-----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, Lz60QwPQIp5sLEYowrckR+pny7rZ9BYbmCfUukXhUdMy8oo6XIiC9vME8J4X4lGr L9HSxrLTnioUrUo2XkQBag== 0000025191-99-000021.txt : 19991018 0000025191-99-000021.hdr.sgml : 19991018 ACCESSION NUMBER: 0000025191-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991014 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: 99728546 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to ____________________ Commission File Number: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-2641992 - ----------------------------- ------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4500 Park Granada, Calabasas, California 91302 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (818) 225-3000 ----------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at October 13, 1999 ----- ------------------------------- Common Stock $.05 par value 113,164,848 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 August 31, February 28, 1999 1999 ------------------- ------------------- Cash $ 48,024 $ 58,748 Mortgage loans and mortgage-backed securities held for sale 5,497,119 6,231,220 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 347,292 311,741 Mortgage servicing rights, net 5,243,776 4,496,439 Other assets 5,095,234 4,550,108 ------------------- ------------------- Total assets $ 16,231,445 $ 15,648,256 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $ 3,610,303 $ 4,020,998 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 10,829,461 $9,935,759 Drafts payable issued in connection with mortgage loan closings 455,984 1,083,499 Accounts payable, accrued liabilities and other 537,246 517,937 Deferred income taxes 1,211,759 1,092,176 ------------------- ------------------- Total liabilities 13,034,450 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 Common stock - authorized, 240,000,000 shares of $0.05 par Value; issued and outstanding, 113,058,030 shares at August 31, 1999 and 112,619,313 shares at February 28, 1999 5,652 5,631 Additional paid-in capital 1,165,027 1,153,673 Accumulated other comprehensive (loss) income (40,176) (19,593) Retained earnings 1,566,492 1,379,174 ------------------- ------------------- Total shareholders' equity 2,696,995 2,518,885 ------------------- ------------------- Total liabilities and shareholders' equity $ 16,231,445 $ 15,648,256 =================== =================== Borrower and investor custodial accounts $ 3,610,303 $ 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 Six Months Ended August 31, Ended August 31, 1999 1998 1999 1998 -------------- -- -------------- -------------- -------------- Revenues Loan origination fees $122,737 $ 157,036 $269,438 $ 295,806 Gain on sale of loans, net of commitment fees 158,652 171,805 328,664 330,832 -------------- -------------- -------------- -------------- Loan production revenue 281,389 328,841 598,102 626,638 Interest earned 264,977 253,278 540,539 496,046 Interest charges (233,831) (243,651) (481,572) (474,887) -------------- -------------- -------------- -------------- Net interest income 31,146 9,627 58,967 21,159 Loan servicing income 295,901 251,483 568,898 494,174 Amortization of mortgage servicing rights, net of servicing hedge (129,435) (151,732) (276,280) (300,443) -------------- -------------- -------------- -------------- Net loan administration income 166,466 99,751 292,618 193,731 Commissions, fees and other income 58,014 43,938 124,331 90,894 -------------- -------------- -------------- -------------- Total revenues 537,015 482,157 1,074,018 932,422 Expenses Salaries and related expenses 184,329 161,753 369,755 308,240 Occupancy and other office expenses 69,743 64,355 143,329 125,334 Guarantee fees 47,964 45,354 93,807 90,021 Marketing expenses 21,080 15,589 40,603 30,104 Other operating expenses 39,304 39,242 82,455 74,082 -------------- ------------ -------------- -------------- Total expenses 362,420 326,293 729,949 627,781 -------------- -------------- -------------- -------------- Earnings before income taxes 174,595 155,864 344,069 304,641 Provision for income taxes 68,092 60,787 134,187 118,810 -------------- -------------- -------------- -------------- NET EARNINGS $106,503 $ 95,077 $209,882 $ 185,831 ============== ============== ============== ============== Earnings per share Basic $0.94 $0.86 $1.86 $1.68 Diluted $0.91 $0.81 $1.79 $1.59
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Six Months Ended August 31, 1999 1998 ---------------- ----------------- Cash flows from operating activities: Net earnings $209,882 $ 185,831 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Gain on sale of available-for-sale securities (11,675) (14,846) Amortization and impairment/recovery of mortgage servicing rights 242,380 590,304 Depreciation and other amortization 30,988 26,834 Deferred income taxes 134,187 118,810 Origination and purchase of loans held for sale (42,818,201) (43,809,607) Principal repayments and sale of loans 43,552,302 43,598,402 ---------------- ----------------- Decrease (increase) in mortgage loans and mortgage- backed securities held for sale 734,101 (211,205) Increase in other assets (837,185) (1,506,858) Increase in accounts payable and accrued liabilities 18,759 893,286 ---------------- ----------------- Net cash provided by operating activities 521,437 82,156 ---------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (786,646) (858,564) Purchase of property, equipment and leasehold improvements, net (59,553) (53,036) Proceeds from sale of available-for-sale securities 59,269 49,676 ---------------- ----------------- Net cash used by investing activities (786,930) (861,924) ---------------- ----------------- Cash flows from financing activities: Net decrease in warehouse debt and other short-term borrowings (767,395) (921,976) Issuance of long-term debt 1,303,000 1,824,315 Repayment of long-term debt (269,418) (143,896) Issuance of common stock 11,146 61,024 Cash dividends paid (22,564) (17,696) ---------------- ----------------- Net cash provided by financing activities 254,769 801,771 ---------------- ----------------- Net increase (decrease) in cash (10,724) 22,003 Cash at beginning of period 58,748 10,707 ================ ================= Cash at end of period $48,024 $ 32,710 ================ ================= Supplemental cash flow information: Cash used to pay interest $ 446,840 $ 371,491 Cash used to pay income taxes $ 173 $ 1,279 Noncash financing activities: Unrealized gain (loss) on available-for-sale securities, net of tax ($20,583) $ 20,174
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollar amounts in thousands) Three Months Six Months Ended August 31, Ended August 31, 1999 1998 1999 1998 --------------- --------------- --------------- --------------- NET EARNINGS $106,503 $ 95,077 $209,882 $185,831 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period (23,468) 19,809 (13,462) 29,230 Less: reclassification adjustment for gains included in net earnings (293) (7,600) (7,121) (9,056) --------------- --------------- --------------- --------------- Other comprehensive income (loss) (23,761) 12,209 (20,583) 20,174 =============== =============== =============== =============== COMPREHENSIVE INCOME $82,742 $107,286 $189,299 $ 206,005 =============== =============== =============== ===============
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six-months ended August 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 six-month period ended August 31, 1998 have been reclassified to conform to the presentation for the six-month period ended August 31, 1999. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows. ----------------------------------------------- ---------------------- --------------------- Six Months Ended August 31, (Dollar amounts in thousands) 1999 ----------------------------------------------- -- ---------------- -- --------------------- Mortgage Servicing Rights Balance at beginning of period $4,591,191 Additions 786,646 Scheduled amortization (245,038) Hedge losses (gains) applied 203,072 ---------------- Balance before valuation reserve at end of period 5,335,871 ---------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (94,752) Reductions (additions) 2,657 ---------------- Balance at end of period (92,095) ================ Mortgage Servicing Rights, net $5,243,776 ================ ----------------------------------------------- -- ---------------- -- ---------------- ----
