of Termination from Employer to Officer; and thereafter, Employer shall continue, from the Termination Date until Officer's death or the fifth anniversary of such notice, whichever first occurs (the "Disability Payment Period"), (i) to pay compensation to Officer, in the same manner as in effect immediately prior to the Termination Date, in an amount equal to (1) fifty percent (50%) of the then existing base salary payable immediately prior to the termination, minus (2) the amount of any cash payments to him under the terms of Employer's disability insurance or other disability benefit plans or Employer's tax-qualified Defined Benefit Pension Plan, and any compensation he may receive pursuant to any other employment, and (ii) to provide during the Disability Payment Period the benefits specified in Section 4(e) hereof. The determination of Disability shall be made only after 30 days notice to Officer and only if Officer has not returned to performance of his duties during such 30-day period. In order to determine Disability, both Employer and Officer shall have the right to provide medical evidence to support their respective positions, with the ultimate decision regarding Disability to be made by a majority of Employer's disinterested directors. (b) Death. In the event that Officer shall die during the term of this Agreement, Employer shall pay Officer's base salary for a period of twelve (12) months following the date of Officer's death and in the manner otherwise payable hereunder, to such person or persons as Officer shall have directed in writing or, in the absence of a designation, to his estate (the "Beneficiary"). Employer shall also provide during the twelve-month period following the date of the Officer's death the benefits specified in Section 4(e) hereof. If Officer's death occurs while he is receiving payments for Disability under Section 5(a)(i) above, such payments shall cease and the Beneficiary shall be entitled to the payments and benefits under this Subsection (b), which shall continue for a period of twelve months thereafter at the full rate of compensation in effect immediately prior to the Disability. This Agreement in all other respects will terminate upon the death of Officer; provided, however, that the termination of the Agreement shall not affect Officer's entitlement to all other benefits in which he has become vested or which are otherwise payable in respect of periods ending prior to its termination. (c) Cause. Employer may terminate Officer's employment under this Agreement for "Cause." A termination for Cause is a termination by reason of (i) a material breach of this Agreement by Officer (other than as a result of incapacity due to physical or mental illness) which is committed in bad faith or without reasonable belief that such breach is in the best interests of Employer and which is not remedied within a reasonable period of time after receipt of written notice from Employer specifying such breach, or (ii) Officer's conviction by a court of competent jurisdiction of a felony, or (iii) entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter removing Officer from office of Employer or its subsidiaries or permanently prohibiting him from participating in the conduct of the affairs of Employer or any of its subsidiaries. If Officer shall be convicted of a felony or shall be removed from office and/or temporarily prohibited from participating in the conduct of Employer's or any of its subsidiaries' affairs by any federal or state regulatory authority having jurisdiction in the matter, Employer's obligations under Sections 4(a), 4(b) and 4(c) hereof shall be automatically suspended; provided, however, that if the charges resulting in such removal or prohibition are finally dismissed or if a final judgment on the merits of such charges is issued in favor of Officer, or if the conviction is overturned on appeal, then Officer shall be reinstated in full with back pay for the removal period plus accrued interest at the rate then payable on judgments. During the period that Employer's obligations under Sections 4(a), 4(b) and 4(c) hereof are suspended, Officer shall continue to be entitled to receive Additional Benefits under Section 4(d) until the conviction of the felony or removal from office has become final and non-appealable. When the conviction of the felony or removal from office has become final and non-appealable, all of Employer's obligations hereunder shall terminate; provided, however, that the termination of Officer's employment pursuant to this Section 5(c) shall not affect Officer's entitlement to all benefits in which he has become vested or which are otherwise payable in respect of periods ending prior to his termination of employment. (d) Severance. (i) Except as provided in Section 5(d)(ii), if during the term of this Agreement Officer's employment shall be terminated by Employer other than for Cause, then (A) until February 28, 2002 or the second anniversary of the Termination Date, whichever is later (the "Severance Period"), Employer shall (1) continue to pay Officer his annual base salary, at the rate in effect on the Termination Date, and (2) provide the benefits specified in Section 4(e) hereof, (B) Employer shall pay Officer, within ten (10) days after the end of each Fiscal Year ending during the Severance Period, an amount equal to the incentive compensation paid or payable to Officer pursuant to Section 4(b) in respect of the Fiscal Year immediately preceding the Fiscal Year in which Officer's Termination Date occurs (the "Bonus Rate") (such amount to be pro-rated for any Fiscal Year ending during the Severance Period that is less than 12 months); provided, however, that in the event the Severance Period ends on a date prior to the end of a Fiscal Year, Employer shall also pay Officer an amount equal to the product of (1) the Bonus Rate and (2) the fraction obtained by dividing (x) the number of days elapsed since the end of the immediately preceding Fiscal Year through the end of the Severance Period by (y) 365, and (C) all stock options held by Officer on the Termination Date shall become immediately and fully exercisable. (ii) If after a "Change in Control" (as defined in Appendix A to this Agreement) and during the term of this Agreement Officer's employment shall be terminated by Employer other than for Cause or by Officer for Good Reason, then (A) Employer shall pay Officer in a single payment as soon as practicable after the Termination Date, as severance pay and in lieu of any further salary and incentive compensation for periods subsequent to the Termination Date, an amount in cash equal to three times the sum of (1) Officer's annual base salary at the Termination Date and (2) the incentive compensation paid or payable to Officer pursuant to Section 4(b) in respect of the Fiscal Year immediately preceding the Fiscal Year in which Officer's Termination Date occurs, (B) Employer shall continue to provide for three years from the Termination Date the benefits specified in Section 4(e) hereof and (C) all stock options held by Officer on the Termination Date shall become immediately and fully exercisable. For purposes of this Agreement, "Good Reason" shall be deemed to occur if Employer (x) breaches this Agreement in any material respect or (y) takes any other action which results in the diminution in Officer's status, title, position and responsibilities other than an insubstantial action not taken in bad faith and which is remedied by Employer promptly after receipt of notice by Officer. Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment or distribution by Employer or any other person or entity to or for the benefit of Officer (within the meaning of Section 280G(b)(2) of the Code), whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with Employer or a change in ownership or effective control of Employer or a substantial portion of its assets (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), the Payments shall be reduced (but not below zero) if and to the extent that such reduction would result in Officer retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the imposition of the Excise Tax), than if Officer received all of the Payments. If the application of the preceding sentence should require a reduction in Payments or other "parachute payments" (within the meaning of Section 280G of the Code), unless Officer shall have designated otherwise, such reduction shall be implemented, first, by reducing any non-cash benefits to the extent necessary and, second, by reducing any cash benefits to the extent necessary. In each case, the reductions shall be made starting with the payment or benefit to be made on the latest date following the Termination Date and reducing payments or benefits in reverse chronological order therefrom. All determinations concerning the application of this paragraph shall be made by a nationally recognized firm of independent accountants, selected by Officer and satisfactory to Employer, whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants shall be borne by Employer. (e) Resignation. Except as provided in Section 5(d)(ii) hereof, if during the term of this Agreement, Officer shall resign voluntarily, all of his rights to payment or benefits hereunder shall immediately terminate; provided, however, that the termination of Officer's employment pursuant to this Section 5(e) shall not affect Officer's entitlement to all benefits in which he has become vested or which are otherwise payable in respect of periods ending prior to his termination of employment. (f) Notice of Termination. Any purported termination by Employer or by Officer shall be communicated by a written Notice of termination (the "Notice of Termination") to the other party hereto which indicates the specific termination provision in this Agreement, if any, relied upon and which sets forth in reasonable detail the facts and circumstances, if any, claimed to provide a basis for termination of Officer's employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. The "Termination Date" shall mean the date specified in the Notice of Termination, which shall be no less than 30 or more than 60 days from the date of the Notice of Termination. Notwithstanding any other provision of this Agreement, in the event of any termination of Officer's employment hereunder for any reason, Employer shall pay Officer his full base salary through the Termination Date, plus any Additional Benefits which have been earned or become payable, but which have not yet been paid as of such Termination Date. (g) Disputes. In the event of a dispute concerning the validity of a purported termination which is maintained in good faith, the Termination Date shall mean the date the dispute is finally resolved and Employer will continue to provide Officer with the compensation and benefits provided for under this Agreement, until the dispute is finally resolved without any obligation by Officer to repay any of such amounts to Employer, notwithstanding the final outcome of the dispute. Payments required to be made by this Section 5(g) are in addition to all other amounts due under Section 5 of this Agreement and shall not be offset against or reduce any other amounts due under Section 5 of this Agreement. Officer shall be required to render services to Employer during the period following his Termination Date but before the dispute concerning the termination is finally determined unless Employer fails to provide Officer with a reasonable opportunity to perform his duties under this Agreement during such period. 