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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13 - 2641992
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
4500 Park Granada, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 225-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.05 Par Value New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
-------------- -------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of May 3, 1999, there were 112,748,275 shares of Countrywide Credit
Industries, Inc. Common Stock, $.05 par value, outstanding. Based on the
closing price for shares of Common Stock on that date, the aggregate market
value of Common Stock held by non-affiliates of the registrant was
approximately $4,787,009,000. For the purposes of the foregoing calculation
only, all directors and executive officers of the registrant have been
deemed affiliates.
PART I
ITEM 1. BUSINESS
A. General
Founded in 1969, Countrywide Credit Industries, Inc. (the "Company" or
"CCI") is a holding company which, through its principal subsidiary, Countrywide
Home Loans, Inc. ("CHL"), is engaged primarily in the mortgage banking business,
and as such originates, purchases, sells and services mortgage loans. The
Company's mortgage loans are principally prime credit quality first-lien
mortgage loans secured by single- (one-to-four) family residences ("prime credit
quality first mortgages"). The Company also offers home equity loans both in
conjunction with newly produced prime credit quality first mortgages and as a
separate product. In addition, the Company offers sub-prime credit quality
first-lien single-family mortgage loans ("sub-prime loans").
The Company, through its other wholly-owned subsidiaries, offers products
and services complementary to its mortgage banking business. See "Business-Other
Operations." Unless the context otherwise requires, references to the "Company"
herein shall be deemed to refer to the Company and its consolidated
subsidiaries.
This Annual Report on Form 10-K may contain forward-looking statements that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those identified below, which could cause future
results to differ materially from historical results or those anticipated. The
words "believe," "expect," "anticipate," "intend," "estimate," "should" and
other expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors, among others, could cause future
results to differ materially from historical results or those anticipated: (1)
the level of demand for mortgage credit, which is affected by such external
factors as the level of interest rates, the strength of the various segments of
the economy and demographics of the Company's lending markets; (2) the direction
of interest rates; (3) the relationship between mortgage interest rates and the
cost of funds; (4) federal and state regulation of the Company's mortgage
banking and capital markets operations; and (5) competition within the mortgage
banking industry and capital markets industries; and (6) the ability of the
Company to manage expenses.
B. Mortgage Banking Operations
The principal sources of revenue from the Company's mortgage banking
business are: (i) loan origination fees; (ii) gains from the sale of loans, if
any; (iii) interest earned on mortgage loans during the period that they are
held by the Company pending sale, net of interest paid on funds borrowed to
finance such mortgage loans; (iv) loan servicing fees; and (v) interest benefit
derived from the custodial balances associated with the Company's servicing
portfolio.
Loan Production Segment
The Company originates and purchases conventional mortgage loans, mortgage
loans insured by the Federal Housing Administration ("FHA"), mortgage loans
partially guaranteed by the Department of Veterans Affairs ("VA"), home equity
loans and sub-prime loans. A majority of the conventional loans are conforming
loans that qualify for inclusion in guarantee programs sponsored by the Federal
National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). The remainder of the conventional loans are
non-conforming loans (i.e., jumbo loans with an original balance in excess of
$240,000 or other loans that do not meet Fannie Mae or Freddie Mac guidelines).
As part of its mortgage banking activities, the Company makes conventional loans
with original balances of up to $1 million.
The following table sets forth the number and dollar amount of the Company's
prime credit quality first mortgage, home equity and sub-prime loan production
for the periods indicated.
Summary of the Company's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------- -----------------------------------------------------------------------
------------------------------- ----
1999 1998 1997 1996 1995
------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
Conventional Loans
Number of Loans 529,345 231,595 190,250 191,534 175,823
Volume of Loans $69,026.1 $29,887.5 $22,676.2 $21,883.4 $20,958.7
Percent of Total Volume 74.3% 61.3% 60.0% 63.3% 75.2%
FHA/VA Loans
Number of Loans 190,654 162,360 143,587 125,127 72,365
Volume of Loans $19,137.5 $15,869.8 $13,657.1 $12,259.3 $6,808.3
Percent of Total Volume 20.6% 32.5% 36.1% 35.5% 24.4%
Home Equity Loans
Number of Loans 65,607 45,052 20,053 7,986 2,147
Volume of Loans $2,220.5 $1,462.5 $613.2 $220.8 $99.2
Percent of Total Volume 2.4% 3.0% 1.6% 0.6% 0.4%
Sub-prime Loans
Number of Loans 25,433 16,360 9,161 1,941 -
Volume of Loans $2,496.4 $1,551.9 $864.3 $220.2 -
Percent of Total Volume 2.7% 3.2% 2.3% 0.6% -
Total Loans
Number of Loans 811,039 455,367 363,051 326,588 250,335
Volume of Loans $92,880.5 $48,771.7 $37,810.8 $34,583.7 $27,866.2
Average Loan Amount $115,000 $107,000 $104,000 $106,000 $111,000
------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
The significant increase in the number and dollar amount of loans produced
in the year ended February 28, 1999 ("Fiscal 1999") was primarily due to an
increase in the Company's market share, driven largely by the expansion of the
Company's consumer markets and wholesale branch networks, combined with an
increase in the overall mortgage market driven largely by refinances.
For Fiscal 1999, 1998 and 1997, jumbo loans represented 23%, 20% and 12%,
respectively, of the Company's total volume of mortgage loans produced. In
addition, adjustable-rate mortgage loans ("ARMs") comprised approximately 5%,
23% and 26%, respectively, of the Company's total volume of mortgage loans
produced. The decrease in the Company's percentage of ARM production was
primarily a result of consumer preference for fixed-rate loans. For Fiscal 1999,
1998 and 1997, refinancing activity represented 57%, 41% and 33%, respectively,
of the Company's total volume of mortgage loans produced. The increase in the
percentage of refinance loans for Fiscal 1999 is indicative of the lower
interest rate environment experienced during that year.
The Company produces mortgage loans through three separate divisions of
Countrywide Home Loans and another subsidiary, Full Spectrum Lending, Inc. (the
"Divisions"). The Company maintains a staff of central office quality control
personnel that performs audits of the loan production of the Divisions on a
regular basis. In addition, the Divisions have implemented various procedures to
control the quality of loans produced, as described below. The Company believes
that its use of technology, benefits derived from economies of scale and a
noncommissioned sales force allow it to produce loans at a low cost relative to
its competition.
Consumer Markets Division
The Company's consumer markets division (the "Consumer Markets Division")
originates primarily prime credit quality first mortgage and home equity loans
through referrals from real estate agents and direct contact with consumers
through its nationwide network of retail branch offices, its telemarketing
centers and its Website. For calendar 1998, the Consumer Markets Division was
ranked as the top retail originator, in terms of loans produced, among
independent residential mortgage lenders and fourth among all residential
mortgage lenders. During Fiscal 1999, the Consumer Markets Division added 81
retail branch offices, bringing the total to 415 Consumer Markets Division
branch offices and 6 processing centers located in 48 states and the District of
Columbia. Each of the Consumer Markets Division's branch offices is typically
staffed by six to seven employees. They are connected to the Company's central
office by a computer network. The Company operates three telemarketing centers
that solicit potential borrowers and receive telephone calls placed by potential
borrowers primarily in response to print or broadcast advertising. Loan
counselors employed in the telemarketing centers provide information and take
loan pre-applications, which are then electronically available to either a
branch office or a processing center for processing and funding. Business from
home construction companies is solicited through a nationwide network of builder
account managers. Additionally, business is solicited through advertising;
participation of branch management in local real estate related business
functions and extensive use of direct mailings to borrowers and real estate
brokers. The Company believes it offers a superior alternative to its customers
through low cost loans, a broad product line which includes one-stop choice,
direct access to the lender using the customer's preferred channel (a local
branch, call centers or through the Internet) and local underwriting authority.
Consumer Markets Division personnel are not paid a commission on loan
production; however, they are paid a bonus based on various factors, including
branch profitability. The Company believes that this approach allows it to
originate high-quality loans at a comparatively low cost. The Consumer Markets
Division uses continuous quality control audits of loans originated within to
monitor compliance with the Company's underwriting criteria. The audits are
performed by branch management and quality control personnel.
The following table sets forth the number and dollar amount of the Consumer
Markets Division's prime credit quality first mortgage, home equity and
sub-prime loan production for the periods indicated.
------------------------------- ---------- ------------------------------------------------------------------------
Summary of the Consumer Markets Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
1999 1998 1997 1996 1995
------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Conventional Loans
Number of Loans 151,845 67,850 43,261 47,260 48,772
Volume of Loans $18,860.2 $8,377.7 $5,145.3 $5,271.8 $5,442.2
Percent of Total Volume 66.2% 62.8% 63.7% 70.7% 77.0%
FHA/VA Loans
Number of Loans 87,290 43,238 27,746 22,829 19,060
Volume of Loans $8,687.0 $4,114.0 $2,514.3 $2,025.4 $1,612.1
Percent of Total Volume 30.4% 30.8% 31.2% 27.1% 22.8%
Home Equity Loans
Number of Loans 31,725 27,198 14,028 6,000 297
Volume of Loans $947.8 $784.3 $384.7 $160.9 $11.4
Percent of Total Volume 3.3% 5.9% 4.8% 2.2% 0.2%
Sub-prime Loans
Number of Loans 130 737 303 - -
Volume of Loans $13.1 $62.5 $27.0 - -
Percent of Total Volume 0.1% 0.5% 0.3% - -
Total Loans
Number of Loans 270,990 139,023 85,338 76,089 68,129
Volume of Loans $28,508.1 $13,338.5 $8,071.3 $7,458.1 $7,065.7
Average Loan Amount $105,000 $96,000 $95,000 $98,000 $104,000
------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Wholesale Division
The Company's wholesale division (the "Wholesale Division") produces prime
credit quality first mortgage, home equity and sub-prime loans through mortgage
loan brokers and other financial intermediaries. As of February 28, 1999, the
Wholesale Division operated 84 loan centers, 14 regional support centers and
three sub-prime underwriting centers in various parts of the United States. For
1998, the Wholesale Division was ranked as the top wholesale originator, in
terms of volume, among residential mortgage lenders. The Company attributes its
success in this channel to providing a high level of service to loan brokers,
which includes access to an extensive branch network. Prime credit quality first
mortgage loans produced by the Wholesale Division comply with the Company's
general underwriting criteria for loans originated through the Consumer Markets
Division. Each such loan is approved by one of the Company's loan underwriters.
Sub-prime loans are underwritten centrally by a specialized underwriting group
and comply with the Company's underwriting criteria for such loans. In addition,
quality control personnel review loans for compliance with the Company's
underwriting criteria. The Wholesale Division has approximately 19,000 approved
mortgage brokers and other third-party originators. Mortgage loan brokers are
approved only after a review of their reputation and mortgage lending expertise,
which includes a review of their references and financial statements.
The following table sets forth the number and dollar amount of the Wholesale
Division's prime credit quality first mortgage, home equity and sub-prime loan
production for the periods indicated.
------------------------------- ----------- --------------------------------------------------------------------
Summary of the Wholesale Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
1999 1998 1997 1996 1995
------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Conventional Loans
Number of Loans 187,852 87,391 50,570 59,670 65,713
Volume of Loans $25,493.4 $11,860.9 $6,187.8 $6,766.9 $7,790.0
Percent of Total Volume 82.5% 75.4% 73.4% 84.0% 91.6%
FHA/VA Loans
Number of Loans 33,282 23,641 12,505 10,448 6,239
Volume of Loans $3,436.1 $2,362.3 $1,190.0 $1,016.2 $626.3
Percent of Total Volume 11.1% 15.0% 14.1% 12.6% 7.4%
Home Equity Loans
Number of Loans 18,172 11,073 6,017 1,937 1,836
Volume of Loans $687.2 $419.4 $227.7 $57.5 $86.9
Percent of Total Volume 2.2% 2.7% 2.7% 0.7% 1.0%
Sub-prime Loans
Number of Loans 13,274 11,721 8,568 1,941 -
Volume of Loans $1,300.5 $1,088.1 $823.9 $220.2 -
Percent of Total Volume 4.2% 6.9% 9.8% 2.7% -
Total Loans
Number of Loans 252,580 133,826 77,660 73,996 73,788
Volume of Loans $30,917.2 $15,730.7 $8,429.4 $8,060.8 $8,503.2
Average Loan Amount $122,000 $118,000 $109,000 $109,000 $115,000
------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Correspondent Division
Through its network of correspondent offices (the "Correspondent Division")
the Company purchases loans from other mortgage bankers, commercial banks,
savings and loan associations, credit unions and other financial intermediaries
("correspondents"). For 1998, the Correspondent Division was ranked as the third
largest correspondent lender, in terms of volume, among residential mortgage
lenders. The Company's correspondent offices are located in Pasadena,
California, Dallas, Texas and Pittsburgh, Pennsylvania. The Correspondent
Division has 1,300 approved financial intermediaries serving all 50 states and
Guam. High quality financial intermediaries are approved after a review of the
reputation, financial strength and mortgage lending expertise of such
institutions, including a review of their references and financial statements.
In addition, all Correspondents are reaffirmed annually based upon a review of
their current audited financial statements and their historical production
volumes and quality. The Company attributes its success in this channel to
providing superior service in the form of a broad product line and advanced
technological systems.
Loans purchased by the Company through the Correspondent Division comply
with the Company's general underwriting criteria for loans originated through
the Consumer Markets Division. The division has monitoring systems in place to
ensure that conventional loans of certain sellers and loans of certain credit
quality grades are reviewed by a Company underwriter prior to purchase. Under
this review process, Company underwriters reviewed approximately 21% of all
conventional loans purchased during Fiscal 1999. An additional 34% of the
conventional loans purchased were underwritten by contract underwriters whose
work is insured against loss or through underwriting systems endorsed by Fannie
Mae and Freddie Mac. For the home equity and sub-prime conventional loan
products, Company underwriters reviewed 100% of loans purchased. To provide
additional assurance against losses, the purchase agreement signed by all its
correspondents provides the Company with recourse to the correspondent in the
event of such occurrences as fraud or misrepresentation in the origination
process. The following table sets forth the number and dollar amount of the
Correspondent Division's prime credit quality first mortgage, home equity and
sub-prime loan production for the periods indicated.
------------------------------- ------------------------------------------------------------------------------- --
Summary of the Correspondent Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
1999 1998 1997 1996 1995
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Conventional Loans
Number of Loans 189,648 76,354 96,419 84,604 61,338
Volume of Loans $24,672.5 $9,648.9 $11,343.1 $9,844.7 $7,726.5
Percent of Total Volume 75.3% 49.3% 53.2% 51.7% 62.8%
FHA/VA Loans
Number of Loans 70,082 95,481 103,336 91,850 47,066
Volume of Loans $7,014.4 $9,393.5 $9,952.8 $9,217.7 $4,570.0
Percent of Total Volume 21.4% 48.0% 46.7% 48.3% 37.2%
Home Equity Loans
Number of Loans 15,597 6,635 8 49 14
Volume of Loans $581.0 $252.4 $0.8 $2.4 $0.8
Percent of Total Volume 1.8% 1.3% 0.0% 0.0% 0.0%
Sub-prime Loans
Number of Loans 4,229 2,457 290 - -
Volume of Loans $479.9 $267.5 $13.4 - -
Percent of Total Volume 1.5% 1.4% 0.1% - -
Total Loans
Number of Loans 279,556 180,927 200,053 176,503 108,418
Volume of Loans $32,747.8 $19,562.3 $21,310.1 $19,064.8 $12,297.3
Average Loan Amount $117,000 $108,000 $107,000 $108,000 $113,000
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Full Spectrum Lending, Inc.
Full Spectrum Lending, Inc. ("FSLI"), a wholly-owned subsidiary of the
Company, which commenced operations on September 1, 1997, originates sub-prime
and home equity loans. FSLI operates a nationwide network of 38 retail branch
offices located in 19 states in addition to three national sales centers which
enables the Company to offer mortgages to a broader spectrum of consumers. Each
of FSLI's branch offices is typically staffed by five to seven employees.
Business is obtained primarily through direct mailings to borrowers, outbound
telemarketing, referrals from other Divisions of the Company and other business
partners. FSLI personnel are not paid a commission on sales, rather they are
paid a bonus based on various factors, which includes branch profitability. Each
loan approved by FSLI is reviewed by its centralized underwriting unit to ensure
that standardized underwriting guidelines are met. In addition, FSLI performs
quality control audits of the origination process on a continuous basis.
