-----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, C3mEnp4M576PxR7VY4NDXhivib8zSzVkBYHACpM7cRooDlIA8hzDb2ScEelxmwdb mIQx4CQ6LZgZrDt9wJp2rg== 0000025191-99-000012.txt : 19990716 0000025191-99-000012.hdr.sgml : 19990716 ACCESSION NUMBER: 0000025191-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 99664972 BUSINESS ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8182253000 MAIL ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 10-Q 1 10-Q Page 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to ____________________ Commission File Number: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-2641992 - --------------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employe incorporation or organization) Identification No.) 4500 Park Granada, Calabasas, California 91302 - -------------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) (818) 225-3000 ------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 13, 1999 ----- ---------------------------- Common Stock $.05 par value 112,934,017 Page 5 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollar amounts in thousands, except per share data) A S S E T S May 31, February 28, 1999 1999 ------------------- ------------------- Cash $32,837 $ 58,748 Mortgage loans and mortgage-backed securities held for sale 6,713,084 6,231,220 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 326,528 311,741 Mortgage servicing rights, net 4,953,321 4,496,439 Other assets 5,338,837 4,550,108 ------------------- ------------------- Total assets $17,364,607 $15,648,256 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $3,817,451 $4,020,998 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $11,543,349 $9,935,759 Drafts payable issued in connection with mortgage loan closings 863,195 1,083,499 Accounts payable, accrued liabilities and other 675,354 517,937 Deferred income taxes 1,159,669 1,092,176 ------------------- ------------------- Total liabilities 14,241,567 12,629,371 Commitments and contingencies - - Company-obligated mandatorily redeemable capital trust pass-through securities of subsidiary trusts holding solely Company guaranteed related subordinated debt 500,000 500,000 Shareholders' equity Preferred stock - authorized, 1,500,000 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, 112,862,117 shares at May 31,1999 and 112,619,313 shares at February 28, 1999 5,643 5,631 Additional paid-in capital 1,162,527 1,153,673 Accumulated other comprehensive (loss) income (16,415) (19,593) Retained earnings 1,471,285 1,379,174 ------------------- ------------------- Total shareholders' equity 2,623,040 2,518,885 ------------------- ------------------- Total liabilities and shareholders' equity $17,364,607 $15,648,256 =================== =================== Borrower and investor custodial accounts $3,817,451 $4,020,998 =================== ===================
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands, except per share data) Three Months Ended May 31, 1999 1998 -------------- -------------- Revenues Loan origination fees $146,701 $ 138,770 Gain on sale of loans, net of commitment fees 170,012 159,027 -------------- -------------- Loan production revenue 316,713 297,797 Interest earned 275,562 242,767 Interest charges (247,741) (231,235) -------------- -------------- Net interest income 27,821 11,532 Loan servicing income 272,997 242,691 Amortization of mortgage servicing rights, net of servicing hedge (146,845) (148,711) -------------- -------------- Net loan administration income 126,152 93,980 Commissions, fees and other income 66,317 46,956 -------------- -------------- Total revenues 537,003 450,265 Expenses Salaries and related expenses 185,426 146,487 Occupancy and other office expenses 76,263 62,677 Guarantee fees 45,843 44,667 Marketing expenses 19,523 14,515 Other operating expenses 40,474 33,142 -------------- -------------- Total expenses 367,529 301,488 -------------- -------------- Earnings before income taxes 169,474 148,777 Provision for income taxes 66,095 58,023 -------------- -------------- NET EARNINGS $103,379 $ 90,754 ============== ============== Earnings per share Basic $0.92 $0.82 Diluted $0.88 $0.78
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Three Months Ended May 31, 1999 1998 ----------------- ----------------- Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash $103,379 $ 90,754 provided (used) by operating activities: Gain on sale of available-for-sale securities (11,194) (2,387) Amortization and impairment/recovery of mortgage servicing rights 128,760 133,893 Depreciation and other amortization 15,752 12,996 Deferred income taxes 66,130 58,023 Origination and purchase of loans held for sale (23,193,000) (20,876,079) Principal repayments and sale of loans 22,711,136 20,154,531 ----------------- ----------------- Increase in mortgage loans and mortgage- backed securities held for sale (481,864) (721,548) Increase in other assets (978,890) (369,664) Increase in accounts payable and accrued liabilities 157,417 269,771 ----------------- ----------------- Net cash used by operating activities (1,000,510) (528,162) ----------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (432,368) (415,012) Purchase of property, equipment and leasehold Improvements, net (27,043) (23,022) Proceeds from sale of available-for-sale securities 49,360 8,619 ----------------- ----------------- Net cash used by investing activities (410,051) (429,415) ----------------- ----------------- Cash flows from financing activities: Net increase in warehouse debt and other short-term borrowings 745,601 601,662 Issuance of long-term debt 717,000 394,315 Repayment of long-term debt (75,315) (47,948) Issuance of common stock 8,632 32,458 Cash dividends paid (11,268) (8,812) ----------------- ----------------- Net cash used provided by financing activities 1,384,650 971,675 ----------------- ----------------- Net increase (decrease) in cash (25,911) 14,098 Cash at beginning of period 58,748 10,707 ================= ================= Cash at end of period $32,837 $ 24,805 ================= ================= Supplemental cash flow information: Cash used to pay interest $ 113,141 $ 145,206 Cash used to pay income taxes $ $ 675 7 Noncash financing activities: Unrealized gain on available-for-sale securities, net of tax $3,178 $ 7,965