6. Reimbursement of Business Expenses. During the term of this Agreement, Employer shall reimburse Officer promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs (including dues) of maintaining memberships at appropriate clubs) to the extent that such expenditures meet the requirements of the Code for deductibility by Employer for federal income tax purposes or are otherwise in compliance with the rules and policies of Employer and are substantiated by Officer as required by the Internal Revenue Service and rules and policies of Employer. 7. Indemnity. To the extent permitted by applicable law, the Certificate of Incorporation and the By-Laws of Employer (as from time to time in effect) and any indemnity agreements entered into from time to time between Employer and Officer, Employer shall indemnify Officer and hold him harmless for any acts or decisions made by him in good faith while performing services for Employer, and shall use reasonable efforts to obtain coverage for him under liability insurance policies now in force or hereafter obtained during the term of this Agreement covering the other officers or directors of Employer. 8. Miscellaneous. (a) Succession. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Officer, this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of the Employer or similar transaction. Employer shall not agree to any such transaction unless the successor to or assignee of the Company's business and/or assets in such transaction expressly assumes all obligations of the Employer hereunder. The obligations and duties of Officer hereby shall be personal and not assignable. (b) Notices. Any notices provided for in this Agreement shall be sent to Employer at 4500 Park Granada, Calabasas, California 91302, Attention: General Counsel/Secretary, with a copy to the Chairman of the Compensation Committee at the same address, or to such other address as Employer may from time to time in writing designate, and to Officer at such address as he may from time to time in writing designate (or his business address of record in the absence of such designation). All notices shall be deemed to have been given two (2) business days after they have been deposited as certified mail, return receipt requested, postage paid and properly addressed to the designated address of the party to receive the notices. (c) Effective Date. This Agreement is effective as of March 1, 1999. (d) Entire Agreement. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and it replaces and supersedes any prior agreements between the parties relating to said subject matter. No modifications or amendments of this Agreement shall be valid unless made in writing and signed by the parties hereto. (e) Waiver. The waiver of the breach of any term or of any condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. (f) California Law. This Agreement shall be construed and interpreted in accordance with the laws of California. (g) Attorneys' Fees in Action on Contract. If any litigation shall occur between the Officer and Employer, which litigation arises out of or as a result of this Agreement or the acts of the parties hereto pursuant to this Agreement, or which seeks an interpretation of this Agreement, the prevailing party in such litigation, in addition to any other judgment or award, shall be entitled to receive such sums as the court hearing the matter shall find to be reasonable as and for the attorneys' fees of the prevailing party. (h) Confidentiality. Officer agrees that he will not divulge or otherwise disclose, directly or indirectly, any trade secret or other confidential information concerning the business or policies of Employer or any of its subsidiaries which he may have learned as a result of his employment during the term of this Agreement or prior thereto as an employee, officer or director of or consultant to Employer or any of its subsidiaries, except to the extent such use or disclosure is (i) necessary or appropriate to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other sources, or (iv) authorized by Employer. The provisions of this subsection shall survive the expiration, suspension or termination, for any reason, of this Agreement. (i) Remedies of Employer. Officer acknowledges that the services he is obligated to render under the provisions of this Agreement are of a special, unique, unusual, extraordinary and intellectual character, which gives this Agreement peculiar value to Employer. The loss of these services cannot be reasonably or adequately compensated in damages in an action at law and it would be difficult (if not impossible) to replace these services. By reason thereof, Officer agrees and consents that if he violates any of the material provisions of this Agreement, Employer, in addition to any other rights and remedies available under this Agreement or under applicable law, shall be entitled during the remainder of the term to seek injunctive relief, from a tribunal of competent jurisdiction, restraining Officer from committing or continuing any violation of this Agreement, or from the performance of services to any other business entity, or both. (j) Severability. If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. (k) No Obligation to Mitigate. Officer shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and, except as provided in Section 5(a)(i)(2) hereof, no payment hereunder shall be offset or reduced by the amount of any compensation or benefits provided to Officer in any subsequent employment. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COUNTRYWIDE CREDIT INDUSTRIES, INC. ATTEST: By: Secretary Title: OFFICER: Stanford L. Kurland, in his individual capacity 126026.06 APPENDIX A To Stanford L. Kurland Employment Agreement A "Change in Control" shall mean the occurrence during the term of the Agreement, of any one of the following events: (a) An acquisition (other than directly from Employer) of any common stock or other "Voting Securities" (as hereinafter defined) of Employer by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty five percent (25%) or more of the then outstanding shares of Employer's common stock or the combined voting power of Employer's then outstanding Voting Securities; provided, however, in determining -------- ------- whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. For purposes of this Agreement, (1) "Voting Securities" shall mean Employer's outstanding voting securities entitled to vote generally in the election of directors and (2) a "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) Employer or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by Employer (for purposes of this definition, a "Subsidiary"), (ii) Employer or any of its Subsidiaries, or (iii) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of the date of the Agreement are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by Employer's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided further, however, that no individual shall beconsidered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) The consummation of: (i) A merger, consolidation or reorganization involving Employer, unless such merger, consolidation or reorganization is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a merger, consolidation or reorganization of Employer where: (A) the stockholders of Employer, immediately before such merger, consolidation or reorganization, own directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy percent (70%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or in the event that, immediately following the consummation of such transaction, a corporation beneficially owns, directly or indirectly, a majority of the Voting Securities of the Surviving Corporation, the board of directors of such corporation; and (C) no Person other than (i) Employer, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) maintained by Employer, the Surviving Corporation, or any Subsidiary, or (iv) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty five percent (25%) or more of the then outstanding Voting Securities or common stock of Employer, has Beneficial Ownership of twenty five percent (25%) or more of the combined voting power of the Surviving Corporation's then outstanding Voting Securities or its common stock; (ii) A complete liquidation or dissolution of Employer; or (iii) The sale or other disposition of all or substantially all of the assets of Employer to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding common stock or Voting Securities as a result of the acquisition of common stock or Voting Securities by Employer which, by reducing the number of shares of common stock or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons; provided, however, that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of common stock or Voting Securities by Employer, and after such share acquisition by Employer, the Subject Person becomes the Beneficial Owner of any additional common stock or Voting Securities which increases the percentage of the then outstanding common stock or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. APPENDIX B INCENTIVE MATRIX To Determine Fiscal 2000, 2001 and 2002 Awards % of Target Bonus Paid (Target Bonus = $800,000) EPS Less ROE than $2.16 $2.16 $2.47 $2.78 $3.09 $3.40 $3.71 $4.02 $4.33 $4.64 $4.94 and more ------ ------------- -------------- ------------- ------------- ------------- ------------- ------------- 18% or more 45% 65% 85% 105% 125% 150% 175% 200% 225% 250% 250% - ---------------- ------------- -------------- ------------- ------------- ------------- ------------- ------- 15% 20% 40% 60% 80% 100% 125% 150% 175% 200% 225% 250% - ---------------- ------------- -------------- ------------- ------------- ------------- ------------- ------- 10% 0% 15% 35% 55% 75% 100% 125% 150% 175% 200% 225% 5% 0% 0% 10% 30% 50% 75% 100% 100% 100% 100% 100% Less than 5% 0 0 0 0 0 0 0 0 0 0 0 - ---------------- ------------- -------------- ------------- ------------- ------------- ------------- -------
* Payouts interpolated between points. * ROE calculated on quarterly average equity. * For new equity infusions, first year return target at 10% rather than 15%. EX-10 5 DEFERRED COMP AMENDMENT COUNTRYWIDE CREDIT INDUSTRIES, INC. AMENDED AND RESTATED DEFERRED COMPENSATION PLAN (AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998) FIRST AMENDMENT The Countrywide Credit Industries, Inc. Amended and Restated Deferred Compensation Plan (amended and restated effective January 1, 1998) shall be further amended as follows, effective January 1, 1999. 1. Section 5.1 shall be amended in its entirety to read as follows: Retirement Benefits. Subject to the Deduction Limitation, a Participant who Retires or who attains "Rule of 105 Status" (as hereafter defined) shall receive as a Retirement Benefit his or her Account Balance provided that no payment shall be made to or in respect of any Participant prior to April 1, 1999, on account of attainment of Rule 105 of Status. For purposes of the Plan, a Participant attains Rule of 105 Status when while employed by an Employer the sum of his or her age and Years of Service equals 105. 2. Section 5.2 shall be amended in its entirety to read as follows: Payment of Retirement Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to a Monthly Installment Method of 60, 120 or 180 months. The Participant may annually change his or her election to an allowable alternative payout by submitting a new Election Form to the Committee; provided that any Election Form must be submitted at least one year prior to the Participant's Retirement or attainment of Rule of 105 Status, as the case may be, and such Form is accepted by the Committee in its sole discretion; provided, further, that in the case of any Participant attaining Rule of 105 Status prior to April 1, 2000, such Election Form must be submitted prior to April 1, 1999, or if later, the date the Participant attains Rule of 105 Status, and shall be given effect the date that is one year after such Election Form is submitted and accepted by the Committee. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days following the earlier of (a) the date the Participant Retires, or (b) the date the Participant attains Rule of 105 Status, or, if later, one year following the date the Participant submits and the Committee accepts a revised Election Form as described above. Any payment made shall be subject to the Deduction Limitation. 3. Section 3.5 shall be amended in its entirety to read as follows: Annual Company Contribution Amount. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant's Company Contribution Account under this Plan, which amount shall be for that Participant the Annual Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Contribution Amount for that Plan Year. The Annual Company Contribution Amount, if any, shall be credited as of the first day of the Plan Year. Commencing with contributions made on or after March 1, 1999, a Participant shall vest in the Annual Company Contribution Amount at the same time he or she vests in the Countrywide Credit Industries, Inc. Supplemental Executive Retirement Plan Benefit. IN WITNESS WHEREOF, this instrument of amendment is executed this ________ day of _______________, 1999. EX-10 6 SECOND AMENDMENT REVOLVING CREDIT SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment") is made and dated as of the 14th day of April, 1999 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 (in such capacity, the "Lead Administrative Agent"). RECITALS A. Pursuant to that certain Revolving Credit Agreement dated as of April 15, 1998 by and among the Company, the Lenders party thereto, the Lead Administrative 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. Extension of Maturity Date. To reflect the agreement of the Lead Administrative Agent and the Lenders to extend the term of the credit facility evidenced by the Revolving Credit Agreement, the definition of "Maturity Date" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Maturity Date' shall mean April 12, 2000." 2. Utilization-Based Pricing Increase. To reflect the agreement of the Company to a pricing increase based upon utilization of the credit facility evidenced by the Revolving Credit Agreement: (a) The definition of "Applicable Eurodollar Rate" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Applicable Eurodollar Rate' shall mean with respect to any Eurodollar Interest Period, the rate per annum (rounded upward, if necessary, to the next higher one one hundredth of one percent (.01%)) calculated in accordance with the following formula: Applicable Eurodollar Rate = ER + ES 1-RR where ER = Eurodollar Rate RR = Reserve Requirement ES = Eurodollar Spread" (b) A new definition is hereby added to the Glossary, in correct alphabetical order, to read in its entirety as follows: "'Eurodollar Spread' shall mean: (a) on each day on which the aggregate dollar amount of Loans outstanding does not exceed twenty five percent (25%) of the Aggregate Credit Limit on such day, 0.295%, and (b) on each day on which the aggregate dollar amount of Loans outstanding exceeds twenty five percent (25%) of the Aggregate Credit Limit on such date, 0.42%." (c) The definition of "Alternate Base Rate" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Alternate Base Rate' shall mean on any date the greater of: (a) the Federal funds Effective Rate plus one half of one percent (0.50%), and (b) the Corporate Base Rate; provided, however that the `Alternate Base Rate' in effect on each day on which the aggregate dollar amount of Loans outstanding exceeds twenty five percent (25%) of the Aggregate Credit Limit on such date shall be increased by 0.125%." 3. Y2K Issues. To reflect the agreement of the parties to address potential technological issues associated with the year 2000: (a) A new Paragraph 8(l) is hereby added to the Revolving Credit Agreement to read in its entirety as follows: "8(l) Year 2000. The Company has reviewed its operations and those of its Affiliates with a view to assessing whether its businesses or the businesses of any of its Affiliates will be vulnerable to a Year 2000 Problem arising from the computer-based systems of the Company or its Affiliates or will be vulnerable to the effects of a Year 2000 Problem suffered by certain of the Company's or any of its Affiliates' major commercial counterparties. The Company has taken or shall take reasonable actions and has committed or shall expeditiously commit adequate resources to enable its computer-based and other systems (and those of its Affiliates) to effectively process data, including dates before, on and after January 1, 2000, without experiencing any Year 2000 Problem arising from its computer-based systems that could cause a Material Adverse Effect. The Company has a reasonable basis to believe that the computer-based systems of the Company and its Subsidiaries will not have a Year 2000 Problem arising from such systems that will cause a Material Adverse Effect." (b) A New Paragraph 9(l) is hereby added to the Revolving Credit Agreement to read in its entirety as follows: "9(l) Year 2000. At the request of the Lead Administrative Agent, the Company will provide the Lead Administrative Agent with a description of the actions undertaken by the Company in its efforts to enable the computer-based systems of the Company and its Affiliates to effectively process data on and after January 1, 2000." (c) The following new definitions are hereby added to the Glossary, in correct alphabetical order, to read in their entirety as follows: "'Material Adverse Effect' shall mean: (a) a materially adverse effect on the assets, business, operations, properties or condition (financial or otherwise) of the Company and its Affiliates, taken as a whole, (b) an impairment of the ability of the Company to perform any of its obligations under the Credit Documents or (c) an impairment of the validity or enforceability of, or an impairment of the rights, remedies or benefits available to the Lenders under, the Credit Documents." "'Year 2000 Problem' shall mean, with respect to any Person, any significant risk that computer hardware, software or equipment containing embedded microchips essential to the business or operation of such Person or any of its Affiliates will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of dates or time periods occurring before January 1, 2000, including the making of accurate leap year calculations." 