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) NOTE C - OTHER ASSETS Other assets consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- August 31, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- -- ----------------- --- ---------------- --- Servicing hedge instruments $1,730,945 $991,401 Trading securities 1,423,701 1,460,446 Mortgage-backed securities retained in securitization 553,153 500,631 Rewarehoused FHA and VA loans 300,763 216,598 Loans held for investment 183,331 125,236 Servicing related advances 177,255 199,143 Receivables related to broker-dealer activities 91,540 401,232 Reverse repurchase agreements 78,278 76,246 Equity Securities 59,405 59,875 Accrued interest 58,003 102,093 Other 438,860 417,207 ----------------- --- ---------------- $5,095,234 $4,550,108 ================= ================
NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows. ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- August 31, 1999 Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $557,914 $17,307 ($22,068) $553,153 Principal only securities 850,952 2,616 (49,518) 804,050 Equity securities 73,681 - (14,276) 59,405 ================ ================= ================ ================ $1,482,547 $19,923 ($85,862) $1,416,608 ================ ================= ================ ================ 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. ------------------------------------------------------------ ----------------------------------------------------- August 31, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- ----------------- --- ---------------- --- Commercial paper $208,468 $176,559 Medium-term notes, Series A, B, C, D, E, F, G, H and Euro Notes 9,074,824 8,039,824 Repurchase agreements 1,345,615 1,517,405 Subordinated notes 200,000 200,000 Other notes payable 554 1,971 ================= ================ $10,829,461 $9,935,759 ================= ================
Commercial Paper and Backup Credit Facilities As of August 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 was extended on September 22, 1999 to September 20, 2000. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. There is an additional one-year facility, which expires April 12, 2000, with eleven of the forty-four banks referenced above for total commitments of $1.0 billion. As consideration for the facility, CHL pays annual commitment fees of $0.8 million. The purpose of these credit facilities is to provide liquidity backup for CHL's commercial paper program. No amount was outstanding under these revolving credit facilities at August 31, 1999. The weighted average borrowing rate on commercial paper borrowings for the six months ended August 31, 1999 was 5.00%. The weighted average borrowing rate on commercial paper outstanding as of August 31, 1999 was 5.69%. 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 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. NOTE E - NOTES PAYABLE (Continued) Medium-Term Notes As of August 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 - 301,000 301,000 6.53% 6.98% Apr. 2000 Aug. 2005 Series C $163,000 197,000 360,000 5.07% 8.43% Nov. 1999 Mar. 2004 Series D 75,000 385,000 460,000 5.36% 6.88% Aug. 2000 Sep. 2005 Series E 310,000 690,000 1,000,000 5.17% 7.45% Feb. 2000 Oct. 2008 Series F 656,000 1,344,000 2,000,000 5.10% 7.00% Oct. 1999 May 2013 Series G 369,000 581,000 950,000 5.04% 7.00% Oct. 1999 Nov. 2018 Series H 114,500 1,912,000 2,026,500 5.16% 8.00% Dec. 1999 Aug. 2019 Euro Notes 709,600 1,124,224 1,833,824 5.07% 6.44% Sept. 1999 Jan. 2009 ------------------------------------------- Total $2,397,100 $6,677,724 $9,074,824 =========================================== - ---------------------------------------------------------------------------------------------------------------------------
As of August 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 six-months ended August 31, 1999, including the effect of the interest rate swap agreements, was 5.51%. As of August 31, 1999, $1,074 million foreign currency denominated fixed-rate notes issued pursuant to the Euro medium-term notes program were outstanding. Such notes are denominated in Deutsche Marks, French Francs, Portuguese Escudos and Euros. The Company manages the associated foreign currency risk by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars. Repurchase Agreements The Company routinely enters into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the six-months ended August 31, 1999 was 4.93%. The weighted average borrowing rate on repurchase agreements outstanding as of August 31, 1999 was 5.41%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to repurchase the same or substantially identical MBS. NOTE E - NOTES PAYABLE (Continued) Pre-Sale Funding Facilities As of August 31, 1999, CHL had uncommitted revolving credit facilities with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. As of August 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 August 31, 1999 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- Interest Rate Floors $33,000 13,000 - $46,000 Long Call Options on Interest Rate Futures $32,000 18,750 (14,250) $36,500 Long Put Options on Interest Rate Futures $54,600 3,500 (54,600) $3,500 Short Call Options on Interest Rate Futures $22,000 2,000 (4,000) $20,000 Short Put Options on Interest Rate Futures $720 - (720) - Interest Rate Futures $22,500 - (22,250) - Capped Swaps $1,000 - - $1,000 Interest Rate Swaps $15,150 300 (13,200) $2,250 Interest Rate Cap $4,500 - - $4,500 Swaptions $32,550 12,500 (6,800) $38,250 Options on Callable Pass-through Certificates $4,561 - - $4,561 - -------------------------------------- -------------------- -------------------- ------------------ ---------------------
Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of August 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) ---- ------------------------------------------------- --------------------------------- --- ---------------------------- August 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 $5,497,119 $5,497,119 $6,231,220 $6,231,220 Items included in other assets: Trading securities 1,423,701 1,423,701 1,460,446 1,460,446 Loans held for investment 183,331 183,331 125,236 125,236 Receivables related to broker-dealer activities 91,540 91,540 401,232 401,232 Reverse repurchase agreements 78,278 78,278 76,246 76,246 Principal only securities purchased 804,050 804,050 32,826 32,826 Mortgage-backed securities retained in Securitizations 553,153 553,153 500,631 500,631 Equity Securities - restricted and unrestricted 59,405 59,405 59,875 46,971 Rewarehoused FHA and VA loans 300,763 300,763 216,598 216,598 Liabilities: Notes payable 10,829,461 10,533,277 9,935,759 9,883,859 Securities sold not yet purchased 111,677 111,677 84,775 84,775 Derivatives: Interest rate floors 445,942 303,803 426,838 402,061 Forward contracts on MBS (5,035) 71,328 12,775 120,709 Options on MBS 12,557 7,230 34,883 62,475 Options on interest rate futures 33,530 20,242 18,261 15,729 Options on callable pass-through certificates 54,592 24,297 55,593 36,460 Interest rate caps 84,146 74,122 77,508 40,437 Capped Swaps (619) (3,927) 8,470 3,092 Swaptions 358,086 155,712 337,703 271,073 Interest rate futures - - 57,280 57,280 Interest rate swaps (17,607) (205,901) 43,570 93,205 Short-term commitments to extend credit - 34,000 - 26,400 ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of August 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 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. ---- ----------------------------------------- ---- ------------------------------------------------- --------- August 31, February 28, (Dollar amounts in thousands) 1999 1999 ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $5,497,119 $ 6,231,220 Mortgage servicing rights, net 5,243,776 4,496,439 Other assets 3,790,303 2,955,382 ============== ============== Total assets $14,531,198 $13,683,041 ============== ============== Short- and long-term debt $10,519,001 $9,910,966 Other liabilities 1,528,952 