The following table sets forth the number and dollar amount of FSLI's home
equity and sub-prime loan production for the periods indicated.
------------------------------- ------------------------------------------------------------------------------- --
Summary of the Full Spectrum Lending's
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
Except average loan amount) Year Ended February 28(29),
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
1999 1998 1997 1996 1995
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Home Equity Loans
Number of Loans 113 146 - - -
Volume of Loans $4.5 $6.4 - - -
Percent of Total Volume 0.6% 4.6% - - -
Sub-prime Loans
Number of Loans 7,800 1,445 - - -
Volume of Loans $702.9 $133.8 - - -
Percent of Total Volume 99.4% 95.4% - - -
Total Loans
Number of Loans 7,913 1,591 - - -
Volume of Loans $707.4 $140.2 - - -
Average Loan Amount $89,000 $88,000 - - -
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Fair Lending Programs
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac and promoted by various government agencies, including the
Department of Housing and Urban Development ("HUD"), the Company has established
affordable home loan and fair lending programs for low-income, moderate-income
and designated minority borrowers. These programs offer more flexible
underwriting guidelines (consistent with guidelines adopted by Fannie Mae and
Freddie Mac) than historical industry standards, thereby enabling more people to
qualify for home loans than had qualified under such historical guidelines.
Highlights of these flexible guidelines include lower down payment requirements,
more liberal guidelines in areas such as credit and employment history, lower
income requirements and no cash reserve requirements at the date of funding.
House America(R) is the Company's affordable home loan program for low- and
moderate-income borrowers. It offers loans that are eligible for purchase by
Fannie Mae and Freddie Mac. During Fiscal 1999 and 1998, the Company produced
approximately $312 million and $400 million, respectively, of mortgage loans
under this program. The decline in House America production from Fiscal 1998 to
Fiscal 1999 was the result of an improvement in the relative attractiveness of
other loan products as an alternative means of providing home ownership to low-
and moderate-income borrowers. House America personnel work with all of the
Company's production Divisions to help properly implement the flexible
underwriting guidelines for House America loan programs. In addition, an
integral part of the program is the House America Counseling Center, a free
educational service, which can provide consumers with a home buyer's educational
program, pre-qualify them for a loan or provide a customized budget plan to help
them obtain their goal of home ownership. Counselors are bilingual. They work
with consumers providing counseling for up to one year. The Company also
organizes and participates in local homebuyer fairs across the country. At these
fairs, branch personnel and Counseling Center counselors discuss various loan
programs, provide free pre-qualifications and distribute credit counseling and
homebuyer education videos and workbooks.
The Company's affordable housing outreach also includes participation in 150
local mortgage revenue bond programs that are available for first-time
homebuyers. Federal law allows local government agencies to sell tax-exempt
bonds to purchase mortgages securing loans made to first-time, low-income home
buyers. These programs provide mortgages with below-market rates. The Company is
approved to participate in over 400 Community Seconds Programs for first-time
homebuyers and low- and moderate-income consumers. These programs are offered by
city agencies and municipalities to assist with downpayment and closing costs.
In addition, a selection of applications from some of the borrowers that are
initially recommended for denial within the Company's Consumer Markets and
Wholesale Divisions are reviewed by a manager of the Company to insure that
denial is appropriate.
The use of more flexible underwriting guidelines may carry a risk of
increased loan defaults. However, because the loans in the Company's portfolio
are generally serviced on a non-recourse basis, the exposure to credit loss
resulting from increased loan defaults is substantially limited. Further,
related late charge income has historically been sufficient to offset
incremental servicing expenses resulting from an increased delinquency rate.
Loan Underwriting
The Company's guidelines for underwriting FHA-insured and VA-guaranteed
loans comply with the criteria established by those entities. The Company's
guidelines for underwriting conventional conforming loans comply with the
underwriting criteria employed by Fannie Mae and/or Freddie Mac. The Company's
underwriting guidelines and property standards for conventional non-conforming
loans are based on the underwriting standards employed by private investors for
such loans. In addition, conventional loans having a loan to value ratio greater
than 80% at origination, which are originated or purchased by the Company, are
covered by primary mortgage insurance. The insurance may be paid for by the
borrower or the lender.
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac, the Company has established affordable home loan programs for
low- and moderate-income borrowers offering more flexible underwriting
guidelines than historical industry standards. See "Business -Fair Lending
Programs".
The following describes the general underwriting criteria taken into
consideration by the Company in determining whether to approve a prime credit
quality first mortgage loan application. Borrowers who do not qualify for a
prime credit quality first mortgage may qualify for a sub-prime loan.
Employment and Income
Under most loan programs, applicants must exhibit the ability to generate
income on a regular basis, which would be sufficient to make the mortgage
payment as well as any other debts they may have. The nature of the information
that a borrower is required to disclose and whether such information is verified
depends, in part, on the documentation program used in the origination process.
Evidence of employment and income is obtained through written verification of
employment with the current and prior employer(s) or by obtaining a recent pay
stub and W-2 forms. Self-employed applicants are generally required to provide
income tax returns, financial statements or other documentation to verify
income. Sources of income to be considered include salary, bonus, overtime,
commissions, retirement benefits, notes receivable, interest, dividends,
unemployment benefits and rental income. The underwriter generally verifies the
information contained in the application relating to employment, income, assets
or mortgages.
Debt-to-Income Ratios
Generally, an applicant's monthly housing expense (loan payment, real estate
taxes, hazard insurance and homeowner association dues, if applicable) should be
25% to 28% of their monthly gross income. Total fixed monthly obligations
(housing expense plus other obligations such as car loans, credit card payments,
etc.) generally should be 33% to 36% of monthly gross income. Other areas of
financial strength, such as equity in the property, large cash reserves or a
history of meeting prior home mortgage or rental obligations are considered to
be compensating factors and may result in an adjustment of these ratio
limitations.
Credit History
An applicant's credit history is examined for both favorable and unfavorable
occurrences. An applicant who has made payments on outstanding or previous
credit obligations according to the contractual terms may be considered
favorably. Unfavorable items such as slow payment records, legal actions,
judgments, bankruptcy, liens, foreclosure or garnishments are discussed with the
applicant. In some instances, where the unfavorable items were due to
extenuating circumstances beyond the applicant's control, the effect of such
unfavorable items on the credit decision would be mitigated.
Property
Under most loan programs, the property's market value is assessed to ensure
that the property provides adequate collateral for the loan. Generally,
properties are appraised by licensed real estate appraisers. Automated or
streamlined appraisal systems may also be used to confirm property values on
some loan programs.
Maximum Indebtedness to Appraised Value
Generally, the maximum amount the Company will lend is 95% of the appraised
value of the property and this percentage may be lower depending on certain
factors such as the principal balance of the loan. Loan amounts in excess of 80%
of the appraised value generally require primary mortgage insurance to protect
against foreclosure loss.
Funds for Closing
Generally, applicants are required to have sufficient funds of their own to
meet the down payment requirement. Funds for closing costs may come from the
applicant or may be a gift from a family member. Certain loan programs require
the applicant to have sufficient funds for a portion of the down payment and the
remaining funds may be provided by a gift or an unsecured loan from a
municipality or a non-profit organization. Certain programs require the
applicant to have cash reserves after closing.
Geographic Distribution
The following table sets forth the geographic distribution of the Company's
prime credit quality first mortgage, home equity and sub-prime loan production
for the year ended February 28, 1999.
-------------------------------------------------------------------------------------------------------
Geographic Distribution of the Company's
Prime Mortgage, Home Equity and Sub-prime Loan Production
----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
Percentage of
Number Principal Total Dollar
(Dollar amounts in of Loans Amount Amount
millions)
----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
California 161,764 $23,349.2 25.1%
Michigan 49,306 5,177.3 5.6%
Texas 45,865 4,470.3 4.8%
Illinois 34,718 4,134.2 4.5%
Colorado 32,933 4,111.1 4.4%
Florida 42,940 3,835.0 4.1%
Washington 25,694 3,160.2 3.4%
Arizona 27,953 2,889.7 3.1%
Massachusetts 21,033 2,881.5 3.1%
Ohio 27,582 2,553.5 2.8%
Georgia 22,055 2,322.2 2.5%
New Jersey 15,594 2,034.0 2.2%
Utah 16,877 1,978.0 2.1%
Others (1) 286,725 29,984.3 32.3%
------------------ ----------------- -----------------
811,039 $92,880.5 100.0%
================== ================= =================
(1) No other state constitutes more than 2.0% of the total dollar
amount of loan production.
California mortgage loan production as a percentage of total mortgage loan
production (measured by principal balance) for Fiscal 1999, 1998 and 1997 was
25%, 26% and 25%, respectively. Loan production within California is
geographically dispersed, which minimizes dependence on any individual local
economy. As of February 28, 1999, 82% of the Consumer Markets Division branch
offices, Wholesale Division loan centers and FSLI branches were located outside
of California.
The following table sets forth the distribution by county of the
Company's California loan production for the year ended February 28, 1999.
-------------------------------------------------------------------------------------------------------
Distribution by County of the Company's California
Loan Production
----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
Percentage of
Number Principal Total Dollar
(Dollar amounts in Of Loans Amount Amount
millions)
----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
Los Angeles 36,721 $5,703.3 24.4%
Orange 18,412 2,904.3 12.4%
San Diego 13,387 2,047.3 8.8%
Santa Clara 7,738 1,496.8 6.4%
Others (1) 85,506 11,197.5 48.0%
------------------ ----------------- ------------------
161,764 $23,349.2 100.0%
================== ================= ==================
(1) No other county in California constitutes more than 5.0% of the
total dollar amount of California loan production.
Sale of Loans
As a mortgage banker, the Company customarily sells substantially all loans
that it originates or purchases. Substantially all prime credit quality first
mortgage loans sold by the Company are sold without recourse, subject in the
case of VA loans to the limits of the VA guaranty described below. Conforming
conventional loans are generally pooled by the Company and exchanged for
securities guaranteed by Fannie Mae or Freddie Mac. These securities are then
sold to national or regional broker-dealers. Substantially all conventional
loans securitized through Fannie Mae or Freddie Mac are sold, subject to certain
representations and warranties on the part of the Company, on a non-recourse
basis, whereby foreclosure losses are generally a liability of Fannie Mae and
Freddie Mac and not the Company.
The Company securitizes substantially all of its FHA-insured and
VA-guaranteed mortgage loans through the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae, or Freddie Mac. The Company is insured
against foreclosure loss by the FHA or partially guaranteed against foreclosure
loss by the VA (at present, generally 25% to 50% of the loan, up to a maximum
amount of $50,750, depending upon the amount of the loan). For Fiscal 1999, 1998
and 1997, the aggregate loss experience of the Company on VA loans in excess of
the VA guaranty was approximately $13.2 million, $18.5 million and $9.3 million,
respectively. To guarantee timely and full payment of principal and interest on
Fannie Mae, Freddie Mac and Ginnie Mae securities, the Company pays guarantee
fees to these agencies.
The Company sells its non-conforming conventional loan production on a
non-recourse basis. These loans can be sold either on a whole-loan basis or in
the form of "private-label" securities which generally have the benefit of some
form of credit enhancement, such as insurance, letters of credit, payment
guarantees or senior/subordinated structures.
Home equity and sub-prime loans may be sold on a whole-loan basis or in the
form of securities backed by pools of these loans. In connection with the
securitization of its home equity and sub-prime loans, the Company retains a
subordinated residual interest. The Company has exposure to credit losses on the
loans to the extent of this residual interest. As of February 28, 1999, the
Company had investments in such subordinated residual interests amounting to
$273.9 million, which represented less than 2% of total assets.
In connection with the sale and securitization of mortgage loans, the
Company makes customary representations and warranties relating to, among other
things, compliance with laws and the underwriting rules of the buyer or
guarantor. In the event of a breach of such representations and warranties, the
Company may be required to indemnify the purchaser against losses suffered as a
result of the breach and repurchase the affected mortgage loan. In such event,
any subsequent credit loss on the mortgage loan will be borne by the Company.
In order to mitigate the risk that a change in interest rates will result in
a decline in the value of the Company's current loan commitments the ("Committed
Pipeline") or closed loans and mortgage backed securities held in inventory (the
"Inventory"), the Company enters into hedging transactions. The Company's
Inventory is hedged with forward contracts for the sale of loans and net sales
of mortgage-backed securities ("MBS"), including options to sell MBS where the
Company can exercise the option on or prior to the anticipated settlement date
of the MBS. Due to the variability of closings in the Company's Committed
Pipeline, which is driven primarily by interest rates, the Company's hedging
policies require that substantially all of the Committed Pipeline be hedged with
a combination of options for the purchase and sale of MBS and treasury futures
and forward contracts for the sale of MBS. The correlation between the Inventory
and Committed Pipeline and the hedge instruments is very high due to their
similarity. The Company is generally not exposed to significant losses nor will
it realize significant gains related to its Inventory and Committed Pipeline due
to changes in interest rates, net of gains or losses on associated hedge
positions. However, the Company is exposed to the risk that the actual closings
in the Committed Pipeline may deviate from the estimated closings for a given
change in interest rates. Although interest rates are the primary determinant,
the actual loan closings from the Committed Pipeline are influenced by many
factors, including the composition of the Committed Pipeline and remaining
commitment periods. The Company's estimated closings are based on historical
data of loan closings as influenced by recent developments.
Loan Servicing Segment
The Company services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases pursuant to servicing agreements
with Fannie Mae, Freddie Mac, Ginnie Mae and various investors. In addition, the
Company periodically purchases bulk servicing contracts, also on a non-recourse
basis, to service single-family residential mortgage loans originated by other
lenders. Servicing contracts acquired through bulk purchases accounted for 10%
of the Company's mortgage servicing portfolio as of February 28, 1999. Servicing
mortgage loans includes collecting and remitting loan payments, responding to
borrower inquires, making advances when required, accounting for principal and
interest, holding custodial (impound) funds for payment of property taxes and
hazard insurance, making any physical inspections of the property, counseling
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering the loans. The Company
receives a fee for servicing mortgage loans ranging generally from 1/4% to 1/2%
annually on the declining principal balances of the loans.
The Company strives to balance its loan servicing and loan production
segments, which are counter-cyclical in nature. In general, earnings from the
loan servicing segment increase as interest rates increase and decline as
interest rates decline, which is normally the opposite of the loan origination
segment. Generally, in an environment of increasing interest rates, the rate of
current and projected future loan prepayments decreases, resulting in a
decreased rate of amortization of mortgage servicing rights ("MSRs").
Conversely, in an environment of declining interest rates, the rate of current
and projected future prepayments increases, resulting in an increased rate of
amortization and potential impairment of MSRs. To further mitigate the impact of
MSR impairment on earnings, the Company has devoted substantial management
expertise and resources to the development and maintenance of a financial hedge
(the "Servicing Hedge"). In addition, the Company believes it is becoming
increasingly effective at recapturing loans that are refinanced from its
portfolio.
To maximize the value of its investment in MSRs, the Company has endeavored
to cross-sell various services and financial products to its portfolio of over
two million borrowers. In particular, the Company has been able to cross-selling
homeowners, fire, flood, earthquake, auto, home warranty, life and disability
insurance, as well as annuities, through its insurance agency, Countrywide
Insurance Services ("CIS"). CIS is a national, full-service, multi-line
insurance agency and brokerage, with over three hundred thousand policies
currently in force with portfolio and non-portfolio customers alike. In
addition, through telemarketing and direct mail solicitations, the Company has
offered home equity lines of credit to its existing borrowers. As of February
28, 1999, the Company had 59,710 home equity lines in place, up from 45,679 as
of February 29,1998.
The Company has vertically integrated several loan-servicing functions that
are commonly out-sourced by other loan servicers. These functions include
monitoring and processing property tax bills, tracking and ensuring adequate
insurance to protect the investor's interest in the property securing each loan,
trustee services, Real Estate Owned ("REO") management and liquidation services,
and property field inspection services. The Company believes the integration of
these functions give it a competitive edge by lowering costs and enabling the
Company to provide an enhanced overall level of service.
Through a separate subsidiary, the Company earns a portion of the private
mortgage insurance premiums associated with loans in the servicing portfolio by
providing a layer of non-catastrophic reinsurance coverage to primary mortgage
insurance companies that underwrite primary mortgage insurance.