4. Amendment of Negative Covenants. To reflect the agreement of the Lenders to modify existing limitations contained in the Revolving Credit Agreement on the ability of the Company to enter into certain repurchase agreements and to fund Advances to Affiliates: (a) 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; (2) Advances to and Receivables of any Person which are fully secured on a first priority perfected basis by Mortgage Loans; (3) Investments in, Advances to and Receivables of any Affiliate which are fully secured on a first priority perfected basis by Mortgage Loans or Prime Quality Mortgage-Backed Securities; (4) Investment in, Advances to and Receivables of any Affiliate or any Servicing Pass-Through Venture which is not otherwise an Affiliate, which are unsecured or which are secured on a first priority perfected basis by collateral other than Mortgage Loans or Prime Quality Mortgage-Backed Securities, in an aggregate amount not to exceed fifteen percent (15%) of the net worth of the Company determined in accordance with GAAP; and (5) Investments in, Advances to and Receivables of Countrywide Capital Markets, Inc. or any of its Subsidiaries, which are fully secured on a first priority perfected basis by: (i) debt instruments issued by FNMA or FHLMC or (ii) time deposit accounts issued by a financial institution the deposits of which are insured by the Bank Insurance Fund and which financial institution has a deposit rating issued by a recognized rating agency not less than the rating assigned to the Company's long term indebtedness." (b) The definition of "Mortgage-Backed Security" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Mortgage-Backed Security' shall mean a security (including, without limitation, a participation certificate) secured by or representing an undivided interest in a pool of Mortgage Loans each of which Mortgage Loan is secured by a completed single family dwelling (one-to-four family units), which security is: (a) Guaranteed by GNMA; (b) Issued by FNMA or FHLMC; or (c) Issued by any other Person provided that such security: (1) was subject to an effective registration statement filed with the Securities and Exchange Commission at the time of initial issuance or was included in a senior tranche of privately-placed securities, and (2) is rated by a recognized rating agency in a category that is not less than the rating assigned to the Company's long term indebtedness." 5. 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 Administrative 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. 6. 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 Administrative 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. 7. 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 Administrative Agent: (a)A copy of this Amendment, duly executed by each party hereto and cknowledged by the Parent; and (b)Such corporate resolutions, incumbency certificates and other authorizing documentation as the Lead Administrative Agent may request. 8. Representations and Warranties. The Company hereby represents and warrants to the Lead Administrative 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. 9. No Other Amendment. Except as expressly amended hereby, the Credit Documents shall remain in full force and effect as written and amended to date. 10. 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 Administrative Agent and a Lender By Name Title MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Lender By Name Title CREDIT LYONNAIS NEW YORK BRANCH, as a Lender By Name Title ABN AMRO BANK, N.V., as a Lender By Name Title By Name Title BARCLAYS BANK PLC, 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 BANQUE NATIONALE DE PARIS, as a Lender By Name Title By Name Title BANQUE PARIBAS, as a Lender By Name Title By Name Title BANK OF HAWAII, as a Lender By Name Title COMMERZBANK, AG, LOS ANGELES BRANCH, as a Lender By Name Title By Name Title WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS BRANCH, as a Lender By Name Title By Name Title ACKNOWLEDGED and AGREED TO as of the date first written above: COUNTRYWIDE CREDIT INDUSTRIES, INC., a Delaware corporation By _______________________________________________ Name _____________________________________________ Title ____________________________________________ Countrywide Credit Industries, Inc. A Delaware Corporation By: - --------------------------------------------- Its: - --------------------------------------------- EX-10 7 FIRST AMENDMENT TO SERP COUNTRYWIDE CREDIT INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (1998 AMENDMENT AND RESTATEMENT) FIRST AMENDMENT The Countrywide Credit Industries, Inc. Supplemental Executive Retirement Plan (1998 amendment and restatement) shall be further amended as follows, effective January 1, 1999. 