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollar amounts in thousands) Three Months Ended May 31, 1999 1998 ----------------- --------------- NET EARNINGS $103,379 $90,754 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period 10,006 9,421 Less: reclassification adjustment for gains included in net earnings (1,456) (6,828) ----------------- --------------- Other comprehensive income 3,178 7,965 ================= =============== COMPREHENSIVE INCOME $ 106,557 $98,719 ================= ===============
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Page 14 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended May 31, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 28, 1999 of Countrywide Credit Industries, Inc. (the "Company"). Certain amounts reflected in the consolidated financial statements for the three-month period ended May 31, 1998 have been reclassified to conform to the presentation for the three-month period ended May 31, 1999. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows. ----------------------------------------------- ---------------------- --------------------- Quarter Ended May 31, (Dollar amounts in thousands) 1999 ----------------------------------------------- -- ---------------- -- ---------------- Mortgage Servicing Rights Balance at beginning of period $4,591,191 Additions 432,368 Scheduled amortization (126,976) Hedge losses (gains) applied 153,274 ---------------- Balance before valuation reserve at end of period 5,049,857 ---------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (94,752) Reductions (additions) (1,784) ---------------- Balance at end of period (96,536) ================ Mortgage Servicing Rights, net $4,953,321 ================ ----------------------------------------------- -- ---------------- -- ---------------- ----
NOTE C - OTHER ASSETS Other assets consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- May 31, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- -- ----------------- --- ---------------- --- Trading securities $2,017,398 $ 1,460,446 Servicing hedge instruments 1,223,261 991,401 Mortgage-backed securities retained in securitization 469,084 500,631 Rewarehoused FHA and VA loans 286,963 216,598 Receivables related to broker-dealer activities 198,151 401,232 Servicing related advances 188,039 199,143 Accrued interest 138,366 102,093 Loans held for investment 169,873 125,236 Reverse repurchase agreements 121,564 76,246 Equity Securities 71,182 59,875 Other 454,956 417,207 ----------------- --- ---------------- $5,338,837 $4,550,108 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- ---
NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows. ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- May 31, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $486,114 $11,224 ($28,254) $469,084 Principal only securities 310,319 2,130 302,799 (9,650) Equity securities 42,498 - (2,498) 40,000 ================ ================= ================ ================ $838,931 $13,354 ($40,402) $811,883 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 28, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $519,321 - ($18,690) $500,631 Principal only securities 32,514 312 - 32,826 Equity securities 42,498 3,098 (16,904) 28,692 ================ ================= ================ ================ $594,333 $3,410 ($35,594) $562,149 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE E - NOTES PAYABLE Notes payable consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- May 31, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- -- ------------------ ---------------- --- Commercial paper $458,578 $176,559 Medium-term notes, Series A, B, C, D, E, F, G, H and Euro Notes 8,681,824 8,039,824 Repurchase agreements 2,201,291 1,517,405 Subordinated notes 200,000 200,000 Other notes payable 1,656 1,971 ================= ================ $11,543,349 $9,935,759 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Commercial Paper and Backup Credit Facilities As of May 31, 1999, CHL, the Company's mortgage banking subsidiary, had unsecured credit agreements (revolving credit facilities) with consortiums of commercial banks permitting CHL to borrow an aggregate maximum amount of $5.0 billion. The facilities included a $4.0 billion revolving credit facility with forty-four commercial banks consisting of: (i) a five-year facility of $3.0 billion, which expires on September 24, 2002, and (ii) a one-year facility of $1.0 billion which expires on September 22, 1999. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. There is an additional one-year facility, which expires April 12, 2000, with eleven of the forty-four banks referenced above for total commitments of $1.0 billion. As consideration for the facility, CHL pays annual commitment fees of $0.8 million. In addition, CHL has entered into a $1.5 billion committed mortgage loan conduit facility, with four commercial banks. The committed mortgage loan conduit 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. All of the facilities contain various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. 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 May 31, 1999. The weighted average borrowing rate on commercial paper borrowings for the quarter ended May 31, 1999 was 4.92%. The weighted average borrowing rate on commercial paper outstanding as of May 31, 1999 was 5.03% NOTE E - NOTES PAYABLE (Continued) Medium-Term Notes As of May 31, 1999, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission or issued by CHL pursuant to its Euro medium-term note program were as follows. - --------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ------------------------------------------- ---------------------- ---------------------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- -------------- ------------- Series A - $143,500 $143,500 7.29% 8.79% Aug. 2000 Mar. 2002 Series B - 351,000 351,000 6.08% 6.98% Jul. 1999 Aug. 2005 Series C $163,000 197,000 360,000 4.86% 8.43% Nov. 1999 Mar. 2004 Series D 75,000 385,000 460,000 5.34% 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 5.00% 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 1,017,000 1,131,500 5.05% 7.00% Dec. 1999 May 2019 Euro Notes 1,019,600 716,224 1,735,824 4.97% 6.30% Jul. 1999 Jan. 2009 ------------------------------------------- Total $3,257,100 $5,424,724 $8,681,824 =========================================== - ---------------------------------------------------------------------------------------------------------------------------