The Company's servicing portfolio is subject to reduction by scheduled
principal payments, prepayments and foreclosures. In addition, the Company has
elected in the past to sell a portion of its MSRs as well as newly originated
loans on a servicing-released basis, and may do so in the future. Nonetheless,
the Company's overall strategy is to build and retain its servicing portfolio.
Loans are serviced from facilities located in Simi Valley, California and
Plano, Texas (see "Properties"). The Company has developed systems and processes
that enable it to service mortgage loans efficiently and therefore enhance
earnings from its investment in MSRs. Some of these systems and processes are
highlighted in the following paragraphs.
All data elements pertaining to each individual loan are transferred from
the various loan origination systems to the loan servicing system without manual
intervention.
Customer service representatives in both servicing facilities have access to
on-line screens containing all pertinent data about a borrower's account, thus
eliminating the need to refer to paper files and shortening the average time per
call. The Company's telephone system controls the flow of calls to each
servicing site and has a "Smart Call Routing" filter. This filter is designed to
match the originating phone number to phone numbers in the Company's database.
Having identified the borrower, the Company can communicate topical loan
information electronically without requiring the caller to enter information.
The caller can get more detailed information through an Interactive Voice
Response application or can speak with a customer service representative. The
Company also features an Internet site for existing borrowers wherein the
borrower can obtain current account status, history, answers to frequently asked
questions and a dictionary to help the borrower understand industry terminology.
The Company issues monthly statements to its borrowers. This allows the
Company to provide personalized home loan information in a more timely manner
while simultaneously providing a vehicle for the Company to market other
products. Monthly statement information is also available to borrowers
electronically through the Company's Website.
The Company's high speed payment processing equipment enables the Company to
deposit virtually all checks on the day of receipt, thereby maximizing cash
availability.
The collection department utilizes its collection management system in
conjunction with its predictive dialing system to track and maximize each
individual collector's performance as well as to track the success of each
collection campaign.
The Company tracks its foreclosure activity through its default processing
system ("DPS"). DPS is a client-server-based application that allows each
foreclosure to be assigned to a state/investor specific workflow template. The
foreclosure processor is automatically guided through each function required to
successfully complete a foreclosure in any state and for any investor.
The following table sets forth certain information regarding the
servicing segment's portfolio of single-family mortgage loans, including
loans and securities held for sale and loans subserviced for others, for
the periodsindicated.
------------------------------------ -- -------------------------------------------------------------------------
(Dollar amounts in millions) Year Ended February 28(29),
------------------------------------ -- -------------------------------------------------------------------------
Composition of Servicing Portfolio 1999 1998 1997 1996 1995
----------- -- ------------ -- ----------- -- ----------- -- ------------
At Period End:
FHA-Insured Mortgage Loans $38,707.0 $ 37,241.3 $ 30,686.3 $ 23,206.5 $ 17,587.5
VA-Guaranteed Mortgage Loans 15,457.7 14,878.7 13,446.4 10,686.2 7,454.3
Conventional Mortgage Loans 155,999.4 127,344.0 112,685.4 102,417.0 87,998.2
Home Equity Loans 2,806.3 1,656.5 689.9 204.5 31.3
Sub-prime Loans 2,502.3 1,744.2 1,048.9 289.1 -
----------- ------------ ----------- ----------- ------------
Total Servicing Portfolio $215,472.7 $182,864.7 $158,556.9 $136,803.3 $113,071.3
=========== ============ =========== =========== ------------
Beginning Servicing Portfolio $182,864.7 $158,556.9 $136,803.3 $113,071.3 $ 84,624.9
Add: Loan Production 92,880.5 48,771.7 37,810.8 34,583.7 27,866.2
Bulk Servicing and
Subservicing 6,644.6 3,761.6 2,808.1 6,428.5 17,888.1
Acquired
Less: Servicing Transferred (1) (7,398.6) (110.6) (70.8) (53.5) (6,287.4)
Runoff (2) (59,518.5) (28,114.9) (18,794.5) (17,226.7) (11,020.5)
=========== ============ =========== =========== ------------
Ending Servicing Portfolio $215,472.7 $182,864.7 $158,556.9 $136,803.3 $113,071.3
=========== ============ =========== =========== ------------
Delinquent Mortgage Loans and Pending
Foreclosures at Period End (3):
30 days 2.52% 2.68% 2.26% 2.13% 1.80%
60 days 0.53% 0.58% 0.52% 0.48% 0.29%
90 days or more 0.50% 0.65% 0.66% 0.59% 0.42%
----------- ----------- ------------ ----------- ------------
Total Delinquencies 3.55% 3.91% 3.44% 3.20% 2.51%
=========== =========== ============ =========== ------------
Foreclosures Pending 0.31% 0.45% 0.71% 0.49% 0.29%
----------- ----------- ------------ ----------- ------------
------------------------------------ -- ----------- -- ----------- -- ------------ -- ----------- -- ------------
(1) When servicing rights are sold from the servicing portfolio, the
Company generally subservices such loans from the sales contract date
to the transfer date.
(2) Runoff refers to scheduled principal repayments on loans and
unscheduled prepayments (partial prepayments or total prepayments due
to refinancing, modifications, sale, condemnation or foreclosure).
(3) Expressed as a percentage of the total number of loans serviced
excluding subserviced loans.
At February 28, 1999, the Company's servicing portfolio of single-family
mortgage loans was stratified by interest rate as follows.
---- -------------------------- -- --------------------------------------------------------------------------------
(Dollar amounts in Total Portfolio at February 28, 1999
millions)
---- -------------------------- -- --------------------------------------------------------------------------------
Weighted
Interest Principal Percent Average MSR
Rate Balance of Total Maturity (Years) Balance
---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
7% and under $ 73,284.4 34.0% 24.8 $ 1,647.6
7.01-8% 109,322.9 50.8% 26.1 2,301.2
8.01-9% 26,813.4 12.4% 25.8 454.1
9.01-10% 4,037.2 1.9% 24.2 76.1
over 10% 2,014.8 0.9% 21.6 17.4
=============== ============== ===================== ===============
$215,472.7 100.0% 25.5 $4,496.4
=============== ============== ===================== ===============
---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
The weighted average interest rate of the single-family mortgage loans in
the Company's servicing portfolio as of February 28, 1999 was 7.5% and 7.8% as
of February 28, 1998. As of February 28, 1999, 90% of the loans in the servicing
portfolio bore interest at fixed rates. The weighted average net service fee of
the loans in the portfolio was 0.405% as of February 28, 1999. The weighted
average interest rate of the fixed-rate loans in the servicing portfolio was
7.4%. The following table sets forth the geographic distribution of the
Company's servicing portfolio of single-family mortgage loans, including loans
and securities held for sale and loans subserviced for others, as of February
28, 1999.
----------------------------------------------------------- -- -----------------------------
Percentage of Principal
Balance Serviced
----------------------------------------------------------- -- -----------------------------
California 30.3%
Texas 5.1%
Florida 4.8%
Illinois 3.7%
Colorado 3.6%
Michigan 3.5%
Washington 3.4%
Ohio 2.9%
Arizona 2.9%
New York 2.7%
Georgia 2.6%
Virginia 2.5%
Massachusetts 2.5%
New Jersey 2.4%
Maryland 2.3%
Other (1) 24.8%
==============
100.0%
==============
(1) No other state contains more than 2.0% of the properties securing loans in
the Company's servicing portfolio.
Financing of Mortgage Banking Operations
The Company's principal financing needs are the financing of its mortgage
loan inventory and the investment in MSRs. To meet these needs, the Company
currently utilizes commercial paper supported by CHL's revolving credit
facility, medium-term notes, mortgage repurchase agreements, pre-sale funding
facilities, an optional cash purchase feature in the dividend reinvestment plan,
redeemable capital trust pass-through securities and cash flow from operations.
The Company estimates that it had available committed and uncommitted credit
facilities aggregating approximately $10.4 billion as of February 28, 1999. In
the past, the Company has utilized whole loan repurchase agreements,
servicing-secured bank facilities, private placements of unsecured notes and
other financings, direct borrowings from CHL's revolving credit facility and
public offerings of common and preferred stock. For further information on the
material terms of the borrowings utilized by the Company to finance its
inventory of mortgage loans and MBS and its investment in servicing rights, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." The Company continues to
investigate and pursue alternative and supplementary methods to finance its
operations through the public and private capital markets. These may include
such methods as mortgage loan sale transactions that are designed to expand the
Company's financial capacity and reduce its cost of capital and the
securitization of servicing income cash flows.
Seasonality
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
C. Information Technology
The Company employs both proprietary and publicly available technology
throughout the enterprise and continually searches for new and better ways of
both providing services to its customers and of maximizing the efficiency of its
operations. Technology is viewed as part of the Company's competitive advantage.
By implementing highly integrated systems into its lines of business, the
Company believes it has been successful in the rapid start-up of new business
enterprises. The Company views technology as a key driver to maintaining world
class productivity levels in its operations. The deployment of Internet
technologies, integrated client server systems, as well as advanced messaging
systems such as Lotus Notes, interactive voice response and call management
systems. These all represent examples where management believes technology has
played a role in improving or maintaining productivity and efficiency.
Proprietary systems currently in use by the Company include CLUESTM, an
artificial intelligence system that is designed to expedite the review of
applications, credit reports and property appraisals. The Company believes that
CLUES increases underwriters' productivity, reduces costs and provides greater
consistency to the underwriting process. As a result, the Company believes it
achieves efficiencies in the Company's overall business processes and in the
level of customer service (improved pricing, approval and funding speed). Other
systems currently in use by the production Divisions are the EDGE (primarily
used by the Consumer Markets, Wholesale Lending Division and Full Spectrum
Lending, Inc.) and GEMS (primarily used by the Correspondent Lending Division)
systems, which are loan origination systems that are designed to reduce the time
and cost associated with the loan application and funding process. These
front-end systems were internally developed for the Company's exclusive use and
are integrated with the Company's loan servicing, sales, accounting, treasury
and other systems. The Company believes that both the EDGE and GEMS systems
improve the quality of its loan products and customer service by: (i) reducing
the risk of deficient loans; (ii) facilitating accurate and customized pricing;
(iii) promptly generating loan documents with the use of laser printers; (iv)
providing for electronic communication with credit bureaus, financial
institutions, HUD and other third parties; and (v) generally minimizing manual
data input.
Another system developed and implemented by the Company is the MORTGAGE LOAN
COUNSELOR. The MORTGAGE LOAN COUNSELOR is designed for telemarketing and
production branches and is currently being used by the telemarketing unit in
conjunction with its Customer Contact Management System ("CCMS"). (See
discussion in the following paragraph.) MORTGAGE LOAN COUNSELOR provides the
telemarketing unit with the ability to: (i) pre-qualify a prospective applicant;
(ii) provide "what if" scenarios to help find the appropriate loan product;
(iii) obtain on-line price quotes; (iv) take applications; (v) request credit
reports electronically through LandSafe, Inc.; (vi) issue a LOCK 'N SHOP (R)
certificate; and (vii) transmit a loan pre-application to the production units
for processing.
CCMS is a telemarketing application designed to provide enterprise-wide
information on both current and prospective customers. CCMS helps the production
divisions identify prospective customers to solicit for specific products or
services and obtain the results of any solicitation as well as facilitate
customer contact management. Management believes that CCMS will provide the
Company the opportunity to (i) reduce the loss of customers who prepay their
loans and (ii) obtain new loans from other sources and generate additional
revenue by cross-selling other products and services.
The Company is currently beta testing in 100 branches a new software
application called "AdvantEdge". AdvantEdge is a reusable object oriented
contact management and loan origination system which can be used separately or
integrated with EDGE. This application has been designed to assist the Consumer
Markets Division, Wholesale Lending Division and FSLI in improving loan
production. Additionally, the loan origination modules of AdvantEdge provide
functionality similar to MORTGAGE LOAN COUNSELOR, access to CLUESTM and the
ability to generate disclosure documents. AdvantEdge assists production
employees to individually manage each customer or business partner relationship.
Once a loan application is ready to be funded, the loan information is
transferred to EDGE, resulting in time saved and enhanced customer service. The
Company believes that AdvantEdge will allow the production divisions to convert
more leads, increase business partner referrals and cross-sell additional
products (e.g. mortgage insurance, property insurance, etc.) throughout the loan
process. By maintaining a database of customer contact information (realtors,
individual customers, loan brokers, builders or other business partners), the
Company believes it will be able to improve the customer relationship and
profitability. AdvantEdge will be introduced into the Company's telemarketing
operations in June 1999 and rolled out to the balance of its retail branch
network beginning in the second quarter.
The Company is a dominant Internet retail home lender. The Company believes
that the Internet provides a unique medium to deliver mortgage services at a
cost significantly lower than the cost incurred in conventional marketing
methods. There are several business units linked to the Company's primary
Website. These include sites that allow our potential customers, current
borrowers and business partners to explore current loan products, insurance
products, REO properties, electronic services, investment services, credit card
services and business partner directories.
The Company's goal is to allow the customer (consumer or business partner)
to be able to utilize the Company's various web sites in an integrated fashion
with its existing infrastructure to provide consumers with competitive pricing
as well as convenient and efficient service. The Company's websites will
continue to evolve in depth and breadth as the Company develops online
partnerships to enhance the "Home-Centric" nature of its site. The Company is
also developing customized, interactive web pages for each of its 400+ branches
to leverage its local knowledge and expertise to the consumer. The Company
believes this strategy provides it with a distinct advantage over its newer
online competitors. A component of the Company's new strategy is to integrate
the closing services required in the loan process (title, appraisal, home
inspection and credit reporting) through its LandSafe subsidiary. This will
provide a "one-stop" solution to the individual consumer and to the Company's
business partners.
The customer links are: (1) "Home Financing - Mortgage and Equity Lines"
which provides potential customers with the ability to pre-qualify for a loan,
calculate maximum home price, loan amount and monthly payments, review loan
products and current price, submit loan applications on-line, determine if
refinancing is advantageous and obtain answers to frequently asked questions;
(2) "Current Customers" which provides current borrowers the ability to review
their current loan status, account history, insurance information, investment
options, and subscription services. This link also includes information on the
"Mortgage Pay on the Web" service, an internally developed product that allows
the customer to make mortgage payments online; (3) "Insurance Solutions "
provides insurance information concerning homeowners, automobile, home warranty,
life, annuities and disability insurance. This link provides calculators to help
customers determine coverage amounts and premiums including instant on-line
quotes. In addition, it provides customers the ability to contact our customer
service department to change existing coverage, review terms, conditions and
status of existing policies, file a claim, make a complaint, renew an existing
policy, make changes to method of billing and update or change personal
information; (4) "Company Information" which contains information about the
Company background, description of products and services offered, a president's
letter, information on the Company's Year 2000 Project, available career
opportunities, press releases, investor information and annual reports.
The Internet sites that enhance business partner relationships are within
the "Countrywide's Partners" site which include the "Realtor's Advantage",
"Builder's Advantage", and "Wholesale Lending Division" sites. The Realtor's
Advantage allows realtors to register in our resource directory, obtain a Lock
N' Shop to guarantee rates and offers real estate agents tools for their
clients. Builder's Advantage is a site that allows builders to register with
Countrywide, learn about the Company's Builder Advantage program and builder
services and links to builder industry web sites. The Wholesale Lending site
allows brokers to track the status of their loans. In addition, a similar site
is available for correspondent lenders, to view pricing and product information,
as well as loan status. The Company believes that the Internet provides a unique
medium to deliver mortgage services at a cost significantly lower than the
incurred in conventional marketing methods.
D. Capital Markets Segment
The Company's Capital Markets Segment consists of Countrywide Capital
Markets ("CCM"), a wholly-owned subsidiary of the Company. CCM has two principal
operating subsidiaries: Countrywide Securities Corporation ("CSC") and
Countrywide Servicing Exchange ("CSE").
CSC is a registered broker-dealer and a member of both the National
Association of Securities Dealers, Inc. and the Securities Investor Protection
Corporation. CSC primarily trades mortgage-related and other securities,
including pass through certificates issued by Ginnie Mae, Fannie Mae and Freddie
Mac, callable agency debt and collateralized mortgage obligations. CSC also
trades certificates of deposit issued by banks, the deposits of which are
insured by the Bank Insurance Fund. CSC participates in the underwriting of
securities for CHL and for unrelated entities. CSC also arranges the purchase
and sale of mortgage loans for CHL and others. CSC trades with institutional
investors, such as investment managers, pension fund companies, insurance
companies, depositories, and other broker-dealers. CSC does not maintain retail
accounts.