1. Section 1.3(i) shall be amended in its entirety to read as follows: The Applicable Percentage (as defined in Section 1.3(v) hereof) of the average of the Participant's five highest years of Salary (or such shorter period that the Participant is employed by an Employer), determined by averaging the Participant's five highest calendar years of Salary during the ten calendar year period ending with the calendar year in which the Participant terminates his or her service with all Employers (or such shorter period that the Participant is employed by an Employer); provided that for purposes of this determination, a Participant shall be deemed to have terminated employment on the date he or she attains Rule of 105 Status (as defined in Section 3.1(a)) so that the Participant's service and salary following the attainment of such status shall not be taken into account; less 2. Section 1.3 shall be amended by the addition of the following new Section 1.3(v) to read as follows: (v) For purposes of this Section 1.3, the Applicable Percentage shall be 70%, or, in the case of a Participant entering the Plan after December 31, 1997, 20% plus an additional 2.67% upon the Participant's completion of each of his sixth, seventh, eighth, ninth and tenth Years of Plan Participation, so that for a Participant entering the Plan after December 31, 1997, the maximum Applicable Percentage shall be 33 1/3% attainable upon the completion of ten Years of Plan Participation. Notwithstanding the foregoing, the Committee may in its discretion award to any Participant with at least ten Years of Plan Participation a maximum Applicable Percentage of up to 60%. 3. Section 2.4 shall be amended in its entirety to read as follows: 2.4 Vesting. a) For All Participants. A Participant shall vest 100% in his or her benefits under this Plan upon the earliest to occur, with respect to the Participant, while employed by an Employer of (i) the onset of a Disability, (ii) a Change in Control, (iii) his or her death, or (iv) attainment of at least age 55 with at least 5 Years of Plan Participation. b) Forfeiture. If a Participant has a Termination of Employment prior to becoming 100% vested, as determined above, he or she shall forfeit the non-vested portion of his or her benefit under this Plan and no person shall have any claim or right to such amount. Further, notwithstanding any other provision of the Plan, if a Participant dies after Termination of Employment but before his or her Retirement or Disability, he or she shall forfeit his entire benefit hereunder. 4. Section 3.1 shall be amended in its entirety to read as follows: 3.1 Normal Benefit. a) Eligibility. Except as provided in Section 3.2 below, upon a Participant's Retirement, Disability or attainment of Rule of 105 Status (as hereafter defined) the Participant shall become entitled to receive the Normal Benefit. For purposes of this Plan, a Participant attains Rule of 105 Status when while employed by an Employer the sum of his or her age and years of service equals 105 where years of service for this purpose means the total of full years in which a Participant has been employed by one or more Employers. b) Form and Amount. The "Normal Benefit" shall be paid in 360 semi-monthly installments to coincide with the Company's normal payroll cycle, with the first payment commencing within 30 days following the Participant's Retirement; onset of the Disability; or, the later of attainment of Rule of 105 Status; or, March 1, 1999. The amount of each payment shall be equal to 1/360th the Benefit Amount as that amount is calculated for the Participant, multiplied by the Participant's vested percentage as determined under Section 2.4 hereof. If a Participant dies after payments have commenced, his or her beneficiary will continue to receive the Normal Benefit for the balance of the 15 year period. Any payment made hereunder shall be limited as follows: If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall be credited with a reasonable rate of interest. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, this limitation shall not apply to any distributions made after a Change in Control. 5. Section 3.2(a) shall be amended in its entirety to read as follows: a) Eligibility. If a Participant dies, or a Change in Control occurs, prior to his or her Retirement, Disability, or attainment of Rule of 105 Status, while the Participant is employed by an Employer, the Participant or his or her Beneficiary, as the case may be, shall be paid the Special Benefit in lieu of the Normal Benefit. If a Participant dies prior to his or her Retirement, Disability, or attainment of Rule of 105 Status, and after a Termination of Employment, no benefit whatsoever shall be payable hereunder in respect of the Participant. IN WITNESS WHEREOF, this instrument of amendment is executed this _______ day of ____________________, 1999. Countrywide Credit Industries, Inc. A Delaware Corporation By: --------------------------------------------- Its: --------------------------------------------- EX-21 8 SUBSIDIARIES EXHIBIT 21 COUNTRYWIDE CREDIT INDUSTRIES, INC. SUSIDIARIES as of February 28, 1999 AWL of Massachusetts, Inc. CCM Municipal Services, Inc. Continental Mobil Home Brokerage Corporation Countrywide Agency of New York, Inc. Countrywide Agency of Ohio, Inc. Directnet Insurance Agency, Inc. (formerly Countrywide Agency, Inc.) Countrywide Aircraft Corporation Countrywide Capital I Countrywide Capital II Countrywide Capital III Countrywide Capital Markets, Inc. Countrywide Field Services Corporation Countrywide Financial Services, Inc. Countrywide Fund Services, Inc. Countrywide General Agency of Texas, Inc. Countrywide GP, Inc. Countrywide Home Loans of Minnesota, Inc. Countrywide Home Loans of New Mexico, Inc. Countrywide Home Loans of Texas, Inc. Countrywide Home Loans, Inc. Countrywide Insurance Agency of Massachusetts, Inc. Countrywide Insurance Agency of Ohio, Inc. Countrywide Insurance Group, Inc. Countrywide Insurance Services of Texas, Inc. Countrywide Insurance Services, Inc (an Arizona corporation) Countrywide Insurance Services, Inc. (a California corporation) Countrywide Investments, Inc. Countrywide Lending Countrywide LP, Inc. Countrywide Mortgage Pass-Thru Corporation Countrywide Parks I, Inc. (Pecan Plantation) Countrywide Parks V, Inc. (Paradise Village) Countrywide Parks VI, Inc. (Quail Run) Countrywide Parks VII, Inc. (Allison Acres) Countrywide Parks VIII, Inc. (Northwest Pines) Countrywide Partnership