1,434,727 Equity 2,483,245 2,337,348 ============== ============== Total liabilities and equity $14,531,198 $13,683,041 ============== ============== ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- ----- ----------------------------------------- --- --------------------------------------------------- -------- Six Months Ended August 31, (Dollar amounts in thousands) 1999 1998 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $870,567 $790,473 Expenses 596,526 542,574 Provision for income taxes 106,876 96,681 =============== =============== Net earnings $167,165 $151,218 =============== =============== ----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE I - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement becomes effective in the fiscal year ending February 28, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. NOTE J - SEGMENTS AND RELATED INFORMATION The Company has three major segments: Loan Production, Loan Servicing and Capital Markets. The Loan Production segment is comprised of the Consumer Markets, Wholesale and Correspondent Divisions and Full Spectrum Lending, Inc. The Loan Production segment originates and purchases conventional mortgage loans, mortgage loans insured by the FHA and VA, home equity and sub-prime loans and sells those loans to permanent investors. The Loan Servicing segment services on a primarily non-recourse basis substantially all of the mortgage loans originated and purchased by the Loan Production segment. In addition, the Loan Servicing segment purchases bulk servicing rights, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. The Capital Markets segment trades securities, primarily mortgage-related securities, with broker-dealers and institutional investors and, as an agent, facilitates the purchase and sale of bulk servicing rights and mortgage loans. Included in the tables below labeled "Other" are the operating segments that provide ancillary services and certain reclassifications to conform management reporting to the consolidated financial statements. - --------------------------------------------------------------------------------------------------------------------- For the three months ended August 31, 1999 - -------------------------------- -- -- ----------- --- ---------- -- ------------ -- ------------ -- ------------ --- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- --- ---------- -- ------------ -- ------------ -- ------------ --- Non-interest revenues $266,655 $200,421 $15,145 $23,648 $505,869 Interest earned 189,289 52,923 22,801 (36) 264,977 Interest charges (140,062) (75,419) (17,454) (896) (233,831) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 49,227 (22,496) 5,347 (932) 31,146 ----------- ----------- ------------ ------------ ------------ Total revenue $315,882 $177,925 $20,492 $22,716 $537,015 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $100,240 $63,768 $7,598 $2,989 $174,595 Segment assets $6,439,322 $8,156,847 $1,663,322 ($28,046) $16,231,445 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --- - -------------------------------------------------------------------------------------------------------------------- For the six months ended August 31, 1999 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $569,613 $365,617 $28,772 $51,049 $1,015,051 Interest earned 379,523 112,603 51,311 (2,898) 540,539 Interest charges (284,797) (158,744) (39,230) 1,199 (481,572) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 94,726 (46,141) 12,081 (1,699) 58,967 ----------- ----------- ------------ ------------ ------------ Total revenue $664,339 $319,476 $40,853 $49,350 $1,074,018 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $226,158 $93,750 $15,373 $8,788 $344,069 Segment assets $6,439,322 $8,156,847 $1,663,322 ($28,046) $16,231,445 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE J - SEGMENTS AND RELATED INFORMATION (Continued) - --------------------------------------------------------------------------------------------------------------------- For the three months ended August 31, 1998 - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $316,474 $117,730 $14,091 $24,235 $472,530 Interest earned 186,236 66,308 3,319 (2,585) 253,278 Interest charges (154,395) (88,452) (2,073) 1,269 (243,651) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 31,841 (22,144) 1,246 (1,316) 9,627 ----------- ----------- ------------ ------------ ------------ Total revenue $348,315 $95,586 $15,337 $22,919 $482,157 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $146,579 ($2,412) $6,786 $4,911 $155,864 Segment assets $6,074,181 $6,484,205 $1,626,042 $66,835 $14,251,263 - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- - -------------------------------------------------------------------------------------------------------------------- For the Six months ended August 31, 1998 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $603,519 $234,189 25,677 $47,878 $911,263 Interest earned 359,096 130,910 4,099 496,046 1,941 Interest charges (297,301) (174,228) (2,375) (983) (474,887) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 61,795 (43,318) 1,724 958 21,159 ----------- ----------- ------------ ------------ ------------ Total revenue $665,314 $190,871 $27,401 $48,836 $932,422 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $282,581 ($3,007) $12,034 $13,033 $304,641 Segment assets $6,074,181 $6,484,205 $1,626,042 $66,835 $14,251,263 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE K - SUBSEQUENT EVENTS On September 22, 1999, CHL renewed the $1.0 billion one-year portion of the $4.0 billion revolving credit facility. This renewal will expire on September 20, 2000. On September 20, 1999, the Company declared a cash dividend of $0.10 per common share payable November 1, 1999 to shareholders of record on October 14, 1999. NOTE L - EARNINGS PER SHARE Basic earnings per share is determined using net income divided by the weighted average shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The following table presents basic and diluted EPS for the three and six month periods ended August 31, 1999 and 1998. - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Three Months Ended August 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 $106,503 $95,077 ========= ========== Basic EPS Net earnings available to common shareholders $106,503 112,991 $0.94 $95,077 111,153 $ 0.86 Effect of dilutive stock options - 4,355 - 6,207 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $106,503 117,346 $0.91 $95,077 117,360 $ 0.81 ========= ========= ========= ========== ========= --------- - ------------------------ --------- --------- --------- - ---------- --------- --------- - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Six Months Ended August 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 $209,882 $185,831 ========= ========== Basic EPS Net earnings available to common shareholders $209,882 112,871 $1.86 $185,831 110,640 $ 1.68 Effect of dilutive stock options - 4,568 - 6,260 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $209,882 117,439 $1.79 $185,831 116,900 $ 1.59 ========= ========= ========= ========== ========= --------- - ------------------------ --------- --------- --------- - ---------- --------- ---------