The principal office of CSC is located in Calabasas, California. CSC also
maintains a sales office in New York, New York.
CSE is among the leading national mortgage servicing brokerage and
consulting firms. CSE, as an agent, facilitates the purchase and sale of bulk
servicing contracts.
CSE's principal office is located in Calabasas, California with a sales
office in Rochester, New York.
E. Other Operations
The Company provides various loan-closing services to its loan production
divisions and to others through its subsidiary, LandSafe, Inc. Through several
subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of
settlement, escrow, appraisal, credit reporting, flood zone determination and
home inspection services. In addition, LandSafe, Inc. provides property profiles
to realtors, builders, consumers, mortgage brokers and other financial
institutions.
Countrywide Financial Services, Inc. ("CFSI") operates as a fund manager and
service provider for unaffiliated mutual funds, broker-dealers, investment
advisors and fund managers. CFSI currently has approximately $1.4 billion in
funds under management and services accounts aggregating over $13.4 billion for
other fund management companies.
F. Segments and Related Information
Information regarding the Company's segments appears in the Notes to the
Consolidated Financial Statements, and is incorporated by this reference.
G. Regulation
The Company's mortgage banking business is subject to the rules and
regulations of, and examination by, HUD, FHA, VA, Fannie Mae, Freddie Mac,
Ginnie Mae and state regulatory authorities with respect to originating,
processing, selling and servicing mortgage loans. Those rules and regulations,
among other things, impose licensing obligations on the Company, establish
standards for originating and servicing mortgage loans, prohibit unlawful
discrimination, provide for inspections and appraisals of property, require
credit reports on prospective borrowers and, in some cases, fix maximum interest
rates, fees and other loan amounts. Moreover, FHA lenders such as the Company
are required annually to submit to the Federal Housing Commissioner audited
financial statements, and Ginnie Mae requires the maintenance of specified net
worth levels (which vary depending on the amount of Ginnie Mae securities issued
by the Company). The Company's affairs are also subject to examination by the
Federal Housing Commissioner at all times to assure compliance with the FHA
regulations, policies and procedures. In addition to other federal laws,
mortgage origination activities are subject to the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act, Home Mortgage Disclosure Act and the Real Estate
Settlement Procedures Act, and the regulations promulgated thereunder. These
laws prohibit unlawful discrimination, require the disclosure of certain basic
information to mortgagors concerning credit and settlement costs, limit payment
for settlement services to the reasonable value of the services rendered and
require the maintenance and disclosure of information regarding the disposition
of mortgage applications based on race, gender, geographical distribution and
income level.
Securities broker-dealer and mutual fund operations are subject to federal
and state securities laws, as well as the rules of both the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.
Insurance agency and title insurance operations are subject to insurance
laws of each of the states in which the Company conducts such operations.
H. Competition
The mortgage banking industry is highly competitive and fragmented. The
Company competes with other financial intermediaries (such as mortgage bankers,
commercial banks, savings and loan associations, credit unions and insurance
companies) and mortgage banking subsidiaries or divisions of diversified
companies. Generally, the Company competes by offering products with competitive
features, by emphasizing the quality of its service and by pricing its range of
products at competitive rates.
During the 1990's, the aggregate share of the United States market for
residential mortgage loans that is served by mortgage bankers has risen,
principally due to the decline in the savings and loan industry. According to
industry statistics, mortgage bankers' aggregate share of this market increased
from approximately 19% during calendar year 1989 to approximately 52% during
calendar year 1998. The Company believes that it has benefited from this trend.
I. Employees
At February 28, 1999, the Company employed 11,378 persons, 6,341 of whom
were engaged in production activities, 1,830 were engaged in loan administration
activities and 3,207 were engaged in other activities. None of these employees
is represented by a collective bargaining agent.
J. Year 2000 Compliance
A discussion of the Year 2000 issue is included in Item 7.
- - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company and its
subsidiaries are located in Calabasas, California. The headquarters facility
consists of approximately 225,000 square feet and is situated on 20.1 acres of
land. The Company currently leases a 90,000 square foot facility in Calabasas,
California, which primarily houses part of the Company's data processing
operations. In approximately June 1999, some business units will relocate to a
newly constructed 88,000 square foot office building in Calabasas, which the
Company has leased with an option to purchase. In September 1998, the Company
entered into a 10-year sublease of a 215,000 square foot facility in Rosemead,
California, which houses loan production and subsidiary operations. The Company
owns an office facility of approximately 300,000 square feet located on 43.5
acres in Simi Valley, California, which is used primarily to house a portion of
the Company's loan servicing and data processing operations. In July 1998, the
Company purchased the adjoining 14-acre parcel and is converting the existing
structure on that parcel to a 206,000 square foot office building for loan
servicing operations and the executive and administrative offices of its
Correspondent Lending Division. In December 1998, the Company purchased a
200,500 square foot building in Rosemead, California, which houses the Company's
document custodian and collateral documents, as well as the Company's document
management operations. The Company also owns a 253,000 square foot building
situated on a 21.5 acres in Plano, Texas, which houses additional loan
servicing, loan production and data processing operations. In order to
accommodate its expanding loan servicing and related business operations, the
Company is constructing two office buildings totaling approximately 500,000
square feet on the 17-acre parcel of land adjacent to the existing Plano
facility. Additional space located in Pasadena, Moorpark and Simi Valley,
California and Dallas, Texas is currently under lease for certain subsidiaries,
loan servicing, loan production and data processing operations. These leases
provide an additional 500,000 square feet on varying terms. In addition, the
Company leases space for its branch offices throughout the country.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. Although
it is difficult to predict the ultimate outcome of these proceedings, management
believes, based on discussions with counsel, that any ultimate liability will
not materially affect the consolidated financial position or results of
operations of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange ("NYSE")
and the Pacific Stock Exchange (Symbol: CCR). The following table sets forth the
high and low sales prices (as reported by the NYSE) for the Company's common
stock and the amount of cash dividends declared for the fiscal years ended
February 28, 1999 and 1998.
------- --------------- ------------------------- --- ------------------------- --- --------------------------------
Fiscal 1999 Fiscal 1998 Fiscal 1999 Fiscal 1998
------- --------------- ------------ ------------ --- ------------ ------------ --- --------------------------------
Quarter High Low High Low Cash Dividends Declared
------- --------------- ------------ ------------ --- ------------ ------------ --- --------------------------------
First $54.50 $44.25 $29.50 $24.38 $0.08 $0.08
Second 56.25 37.00 35.25 26.75 0.08 0.08
Third 50.75 28.63 41.88 31.50 0.08 0.08
Fourth 51.44 36.75 48.50 39.25 0.08 0.08
------- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- ---------------
The Company has declared and paid cash dividends on its common stock
quarterly since 1982. For the fiscal years ended February 28, 1999 and 1998, the
Company declared quarterly cash dividends aggregating $0.32 per share. On March
24, 1999, the Company declared a quarterly cash dividend of $0.10 per common
share, which was paid on April 30, 1999.
The ability of the Company to pay dividends in the future is limited by
various restrictive covenants in the debt agreements of the Company, the
earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under certain of its debt agreements,
including its guarantee of CHL's revolving credit facility, from paying
dividends on any capital stock (other than dividends payable in capital stock or
stock rights), except that so long as no event of default or potential event of
default under the agreements exists at the time, the Company may pay dividends
in an aggregate amount not to exceed the greater of: (i) the after-tax net
income of the Company, determined in accordance with generally accepted
accounting principles, for the fiscal year to the end of the quarter to which
the dividends relate and (ii) the aggregate amount of dividends paid on common
stock during the immediately preceding year. The primary source of funds for
payments to stockholders by the Company is dividends received from its
subsidiaries. Accordingly, such payments by the Company in the future also
depend on various restrictive covenants in the debt obligations of its
subsidiaries, the earnings, the cash position and the capital needs of its
subsidiaries, as well as laws and regulations applicable to its subsidiaries.
Unless the Company and CHL each maintain specified minimum levels of net worth
and certain other financial ratios, dividends cannot be paid by the Company and
CHL in compliance with certain of CHL's debt obligations (including its
revolving credit facility). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
As of May 3, 1999, there were 2,382 shareholders of record of the
Company's common stock, with 112,748,275 common shares outstanding.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
---------------------------------------------- -----------------------------------------------------------------
Years ended February 28(29),
---------------------------------------------- ------------ ------------- ------------ ------------ ------------
(Dollar amounts in thousands, except per 1999 1998 1997 1996 1995
share data)
---------------------------------------------- ------------ ------------- ------------ ------------ ------------
Statement of Earnings Data (1):
Revenues:
Loan origination fees $623,531 $301,389 $193,079 $199,724 $203,426
Gain (loss) on sale of loans 699,433 417,427 247,450 92,341 (41,342)
------------ ------------- ------------ ------------ ------------
Loan production revenue 1,322,964 718,816 440,529 292,065 162,084
Interest earned 1,029,066 584,076 457,005 364,531 311,781
Interest charges (983,829) (568,359) (423,447) (337,655) (267,685)
------------ ------------- ------------ ------------ ------------
Net interest income 45,237 15,717 33,558 26,876 44,096
Loan servicing income 1,023,700 907,674 773,715 620,835 460,351
Amortization and impairment/recovery of
mortgage servicing rights (1,013,578) (561,804) (101,380) (342,811) (95,768)
Servicing hedge benefit (expense) 412,812 232,959 (125,306) 200,135 (40,030)
Less write-off of servicing hedge - - - - (25,600)
------------ ------------- ------------ ------------ ------------
Net loan administration income 422,934 578,829 547,029 478,159 298,953
138 91,346
Commissions, fees and other income 187,867 138,217 91,346 63,642 40,650
Gain on sale of subsidiary - 57,381 - - -
Gain on sale of servicing - - - - 56,880
------------ ------------- ------------ ------------ ------------
Total revenues 1,979,002 1,508,960 1,112,462 860,742 602,663
------------ ------------- ------------ ------------ ------------
Expenses:
Salaries and related expenses 669,686 424,321 286,884 229,668 199,061
Occupancy and other office expenses 277,921 184,338 129,877 106,298 102,193
Guarantee fees 181,117 172,692 159,360 121,197 85,831
Marketing expenses 64,510 42,320 34,255 27,115 23,217
Other operating expenses 153,963 119,743 80,188 50,264 37,016
Branch and administrative office - - - - 8,000
consolidation costs
------------ ------------- ------------ ------------ ------------
Total expenses 1,347,197 943,414 690,564 534,542 455,318
------------ ------------- ------------ ------------ ------------
421,898
Earnings before income taxes 631,805 565,546 421,898 326,200 147,345
Provision for income taxes 246,404 220,563 164,540 130,480 58,938
------------ ------------- ------------ ------------ ------------
============ ============= ============ ============ ------------
Net earnings $385,401 $344,983 $257,358 $195,720 $88,407
============================================== ============ ============= ============ ============ ------------
---------------------------------------------- ============ ============= ============ ============ ------------
Per Share Data (2):
Basic (3) $3.46 $3.21 $2.50 $1.99 $0.97
Diluted (3) $3.29 $3.09 $2.44 $1.95 $0.96
Cash dividends per share $0.32 $0.32 $0.32 $0.32 $0.32
Weighted average shares outstanding:
Basic 111,414,000 107,491,000 103,112,000 98,352,000 91,240,000
Diluted 117,045,000 111,526,000 105,677,000 100,270,000 92,087,000
============================================== ============ ============= ============ ============ ------------
---------------------------------------------- ============ ============= ============ ============ ------------
Selected Balance Sheet Data at End of Period
(1):
Total assets $15,648,256 $12,183,211 $7,689,090 $8,321,652 $5,589,138
Short-term debt $5,065,934 $4,043,774 $2,567,420 $4,423,738 $2,664,006
Long-term debt $5,953,324 $4,195,732 $2,367,661 $1,911,800 $1,499,306
Common shareholders' equity $2,518,885 $2,087,943 $1,611,531 $1,319,755 $ 942,558
============================================== ============ ============= ============ ============ ------------
---------------------------------------------- ============ ============= ============ ============ ------------
Operating Data (dollar amounts in millions):
Loan servicing portfolio (4) $215,489 $182,889 $158,585 $136,835 $113,111
Volume of loans originated $92,881 $48,772 $ 37,811 $ 34,584 $ 27,866
============================================== ============ ============= ============ ============ ============
(1) Certain amounts in the Consolidated Financial Statements have been
reclassified to conform to current year presentation. (2) Adjusted to
reflect subsequent stock dividends and splits. (3) Earnings per share for
Fiscal 1998 include a $57.4 million gain on sale of subsidiary. Excluding
the non-recurring gain on
sale of subsidiary, basic and diluted earnings per share would have been
$2.88 and $2.78, respectively. (4) Includes warehoused loans and loans under
subservicing agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business strategy is primarily focused on four areas: loan
production, loan servicing, capital markets and businesses ancillary to mortgage
lending. Loan production and loan servicing comprise the Company's mortgage
banking business. See "Business--Mortgage Banking Operations",
"Business--Capital Markets" and "Business--Other Operations." The Company
intends to continue its efforts to expand its operations in each segment focus
area. A strong production capability and a growing servicing portfolio are the
primary means used by the Company to reduce the sensitivity of its earnings to
changes in interest rates because the effect of interest rate changes on loan
production income is counter cyclical to their effect on servicing income. The
operations of the capital markets segment include trading mortgage-backed
securities ("MBS") and other mortgage-related assets as well as brokering
service contracts and bulk purchases and sales of whole loans. Finally, the
Company is involved in business activities complementary to its mortgage banking
business. These services include acting as agent in the sale of insurance,
including homeowners, fire, flood, earthquake, life and disability, providing
various title insurance agent and escrow services and offering appraisal and
credit reporting services.
The Company's results of operations historically have been influenced
primarily by the level of demand for mortgage loans, which is affected by such
external factors as the level and direction of interest rates, and the
strength of the overall economy and the economy in each of the Company's
lending markets.
The fiscal year ended February 28, 1997 ("Fiscal 1997") was a period in
which interest rates were somewhat volatile. The rates during Fiscal 1997 were
generally higher than during the previous fiscal year; however, they remained at
levels that were conducive to refinance and home purchase activity. The
Company's earnings increased 31% from the fiscal year ended February 29, 1996
("Fiscal 1996"). Loan production increased to $37.8 billion, up from $34.6
billion in the prior year. The Company attributed the increase in production to:
(i) the generally strong economy and home purchase market; (ii) the continued
implementation of a national advertising campaign, which was aimed at developing
a brand identity for Countrywide and reaching the consumer directly; and (iii)
the integration of home equity and sub-prime lending into the Company's product
offerings and production capacity. For calendar 1996, the Company ranked second
in the amount of single-family mortgage originations nationwide. The Company's
market share for both calendar 1996 and 1995 was approximately 4.8% of the
estimated $800 billion and $650 billion, respectively, single-family mortgage
origination market. During Fiscal 1997, the Company's loan servicing portfolio
grew to $158.6 billion, up from $136.8 billion at the end of Fiscal 1996. This
growth resulted from the Company's loan production during the year and bulk
servicing acquisitions that amounted to $1.4 billion. The increase was partially
offset by prepayments, partial prepayments and scheduled amortization of $18.8
billion. The prepayment rate in the servicing portfolio was 11%, slightly down
from the prior year due to the higher mortgage interest rate environment in
Fiscal 1997.
The fiscal year ended February 28, 1998 ("Fiscal 1998") was a record year
from ongoing operations in revenues and net earnings for the Company. Loan
production increased to $48.8 billion, up from $37.8 billion in the prior year.
The Company attributed the increase in production to: (i) lower interest rates;
(ii) the generally strong economy and home purchase market; (iii) the continued
implementation of a national advertising campaign aimed at developing a brand
identity for Countrywide and reaching the consumer directly; and (iv) increased
expansion of the Consumer Markets and Wholesale branch networks, including the
new retail sub-prime branches. For calendar 1997, the Company ranked second in
the amount of single-family mortgage originations nationwide. For calendar 1997,
the Company's market share increased to approximately 5.1% of the estimated $850
billion single-family mortgage origination market, up from approximately 4.8% of
the estimated $800 billion single-family mortgage origination market for 1996.