Investments, Inc. Countrywide Realty Partners, Inc. Countrywide Securities Corporation Countrywide Servicing Exchange Countrywide Tax Services Corporation CTC Real Estate Services (formerly CTC Foreclosure Services Corporation) CW Fund Distributors, Inc. CWABS, Inc. CWHL Funding Corporation CWMBS, Inc. CW Securities Holdings, Inc. Full Spectrum Lending, Inc. IndyMac, Inc HomeSafe Termite Inspection, Inc. LandSafe Appraisal Services, Inc. LandSafe Credit, Inc. LandSafe Flood Determination, Inc. LandSafe Home Inspection Services, Inc LandSafe, Inc. LandSafe Real Estate Partnership Services, Inc. LandSafe Services, Inc. LandSafe Servicing, Inc. LandSafe Title Agency, Inc. LandSafe Title Agency of New York, Inc. LandSafe Title Agency of Ohio, Inc. LandSafe Title of California, Inc. LandSafe Title of Florida, Inc. LandSafe Title of Illinois, Inc. LandSafe Title of Indiana, Inc. LandSafe Title of Maryland, Inc. LandSafe Title of Michigan, Inc. LandSafe Title of Nevada, Inc. LandSafe Title of Texas, Inc. LandSafe Title of Washington, Inc. Second Charter Reinsurance Company Suedore Limited The Countrywide Foundation CREDIT LYONNAIS NEW YORK BRANCH, as a Lender By Name Title ABN AMRO BANK, N.V., as a Lender By Name Title By Name Title BARCLAYS BANK PLC, 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 BANQUE NATIONALE DE PARIS, as a Lender By Name Title By Name Title BANQUE PARIBAS, as a Lender By Name Title By Name Title BANK OF HAWAII, as a Lender By Name Title COMMERZBANK, AG, LOS ANGELES BRANCH, as a Lender By Name Title By Name Title WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS BRANCH, as a Lender By Name Title 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-23 9 CONSENT LETTER CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 21, 1999, accompanying the consolidated financial statements and schedules included in the Annual Report of Countrywide Credit Industries, Inc. on Form 10-K for the year ended February 28, 1999. We hereby consent to the incorporation by referenced of said report in the Registration Statements of Countrywide Credit Industries, Inc. on Form S-3 (File No. 333-06473, effective June 21, 1996; File No. 33-59559 and 33-59559-01, effective June 26, 1995 and as amended on March 26, 1997; File No. 333-3835 and 333-3835-01, effective August 2, 1996 and amended on March 26, 1997; File No. 333-14111, 333-14111-01, 333-14111-02, and 333-14111-03, effective December 10, 1996; File No. 333-31529, 333-31529-01, effective August 12, 1997; File No. 333-58125 and 333-58125-01, effective July 16, 1998; and File No. 333-66467 and 333-66467-01, effective November 10, 1998) and on Form S-8 (File No. 33-9231, effective October 20, 1986, as amended on February 19, 1987, and as amended on December 20, 1988; File No. 33-17271, effective December 20, 1987; File No. 33-42625, effective September 6, 1991; File No. 33-56168, effective December 22, 1992; and File No. 33-69498, effective September 28, 1993; as supplemented on September 28, 1996; File No. 333-66095, effective October 23, 1998) and on Form S-4 (File No. 333-37047, effective November 19, 1997). GRANT THORNTON LLP Los Angeles, California April 21, 1999 EX-11 10 RECOMPUTATION OF EPS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Year ended February 28, (Dollar amounts in thousands, except per share data) 1999 1998 1997 -------------- -------------- ------------- BASIC Net earnings $385,401 $344,983 $257,358 ============== ============== ============= Total average shares 111,414 107,491 103,112 ============== ============== ============= Per share amount $3.46 $3.21 $2.50 ============== ============== ============= DILUTED Net earnings $385,401 $344,983 $257,358 ============== ============== ============= Average shares outstanding 111,414 107,491 103,112 Net effect of dilutive stock options -- based on the treasury stock method using the year-end market price, if higher than average market price 5,631 4,035 2,565 -------------- -------------- ------------- Total average shares 117,045 111,526 105,677 ============== ============== ============= Per share amount $3.29 $3.09 $2.44 ============== ============== =============
EX-12 11 CALCULATION OF RATIO 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 five fiscal years ended February 28, 1999 computed by dividing net fixed charges (interest expense on all debt plus the interest element (one-third) of operating leases) into earnings (income before income taxes and fixed charges). For Fiscal Years Ended February 28(29), ------------- - ------------- -- ------------- -- ------------ -- ------------- 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------ ------------- Net earnings $385,401 $344,938 $257,358 $195,720 $88,407 Income tax expense 246,404 220,563 164,540 130,480 58,938 Interest charges 983,829 568,359 423,447 337,655 267,685 Interest portion of rental expense 14,898 10,055 7,420 6,803 7,379 ------------- ------------- ------------- ------------ ------------- Earnings available to cover fixed charges $1,630,532 $1,143,915 $852,765 $670,658 $422,409 ============= ============= ============= ============ ============= Fixed charges Interest charges 983,829 568,359 423,447 337,655 267,685 Interest portion of rental expense 14,898 10,055 7,420 6,803 7,379 ------------- ------------- ------------- ------------ ------------- Total fixed charges $998,727 $578,414 $430,867 $344,458 $275,064 ============= ============= ============= ============ ============= Ratio of earnings to fixed charges 1.63 1.98 1.98 1.95 1.54 ============= ============= ============= ============ =============
EX-27 12 ART.5 FDS 10-K
5 (Replace this text with the legend) 1,000 0 YEAR FEB-28-1999 MAR-01-1998 FEB-28-1999 1.0 58,748 0 0 0 0 0 479,190 167,449 15,648,256 0 8,241,795 0 0 5,631 2,513,254 15,648,256 0 1,979,002 0 1,347,197 0 0 0 631,805 246,404 385,401 0 0 0 385,401 3.46 3.29
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