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 16 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 August 31, 1999 Compared to Quarter Ended August 31, 1998 Revenues for the quarter ended August 31, 1999 increased 11% to $537.0 million, up from $482.2 million for the quarter ended August 31, 1998. Net earnings increased 12% to $106.5 million for the quarter ended August 31, 1999, up from $95.1 million for the quarter ended August 31, 1998. The increase in revenues and net earnings for the quarter ended August 31, 1999 compared to the quarter ended August 31, 1998 was primarily attributed to improved profitabiliy in the loan servicing segment, along with an increased contribution from non traditional loan products (home equity and sub-prime loans). This was partially offset by a decline in earnings contribution from the Company's traditional prime loan origination business, attributable to the decline in loan refinancings. The total volume of loans produced by the Company decreased 14% to $19.6 billion for the quarter ended August 31, 1999, down from $22.9 billion for the quarter ended August 31, 1998. The decrease in loan production was primarily due to a decrease in the mortgage market, primarily refinances, partially offset by an increase in the Company's market share. Purchase fundings increased 19% to $13.7 billion, or 70% of total fundings, for the quarter ended August 31, 1999 as compared to $11.5 billion, or 50% of total fundings, for the quarter ended August 31, 1998. Fixed-rate mortgage loan production totaled $16.8 billion, or 85% of total fundings, for the quarter ended August 31, 1999 as compared to $21.7 billion, or 95% of total fundings, for the quarter ended August 31, 1998. Total loan volume in the Company's production Divisions is summarized below. - -------------------------------------------- ----------------------------------- (Dollar amounts in millions) Loan Production Three Months Ended August 31, - -------------------------------------------- ------------------------------------ 1999 1998 ------------- ------------- Consumer Markets Division $6,054 $ 7,258 Wholesale Lending Division 5,458 7,527 Correspondent Lending Division 7,734 7,962 Full Spectrum Lending, Inc. 379 187 ============= ============= Total Loan Volume $19,625 $22,934 ============= ============= - --------------------------------------------------------------------------------
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 $1.2 billion of home equity loans funded in the quarter ended August 31, 1999 and $613 million funded in the quarter ended August 31, 1998. Sub-prime loan production, which is also included in the Company's total production volume, was $1.3 billion in the quarter ended August 31, 1999 and $872 million in the quarter ended August 31, 1998. As of August 31, 1999 and 1998, the Company's pipeline of loans in process was $10.9 billion and $13.1 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process have funded. In addition, as of August 31, 1999, the Company had committed to make loans in the amount of $3.1 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). As of August 31, 1998, the LOCK 'N SHOP (R) Pipeline was $1.3 billion. During the quarters ended August 31, 1999 and 1998, the Company received 265,263 and 287,748 new loan applications, respectively, at an average daily rate of $416 million and $499 million, respectively. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production Divisions' loan processing efficiency and loan pricing decisions. Loan origination fees decreased in the quarter ended August 31, 1999 as compared to the quarter ended August 31, 1998 primarily due to lower production and a change in the Divisional mix. The Consumer Markets Division and Wholesale Lending Division (which, due to their cost structures, charge higher origination fees per dollar loaned than the Correspondent Division), comprised a lower percentage of total production in the quarter ended August 31, 1999 than in the quarter ended August 31, 1998. Gain on sale of loans also decreased in the quarter ended August 31, 1999 as compared to the quarter ended August 31, 1998 primarily due to lower production volume combined with reduced margins on prime credit quality mortgages. These factors were partially offset by increased sales during the quarter ended August 31, 1999 of higher margin home equity and sub-prime loans. The sale of home equity loans contributed $26.5 million and $17.3 million to gain on sale of loans in the quarter ended August 31, 1999 and the quarter ended August 31, 1998, respectively. Sub-prime loans contributed $48.2 million to the gain on sale of loans in the quarter ended August 31, 1999 and $26.9 million in the quarter ended August 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 $31.1 million for the quarter ended August 31, 1999, up from $9.6 million for the quarter ended August 31, 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($49.2 million and $31.8 million for the quarter ended August 31, 1999 and the quarter ended August 31, 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($75.4 million and $88.5 million for the quarter ended August 31, 1999 and the quarter ended August 31, 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($52.9 million and $66.3 million for the quarter ended August 31, 1999 and the quarter ended August 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 a higher net earnings rate combined with a longer warehousing period during the quarter ended August 31, 1999. The decrease in interest expense on the investment in servicing rights resulted primarily from a decrease in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). 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 August 31, 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. As of August 31, 1999, the Company serviced $236 billion of loans (including $2.4 billion of loans subserviced for others), up from $195 billion (including $2.4 billion of loans subserviced for others) as of August 31, 1998, which was a 22% increase. The growth in the Company's servicing portfolio since August 31, 1998 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization. During the quarter ended August 31, 1999, the annual prepayment rate of the Company's servicing portfolio was 15%, compared to 26% for the quarter ended August 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 August 31, 1999 was 7.4% compared to 7.7% as of August 31, 1998. The Company recorded amortization and net recovery of its MSRs for the quarter ended August 31, 1999 totaling $63.8 million (consisting of amortization amounting to $118.1 million and recovery of previous impairment of $54.3 million), compared to $441.0 million of amortization and impairment (consisting of amortization amounting to $136.1 million and impairment of $304.9 million) for the quarter ended August 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 August 31, 1999, the Company recognized a net expense of $65.6 million from its Servicing Hedge. The net expense included unrealized net losses of $37.1 million and realized net expense of $28.5 million from premium amortization and the sale of various financial instruments that comprise the Servicing Hedge. In the quarter ended August 31, 1998, the Company recognized a net benefit of $289.2 million from its Servicing Hedge. The net benefit included unrealized gains of $268.0 million and net realized gains of $21.2 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, 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. The Swaptions consist of options to enter into a receive-fixed, pay-floating interest swap ("Receiver Swaption") and options to enter into a pay-fixed, receive-floating interest rate swap ("Payor Swaption") at a future date or to settle the transaction for cash. The P/O securities consist of certain tranches of collateralized mortgage securities ("CMOs"), mortgage trust principal only securities and treasury principal only strips. These securities have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs and mortgage trust principal only securities should increase. This results in a decline in the average lives of the P/O securities and a corresponding increase in the present values of their cash flows. Conversely, as interest rates increase, prepayments on the collateral underlying the CMOs and mortgage trust principal only securities should decrease. This would result in an increase in the average lives of the P/O Securities and a decrease in the present values of their cashflows. The prices of the treasury principal only Strips are determined by the discount rate used to determine their present value, as interest rates decline the discount rate applied to the maturity principal payment declines, resulting in an increase in the price. An option 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 was not a party to any futures contracts at August 31, 1999. With respect to the Interest Rate Swaps contracts entered into by the Company as of August 31, 1999, the Company estimates that its maximum exposure to loss over the contractual term is $41 million. With respect to the Capped Swaps contracts entered into by the Company as of August 31, 1999, the Company estimates that its maximum exposure over the contractual term is $12 million. Salaries and related expenses are summarized below for the quarters ended August 31, 1999 and 1998. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended August 31, 1999 thousands) ---- --------------------------- - -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $62,934 $15,353 $26,607 $14,232 $119,126 Incentive Bonus 30,097 801 5,222 6,043 42,163 Payroll Taxes and Benefits 12,912 3,230 5,146 1,752 23,040 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $105,943 $19,384 $36,975 $22,027 $184,329 ============ ============= ============= ============= ------------ Average Number of 6,076 2,182 2,225 780 11,263 Employees ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended August 31, 1998 thousands) ---- --------------------------- -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $49,618 $11,475 $22,414 $10,361 $93,868 Incentive Bonus 37,658 151 4,769 5,030 47,608 Payroll Taxes and Benefits 12,121 2,499 4,048 1,609 20,277 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $99,397 $14,125 $31,231 $17,000 $161,753 ============ ============= ============= ============= ------------ Average Number of 5,122 1,750 1,764 744 9,380 Employees ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during the quarter ended August 31, 1999 reflecting the Company's strategy of expanding and enhancing its Consumer Markets branch network, including new retail sub-prime branches. This was partially offset by a reduction in loan processing personnel resulting from the decline in refinance activity. In addition, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries also contributed to the increase. Incentive bonuses earned during the quarter ended August 31, 1999 decreased primarily due to the decline in production volume. Occupancy and other office expenses for the quarter ended August 31, 1999 increased to $69.7 million from $64.4 million for the quarter ended August 31, 1998. This was primarily due to: (i) the continued effort by the Company to expand its Consumer Markets branch network, including new retail sub-prime branches; (ii) a larger servicing portfolio and (iii) growth in the Company's non-mortgage banking activities. Guarantee fees represent fees paid to Fannie Mae, Freddie Mac, and Ginnie Mae("GSEs") toguarantee 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 August 31, 1999, guarantee fees increased 6% to $48.0 million, up from $45.4 million for the quarter ended August 31, 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated at the time of loan sales. Marketing expenses for the quarter ended August 31, 1999 increased 35% to $21.1 million as compared to $15.6 million for the quarter ended August 31, 1998. This increase supported the larger Consumer Markets branch network, including the retail subprime branches. Other operating expenses were $39.3 million for the quarter ended August 31, 1999 as compared to $39.2 million August 31, 1998. Profitability of Loan Production Segment In the quarter ended August 31, 1999, pre-tax earnings from loan production segment activities (which include loan origination and purchases, warehousing and sales) were $100.2 million. In the quarter ended August 31, 1998, comparable pre-tax earnings were $146.6 million. The decrease of $46.4 million was primarily attributable to decreased production combined with reduced margins on prime credit quality mortgages which in turn was attributable to the decline in refinance acitivitity. These factors were partially offset by increased sales of higher margin home equity and subprime loans. Profitability of Loan Servicing Segment In the quarter ended August 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 $63.8 million as compared to a $2.4 million loss in the quarter ended August 31, 1998. The increase of $66.2 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 attributable to the decline in refinance activity. These positive factors were partially offset by higher servicing costs. Profitability of Capital Markets Segment In the quarter ended August 31, 1999, pre-tax earnings from the capital markets segment were $7.6 million. In the quarter ended August 31, 1998, comparable pre-tax earnings were $6.8 million. The increase of $0.8 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 August 31, 1999, LandSafe Inc. contributed $3.9 million to the Company's pre-tax income compared to $5.8 million for the quarter ended August 31, 1998. The decrease in the profitability of LandSafe Inc. resulted primarily from decreased title business attributable to the decline in refinance activity. The Company's other activities consist primarily of the operations of its holding company. The operations of other activities, excluding LandSafe Inc., incurred pre-tax losses of $0.9 million during the quarter ended August 31, 1999 compared to pre-tax loss of $0.9 million during the quarter ended August 31, 1998. RESULTS OF OPERATIONS Six Months Ended August 31, 1999 Compared to Six Months Ended August 31, 1998 Revenues for the six months ended August 31, 1999 increased 15% to $1,074.0 million, up from $932.4 million for the six months ended August 31, 1998. Net earnings increased 13% to $209.9 million for the six months ended August 31, 1999, up from $185.8 million for August 31, 1998. The increase in revenues and net earnings for the six months ended August 31, 1999 compared to the six months ended August 31, 1998 was primarily attributed to improved profitability in the loan servicing segment, along with an increased contribution from non traditional loan products (home equity and sub-prime loans). This was partially offset by a decline in earnings contribution from the Company's traditional prime loan origination business, attributable to the decline in loan refinancings. The total volume of loans produced by the Company decreased 2% to $42.8 billion for the six months ended August 31, 1999, down from $43.8 billion for the six months ended August 31, 1998. The decrease in loan production was primarily due to a decrease in the mortgage market, driven largely by a reduction in refinances, partially offset by an increase in the Company's market share. Purchase fundings increased 24% to $25.4 billion, or 59% of total fundings, for the six months ended August 31, 1999 as compared to $20.5 billion, or 47% of total fundings, for the six months ended August 31, 1998. Fixed-rate mortgage loan production totaled $38.4 billion, or 90% of total fundings, for the six months ended August 31, 1999 as compared to $41.1 billion, or 94% of total fundings, for the six months ended August 31, 1998. Total loan volume in the Company's production Divisions is summarized below. - -------------------------------------------- ------------------------------------ -------- (Dollar amounts in millions) Loan Production Six Months Ended August 31, - -------------------------------------------- ------------------------------------ -------- 1999 1998 ------------- ------------- Consumer Markets Division $13,089 $ 13,259 Wholesale Lending Division 12,580 14,989 Correspondent Lending Division 16,446 15,249 Full Spectrum Lending, Inc. 703 313 ============= ============= Total Loan Volume $42,818 $ 43,810 ============= ============= - -------------------------------------------- ------------- -------- ------------- --------