During Fiscal 1998, the Company's loan servicing portfolio grew to $182.9
billion, up from $158.6 billion at the end of Fiscal 1997. This growth resulted
from the Company's loan production during the year and bulk servicing
acquisitions amounting to $1.0 billion. The increase was partially offset by
prepayments, partial prepayments and scheduled amortization of $24.3 billion.
The prepayment rate in the servicing portfolio was 15%, up from the prior year
due to the lower mortgage interest rate environment in Fiscal 1998.
On July 1, 1997, the Company and IndyMac Mortgage Holdings, Inc. (formerly
INMC Mortgage Holdings, Inc.) ("INMC") concluded the restructuring of their
business relationship. In substance, INMC acquired the assets, operations and
employees of its former manager Countrywide Asset Management Corporation
("CAMC"), formerly a wholly-owned subsidiary of the Company. INMC no longer pays
management fees to CAMC. In return, the Company received 3,440,800 newly issued
common shares of INMC. These shares are subject to resale restrictions which
apply to the shares from the date of issuance through up to three years. The
transaction was structured as a merger of CAMC with and into INMC.
The fiscal year ended February 28, 1999 ("Fiscal 1999") was a record year
from ongoing operations in revenues and net earnings for the Company. Loan
production increased to $92.9 billion, up from $48.8 billion in the prior year.
The Company attributed the increase in production to: (i) an increase in the
overall mortgage market driven largely by refinances; (ii) the generally strong
economy and home purchase market; and (iii) an increase in the Company's market
share, driven largely by the expansion of its Consumer Markets and Wholesale
branch networks, including the new retail sub-prime branches. For calendar 1998,
the Company ranked second in the amount of single-family mortgage originations
nationwide. During calendar 1998, the Company's market share increased to
approximately 6.1% of the estimated $1.4 trillion single-family mortgage
origination market, up from approximately 5.1% of the estimated $850 billion
market in calendar 1997. During Fiscal 1999, the Company's loan servicing
portfolio grew to $215.5 billion, up from $182.9 billion at the end of Fiscal
1998. This growth resulted from the Company's loan production during the year
and bulk servicing acquisitions amounting to $4.6 billion. This growth was
partially offset by prepayments, partial prepayments and scheduled amortization
of $53.2 billion and the transfer out of $6.5 billion of subservicing. The
prepayment rate in the servicing portfolio was 28%, up from the prior year due
to the lower mortgage interest rate environment in Fiscal 1999.
RESULTS OF OPERATIONS
Fiscal 1999 Compared with Fiscal 1998
Revenues from ongoing operations for Fiscal 1999 increased 36% to $1,979.0
million, up from $1,451.6 million for Fiscal 1998. Net earnings from ongoing
operations increased 24% to $385.4 million for Fiscal 1999, up from $310.0
million for Fiscal 1998. Revenues and net earnings from ongoing operations for
Fiscal 1998 exclude a nonrecurring pre-tax gain of $57.4 million on the sale of
CAMC. The increase in revenues and net earnings from ongoing operations for
Fiscal 1999 compared to Fiscal 1998 was primarily attributed to higher loan
production volume, an increase in the size of the Company's servicing portfolio
and an increase in the income of the non-mortgage banking subsidiaries. These
positive factors were partially offset by an increase in amortization of the
servicing asset and an increase in expenses in Fiscal 1999 over Fiscal 1998.
The total volume of loans produced by the Company increased 90% to $92.9
billion for Fiscal 1999, up from $48.8 billion for Fiscal 1998. The increase in
loan production was primarily due to an increase in the Company's market share,
driven largely by the expansion of the Company's consumer markets and wholesale
branch networks, including the retail sub-prime branches, combined with an
increase in the overall mortgage market driven largely by refinances.
Refinancings totaled $53.2 billion, or 57% of total fundings, for Fiscal 1999 as
compared to $19.8 billion, or 41% of total fundings, for Fiscal 1998. Fixed-rate
mortgage loan production totaled $88.3 billion, or 95% of total fundings, for
Fiscal 1999 as compared to $37.5 billion, or 77% of total fundings, for Fiscal
1998.
Total loan volume in the Company's production Divisions is summarized below.
- -------------------------------------------- -----------------------------------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- -----------------------------------
Fiscal 1999 Fiscal 1998
------------- ------------
Consumer Markets Division $28,508 $13,339
Wholesale Lending Division 30,917 15,731
Correspondent Lending Division 32,748 19,562
Full Spectrum Lending, Inc. 708 140
============= ============
Total Loan Volume $92,881 $48,772
============= ============
Electronic Commerce (1) $2,201 $87
(1) This category includes loans sourced through the Company's website of
$648 million and $87 million for Fiscal 1999 and Fiscal 1998,
respectively, as well as loans submitted to the Correspondent Lending
Division via its correspondent website of $1,553 million for Fiscal 1999.
- --------------------------------------------------------------------------------
The factors which affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's product
offerings, the level of mortgage lending activity in each Division's market and
the success of each Division's sales and marketing efforts.
Included in the Company's total volume of loans produced are $2.2 billion of
home equity loans funded in Fiscal 1999 and $1.5 billion funded in Fiscal 1998.
Sub-prime loan production, which is also included in the Company's total
production volume, was $2.5 billion in Fiscal 1999 and $1.6 billion in Fiscal
1998.
As of February 28, 1999 and 1998, the Company's pipeline of loans in process
was $14.6 billion and $12.6 billion, respectively. Historically, approximately
43% to 77% of the pipeline of loans in process have funded. In addition, as of
February 28, 1999, the Company had committed to make loans in the amount of $2.1
billion, subject to property identification and approval of the loans (the "LOCK
'N SHOP (R) Pipeline"). As of February 28, 1998, the LOCK 'N SHOP (R) Pipeline
was $1.4 billion. During Fiscal 1999 and Fiscal 1998, the Company received
1,194,833 and 714,668 new loan applications, respectively, at an average daily
rate of $540 million and $306 million, respectively. The factors that affect the
percentage of applications received and funded during a given time period
include the movement and direction of interest rates, the average length of loan
commitments issued, the creditworthiness of applicants, the production
Divisions' loan processing efficiency and loan pricing decisions.
Loan origination fees increased in Fiscal 1999 as compared to Fiscal 1998
primarily due to higher production. In addition, the Consumer Markets and
Wholesale Lending Divisions (which, due to their higher cost structure, charge
higher origination fees per dollar loaned) comprised a greater percentage of
total production in Fiscal 1999 than in Fiscal 1998. Gain on sale of loans also
increased in Fiscal 1999 as compared to Fiscal 1998 primarily due to higher
production volume. This positive factor was partially offset by reduced margins
on home equity and sub-prime loans. The sale of home equity loans contributed
$65 million and $62 million to gain on sale of loans in Fiscal 1999 and Fiscal
1998, respectively. Sub-prime loans contributed $92 million to the gain on sale
of loans in Fiscal 1999 and $70 million in Fiscal 1998. In general, loan
origination fees and gain (loss) on sale of loans are affected by numerous
factors including the volume and mix of loans produced and sold, loan pricing
decisions, interest rate volatility and the general direction of interest rates.
Net interest income (interest earned net of interest charges) increased to
$45.2 million for Fiscal 1999, up from $15.7 million for Fiscal 1998. Net
interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($118.2 million and $74.5 million for
Fiscal 1999 and Fiscal 1998, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($351.4 million and $219.7 million for
Fiscal 1999 and Fiscal 1998, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($270.4
million and $151.0 million for Fiscal 1999 and Fiscal 1998, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its warehouse. The increase in net interest income from the mortgage
loan warehouse was primarily attributable to higher production levels. The
increase in interest expense on the investment in servicing rights resulted
primarily from a larger servicing portfolio and an increase in the payments of
interest to certain investors pursuant to customary servicing arrangements with
regard to paid-off loans in excess of the interest earned on these loans through
their respective payoff dates ("Interest Costs Incurred on Payoffs"). The
increase in net interest income earned from the custodial balances was related
to an increase in the average custodial balances caused by growth of the
servicing portfolio and an increase in the amount of prepayments.
During Fiscal 1999, loan servicing income before amortization increased
primarily due to growth of the loan servicing portfolio. As of February 28,
1999, the Company serviced $215.5 billion of loans (including $2.2 billion of
loans subserviced for others), compared to $182.9 billion (including $6.7
billion of loans subserviced for others) as of February 28, 1998, which was an
18% increase. The growth in the Company's servicing portfolio during Fiscal 1999
was the result of increased loan production volume and the acquisition of bulk
servicing rights. This was partially offset by prepayments, partial prepayments,
scheduled amortization of mortgage loans and the transfer back to INMC of $6.5
billion of subservicing.
During Fiscal 1999, the annual prepayment rate of the Company's servicing
portfolio was 28%, compared to 15% for Fiscal 1998. In general, the prepayment
rate is affected by the level of refinance activity, which in turn is driven by
the relative level of mortgage interest rates, and activity in the home purchase
market. The weighted average interest rate of the mortgage loans in the
Company's servicing portfolio as of February 28, 1999 was 7.5% compared to 7.8%
as of February 28, 1998.
The Company recorded amortization and net impairment of its MSRs for Fiscal
1999 totaling $1,013.6 million (consisting of amortization amounting to $556.4
million and impairment of $457.2 million), compared to $561.8 million of
amortization and impairment (consisting of amortization amounting to $300.3
million and impairment of $261.5 million) for Fiscal 1998. To mitigate the
effect on earnings of MSR impairment that may result from increased current and
projected future prepayment activity, the Company acquires financial
instruments, including derivative contracts, that increase in aggregate value
when interest rates decline (the "Servicing Hedge").The factors affecting the
amount of amortization and impairment of the MSRs recorded in an accounting
period include the level of prepayments during the period, the change in
estimated future prepayments and the amount of Servicing Hedge gains or losses.
In Fiscal 1999, the Company recognized a net benefit of $412.8 million from
its Servicing Hedge. The net benefit included unrealized net gains of $26.1
million and realized net gains of $386.7 million from the sale of various
financial instruments that comprise the Servicing Hedge net of premium
amortization. In Fiscal 1998, the Company recognized a net benefit of $233.0
million from its Servicing Hedge. The net benefit included unrealized gains of
$182.2 million and net realized gains of $50.8 million from the sale of various
financial instruments that comprise the Servicing Hedge net of premium
amortization. There can be no assurance that the Servicing Hedge will generate
gains in the future, or if gains are generated that they will fully offset
impairment of the MSRs.
The financial instruments that comprised the Servicing Hedge include options
on interest rate futures and MBS, interest rate futures, interest rate floors,
interest rate swaps, interest rate swaps with the Company's maximum payment
capped ("Capped Swaps"), options on interest rate swaps ("Swaptions"), interest
rate caps, certain tranches of collateralized mortgage obligations ("CMOs") and
options on callable pass-through certificates ("options on CPC").
With the Capped Swaps, the Company receives and pays interest on a specified
notional amount. The rate received is fixed. The rate paid is adjustable, is
indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR")
and has a specified maximum or "cap".
With Swaps, the Company receives and pays interest on a specified notional
amount. The rate received is fixed; the rate paid is adjustable and is indexed
to LIBOR.
With the Swaptions, the Company has the option to enter into a
receive-fixed, pay-floating interest rate swap at a future date or to settle the
transaction for cash.
The CMOs, which consist of principal-only ("P/O") securities, have been
purchased at deep discounts to their par values. As interest rates decrease,
prepayments on the collateral underlying the CMOs should increase. This results
in a decline in the average lives of the P/O securities and a corresponding
increase in the present values of their cash flows. Conversely, as interest
rates increase, prepayments on the collateral underlying the CMOs should
decrease. This would result in an increase in the average lives of the P/O
securities and a decrease in the present values of their cash flows.
An option on CPC gives the holder the right to call a mortgage-backed
security at par and receive the remaining cash flows from the particular pool.
This option has a one year lockout, meaning it cannot be exercised until the end
of the first year. After the lockout period, the option can be exercised at
anytime.
The Servicing Hedge is designed to protect the value of the investment in
mortgage servicing rights ("MSRs") from the effects of increased prepayment
activity that generally results from declining interest rates. To the extent
that interest rates increase, the value of the MSRs increases while the value of
the hedge instruments declines. With respect to the floors, options, caps,
Swaptions, options on CPC and CMOs, the Company is not exposed to loss beyond
its initial outlay to acquire the hedge instruments plus any unrealized gains
recognized to date. The Company's exposure to loss on futures is related to
changes in the LIBOR rate over the life of the contract. The Company estimates
that its maximum exposure to loss over the contractual terms is $88.0 million.
With respect to the Capped Swaps contracts entered into by the Company as of
February 28, 1999, the Company estimates that its maximum exposure to loss over
the contractual terms is $19.5 million. With respect to the Swap contracts
entered into by the Company as of February 28, 1999, the Company estimates that
its maximum exposure to loss over the contractual terms is $382.0 million.
During Fiscal 1999, the Company acquired bulk servicing rights for loans
with principal balances aggregating $4.6 billion at a price of 1.21% of the
aggregate outstanding principal balances. During Fiscal 1998, the Company
acquired bulk servicing rights for loans with principal balances aggregating
$1.0 billion at a price of 1.13% of the aggregate outstanding principal
balances.
Salaries and related expenses are summarized below for Fiscal 1999 and Fiscal
1998.
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1999
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $212,591 $52,577 $90,953 $38,218 $394,339
Incentive Bonus 147,695 1,916 20,706 19,042 189,359
Payroll Taxes and Benefits 52,821 12,131 15,170 5,866 85,988
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $413,107 $66,624 $126,829 $63,126 $669,686
============ ============= ============= ============= ------------
Average Number of 5,512 1,966 1,823 646 9,947
Employees
---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1998
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $134,776 $44,911 $70,305 $24,512 $274,504
Incentive Bonus 76,854 1,196 16,570 10,361 104,981
Payroll Taxes and Benefits 22,956 8,476 10,581 2,823 44,836
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $234,586 $54,583 $97,456 $37,696 $424,321
============ ============= ============= ============= ------------
Average Number of 3,132 1,630 1,370 434 6,566
Employees
---- --------------------------- -- ------------ -- ------------- -- ----------
The amount of salaries increased during Fiscal 1999 reflecting the Company's
strategy of expanding and enhancing its Consumer Markets and Wholesale branch
networks, including new retail sub-prime branches. In addition, a larger
servicing portfolio and growth in the Company's non-mortgage banking
subsidiaries also contributed to the increase. Incentive bonuses earned during
Fiscal 1999 increased primarily due to higher production and a change in
production mix.
Occupancy and other office expenses for Fiscal 1999 increased to $277.9
million from $184.3 million for Fiscal 1998. This was primarily due to: (i) the
continued effort by the Company to expand its Consumer Markets and Wholesale
branch networks, including new retail sub-prime branches; (ii) higher loan
production; (iii) a larger servicing portfolio; and (iv) growth in the Company's
non-mortgage banking activities.
Guarantee fees represent fees paid to Fannie Mae, Freddie Mac, and Ginnie
Mae in order for these Government Sponsored Entities ("GSE") to agree to
guarantee timely and full payment of principal and interest on MBS and to
transfer the credit risk of the loans in the servicing portfolio sold to these
entities. For Fiscal 1999, guarantee fees increased 5% to $181.1 million, up
from $172.7 million for Fiscal 1998. The increase resulted from an increase in
the servicing portfolio, changes in the mix of the portfolio sold to GSE and
terms negotiated at the time of loan sales.
Marketing expenses for Fiscal 1999 increased 52% to $64.5 million which was
up from $42.3 million for Fiscal 1998, reflecting the increased mortgage market
and the Company's continued implementation of a marketing plan to increase its
consumer brand awareness.
Other operating expenses for Fiscal 1999 increased from Fiscal 1998 by $34.2
million, or 29%. This increase was due primarily to higher loan production, a
larger servicing portfolio, increased systems development and growth in the
Company's non-mortgage banking subsidiaries in Fiscal 1999 as compared to Fiscal
1998.
Profitability of Loan Production Segment
In Fiscal 1999, pre-tax earnings from loan production segment activities
(which include loan origination and purchases, warehousing and sales) were
$556.2 million. In Fiscal 1998, comparable pre-tax earnings were $245.1 million.
The increase of $311.1 million was primarily attributable to increased
production and a shift in production towards the Consumer Markets and Wholesale
Divisions. These positive results were partially offset by higher production
costs.