As of May 31, 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 quarter ended May 31, 1999, including the effect of the interest rate swap agreements, was 5.44%. As of May 31, 1999, $666.2 million foreign currency denominated fixed-rate notes issued pursuant to the Euro medium-term notes program were outstanding. Such notes are denominated in Deutsche marks, French Francs 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 quarter ended May 31, 1999 was 4.83%. The weighted average borrowing rate on repurchase agreements outstanding as of May 31, 1999 was 4.98%. 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. NOTE E - NOTES PAYABLE (Continued) 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 May 31, 1999 CHL had no uncommitted revolving credit facilities with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. As of May 31, 1999, the Company had no outstanding borrowings under any of these facilities. NOTE F - FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge. - -------------------------------------- -------------------- -------------------- ------------------ --------------------- (Dollar amounts in millions) Balance, Dispositions/ Balance, February 28, 1999 Additions Expirations May 31, 1999 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- Interest Rate Floors $33,000 9,000 - $42,000 Long Call Options on Interest Rate Futures $32,000 250 (11,000) $21,250 Long Put Options on Interest Rate Futures $54,600 - (2,100) $52,500 Short Call Options on Interest Rate Futures $22,000 - (1,000) $21,000 Short Put Options on Interest Rate Futures $720 - (720) - Interest Rate Futures $22,500 - (8,500) $14,000 Capped Swaps $1,000 - - $1,000 Interest Rate Swaps $15,150 300 - $15,450 Interest Rate Cap $4,500 - - $4,500 Swaptions $32,550 7,500 (300) $39,750 Options on Callable Pass-through Certificates $4,561 - - $4,561 - -------------------------------------- -------------------- -------------------- ------------------ ---------------------
Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of May 31, 1999 and February 28, 1999 is made by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. NOTE F- FINANCIAL INSTRUMENTS (Continued) ---- ------------------------------------------------- --------------------------------- --- ---------------------------- May 31, 1999 February 28, 1999 --------------------------------- --- ---------------------------- Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount fair value Amount fair value ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- ------------- Assets: Mortgage loans and mortgage-backed securities held for sale $6,713,084 $6,713,084 $6,231,220 $6,231,220 Items included in other assets: Trading securities 2,017,398 2,017,398 1,460,446 1,460,446 Loans held for investment 169,873 169,873 125,236 125,236 Receivables related to broker-dealer activiti198,151 198,151 401,232 401,232 Reverse repurchase agreements 121,564 121,564 76,246 76,246 Principal only securities purchased 302,799 302,799 32,826 32,826 Mortgage-backed securities retained in Securitizations 469,084 469,084 500,631 500,631 Equity Securities - restricted and unrestricte71,182 65,483 59,875 46,971 Rewarehoused FHA and VA loans 286,963 286,963 216,598 216,598 Liabilities: Notes payable 11,543,349 10,734,731 9,935,759 9,883,859 Securities sold not yet purchased 143,430 143,430 84,775 84,775 Derivatives: Interest rate floors 437,596 324,923 426,838 402,061 Forward contracts on MBS 13,886 200,415 12,775 120,709 Options on MBS 16,081 51,228 34,883 62,475 Options on interest rate futures 5,560 1,109 18,261 15,729 Options on callable pass-through certificates 55,093 25,758 55,593 36,460 Interest rate caps 63,777 52,371 77,508 40,437 Capped Swaps 4,892 2,710 8,470 3,092 Swaptions 361,041 197,708 337,703 271,073 Interest rate futures (46,189) (46,189) 57,280 57,280 Interest rate swaps (3,189) (65,678) 43,570 93,205 Short-term commitments to extend credit - 14,100 - 26,400 ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of May 31, 1999 and February 28, 1999 are based on pertinent information that was available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. NOTE G - LEGAL PROCEEDINGS Legal Proceedings The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Home Loans, Inc. was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- --------- May 31, February 28, (Dollar amounts in thousands) 1999 1999 ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $6,713,084 $ 6,231,220 Mortgage servicing rights, net 4,953,321 4,496,439 Other assets 3,271,258 2,955,382 ============== ============== Total assets $14,937,663 $13,683,041 ============== ============== Short- and long-term debt $10,923,756 $9,910,966 Other liabilities 1,602,744 1,434,727 Equity 2,411,163 2,337,348 ============== ============== Total liabilities and equity $14,937,663 $13,683,041 ============== ============== ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- ----- ----------------------------------------- --- --------------------------------------------------- -------- Three Months Ended May 31, (Dollar amounts in thousands) 1999 1998 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $436,497 $382,167 Expenses 303,314 261,114 Provision for income taxes 51,941 47,211 =============== =============== Net earnings $81,242 $ 73,842 =============== =============== ----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE I - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). It requires that an entity 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, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. NOTE J - SEGMENTS AND RELATED INFORMATION The Company has three major segments: Loan Production, Loan Servicing and Capital Markets. The Loan Production segment is comprised of the Consumer Markets, Wholesale and Correspondent Divisions and Full Spectrum Lending, Inc. The Loan Production segment originates and purchases conventional mortgage loans, mortgage loans insured by the FHA and VA, home equity and sub-prime loans and sells those loans to permanent investors. The Loan Servicing segment services on a primarily non-recourse basis substantially all of the mortgage loans originated and purchased by the Loan Production segment. In addition, the Loan Servicing segment purchases bulk servicing rights, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. The Capital Markets segment trades securities, primarily mortgage-related securities, with broker-dealers and institutional investors and, as an agent, facilitates the purchase and sale of bulk servicing rights. Included in the tables below labeled "Other" are the operating segments that provide ancillary services and certain reclassifications to conform management reporting to the consolidated financial statements. - -------------------------------------------------------------------------------------------------------------------- For the fiscal quarter ended May 31, 1999 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $302,958 $165,196 $13,627 $27,401 $509,182 Interest earned 190,234 59,680 28,510 (2,862) 275,562 Interest charges (144,735) (83,325) (21,776) 2,095 (247,741) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 45,499 (23,645) 6,734 (767) 27,821 ----------- ----------- ------------ ------------ ------------ Total revenue $348,457 $141,551 $20,361 $26,634 $537,003 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $125,918 $29,982 $7,775 $5,799 $169,474 Segment assets $7,606,791 $7,385,579 $2,306,038 $66,199 $17,364,607 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- - -------------------------------------------------------------------------------------------------------------------- For the fiscal quarter ended May 31, 1998 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $287,045 $116,459 $11,586 $23,643 $438,733 Interest earned 172,860 64,602 781 4,524 242,767 Interest charges (142,906) (85,776) (303) (2,250) (231,235) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 29,954 (21,174) 478 2,274 11,532 ----------- ----------- ------------ ------------ ------------ Total revenue $316,999 $95,285 $12,064 $25,917 $450,265 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $136,002 ($595) $5,248 $8,122 $148,777 Segment assets $7,071,379 $6,096,420 $348,576 $105,320 $13,621,695 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE K - SUBSEQUENT EVENTS On June 14, 1999 the Company announced that it had reached an agreement to purchase Balboa from Associates First Capital Corporation for $425 million. The purchase price will be funded by approximately $200 million of new common stock, or an equivalent amount of Hybrid Equity Securities, along with unsecured debt to be issued by the Company or CHL. Balboa is an underwriter of credit-related insurance, specializing in creditor-placed auto and homeowners insurance. Balboa also offers voluntary homeowners and life and disability products. NOTE K - SUBSEQUENT EVENTS (Continued) On June 24, 1999 CHL issued $750 million 6.85% Senior Global Notes (the "Notes"). Interest is payable semi-annually on each June 15 and December 15. The Notes mature June 15, 2004 and are not redeemable prior to maturity. On July 9, 1999, the Company filed a shelf registration statement with the Securities and Exchange Commission (the "SEC") which provides for the issuance of common stock, preferred stock, debt securities and/or hybrid equity securities with an aggregate public offering price of up to $3.0 billion. Pursuant to this registration statement, the Company may issue adjustable conversion rate equity securities (the "Hybrid Equity Securities"), which will include the issuance by the Company or CHL of a subordinated deferrable note and a contract to purchase shares of common stock of the Company. If issued, the proceeds from the Hybrid Equity Securities may be used to pay a portion of the purchase price for the acquisition of the Balboa Life and Casualty Insurance group. NOTE L - EARNINGS PER SHARE Basic earnings per share is determined using net income divided by the weighted average shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The following table presents basic and diluted EPS for the three months ended May 31, 1999 and 1998. - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Three Months Ended May 31, -- -- ----- ------------------------------------ -- ----- ---- 1999 1998 --------- --------- --------- ---------- --------- --------- (Dollar amounts in Per-Share Per-Share thousands, except per Net Amount Net Amount share data) Earnings Shares Earnings Shares - ------------------------ --------- --------- --------- --------- ========= ========== Net earnings $103,379 $90,754 ========= ========== Basic EPS Net earnings available to common shareholders $103,379 112,751 $0.92 $90,754 110,127 $ 0.82 Effect of dilutive stock options - 4,762 - 6,416 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $103,379 117,513 $0.88 $90,754 116,543 $ 0.78 ========= ========= ========= ========== ========= --------- - ------------------------ --------- --------- --------- - ---------- --------- ---------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 15 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," "intend," "estimate," "should" and other expressions which indicate future events and trends identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: (1) the level of demand for mortgage credit, which is affected by such external factors as the level of interest rates, the strength of the various segments of the economy and demographics of the Company's lending markets; (2) the direction of interest rates; (3) the relationship between mortgage interest rates and the cost of funds; (4) federal and state regulation of the Company's mortgage banking operations, capital markets operations, and insurance services; and (5) competition within the mortgage banking industry, capital markets industries, and insurance services; and (6) the ability of the Company to manage expenses. RESULTS OF OPERATIONS Quarter Ended May 31, 1999 Compared to Quarter Ended May 31, 1998 Revenues for the quarter ended May 31, 1999 increased 19% to $537.0 million, up from $450.3 million for the quarter ended May 31, 1998. Net earnings from ongoing operations increased 14% to $103.4 for the quarter ended May 31, 1999, up from $90.8 million for May 31, 1998. The increase in revenues and net earnings from ongoing operations for the quarter ended May 31, 1999 compared to the quarter ended May 31, 1998 was primarily attributed to higher loan production volume, an increase in the size of the Company's servicing portfolio, a reduction in the amortization rate of its mortgage servicing rights ("MSRs") and an increase in the income of the non-mortgage banking subsidiaries. These positive factors were partially offset by an increase in expenses for the quarter ended May 31, 1999 over the quarter ended May 31, 1998. The total volume of loans produced by the Company increased 11% to $23.2 billion for the quarter ended May 31, 1999, up from $20.9 billion for the quarter ended May 31, 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. Purchase fundings totaled $11.7 billion, or 51% of total fundings, for the quarter ended May 31, 1999 as compared to $9.0 billion, or 43% of total fundings, for the quarter ended May 31, 1998. Fixed-rate mortgage loan production totaled $21.6 billion, or 93% of total fundings, for the quarter ended May 31, 1999 as compared to $19.4 billion, or 93% of total fundings, for the quarter ended May 31, 1998. Total loan volume in the Company's production Divisions is summarized below. - -------------------------------------------- ------------------------------------ -------- (Dollar amounts in millions) Loan Production Three Months Ended May 31, - -------------------------------------------- ------------------------------------ -------- 1999 1998 ------------- ------------ Consumer Markets Division $7,035 $ 6,001 Wholesale Lending Division 7,122 7,462 Correspondent Lending Division 8,712 7,287 Full Spectrum Lending, Inc. 324 126 ============= ============= Total Loan Volume $23,193 $20,876 ============= ============= Electronic Commerce (1) $1,792 $84
(1) This category includes loans sourced through the Company's website of $212 million and $84 million for the quarter ended May 31, 1999 and the quarter ended May 31, 1998, respectively, as well as loans submitted to the Correspondent Lending Division via its correspondent website of $1,580 million for the quarter ended May 31, 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 $717 million of home equity loans funded in the quarter ended May 31, 1999 and $452 million funded in the quarter ended May 31, 1998. Sub-prime loan production, which is also included in the Company's total production volume, was $769 million in the quarter ended May 31, 1999 and $521 million in the quarter ended May 31, 1998. As of May 31, 1999 and 1998, the Company's pipeline of loans in process was $14.1 billion and $14.6 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process have funded. In addition, as of May 31, 1999, the Company had committed to make loans in the amount of $2.7 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). As of May 31, 1998, the LOCK 'N SHOP (R) Pipeline was $1.5 billion. During the quarters ended May 31, 1999 and 1998, the Company received 303,942 and 278,448 new loan applications, respectively, at an average daily rate of $521 million and $495 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 the quarter ended May 31, 1999 as compared to the quarter ended May 31, 1998 primarily due to higher production. Gain on sale of loans also increased in the quarter ended May 31, 1999 as compared to the quarter ended May 31, 1998 primarily due to higher production volume and increased sales during the quarter ended May 31, 1999 of higher margin home equity and sub-prime loans. These positive factors were partially offset by reduced margins on prime credit quality mortgages. The sale of home equity loans contributed $20.3 million and $17.5 million to gain on sale of loans in the quarter ended May 31, 1999 and the quarter ended May 31, 1998, respectively. Sub-prime loans contributed $35.5 million to the gain on sale of loans in the quarter ended May 31, 1999 and $16.4 million in the quarter ended May 31, 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 $27.8 million for the quarter ended May 31, 1999, up from $11.5 million for the quarter ended May 31, 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($45.5 million and $30.0 million for the quarter ended May 31, 1999 and the quarter ended May 31, 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($83.3 million and $85.8 million for the quarter ended May 31, 1999 and the quarter ended May 31, 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($59.7 million and $64.6 million for the quarter ended May 31, 1999 and the quarter ended May 31, 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 combined with a higher net earnings rate during the quarter ended May 31, 1999. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio partially offset by a decrease in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances caused by a decrease in the amount of prepayments. During the quarter ended May 31, 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. As of May 31, 1999, the Company serviced $226.0 billion of loans (including $2.3 billion of loans subserviced for others), up from $191.6 billion (including $8.3 billion of loans subserviced for others) as of May 31, 1998, which was an 18% increase. The growth in the Company's servicing portfolio since May 31, 1998 was the result of increased loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization and the transfer back to IndyMac Mortgage Holdings, Inc. ("INMC ") of $6.5 billion of subservicing. During the quarter ended May 31, 1999, the annual prepayment rate of the Company's servicing portfolio was 21%, compared to 28% for the quarter ended May 31, 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 May 31, 1999 was 7.4% compared to 7.7% as of May 31, 1998. The Company recorded amortization and net recovery of its MSRs for the quarter ended May 31,1999 totaling $24.5 million (consisting of amortization amounting to $127.0 million and recovery of previous impairment of $151.5 million), compared to $149.3 million of amortization and impairment (consisting of amortization amounting to $132.9 million and impairment of $16.4 million) for the quarter ended May 31, 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 the quarter ended May 31, 1999, the Company recognized a net expense of $171.4 million from its Servicing Hedge. The net expense included unrealized net losses of $182.8 million and realized net gains of $11.4 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In the quarter ended May 31, 1998, the Company recognized a net benefit of $0.6 million from its Servicing Hedge. The net benefit included unrealized gains of $4.6 million and net realized losses of $4.0 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, principal only securities ("P/O securities" ) 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 Rate for U.S. dollar deposits ("LIBOR") and has a specified maximum or "cap". With Swaps, the Company receives and pays interest on a specified 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 P/O securities consist of certain tranches of collateralized mortgage securities ("CMOs"), mortgage Trust Principal Only Securities and Treasury Principal Only Strips. These securities have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs and mortgage Trust Principal Only Securities should increase. This results in a decline in the average lives of the P/O securities and a corresponding increase in the present values of their cash flows. Conversely, as interest rates increase, prepayments on the collateral underlying the CMOs and mortgage Trust Principal Only Securities should decrease. This would result in an increase in the average lives of the P/O Securities and a decrease in the present values of their cashflows. The prices of the Treasury Principal Only Strips are determined by the discount rate used to determine their present value, as interest rates decline the discount rate applied to the maturity principal payment declines, resulting in an increase in the price. An option 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 MSRs from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the MSRs increases while the value of the hedge instruments declines. With respect to the floors, options, caps, Swaptions, options on CPC and P/O Securities, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. The Company's exposure to loss on futures is related to changes in the LIBOR rate over the life of the contract. The Company estimates that its maximum exposure to loss over the contractual term is $53 million. With respect to the Interest Rate Swaps contracts entered into by the Company as of May 31, 1999, the Company estimates that its maximum exposure to loss over the contractual term is $305 million. During the quarter ended May 31, 1999, the Company acquired bulk servicing rights for loans with principal balances aggregating $268.0 million at a price of 1.22% of the aggregate outstanding principal balances. During the quarter ended May 31, 1998, the Company acquired bulk servicing rights for loans with principal balances aggregating $291.2 million at a price of 1.35% of the aggregate outstanding principal balances. Salaries and related expenses are summarized below for the quarters ended May 31, 1999 and 1998. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended May 31, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $62,474 $14,979 $25,076 $12,952 $115,481 Incentive Bonus 32,857 693 5,850 6,385 45,785 Payroll Taxes and Benefits 14,481 3,180 4,604 1,895 24,160 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $109,812 $18,852 $35,530 $21,232 $185,426 ============ ============= ============= ============= ------------ Average Number of 6,380 2,162 2,092 862 11,496 Employees ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended May 31, 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $43,485 $11,960 $20,211 $7,806 $83,462 Incentive Bonus 33,539 329 5,122 3,640 42,630 Payroll Taxes and Benefits 12,062 2,826 4,274 1,233 20,395 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $89,086 $15,115 $29,607 $12,679 $146,487 ============ ============= ============= ============= ------------ Average Number of 4,597 1,839 1,622 641 8,699 Employees ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during the quarter ended May 31, 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 the quarter ended May 31, 1999 increased primarily due to growth in the Company's non-mortgage banking subsidiaries. Occupancy and other office expenses for the quarter ended May 31, 1999 increased to $76.3 million from $62.7 million for the quarter ended May 31, 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 the quarter ended May 31, 1999, guarantee fees increased 3% to $45.8 million, up from $44.7 million for the quarter ended May 31, 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 the quarter ended May 31, 1999 increased 35% to $19.5 million which was up from $14.5 million for the quarter ended May 31, 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 the quarter ended May 31, 1999 increased from the quarter ended May 31, 1998 by $7.3 million, or 22%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased systems development and growth in the Company's non-mortgage banking subsidiaries in the quarter ended May 31, 1999 as compared to the quarter ended May 31, 1998. On May 11, 1999 the Company 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. 