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 $1.9 billion of home equity loans funded in the six months ended August 31, 1999 and $1.1 billion funded in the six ended August 31, 1998. Sub-prime loan production, which is also included in the Company's total production volume, was $2.1 billion in the six months ended August 31, 1999 and $1.4 billion in the six months ended August 31, 1998. Loan origination fees decreased in the six months ended August 31, 1999 as compared to the six months ended August 31, 1998 primarily due to lower production and a change in the Divisional mix. The Wholesale Lending Division (which, due to its cost structure, charges higher origination fees per dollar loaned than the Correspondent Division), comprised a lower percentage of total production in the six month ended August 31, 1999 than in the six months ended August 31, 1998. Gain on sale of loans also decreased in the six months ended August 31, 1999 as compared to the six months ended August 31, 1998 primarily due to lower production volume and reduced margins on prime credit quality mortgages partially offset by increased sales during the six months ended August 31, 1999 of higher margin home equity and sub-prime loans. Net interest income (interest earned net of interest charges) increased to $59.0 million for the six months ended August 31, 1999, up from $21.2 million for the six months ended August 31, 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($94.7 million and $61.8 million for the six months August 31, 1999 and the six months ended August 31, 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($158.7 million and $174.2 million for the quarter ended August 31, 1999 and the six months ended August 31, 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($112.6 million and $130.9 million for the six months ended August 31, 1999 and the six months ended August 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 an increase in inventory levels as a result of a longer warehouse period combined with a higher net earnings rate during the quarter ended August 31, 1999. The decrease in interest expense on the investment in servicing rights resulted primarily from a decrease in (Interest Costs Incurred on Payoffs). The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances caused by a decrease in the amount of prepayments. During the six months ended August 31, 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. The growth in the Company's servicing portfolio since August 31, 1998 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partially prepayments and scheduled amortization. During the six months ended August 31, 1999, the annual prepayment rate of the Company's servicing portfolio was 18%, compared to 27% for the six months ended August 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 Company recorded amortization and net recovery of its MSRs for the six months ended August 31, 1999 totaling $39.3 million (consisting of amortization amounting to $245.1 million and recovery of previous impairment of $205.8 million), compared to $590.3 million of amortization and impairment (consisting of amortization amounting to $269.0 million and impairment of $321.3 million) for the six months ended August 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 six months ended August 31, 1999, the Company recognized a net expense of $237.0 million from its Servicing Hedge. The net expense included unrealized net losses of $219.9 million and realized net expense of $17.1 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In the six months ended August 31, 1998, the Company recognized a net benefit of $289.2 million from its Servicing Hedge. The net benefit included unrealized gains of $272.7 million and net realized gains of $17.2 million from the 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. Salaries and related expenses are summarized below for the six months ended August 31, 1999 and 1998. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Six Months Ended August 31, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $125,408 $30,333 $51,683 $27,184 $234,608 Incentive Bonus 62,953 1,495 11,072 12,428 87,948 Payroll Taxes and Benefits 27,393 6,410 9,749 3,647 47,199 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $215,754 $38,238 $72,504 $43,259 $369,755 ============ ============= ============= ============= ------------ Average Number of 6,228 2,172 2,159 821 11,380 Employees ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Six Months Ended August 31, 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $93,103 $23,435 $42,625 $18,168 $ 177,331 Incentive Bonus 71,196 481 9,892 8,669 90,238 Payroll Taxes and Benefits 24,183 5,325 8,321 2,842 40,671 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $188,482 $29,241 $60,838 $29,679 $308,240 ============ ============= ============= ============= ------------ Average Number of 4,859 1,795 1,693 625 8,972 Employees
The amount of salaries increased during the six months ended August 31, 1999 reflecting the Company's strategy of expanding and enhancing its Consumer Markets and Wholesale branch networks, including new retail sub-prime branches. This was partially offset by a reduction in loan processing personnel resulting from the decline in refinance activity. In addition, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries also contributed to the increase. Incentive bonuses earned during the six months ended August 31, 1999 decreased primarily due to the reduction in production. Occupancy and other office expenses for the six months ended August 31, 1999 increased to $143.3 million from $125.3 million for the six months ended August 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) a larger servicing portfolio; and (iii) growth in the Company's non-mortgage banking activities. Guarantee fees represent fees paid to Fannie Mae, Freddie Mac, and Ginnie Mae to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For the six months ended August 31, 1999, guarantee fees increased 4% to $93.8 million, up from $90.0 million for the six months ended August 31, 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated at the time of loan sales. Marketing expenses for the six months ended August 31, 1999 increased 35% to $40.6 million compared to from $30.1 million for the six months ended August 31, 1998. This increase supported the larger Consumer Markets branch network, including the retail subprime branches. Other operating expenses for the six months ended August 31, 1999 increased from the six months ended August 31, 1998 by $8.4 million, or 11%. This increase was due primarily to the expansion of the production branch networks, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries in the six months ended August 31, 1999 as compared to the six months ended August 31, 1998. Profitability of Loan Production Segment In the six months ended August 31, 1999, pre-tax earnings from loan production segment activities (which include loan origination and purchases, warehousing and sales) were $226.2 million. In the six months ended August 31, 1998, comparable pre-tax earnings were $282.6 million. The decrease of $56.4 million was primarily attributable to higher production costs and reduced margins on prime credit quality mortgages. These factors were partially offset by increased warehouse spread and greater originations and sales of higher margin home equity and subprime loans. Profitability of Loan Servicing Segment In the six months ended August 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 $93.8 million as compared to $3.0 million loss in the six months ended August 31, 1998. The increase of $96.8 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 attributable to the declinein refinance activity. These positive factors were partially offset by higher servicing costs. Profitability of Capital Markets Segment In the six months ended August 31, 1999, pre-tax earnings from the capital markets segment were $15.4 million. In the six months ended August 31, 1998, comparable pre-tax earnings were $12.0 million. The increase of $3.4 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 six months ended August 31, 1999, LandSafe Inc. contributed $10.3 million to the Company's pre-tax income compared to $10.8 million for the six months ended August 31, 1998. The Company's other activities consist primarily of the operations of its holding company. The operations of other activities, excluding LandSafe Inc., incurred pre-tax losses of $1.6 million during the six months ended August 31, 1999 compared to pre-tax income of $2.2 million during the six months ended August 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 August 31, 1999, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $0.02 million after-tax loss related to its trading securities and a $7.4 million after-tax loss related to its other financial instruments. As of August 31, 1999, the Company estimates that this combined after-tax loss of $7.5 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 six months ended August 31, 1999, the