Profitability of Servicing Segment
In Fiscal 1999, pre-tax income from loan servicing segment activities (which
include administering the loans in the servicing portfolio, selling homeowners
and other insurance, acting as tax payment agent, marketing foreclosed
properties and acting as reinsurer) was $24.3 million as compared to $215.5
million in Fiscal 1998. The decrease of $191.2 million was primarily attributed
to increased amortization of the servicing asset, increased Interest Costs
Incurred on Payoffs due to an increase in prepayments from Fiscal 1998 to Fiscal
1999 and a reduction in the performance of interests retained in securitization.
These negative factors were partially offset by the increase in servicing fees,
miscellaneous income and interest earned on escrow balances derived by the
larger servicing portfolio.
Profitability of Capital Markets Segment
In Fiscal 1999, pre-tax earnings from the capital markets segment were $26.7
million. In Fiscal 1998, comparable pre-tax earnings were $19.7 million. The
increase of $7.0 million was primarily due to increased trading volumes.
Profitability of Other Activities
In addition to loan production, loan servicing and capital markets, the
Company offers ancillary products and services related to its mortgage banking
activities, primarily through its subsidiary, LandSafe, Inc. Through several
subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of
settlement, escrow, appraisal and credit reporting and home inspection services.
During Fiscal 1999, LandSafe, Inc., through a subsidiary, began providing flood
zone determination services. In addition, LandSafe, Inc. provides property
profiles to realtors, builders, consumers, mortgage brokers and other financial
institutions. For Fiscal 1999, LandSafe Inc. contributed $25.2 million to the
Company's pre-tax income compared to $10.1 million for Fiscal 1998. The increase
in the profitability of LandSafe Inc. resulted primarily from expanded services
and increased loan production.
The Company's other activities also include the operations of its holding
company, Countrywide Credit Industries, Inc. ("CCI") and Countrywide Financial
Services, Inc.. The operations of other activities, excluding LandSafe Inc.,
incurred pre-tax losses of $0.6 million during Fiscal 1999 compared to pre-tax
income of $17.7 million during Fiscal 1998. This decrease in pre-tax income
primarily resulted from: (i) a decrease in CCI net interest income related to a
receivable from CHL that was eliminated by a capital contribution during Fiscal
1999 and (ii) the discontinuance of management fees received prior to the sale
of a subsidiary.
During Fiscal 1998, Countrywide Asset Management Corporation, a subsidiary
of the Company, was sold to INMC Mortgage Holdings, Inc., (INMC) a publicly
traded real estate investment trust for 3,440,800 newly issued common shares of
INMC stock. These shares are subject to resale restrictions which apply to the
shares from the date of issuance through up to three years. The sale resulted in
a $57.4 million pre-tax gain.
Fiscal 1998 Compared with Fiscal 1997
Revenues from ongoing operations for Fiscal 1998 increased 30% to $1,451.6
million, up from $1,112.5 million for Fiscal 1997. Net earnings from ongoing
operations increased 20% to $ 310.0 million for Fiscal 1998, up from $257.4
million for Fiscal 1997. Both revenues and net earnings from ongoing operations
for Fiscal 1998 exclude a nonrecurring pre-tax gain of $57.4 million on the sale
of a subsidiary. The increase in revenues and net earnings from ongoing
operations for Fiscal 1998 compared to Fiscal 1997 was primarily due to higher
loan production, including home equity and sub-prime loans, improved pricing
margins on prime credit quality first mortgages, an increase in the size of the
Company's servicing portfolio and an increase in the income of the non-mortgage
banking subsidiaries. These positive factors were partially offset by an
increase in amortization of MSRs and an increase in expenses in Fiscal 1998 over
Fiscal 1997.
The total volume of loans produced increased 29% to $48.8 billion for Fiscal
1998, up from $37.8 billion for Fiscal 1997. The increase in loan production was
primarily due to an increase in the overall mortgage market, driven primarily by
refinances, as well as to the continuing expansion of the Company's Consumer
Markets and Wholesale Lending divisions, including the new retail sub-prime
branches. Refinancings totaled $19.8 billion, or 41% of total fundings, for
Fiscal 1998, as compared to $12.3 billion, or 33% of total fundings, for Fiscal
1997. Fixed-rate mortgage loan production totaled $37.5 billion, or 77% of total
fundings, for Fiscal 1998, as compared to $27.9 billion, or 74% of total
fundings, for Fiscal 1997.
Total loan volume in the Company's production Divisions is summarized below.
- -------------------------------------------- -----------------------------------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- -----------------------------------
Fiscal 1998 Fiscal 1997
------------- ------------
Consumer Markets Division $13,339 $ 8,071
Wholesale Lending Division 15,731 8,430
Correspondent Lending Division 19,562 21,310
Full Spectrum Lending, Inc. 140 -
============= ============
Total Loan Volume $48,772 $37,811
============= ============
- -------------------------------------------- ------------- -------- ------------
The factors which affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's product
offerings, the level of mortgage lending activity in each Division's market and
the success of each Division's sales and marketing efforts.
Included in the Company's total volume of loans produced is $1.5 billion of
home equity loans funded in Fiscal 1998 and $613 million funded in Fiscal 1997.
Sub-prime loan production, which is also included in the Company's total
production volume, was $1.6 billion in Fiscal 1998 and $864 million in Fiscal
1997.
As of February 28, 1998 and 1997, the Company's pipeline of loans in process
was $12.6 billion and $4.7 billion, respectively. Historically, approximately
43% to 77% of the pipeline of loans in process have funded. In addition, as of
February 28, 1998, the Company had committed to make loans in the amount of $1.4
billion, subject to property identification and approval of the loans (the "LOCK
'N SHOP (R) Pipeline"). As of February 28, 1997, the LOCK 'N SHOP (R) Pipeline
was $1.8 billion. In Fiscal 1998 and Fiscal 1997, the Company received 714,668
and 499,861 new loan applications, respectively, at an average daily rate of
$306 million and $206 million, respectively. The factors that affect the
percentage of applications received and funded during a given time period
include the movement and direction of interest rates, the average length of loan
commitments issued, the creditworthiness of applicants, the Production
Divisions' loan processing efficiency and loan pricing decisions.
Loan origination fees increased in Fiscal 1998 as compared to Fiscal 1997
due to higher production. In addition, the Consumer Markets and Wholesale
Lending Divisions (which, due to their higher cost structure, charge higher
origination fees per dollar loaned) comprised a greater percentage of total
production in Fiscal 1998 than in Fiscal 1997. Gain on sale of loans improved in
Fiscal 1998 as compared to Fiscal 1997 primarily due to increased production and
improved margins. Home equity and sub-prime loans contributed $132 million and
$92 million to gain on sale of loans in Fiscal 1998 and Fiscal 1997,
respectively. In general, loan origination fees and gain (loss) on sale of loans
are affected by numerous factors including the volume and mix of loans produced
and sold, loan pricing decisions, interest rate volatility and the general
direction of interest rates.
Net interest income (interest earned net of interest charges) decreased to
$15.7 million for Fiscal 1998 from $33.6 million for Fiscal 1997. Net interest
income is principally a function of: (i) net interest income earned from the
Company's mortgage loan warehouse ($74.5 million and $61.6 million for Fiscal
1998 and Fiscal 1997, respectively); (ii) interest expense related to the
Company's investment in MSRs ($219.7 million and $148.3 million for Fiscal 1998
and Fiscal 1997, respectively) and (iii) interest income earned from the
custodial balances associated with the Company's servicing portfolio ($151.0
million and $116.9 million for Fiscal 1998 and Fiscal 1997, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its warehouse. The increase in net interest income from the mortgage
loan warehouse was primarily attributable to higher production levels partially
resulting from aggregating home equity and sub-prime loans (which generally bear
interest at higher rates than prime credit quality first mortgages) prior to
their sale or securitization. The increase in interest expense on the investment
in MSRs resulted primarily from a larger servicing portfolio and an increase in
Interest Costs Incurred on Payoffs. The increase in net interest income earned
from the custodial balances was related to an increase in the average custodial
balances (caused by growth of the servicing portfolio and an increase in the
amount of prepayments), combined with an increase in the earnings rate from
Fiscal 1997 to Fiscal 1998.
During Fiscal 1998, loan administration income before amortization increased
due primarily to growth of the loan servicing portfolio. As of February 28,
1998, the Company serviced $182.9 billion of loans (including $6.7 billion of
loans subserviced for others), compared to $158.6 billion (including $3.9
billion of loans subserviced for others) at February 28, 1997, a 15% increase.
The growth in the Company's servicing portfolio during Fiscal 1998 was the
result of loan production volume and the acquisition of bulk servicing rights,
partially offset by prepayments, partial prepayments and scheduled amortization
of mortgage loans.
During Fiscal 1998, the prepayment rate of the Company's servicing portfolio
was 15%, compared to 11% for Fiscal 1997. In general, the prepayment rate is
affected by the level of refinance activity, which in turn is driven by the
relative level of mortgage interest rates, and activity in the home purchase
market. The increase in the prepayment rate from Fiscal 1997 to Fiscal 1998 was
primarily due to the increase in refinance activity caused by lower interest
rates during Fiscal 1998 than during Fiscal 1997. The weighted average interest
rate of the mortgage loans in the Company's servicing portfolio at both February
28, 1998 and 1997 was 7.8%.
The Company recorded amortization and net impairment of its MSRs for Fiscal
1998 totaling $561.8 million (consisting of amortization amounting to $300.3
million and impairment of $261.5 million), compared to $101.4 million of
amortization and net impairment (consisting of amortization amounting to $220.1
million and recovery of previous impairment of $118.7 million) for Fiscal 1997.
The factors affecting the amount of amortization and impairment or recovery of
the MSRs recorded in an accounting period include the level of prepayments
during the period; the change in estimated future prepayments and the amount of
Servicing Hedge gains or losses.
In Fiscal 1998, the Company recognized a net benefit of $233.0 million from
its Servicing Hedge. The net benefit included unrealized net gains of $182.2
million and realized gains of $50.8 million from the sale of various financial
instruments that comprise the Servicing Hedge and premium amortization. In
Fiscal 1997, the Company recognized a net expense of $125.3 million from its
Servicing Hedge. The net expense included unrealized losses of $56.9 million and
net realized losses of $68.4 million from the sale of various financial
instruments that comprise the Servicing Hedge and premium amortization. There
can be no assurance that the Servicing Hedge will generate gains in the future,
or if gains are generated, that they will fully offset impairment of the MSRs.
During Fiscal 1998, the Company acquired bulk servicing rights for loans
with principal balances aggregating $1.0 billion at a price of 1.13% of the
aggregate outstanding principal balances. During Fiscal 1997, the Company
acquired bulk servicing rights for loans with principal balances aggregating
$1.4 billion at a price of 1.60% of the aggregate outstanding principal
balances.
Salaries and related expenses are summarized below for Fiscal 1998 and Fiscal
1997.
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1998
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $134,776 $44,911 $70,305 $24,512 $274,504
Incentive Bonus 76,854 1,196 16,570 10,361 104,981
Payroll Taxes and Benefits 22,956 8,476 10,581 2,823 44,836
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $234,586 $54,583 $97,456 $37,696 $424,321
============ ============= ============= ============= ------------
Average Number of 3,132 1,630 1,370 434 6,566
Employees
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1997
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $91,054 $41,806 $54,244 $12,852 $199,956
Incentive Bonus 34,501 763 14,820 6,799 56,883
Payroll Taxes and Benefits 15,105 7,747 5,389 1,804 30,045
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $140,660 $50,316 $74,453 $21,455 $286,884
============ ============= ============= ============= ------------
Average Number of 2,303 1,555 1,107 251 5,216
Employees
The amount of salaries increased during Fiscal 1998 reflecting the Company's
strategy of expanding and enhancing its Consumer Markets and Wholesale branch
networks, including new retail sub-prime branches. In addition, a larger
servicing portfolio and growth in the Company's non-mortgage banking
subsidiaries also contributed to the increase. Incentive bonuses earned during
Fiscal 1998 increased primarily due to higher production and a change in
divisional production mix.
Occupancy and other office expenses for Fiscal 1998 increased to $184.3
million, up from $129.9 million for Fiscal 1997 primarily due to: (i) the
continued effort by the Company to expand its retail branch network,
particularly outside of California; (ii) higher loan production; (iii) a larger
servicing portfolio; and (iv) growth in the Company's non-mortgage banking
activities.
Guarantee fees represent fees paid to Fannie Mae, Freddie Mac and Ginnie Mae
in order for these GSE to agree to guarantee timely and full payment of
principal and interest on MBS and to transfer the credit risk of the loans in
the servicing portfolio sold to these entities. For Fiscal 1998, guarantee fees
increased 8% to $172.7 million from $159.4 million for Fiscal 1997. The increase
resulted from an increase in the servicing portfolio, changes in the mix of the
portfolio sold to GSE and terms negotiated at the time of loan sales.
Marketing expenses for Fiscal 1998 increased 24% to $42.3 million, which was
up from $34.3 million for Fiscal 1997, reflecting the increase in the mortgage
market and the Company's continued implementation of a marketing plan to
increase its consumer brand awareness.
Other operating expenses for Fiscal 1998 increased from Fiscal 1997 by $39.6
million, or 49%. This increase was due primarily to higher loan production, a
larger servicing portfolio, increased reserves for bad debt, increased systems
development and growth in the Company's non-mortgage banking subsidiaries in
Fiscal 1998 as compared to Fiscal 1997.
Profitability of Loan Production Segment
In Fiscal 1998, pre-tax earnings from the loan production segment (which
includes loan origination and purchases, warehousing and sales) were $245.1
million. In Fiscal 1997, comparable pre-tax earnings were $141.9 million. The
increase of $103.2 million was primarily due to increased production, greater
sales of higher-margin home equity and sub-prime loans at significantly higher
margins than prime credit quality first mortgages and improved pricing margins
on prime credit quality first mortgages. These positive results were partially
offset by higher production costs.
Profitability of Servicing Segment
In Fiscal 1998, pre-tax earnings from the loan servicing segment (which
includes administering the loans in the servicing portfolio, selling homeowners
and other insurance, acting as tax payment agent, marketing foreclosed
properties and acting as reinsurer) were $215.5 million as compared to $254.2
million in Fiscal 1997. The decrease of $38.7 million was primarily attributed
to increased amortization of MSRs and Interest Costs Incurred on Payoffs due to
increased prepayments from Fiscal 1997 to Fiscal 1998. These negative factors
were partially offset by the increase in servicing fees, miscellaneous income
and interest earned on escrow balances derived by the larger servicing
portfolio.
Profitability of Capital Markets Segment
In Fiscal 1998, pre-tax earnings from the capital markets segment were $19.7
million. In Fiscal 1997, comparable pre-tax earnings were $12.9 million. The
increase of $6.8 million was primarily the result of increased trading volumes.
Profitability of Other Activities
In addition to loan production, loan servicing and capital markets, the
Company offers ancillary products and services related to its mortgage banking
activities, primarily through its subsidiary, LandSafe Inc. Through several
subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of
settlement, escrow, appraisal and credit reporting services. During Fiscal 1998,
LandSafe, Inc., through a subsidiary, began providing home inspection services.
In addition, LandSafe Inc. provides property profiles to realtors, builders,
consumers, mortgage brokers and other financial institutions. For Fiscal 1998,
LandSafe Inc. contributed $10.1 million to the Company's pre-tax income compared
to $1.2 million for Fiscal 1997. The increase in LandSafe Inc. pre-tax income
primarily resulted from expanded services and increased loan production.
Additionally, the Company's other activities include the operations of CCI
and Countrywide Financial Services, Inc. The operations of other activities,
excluding LandSafe Inc., contributed $17.7 million to the Company's pre-tax
income for Fiscal 1998 compared to $11.7 million for Fiscal 1997. The increase
in pre-tax income primarily resulted from an increase in CCI dividend income.