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. As of May 31, 1999, the Company had contributed capital of approximately $8.0 million to the Joint Venture. The Joint Venture is expected to begin operations in the second half of 1999. On June 14, 1999 the Company announced that it had reached an agreement to purchase Balboa from Associates First Capital Corporation for $425 million. The purchase price will be funded by approximately $200 million of new common stock, or Hybrid Equity Securities, along with unsecured debt to be issued by the Company or CHL. Balboa is an underwriter of credit-related insurance, specializing in creditor-placed auto and homeowners insurance. Balboa also offers voluntary homeowners and life and disability products. Profitability of Loan Production Segment In the quarter ended May 31, 1999, pre-tax earnings from loan production segment activities (which include loan origination and purchases, warehousing and sales) were $125.9 million. In the quarter ended May 31, 1998, comparable pre-tax earnings were $136.0 million. The decrease of $10.1 million was primarily attributable to higher production costs which were partially offset by increased production and a shift in production towards the Consumer Markets Division. Profitability of Loan Servicing Segment In the quarter ended May 31, 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 $30.0 million as compared to $0.6 million loss in the quarter ended May 31, 1998. The increase of $30.6 million is primarily due to an increase in servicing revenues resulting from servicing portfolio growth combined with a reduction in the amortization rate of the servicing asset. These positive factors were partially offset by higher servicing costs. Profitability of Capital Markets Segment In the quarter ended May 31, 1999, pre-tax earnings from the capital markets segment were $7.8 million. In the quarter ended May 31, 1998, comparable pre-tax earnings were $5.2 million. The increase of $2.6 million was primarily due to increased trading volumes. Profitability of Other Activities In addition to loan production, loan servicing and capital markets, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting, and home inspection and flood zone determination services. In addition, through its subsidiaries, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For the quarter ended May 31, 1999, LandSafe Inc. contributed $6.5 million to the Company's pre-tax income compared to $5.0 million for the quarter ended May 31, 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 the operations of Countrywide Financial Services, Inc. and subsidiaries. The operations of other activities, excluding LandSafe Inc., incurred pre-tax losses of $0.7 million during the quarter ended May 31, 1999 compared to pre-tax income of $3.2 million during the quarter ended May 31, 1998. The decrease in pre-tax income resulted from a decrease in the CCI's net interest income related to a receivable from CHL that was eliminated by a capital contribution. 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 May 31, 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 $29.6 million after-tax loss related to its other financial instruments. As of May 31, 1999, the Company estimates that this combined after-tax loss of $29.2 million is the largest such loss that would occur within the range of reasonably possible interest rate changes. These sensitivity analyses are limited by the fact that they are performed at a particular point in time and do not incorporate other factors that would impact the Company's financial performance in such a scenario. Consequently, the preceding estimates should not be viewed as a forecast. An additional market risk facing the Company is foreign currency risk. The Company has issued foreign currency denominated medium-term notes (See Note E). The Company manages the foreign currency risk associated with such medium-term notes by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into the Company's reporting currency (i.e., U.S. dollars) thereby eliminating the associated foreign currency risk. 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, senior debt, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from the revolving credit facility and public offerings of common and preferred stock. Certain of the debt obligations of the Company and Countrywide Home Loans, Inc. ("CHL") contain various provisions that may affect the ability of the Company and CHL to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CHL to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells the mortgage loans it originates and purchases to investors but generally retains the right to service the loans, thereby increasing the Company's investment in MSRs. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In the quarter ended May 31, 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 the quarter ended May 31, 1998, operating activities used approximately $0.5 billion on a short-term basis primarily to support the increase in its mortgage loans and MBS held for sale. Investing Activities The primary investing activity for which cash was used by the Company was the investment in MSRs. Net cash used by investing activities was $0.4 billion for the quarter ended May 31, 1999, $0.4 billion for the quarter ended May 31, 1998. Financing Activities Net cash provided by financing activities amounted to $1.4 billion for the quarter ended May 31, 1999. Net cash provided by financing activities amounted to $1.0 billion for the quarter ended May 31, 1998. The increase or decrease in cash flow from financing activities was primarily the result of the change in the Company's mortgage loan inventory and investment in MSRs. Prospective Trends Applications and Pipeline of Loans in Process For the month ended June 30, 1999, the Company received new loan applications at an average daily rate of $490 million. As of June 30, 1999, the Company's pipeline of loans in process was $13.3 billion. This compares to a daily application rate for the month ended in June 30, 1998 of $505 million and a pipeline of loans in process as of June 30, 1998 of $14.7 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 June 30, 1999 was $3.5 billion and as of June 30, 1998 was $1.4 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 11% from the quarter ended May 31, 1998 to quarter ended May 31, 1999. This increase was primarily due to two 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, new and existing home sales were stronger during the quarter ended May 31, 1999 compared to the quarter ended May 31, 1998. Additionally higher market interest rates during the quarter ended May 31, 1999 compared to the same period in 1998 resulted in a shift in production from refinancings to purchase fundings. The prepayment rate in the servicing portfolio decreased from 28% for the quarter ended May 31, 1998 to 21% for the quarter ended May 31, 1999. This was due primarily to decreases in 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 23% of its total production during the quarter ended May 31, 1999 and 26% during the quarter ended May 31, 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 3.00% at May 31, 1999 from 3.38% as of May 31, 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 43% and 47% of the portfolio as of May 31, 1999 and May 31, 1998, respectively. In addition, the weighted average age of the portfolio was 25 months at May 31, 1999, down from 30 months as of May 31, 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 0.27% as of May 31, 1999 from 0.39% as of May 31, 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 (24% of the Company's servicing portfolio as of May 31, 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 May 31, 1999, the Company had investments in such subordinated interests amounting to $313.6 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, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. 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 of the Company's mission critical Client Server applications have been forward-date tested. The Company estimates that forward-date testing of its less critical applications will be completed by September 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 43 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 $27.9 million had been incurred through May 31, 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. Page 27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement Regarding Computation of Per Share Earnings 12.1 Computation of the Ratio of Earnings to Fixed Charges 27 Financial Data Schedules (included only in the electronic filing with the SEC). (b) Reports on Form 8-K. None. EX-11 2 STATEMENT REGARDING PER SHARE EARNINGS Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Three Months Ended May 31, 1999 1998 ----------------- ---------------- (Dollar amounts in thousands, except per share data) Basic Net earnings applicable to common stock $103,379 $90,754 ================ ================= Average shares outstanding 112,751 110,127 ================ ================= Per share amount $0.92 $0.82 ================ ================= Diluted Net earnings applicable to common stock $103,379 $90,754 ================ ================= Average shares outstanding 112,751 110,127 Net effect of dilutive stock options -- based on the treasury stock method using the average market price. 4,762 6,416 ---------------- ----------------- Total average shares 117,513 116,543 ================ ================= $0.88 $0.78 ================ ================= Per share amount
EX-12 3 RATIO OF EARNINGS TO FIXED CHARGES COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the three months ended May 31, 1999 and 1998 and for the five fiscal years ended February 28, 1999 computed by dividing net fixed charges (interest expense on all debt plus the interest element (one-third) of operating leases) into earnings (income before income taxes and fixed charges). Three Months Ended May 31, Fiscal Years Ended February 29(28), -------------------------- ------------------------------------------------------------------ 1999 1998 1999 1998 1997 1996 1995 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Net earnings $103,379 $90,754 $385,401 $344,938 $257,358 $195,720 $ 88,407 Income tax expense 66,095 58,023 246,404 220,563 164,540 130,480 58,938 Interest charges 247,741 231,235 983,829 568,359 423,447 337,655 267,685 Interest portion of rental Expense 4,798 3,107 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Earnings available to cover fixed charges $422,013 $383,119 $1,630,532 $1,143,915 $852,765 $670,658 $422,409 ============ ============= ============ ============= ============ ============ ============= Fixed charges Interest charges $247,741 $231,235 $983,829 $568,359 $423,447 $337,655 $267,685 Interest portion of rental Expense 4,798 3,107 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Total fixed charges $252,539 $234,342 $998,727 $578,414 $430,867 $344,458 $275,064 ============ ============= ============ ============= ============ ============ ============= Ratio of earnings to fixed charges 1.67 1.63 1.63 1.98 1.98 1.95 1.54 ============ ============= ============ ============= ============ ============ =============
EX-27 4 FINANCIAL DATA SCHEDULE
5 0000025191 Countrywide Credit Industries 1,000 1.00 3-MOS FEB-28-2000 MAR-01-1999 MAY-31-1999 1.00 32,837 0 0 0 0 0 326,528 179,705 17,364,607 0 8,681,824 0 0 5,643 2,617,397 17,364,607 0 537,003 0 367,529 0 0 0 169,474 66,095 103,379 0 0 0 103,379 0.92 0.88
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