Company's operating activities provided cash of approximately $0.5 billion. In the six months ended August 31, 1998, operating activities provided approximately $0.1 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 $0.8 billion for the six months ended August 31, 1999 and $0.9 billion for the six months ended August 31, 1998. Financing Activities Net cash provided by financing activities amounted to $0.3 billion for the six months ended August 31, 1999. Net cash provided by financing activities amounted to $0.8 billion for the six months ended August 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 September 30, 1999, the Company received new loan applications at an average daily rate of $314 million. As of September 30, 1999, the Company's pipeline of loans in process was $9.8 billion. This compares to a daily application rate for the month ended in September 30, 1998 of $625 million and a pipeline of loans in process as of September 31, 1998 of $15.9 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 September 30, 1999 was $2.3 billion and as of September 30, 1998 was $1.5 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 decreased 14% from the quarter ended August 31, 1998 to quarter ended August 31, 1999. This decrease was primarily due to a smaller mortgage market, driven by reduced refinances. Loan purchase production increased by 20% to $13.7 billion during the same period driven by a strong purchase market and an increase in the Company's market share. The prepayment rate in the servicing portfolio decreased from 26% for the quarter ended August 31, 1998 to 15% for the quarter ended August 31, 1999. This was due primarily to decreases in refinances. The loan origination segment has recently experienced increased pricing competition. The Company attributes this to excess capacity currently in the marketplace caused by the significant drop in refinance activity. This pricing competition is being exacerbated by increased consumer demand for adjustable rate mortgages, which certain banks and thrifts are currently pricing very competitively. The Company expects this heightened pricing competition to continue until remaining excess capacity in the marketplace is eliminated. Elimination of the remaining excess capacity should be aided by continued growth in the purchase loan market. The Company's California mortgage loan production (as measured by principal balance) constituted 21% of its total production during the quarter ended August 31, 1999 and 25% during the quarter ended August 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 3.36% at August 31, 1999 from 3.64% as of August 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 August 31, 1999 and August 31, 1998, respectively. In addition, the weighted average age of the portfolio was 25 months at August 31, 1999, down from 29 months as of August 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 0.28% as of August 31, 1999 from 0.36% as of August 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 August 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 August 31, 1999, the Company had investments in such subordinated interests amounting to $388.1 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 and nearly all of its less critical Client Server application have been forward-date tested. 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 approximately five 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 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 $31.4 million had been incurred through August 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 32 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.7.2 Second Amendment to the Deferred Compensation Plan. 10.8.6 Short Term Facility Extension on Revolving Credit 10.23.3 Second Amendment to the Supplemental Executive Retirement Plan. 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. 33 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COUNTRYWIDE CREDIT INDUSTRIES, INC. (Registrant) DATE: October 14, 1999 /s/ Stanford L. Kurland -------------------------------------- Senior Managing Director and Chief Operating Officer DATE: October 14, 1999 /s/ Carlos M. Garcia -------------------------------------- Managing Director; Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) EX-10 2 AMENDMENT TO DEFERRED COMPENSATION PLAN SECOND AMENDMENT TO COUNTRYWIDE CREDIT INDUSTRIES, INC. DEFERRED COMPENSATION PLAN Originally Effective August 1, 1993 Amended and Restated Effective January 1,1998 Countrywide Credit Industries, Inc., a Delaware corporation (the "Company"), pursuant to the power granted to it by Section 11.2 of the Countrywide Credit Industries, Inc. Amended and Restated Deferred Compensation Plan (the "Plan"), hereby amends the Plan, by action of its board of directors, as follows, effective as of June 30, 1999: 1. Section 3.12 is amended and restated in its entirety to read as follows: "3.12 FICA and Other Taxes. (a) Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount and/or on benefits due under any other nonqualified employee benefit plan(s) of the Employer. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.11. (b) Annual Stock Option Amounts.For each Plan Year in which an Annual Stock Option Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary, Annual Bonus and Qualifying Gains that are not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Stock Option Amount. If necessary, the Committee may reduce the Annual Stock Option Amount in order to comply with this Section 3.11. (c) Distributions. The Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, and/or in connection with any other nonqualified benefit plan(s) of the Employer, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust." 2. Section 3.11 shall be deleted in its entirety. The Company has caused this Amendment to be signed, by action of its board of directors and by its duly authorized officer as of the date written below. Countrywide CreditIndustries, Inc. By: Anne D. McCallion Managing Director Chief Administrative Officer Date: EX-10 3 SHORT TERM FACILITY EXTENSION ON REVOLVING CREDIT SHORT TERM FACILITY EXTENSION AMENDMENT (September, 1999) THIS SHORT TERM FACILITY EXTENSION AMENDMENT (the "Amendment") is made and dated as of the 22nd day of September, 1999 by and among COUNTRYWIDE HOME LOANS, INC. (the "Company"), the Short Term Lenders under (and as that term and capitalized terms not otherwise defined herein are defined in) the Revolving Credit Agreement described below and BANKERS TRUST COMPANY, as Credit Agent (in such capacity, the "Credit Agent"). RECITALS A. Pursuant to that certain Revolving Credit Agreement dated as of September 24, 1997 by and among the Company, the Lenders party thereto, including, without limitation, the Short Term Lenders, the Credit Agent and others (as amended, extended and replaced from time to time, the "Revolving Credit Agreement"), the Short Term Lenders agreed to extend credit to the Company in the form of a 364-day revolving credit facility. B. The Company has requested that the Short Term Lenders currently party to the Revolving Credit Agreement agree to extend the Short Term Facility Maturity Date and certain of such Short Term Lenders have agreed to do so on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Extension of Maturity Date. To reflect the agreement of the Short Term Lenders to extend the Short Term Facility Maturity Date, effective as of the Amendment Effective Date (as defined in Paragraph 6 below), the definition of "Short Term Facility Maturity Date" set forth in the Glossary attached to the Revolving Credit Agreement is hereby amended to delete the date "September 22, 1999" appearing therein and to replace the same with the date "September 20, 2000". 2. Extension of Short Term Facility Fee Letter. To reflect the agreement of the Company to continue to pay to the Short Term Lenders a facility fee during the period from the current Short Term Facility Maturity Date to the Short Term Facility Maturity Date as extended hereunder, the Company hereby reaffirms the Short Term Facility Fee Letter dated as of September 24, 1997 and agrees that the "Short Term Facility Maturity Date" referred to therein shall mean the Short Term Facility Maturity Date as extended hereunder. 