During Fiscal 1998, Countrywide Asset Management Corporation, a subsidiary of
the Company, was sold to (INMC) a publicly traded real estate investment trust
for 3,440,800 newly issued common shares of INMC stock. These shares are subject
to resale restrictions which apply to the shares from the date of issuance
through up to three years. The sale resulted in a $57.4 million pre-tax gain.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are counter
cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its committed pipeline, mortgage loan inventory and MBS
held for sale, MSRs, mortgage-backed securities retained in securitizations,
trading securities and debt securities. The overall objective of the Company's
interest rate risk management policies is to offset changes in the values of
these items resulting from changes in interest rates. The Company does not
speculate on the direction of interest rates in its management of interest rate
risk.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that quantify the net financial impact of changes
in interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses incorporate scenarios including selected
hypothetical (instantaneous) parallel shifts in the yield curve. Various
modeling techniques are employed to value the financial instruments. For
mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread
("OAS") model is used. The primary assumptions used in this model are the
implied market volatility of interest rates and prepayment speeds. For options
and interest rate floors, an option-pricing model is used. The primary
assumption used in this model is implied market volatility of interest rates.
MSRs and residual interests are valued using discounted cash flow models. The
primary assumptions used in these models are prepayment rates, discount rates
and credit losses.
Utilizing the sensitivity analyses described above, as of February 28, 1999,
the Company estimates that a permanent 0.50% reduction in interest rates, all
else being constant, would result in a $0.4 million after-tax gain related to
its trading securities and a $11.5 million after-tax loss related to its other
financial instruments. As of February 28, 1999, the Company estimates that this
combined after-tax loss of $11.1 million is the largest such loss that would
occur within the range of reasonably possible interest rate changes. These
sensitivity analyses are limited by the fact that they are performed at a
particular point in time and do not incorporate other factors that would impact
the Company's financial performance in such a scenario. Consequently, the
preceding estimates should not be viewed as a forecast.
An additional market risk facing the Company is foreign currency risk.
During Fiscal 1999, the Company issued foreign currency denominated medium-term
notes (See Note F). The Company manages the foreign currency risk associated
with such medium-term notes by entering into currency swaps. The terms of the
currency swaps effectively translate the foreign currency denominated
medium-term notes into the Company's reporting currency (i.e., U.S. dollars)
thereby eliminating the associated foreign currency risk. As a result,
hypothetical changes in the exchange rates of foreign currencies denominating
such medium-term notes would not have a net financial impact on future earnings,
fair values or cash flows.
Inflation
Inflation affects the Company most significantly in the areas of loan
production and servicing. Interest rates normally increase during periods of
high inflation and decrease during periods of low inflation. Historically, as
interest rates increase, loan production decreases, particularly from loan
refinancings. Although in an environment of gradual interest rate increases,
purchase activity may actually be stimulated by an improving economy or the
anticipation of increasing real estate values. In such periods of reduced loan
production, production margins may decline due to increased competition
resulting from overcapacity in the market. In a higher interest rate
environment, servicing-related earnings are enhanced because prepayment rates
tend to slow down thereby extending the average life of the Company's servicing
portfolio and reducing amortization and impairment of the MSRs, decreasing
Interest Costs Incurred on Payoffs and because the rate of interest earned from
the custodial balances tends to increase. Conversely, as interest rates decline,
loan production, particularly from loan refinancings, increases. However, during
such periods, prepayment rates tend to accelerate (principally on the portion of
the portfolio having a note rate higher than the then-current interest rates),
thereby decreasing the average life of the Company's servicing portfolio and
adversely impacting its servicing-related earnings primarily due to increased
amortization and impairment of the MSRs, a decreased rate of interest earned
from the custodial balances and increased Interest Costs Incurred on Payoffs.
The impacts of changing interest rates on servicing-related earnings are reduced
by performance of the Servicing Hedge, which is designed to mitigate the impact
on earnings of higher amortization and impairment that may result from declining
interest rates.
Seasonality
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of its mortgage
loan inventory and its investment in MSRs. To meet these needs, the Company
currently utilizes commercial paper supported by the revolving credit facility,
medium-term notes, MBS repurchase agreements, subordinated notes, pre-sale
funding facilities, an optional cash purchase feature in the dividend
reinvestment plan, redeemable capital trust pass-through securities and cash
flow from operations. In addition, in the past the Company has utilized whole
loan repurchase agreements, servicing-secured bank facilities, private
placements of unsecured notes and other financings, direct borrowings from the
revolving credit facility and public offerings of common and preferred stock.
Certain of the debt obligations of the Company and Countrywide Home Loans,
Inc. ("CHL") contain various provisions that may affect the ability of the
Company and CHL to pay dividends and remain in compliance with such obligations.
These provisions include requirements concerning net worth and other financial
covenants. These provisions have not had, and are not expected to have, an
adverse impact on the ability of the Company and CHL to pay dividends.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
In connection with its derivative contracts, the Company may be required to
deposit cash or certain government securities or obtain letters of credit to
meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells the mortgage loans it originates and purchases to investors but generally
retains the right to service the loans, thereby increasing the Company's
investment in MSRs. The Company views the sale of loans on a servicing-retained
basis in part as an investment vehicle. Significant unanticipated prepayments in
the Company's servicing portfolio could have a material adverse effect on the
Company's future operating results and liquidity.
Cash Flows
Operating Activities In Fiscal 1999, the Company's operating activities used
cash of approximately $1.0 billion on a short-term basis primarily to support
the increase in its mortgage loans and MBS held for sale. In Fiscal 1998,
operating activities used approximately $2.5 billion on a short-term basis
primarily to support the increase in its mortgage loans and MBS held for sale.
In Fiscal 1997, the Company's operating activities provided cash of
approximately $2.0 billion.
Investing Activities The primary investing activity for which cash was used
by the Company was the investment in MSRs. Net cash used by investing activities
was $1.8 billion for Fiscal 1999, $1.1 billion for Fiscal 1998 and $0.9 billion
for Fiscal 1997.
Financing Activities Net cash provided by financing activities amounted to
$2.8 billion for Fiscal 1999. Net cash provided by financing activities amounted
to $3.6 billion for Fiscal 1998. Net cash used by financing activities amounted
to $1.0 billion for Fiscal 1997. The increase or decrease in cash flow from
financing activities was primarily the result of the change in the Company's
mortgage loan inventory and investment in MSRs.
Prospective Trends
Applications and Pipeline of Loans in Process
During Fiscal 1999, the Company received new loan applications at an average
daily rate of $540 million. As of February 28, 1999, the Company's pipeline of
loans in process was $14.6 billion. This compares to a daily application rate in
Fiscal 1998 of $306 million and a pipeline of loans in process as of February
28, 1998 of $12.6 billion. The size of the pipeline is generally an indication
of the level of future fundings, as historically 43% to 77% of the pipeline of
loans in process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline
as of February 28, 1999 was $2.1 billion and as of February 28, 1998 was $1.4
billion. For the month ended March 31, 1999, the average daily rate of
applications received was $537 million, and as of March 31, 1999, the pipeline
of loans in process was $14.2 billion and the LOCK `N SHOP Pipeline was $2.5
billion. Future application levels and loan fundings are dependent on numerous
factors, including the level of demand for mortgage loans, the level of
competition in the market, the direction of interest rates, seasonal factors and
general economic conditions.
Market Factors
Loan production increased 90% from Fiscal 1998 to Fiscal 1999. This increase
was primarily due to three factors. First, the Company's market share increased,
driven largely by the expansion of the Company's consumer markets and wholesale
branch networks, including the new retail sub-prime branches. Second, mortgage
interest rates generally decreased during Fiscal 1999, driving an increase in
refinances. Third, new and existing home sales were stronger during Fiscal 1999
than in Fiscal 1998.
The prepayment rate in the servicing portfolio increased from Fiscal
1998 to Fiscal 1999. This was due primarily to increased refinances.
The Company's primary competitors are commercial banks, savings and loans,
mortgage banking subsidiaries of diversified companies, as well as other
mortgage bankers. Over the past several years, certain commercial banks have
expanded their mortgage banking operations through the acquisition of formerly
independent mortgage banking companies or through consolidation. The Company
believes that these transactions and activities have not had a material impact
on the overall level of competition in the market.
The Company's California mortgage loan production (as measured by principal
balance) constituted 25% of its total production during Fiscal 1999 and 26%
during Fiscal 1998. The Company is continuing its efforts to expand its
production capacity outside of California. Some regions in which the Company
operates have experienced slower economic growth, and real estate financing
activity in these regions has been impacted negatively. The Company has striven
to diversify its mortgage banking activities geographically to mitigate such
effects.
The delinquency rate in the Company's servicing portfolio, excluding
sub-servicing, decreased to 3.55% as of February 28, 1999 from 3.91% as of
February 28, 1998. The Company believes that this decrease was primarily the
result of changes in portfolio mix and aging. The proportion of government loans
and high loan-to-value conventional loans (which tend to experience higher
delinquency rates than low loan-to-value conventional loans) was 44% and 48% of
the portfolio as of February 28, 1999 and February 28, 1998, respectively. In
addition, the weighted average age of the portfolio was 26 months at February
28, 1999, down from 31 months as of February 28, 1998. Delinquency rates tend to
increase as loans age, reaching a peak at three to five years of age. However,
because the loans in the portfolio are generally serviced on a non-recourse
basis, the Company's exposure to credit loss resulting from increased
delinquency rates is substantially limited. Furthermore the, related late charge
income has historically been sufficient to offset incremental servicing expenses
resulting from an increased delinquency rate.
The percentage of loans in the Company's servicing portfolio, excluding
sub-servicing, that are in foreclosure decreased to 0.31% as of February 28,
1999 from 0.45% as of February 28, 1998. Generally, the Company is not exposed
to credit risk. Because the Company services substantially all conventional
loans on a non-recourse basis, foreclosure losses are generally the
responsibility of the investor or insurer and not the Company. While the Company
does not generally retain credit risk with respect to the prime credit quality
first mortgage loans it sells, it does have potential liability under
representations and warranties made to purchasers and insurers of the loans. In
the event of a breach of these representations and warranties, the Company may
be required to repurchase a mortgage loan and any subsequent loss on the
mortgage loan may be borne by the Company. Similarly, government loans serviced
by the Company (25% of the Company's servicing portfolio as of February 28,
1999) are insured by the Federal Housing Administration or partially guaranteed
against loss by the Department of Veterans Administration. The Company is
exposed to credit losses to the extent that the partial guarantee provided by
the Department of Veterans Administration is inadequate to cover the total
credit losses incurred. The Company retains credit risk on the home equity and
sub-prime loans it securitizes, through retention of a subordinated interest. As
of February 28, 1999, the Company had investments in such subordinated interests
amounting to $273.9 million.
Servicing Hedge
As previously discussed, the Company's Servicing Hedge is designed to
protect the value of its investment in MSRs from the effects of increased
prepayment activity that generally results from declining interest rates. In
periods of increasing interest rates, the value of the Servicing Hedge generally
declines and the value of MSRs generally increases. There can be no assurance
that, in periods of increasing interest rates, the increase in value of the MSRs
will offset the decline in value of the Servicing Hedge. Likewise, there can be
no assurance that, in periods of declining interest rates, that the Servicing
Hedge will generate gains, or if gains are generated, that they will fully
offset impairment of the MSRs.
Implementation of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize the fair value of all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement will become
effective in the fiscal year ended February 28, 2001. The Company has not yet
determined the impact upon adoption of this standard on the Consolidated
Financial Statements.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interests
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998 and reclassified mortgage-backed
securities retained in securitization as available for sale securities.
Year 2000 Update
The Company has four distinct Year 2000 Projects, each of which focuses on a
particular critical area.
The Company's primary platform is the IBM AS/400 which contains all of the
data relating to the origination and servicing of the home loans in the
Company's portfolio. As of December 31, 1998 the Company has substantially
reprogrammed and re-engineered the system to incorporate four-digit century date
fields by testing the function and accuracy of the reprogrammed fields,
implementing the revised code and forward-date testing of the more than 17,000
production programs on the AS/400.
Many of the Company's Client Server applications have been developed
in-house and in a Year 2000 compliant format. The majority of these applications
interface with the AS/400. The Company has reviewed each of its mission critical
Client Server applications to confirm their Year 2000 readiness. Additionally,
as part of this project, the Company has tested the interfaces between the
individual mission critical Client Server applications and the AS/400 to confirm
that accurate data is exchanged with the revised AS/400 programs. All but one of
the Company's mission critical Client Server applications have been forward-date
tested. The Company estimates that forward-date testing of the one remaining
mission critical Client Server application and most of its less critical
applications will be completed by June 30, 1999. Newly-developed Client Server
applications are forward-date tested before they are implemented into
production.
The Company's Infrastructure Project has inventoried the personal computers
used by the Company's employees nationwide to determine the Year 2000 readiness
of these computers. The Company has fewer than 125 computers and related
hardware which are not Year 2000 compliant, and they will be upgraded or
replaced before December 31, 1999. As part of the Infrastructure Project, the
Company also identified "shrink-wrapped" and desktop software used company-wide,
as well as desktop software supporting individuals and individual business
units, in order to determine whether the vendor is bringing its products into
compliance. This Project also monitors websites and other available information
concerning software and hardware vendors and disseminates the latest available
information to those business units relying on the product. In the event that
the products are not, or will not be compliant, the Company is assessing its
need for these applications. With respect to non-compliant software, the Company
will either seek alternative sources of similar applications, develop its own
applications or attempt to obtain the source code and the vendor's authorization
to re-engineer it.
The Infrastructure Project has inventoried, assessed, corrected and
forward-date tested the Company's mission critical wide area network components,
telecommunications systems and unique business systems. Additionally, the
Infrastructure Project personnel, along with personnel from the Company's
Facilities and Property Management Departments, have evaluated building systems
of the Company's corporate facilities to assess whether they will operate
satisfactorily in the Year 2000 and beyond. These building systems include
energy management, environmental, and safety and security systems. Where
necessary, non-compliant systems or components will be upgraded or replaced
before December 31, 1999.
The Communications Project personnel have developed a database for
collecting information regarding the Year 2000 status of the Company's strategic
business partners and other vendors and suppliers. Individual business units
identify contact information in the database regarding their respective business
partners, vendors and suppliers. The database tracks the inquiry made of each
such entity, that entity's response to the Company's inquiry and the Company's
response to each entity's inquiry. Analysis of the information contained in the
database and development of additional features and functions of the database
are ongoing. The goal is to achieve a reasonable understanding of the Year 2000
readiness and contingency plans of the Company's business partners, vendors and
suppliers well in advance of the Year 2000. The Company has successfully
completed company-wide testing of electronic interfaces with Freddie Mac, Fannie
Mae and Ginnie Mae.
Additionally, the Communications Project personnel represent the Company in
its participation as one of the leading mortgage banking companies involved in
the Mortgage Bankers Association ("MBA") inter-industry testing project. Other
participants include Freddie Mac, Fannie Mae and Ginnie Mae, as well as banks,
insurance companies and credit bureaus. The MBA project involves inter-industry
testing of transactions from loan origination, secondary marketing and loan
servicing areas and its mission is to make sure the various interfaces work
together across the entire industry.
Contingency Planning
The Company has retained a vendor specializing in business continuity
planning to review its business continuity procedures on a company-wide basis
and assist in its assessment of the contingency plans of each business unit, as
well as those of mission critical business partners, vendors and suppliers.
Documentation of the Year 2000 aspect of business recovery planning for the
Company's mission critical business functions is complete. The business analysis
aspect of the contingency planning process also serves as a means of verifying
the Company's existing inventories of Client Server applications, Infrastructure
hardware and software, vendors and suppliers, external and internal interfaces
and business partners.
Costs
The total cost associated with the Company's Year 2000 efforts is not
expected to be material to the Company's financial position. The Company is
expensing these costs during the period in which they are incurred. The
estimated total cost of the Year 2000 Project is approximately $43.0 million, of
which $24.7 million had been incurred through February 28, 1999. However, the
Company's expectations about future costs associated with the Year 2000 are
subject to uncertainties that could cause the actual results to differ
materially from the Company's expectations. Factors that could influence the
amount and timing of future costs include the success of the Company in
identifying systems and programs that are not year 2000 compliant, the nature
and amount of programming required to replace or upgrade each of the affected
programs, the availability, rate and magnitude of related labor and consulting
costs and the success of the Company's business partners, vendors and clients in
addressing Year 2000 issues.