3. Revised Commitment Schedule. To reflect certain changes in the financial institutions which will be participating in the Short Term Facility as extended hereby and other modifications in the Short Term Facility Credit Limit and the Short Term Facility Percentage Shares of the Short Term Lenders participating in the Short Term Facility as extended hereby, the Commitment Schedule is hereby revised as of the Amendment Effective Date consistent with Amendment Schedule I attached hereto. 4. Reaffirmation of Loan Documents. The Company hereby affirms and agrees that (a) the execution and delivery by the Company of and the performance of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Credit Agent, the Lenders or any other Person under the Revolving Credit Agreement or any other Credit Document, (b) the term "Obligations" as used in the Credit Documents includes, without limitation, the Obligations of the Company under the Revolving Credit Agreement as amended hereby, and (c) the Revolving Credit Agreement as amended hereby and the other Credit Documents remain in full force and effect. 5. Reaffirmation of Guaranty and Subordination Agreement. By executing this Amendment as provided below, the Parent acknowledges the terms and conditions of this Amendment and affirms and agrees that (a) the execution and delivery by the Company and the performance of its obligations under this Amendment shall not in any manner or to any extent affect any of the obligations of the Parent or the rights of the Credit Agent, the Lenders or any other Person under the Guaranty, the Subordination Agreement or any other document or instrument made or given by the Parent in connection therewith, (b) the term "Obligations" as used in the Guaranty and the Subordination Agreement includes, without limitation, the Obligations of the Company under the Revolving Credit Agreement as amended hereby, and (c) the Guaranty and the Subordination Agreement remain in full force and effect. 6. Amendment Effective Date. This Amendment shall be effective as of the day and year first above written upon the date (the "Amendment Effective Date") that there has been delivered to the Credit Agent: (a) A copy of this Amendment, duly executed by each party hereto and acknowledged by the Parent; and (b) Such corporate resolutions, incumbency certificates and other authorizing documentation as the Credit Agent may request. As required pursuant to Paragraph 13(b) of the Revolving Credit Agreement, following the Amendment Effective Date the Credit Agent shall provide a copy of this Amendment, including the Commitment Schedule effective as of the Amendment Effective Date, to all parties to the Credit Documents. 7. Representations and Warranties. The Company hereby represents and warrants to the Credit Agent and each of the Short Term Lenders that at the date hereof and at and as of the Amendment Effective Date: (a) Each of the Company and the Parent has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered on behalf of the Company and the Parent and constitutes the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms. (b) Both prior to and after giving effect hereto: (1) the representations and warranties of the Company and the Parent contained in the Credit Documents are accurate and complete in all respects, and (2) there has not occurred an Event of Default or Potential Default. 8. No Other Amendment. Except as expressly amended hereby, the Credit Documents shall remain in full force and effect as written and amended to date. 9. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. COUNTRYWIDE HOME LOANS, INC., a New York corporation By Name Title BANKERS TRUST COMPANY, as Credit Agent By Name EX-10 4 AMENDMENT TO THE SERP SECOND AMENDMENT TO COUNTRYWIDE CREDIT INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Originally Effective March 1, 1994 Amended Effective September 13, 1996 Amended and Restated Effective July 1, 1998 Countrywide Credit Industries, Inc., a Delaware corporation (the "Company"), pursuant to the power granted to it by Section 5.2 of the Countrywide Credit Industries, Inc. Supplemental Executive Retirement Plan, 1998 Amendment and Restatement (the "Plan"), hereby amends the Plan, as follows, effective as of June 30, 1999: 1. Section 3.3 is amended and restated in its entirety to read as follows: "3.3 Withholding and Payroll Taxes. When a Participant becomes vested hereunder and/or at such other time as taxes must be withheld and paid by the Employer in connection with benefits due hereunder and/or under any other nonqualified employee benefit plan(s) of the Employer, the Participant's Employer(s) shall withhold from the Participant's regular salary or bonus, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. In addition, the Participant's Employer(s), or the trustee of any Trust, shall withhold from any and all of the Participant's benefits distributed under this Article 3 and, if necessary, the Participant's wages, all federal, state and local income, employment and other taxes required to be withheld by the Employer(s) in connection with the benefits hereunder and/or under any other nonqualified employee benefit plan(s) of the Employer, in amounts to be determined in the sole discretion of the Employer." The Company has caused this Amendment to be signed by its duly authorized officer as of the date written below. Countrywide Credit Industries, Inc. By: Anne D. McCallion Managing Director Chief Administrative Officer Date: EX-11 5 COMPUTATION OF PER SHARE EARNINGS Page 41 Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Six Months Ended August 31, 1999 1998 ----------------- -- ---------------- (Amounts in thousands, except per share data) Basic Net earnings applicable to common stock $209,882 $ 185,831 ================ ================= Average shares outstanding 112,871 110,640 ================ ================= Per share amount $ 1.86 $1.68 ================ ================= Diluted Net earnings applicable to common stock $209,882 $185,831 ================ ================= Average shares outstanding Net effect of dilutive stock options -- 112,871 110,640 based on the treasury stock method using the average market price. 4,568 6,260 ---------------- ----------------- Total average shares 117,439 116,900 ================ ================= Per share amount $ 1.79 $ 1.59 ================ =================
EX-12 6 COMPUTATION OF 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 six months ended August 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). Six Months Ended August 31, Fiscal Years Ended February 29(28), -------------------------- ------------------------------------------------------------------ 1999 1998 1999 1998 1997 1996 1995 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Net earnings $209,882 $185,831 $385,401 $344,983 $257,358 $195,720 $ 88,407 Income tax expense 134,187 118,810 246,404 220,563 164,540 130,480 58,938 Interest charges 481,572 474,887 983,829 568,359 423,447 337,655 267,685 Interest portion of rental Expense 4,488 3,436 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Earnings available to cover fixed charges $830,129 $782,964 $1,630,532 $1,143,960 $852,765 $670,658 $422,409 ============ ============= ============ ============= ============ ============ ============= Fixed charges Interest charges $481,572 $474,887 $983,829 $568,359 $423,447 $337,655 $267,685 Interest portion of rental Expense 4,488 3,436 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Total fixed charges $486,060 $478,323 $998,727 $578,414 $430,867 $344,458 $275,064 ============ ============= ============ ============= ============ ============ ============= Ratio of earnings to fixed Charges 1.71 1.64 1.63 1.98 1.98 1.95 1.54 ============ ============= ============ ============= ============ ============ =============
EX-27 7 FINANCIAL DATA SCHEDULE
5 0000025191 Countrywide Credit Industries 1,000 1.00 6-MOS FEB-28-2000 MAR-01-1999 AUG-31-1999 1.00 48,024 0 0 0 0 0 347,292 191,451 16,231,445 13,034,450 0 0 0 5,652 2,696,995 16,231,445 0 1,074,018 0 729,949 0 0 0 344,069 134,187 209,882 0 0 0 209,882 1.86 1.79
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