Risks
Due to the global nature of the Year 2000 issue, the Company cannot
determine all of the consequences the Year 2000 may have on its business and
operations. The Company believes that in light of the efforts of its Year 2000
Projects, including the Contingency Planning aspect, the possibility of material
business interruptions is unlikely. However, there may be instances where the
Company will rely on third party information, which may be unreliable or
unverifiable. Furthermore, the Company cannot be assured that the third parties,
upon which it relies, including utilities and telecommunications service
providers, will not have business interruptions which could have an adverse
effect on the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In response to this Item, the information set forth on page 29 and Note A of
this Form 10-K is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is hereby incorporated by
reference from the Company's Financial Statements and Auditors' Report beginning
at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The information required by this Item 11 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The information required by this Item 12 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) - Financial Statement Schedules.
The information called for by this section of Item 14 is set forth in the
Financial Statements and Auditors' Report beginning at page F-1 of this Form
10-K. The index to Financial Statements and Schedules is set forth at page F-2
of this Form 10-K.
(3) - Exhibits
Exhibit
No. Description
2.1* Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc.,
Countrywide Asset Management Corporation and Countrywide Credit
Industries, Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Annual Report on Form 10-K dated February 28, 1997). 3.1*
Certificate of Amendment of Restated Certificate of Incorporation of
Countrywide Credit Industries, Inc. (incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1987).
3.2* Restated Certificate of Incorporation of Countrywide Credit
Industries, Inc.(incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1987).
3.3* Bylaws of Countrywide Credit Industries, Inc., as amended and restated
(incorporated by reference to Exhibit 3 to the Company's Current
Report on Form 8-K dated February 10, 1988).
3.3.1* Amendment to Bylaws of Countrywide Credit Industries, Inc. dated
January 28, 1998(incorporated by reference to Exhibit 3.3.1 to the
Company's Annual Report on Form 10-K dated February 28, 1998).
3.3.2* Amendment to Bylaws of Countrywide Credit Industries, Inc.dated
February 3, 1998 (incorporated by reference to Exhibit 3.3.1 to the
Company's Annual Report on Form 10-K dated February 28, 1998).
4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide
Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Form 8-A
filed pursuant to Section 12 of the Securities Exchange Act of 1934 on
February 12, 1988).
4.1.1* Amendment No. 1 to Rights Agreement dated as March 24, 1992
(incorporated by reference to Exhibit 1 to the Company's Form 8 filed
with the SEC on March 27, 1992).
4.2* Specimen Certificate of the Company's Common Stock(incorporated by
reference to Exhibit 4.2 to the Current Company's Report on Form 8-K
dated February 6, 1987).
4.3* Specimen Debenture Certificate (incorporated by reference to Exhibit
4.3 to the Company's Current Report on Form 8-K dated February 6,
1987).
4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide
Funding Corporation (now known as Countrywide Home Loans, Inc.)
("CHL") (incorporated by reference to Exhibit 4.2 to the Company's
registration statement on Form S-3(File Nos. 33-44194 and 33-44194-1)
filed with the SEC on November 27, 1991).
4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the Company's
registration statement on Form S-3(File Nos. 33-44194 and 33-44194-1)
filed with the SEC on November 27, 1991).
4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the Company's registration statement on
Form S-3(File No. 33-51816) filed with the SEC on September 9, 1992).
4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the Company's
registration statement on Form S-3(File No. 33-51816) filed with the
SEC on September 9, 1992).
4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the registration statement on Form S-3
of CHL and the Company (File Nos.33-50661 and 33-50661-01) filed with
the SEC on October 19, 1993).
4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration
statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and
33-50661-01) filed with the SEC on October 19, 1993).
4.10*Indenture dated as of January 1, 1992 among CHL, the Company and The
Bank of New York, as trustee (incorporated by reference to Exhibit 4.1
to the registration statement on Form S-3 of CHL and the Company (File
Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19,
1993).
4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to
the Indenture dated as of January 1, 1992, among CHL, the Company, and
The Bank of New York, as trustee (incorporated by reference to Exhibit
4.9 to Amendment No. 2 to the registration statement on Form S-3 of
the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with
the SEC on June 16, 1995).
4.11*Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.10 to Amendment No. 2 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and
33-59559-01) filed with the SEC on June 16, 1995).
4.12*Form of Medium-Term Notes, Series D (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
4.13*Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
333-3835 and 333-3835-01) filed with the SEC on August 2, 1996).
4.14*Form of Medium-Term Notes, Series E (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment
No. 1 to the registration statement on Form S-3 of the Company and CHL
(File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2,
1996).
4.15*Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers
Trustee Company Limited, as Trustee for Euro Medium Notes of CHL
(incorporated by reference to Exhibit 4.15 to the Company's Quarterly
Report on Form 10-Q dated May 31, 1998).
4.16 First Supplemental Trust Deed dated 16th December, 1998, modifying the
provisions of a Trust Deed dated 1st May, 1998 among CHL, the Company
and Bankers Trustee Company Limited, as Trustee for Euro Medium Notes
of CHL.
4.16.1* Form of Medium-Term Notes, Series F (fixed-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-31529 and
333-31529-01) filed with the SEC on July 29, 1997).
4.16.2* Form of Medium-Term Notes, Series F (floating-rate) of CHL
(incorporated by reference to Exhibit 4.4 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-31529 and
333-31529-01) filed with the SEC on July 29, 1997).
4.17*Form of Medium-Term Notes, Series G (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.10 to the registration statement on Form S-3
of the Company and CHL (File Nos. 333-58125 and 333-58125-01) filed
with the SEC on June 30, 1998).
4.18*Form of Medium-Term Notes, Series G (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and
333-58125-01) filed with the SEC on June 30, 1998).
4.19*Form of Medium-Term Notes, Series H (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to the registration statement on Form S-3
of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed
with the SEC on October 30, 1998).
4.20*Form of Medium-Term Notes, Series H (floating-rate) of CHL
(incorporated by reference to Exhibit 4.4 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and
333-66467-01) filed with the SEC on October 30, 1998).
+ 10.1* Indemnity Agreements with Directors and Officers of Countrywide
Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 8-K dated February 6, 1987).
+ 10.2* Restated Employment Agreement for David S. Loeb dated March 26,
1996 (incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-Q dated August 31, 1996).
+ 10.2.1 Third Restated Employment Agreement by and between the Company
and David S. Loeb in effect as of March 1, 1999.
+ 10.3* Restated Employment Agreement for Angelo R Mozilo dated March
26, 1996 (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q dated August 31, 1996).
+ 10.3.1* Amendment Number One to Restated Employment Agreement for
Angelo R. Mozilo (incorporated by reference to Exhibit 10.3.1 to the
Company's Annual Report on Form 10-K dated February 28, 1998).
+ 10.3.2* Amendment Number Two to Restated Employment Agreement for
Angelo R. Mozilo (incorporated by reference to Exhibit 10.3.2 to the
Company's Annual Report on Form 10-K dated February 28, 1998).
+ 10.4* Employment Agreement for Stanford L. Kurland dated May 7, 1996
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-Q dated August 31, 1996).
+ 10.4.1 Employment Agreement by and between the Company and Stanford L.
Kurland, dated as of March 1, 1999.
+ 10.5* Countrywide Credit Industries, Inc. Deferred Compensation
Agreement for Non-Employee Directors (incorporated by reference to
Exhibit 5.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1987).
+ 10.5.1* Supplemental Form of Countrywide Credit Industries, Inc.
Deferred Compensation Agreement for Non-Employee Directors
(incorporated by reference to Exhibit 10.5.1 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1998).
+ 10.6* Countrywide Credit Industries, Inc. Deferred Compensation Plan
for Key Management Employees dated April 15, 1992 (incorporated by
reference to Exhibit 10.3.1 to the Company's Annual Report on Form
10-K dated February 28, 1993).
+ 10.7* Countrywide Credit Industries, Inc. Deferred Compensation Plan
Amended and Restated Effective January 1, 1998 (incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K
dated February 28, 1998).
+ 10.7.1 First Amendment to Countrywide Credit Industries, Inc. Deferred
Compensation Plan Amended and Restated effective January 1, 1999.
10.8*Revolving Credit Agreement dated as of the 24th day of September,
1997, by and among Countrywide Home Loans, Inc., Bankers Trust
Company, The First National Bank of Chicago, The Bank of New York,
Chase Securities Inc., The Chase Manhattan Bank and the Lenders Party
thereto. (incorporated by reference to Exhibit 10.8 to the Company's
Quarterly report on Form 10-Q dated August 31, 1997).
10.8.1* Revolving Credit Agreement dated as of the 15th day of April, 1998,
by and among Countrywide Home Loans, Inc., Royal Bank of Canada, The
Bank of New York, Morgan Guaranty Trust Company of New York, Credit
Lyonnais, San Francisco Branch and the Lenders Party Thereto.
10.8.2* Short Term Facility Extension Amendment dated as of the 23rd day of
September 1998 by and among CHL, the Short Term Lenders under the
Revolving Credit Agreement dated as of September 24, 1997 and Bankers
Trust Company, as Credit Agent (incorporated by reference to Exhibit
10.8.1 to the Company's Quarterly Report on Form 10-Q dated August 31,
1998).
10.8.3* Amendment to Revolving Credit Agreement dated as of the 25th day of
November, 1998 by and among CHL, the Lenders under (as that term is
defined in) the Revolving Credit Agreement dated as of September 24,
1997, and Bankers Trust Company as Credit Agent (incorporated by
reference to Exhibit 10.8.3 to the Company's Quarterly Report on Form
10-Q dated November 30, 1998).
10.8.4* Amendment to Revolving Credit Agreement dated as of the 20th day of
November, 1998 by and among CHL, the Lenders under (as that term is
defined in ) the Revolving Credit Agreement dated as of April 15, 1998
and Royal Bank of Canada, as lead administrative agent for the Lenders
(incorporated by reference to Exhibit 10.8.4 to the Company's
Quarterly Report on Form 10-Q dated November 30, 1998).
10.8.5 Second Amendment to Revolving Credit Agreement dated as of the 14th
day of April, 1999 by and among CHL, the Lenders under (as that term
is defined in ) the Revolving Credit Agreement dated as of April 15,
1998 and Royal Bank of Canada, as lead administrative agent for the
Lenders.
+10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q dated May 31,
1988).
+ 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989
(incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K dated February 28, 1989).
+ 10.11.1* First Amendment to the 1987 Stock Option Plan as Amended and
Restated. (incorporated by reference to Exhibit 10.11.1 to the
Company's Quarterly Report on Form 10-Q dated November 30, 1997).
+ 10.11.2* Second Amendment to the 1987 Stock Option Plan as Amended and
Restated. (incorporated by reference to Exhibit 10.11.2 to the
Company's Quarterly Report on Form 10-Q dated November 30, 1997).
+ 10.11.3* Third Amendment to the 1987 Stock Option Plan as Amended and
Restated (incorporated by reference to Exhibit 10.11.3 to the
Company's Quarterly Report on Form 10-Q dated November 30, 1997).
+ 10.11.4* Fourth Amendment to the 1987 Stock Option Plan as Amended and
Restated (incorporated by reference to Exhibit 10.11.4 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1998).
+ 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated
by reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed
with the SEC on December 20, 1988).
+ 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated
by reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed
with the SEC on December 20, 1988).
+ 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated
by reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed
with the SEC on December 20, 1988).
+ 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by
reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to
the Company's registration statement on Form S-8 (File No. 33-9231)
filed with the SEC on December 20, 1988).
+ 10.16* Amended and Restated Stock Option Financing Plan (incorporated
by reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed
with the SEC on December 20, 1988).
10.17* 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide
Asset Management Corporation (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q dated August 31,
1995).
10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CHL (incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-K dated February 28, 1990).
10.19* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q dated August 31, 1995).
+ 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit
10.19 to the Company's Annual Report on Form 10-K dated February 29,
1992).
+ 10.20.1* First Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.1
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.2* Second Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.2
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.3* Third Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.3
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.4* Fourth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.4
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.5* Fifth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.5
to the Company's Annual Report on Form 10-K dated
February 28, 1995).
+ 10.20.6* Sixth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.20.6
to the Company's Annual Report on Form 10-Q dated
November 30, 1997).
+ 10.20.7* Seventh Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.20.7
to the Company's Annual Report on Form 10-Q dated
November 30, 1997).
+ 10.20.8* Eighth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.20.8
to the Company's Quarterly Report on Form 10-Q
dated May 31, 1998).
+ 10.21* 1992 Stock Option Plan dated as of Decembe
22, 1992 (incorporated by reference to Exhibit
10.19.5 to the Company's Annual Report on Form
10-K dated February 28, 1993).
+ 10.21.1* First Amendment to the 1992 Stock Option
Plan (incorporated by reference to Exhibit 10.21.1
to the Company's Quarterly Report on Form 10-Q
dated November 30, 1997).
+ 10.21.2* Second Amendment to the 1992 Stock Option
Plan (incorporated by reference to Exhibit 10.21.2
to the Company's Quarterly Report on Form 10-Q
dated November 30, 1997).
+ 10.21.3* Third Amendment to the 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.21.3
to the Company's Quarterly Report on Form 10-Q
dated May 31,1998).
+ 10.22* Amended and Restated 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q
dated August 31,1996).
+ 10.22.1* First Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.5.1 to the Company's
Quarterly Report on Form 10-Q dated August 31,
1996).
+10.22.2* Second Amendment to the Amended and Restated 1993
StockOption Plan. (incorporated by reference to
Exhibit 10.22.2 to the Company's Quarterly Report
on Form 10-Q dated November 30, 1997).
+ 10.22.3* Third Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.22.3 to the Company's
Annual Report on Form 10-K dated February 28,
1998).
+ 10.22.4* Fourth Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.22.4 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1998).
+ 10.22.5* Fifth Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.22.5 to the Company's
Quarterly Report on Form 10-Q dated August 31,
1998).
+ 10.23* Supplemental Executive Retirement Plan effective
March 1, 1994 (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form
10-Q dated May 31, 1994).
+ 10.23.1* Amended and Restated Supplemental
Executive Retirement Plan (incorporated by
reference to Exhibit 10.23.1 to the Company's
Annual Report on Form 10-K dated February 28,
1998).
+10.23.2 First Amendment, effective January 1, 1999,
to the Company's Supplemental Executive Retirement
Plan 1998 Amendment and Restatement.
+10.24* Split-Dollar Life Insurance Agreement(incorporated
by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1994).
+10.24.1* Amended and Restated Split-Dollar Life
Insurance Agreement (incorporated by reference to
Exhibit 10.24.1 to the Company's Quarterly Report
on Form 10-Q dated November 30, 1998).
+10.25* Split-Dollar Collateral Assignment (incorporated
by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1994).
+10.26* Annual Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q dated August 31, 1996).
+10.27* Change in Control Severance Plan.
+10.27.1* First Amendment to Change in Control
Severance Plan (incorporated by reference to
Exhibit 10.27.1 to the Company's Quarterly Report
on Form 10-Q dated November 30, 1998).
11.1 Statement Regarding Computation of Earnings Per
Share.
12.1 Computation of the Ratio of Earnings to Fixed
Charges.
21 List of subsidiaries.
23 Consent of Grant Thornton LLP.
27 Financial Data Schedules (included only with the
electronic filing with the SEC).
* Incorporated by reference
+Constitutes a management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By: /s/ ANGELO R. MOZILO
-------------------------------------
Angelo R. Mozilo, Chairman and Chief
Executive Officer
Dated: May 6, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signatures Title Date
/S/ANGELO R.MOZILO Chief Executive Officer, Chairman of the May 6, 1999
----------------- Board of Directors and Director
Angelo R. Mozilo (Principal Executive Officer)
/s/ DAVID S. LOEB President and Director May 6, 1999
-------------------
David S. Loeb
/s/ STANFORD L. KURLAND Senior Managing Director and Chief May 6, 1999
--------------------- Operating Officer
Stanford L. Kurland
/s/ CARLOS M. GARCIA Managing Director; Chief Financial May 6, 1999
- --------------------- Officer and Chief Accounting Officer
Carlos M. Garcia (Principal Financial Officer and
Principal Accounting Officer)
/s/ JEFFREY M. CUNNINGHAM Director May 6, 1999
- --------------------------
Jeffrey M. Cunningham
/s/ ROBERT J. DONATO Director May 6, 1999
- -------------------------
Robert J. Donato
/s/ Director May 6, 1999
- ----------------------------
Michael E. Dougherty
/s/ BEN M. ENIS Director May 6, 1999
- ---------------------------
Ben M. Enis
/s/ EDWIN HELLER Director May 6, 1999
- -----------------------------
Edwin Heller
/s/ HARLEY W. SNYDER Director May 6, 1999
- --------------------------
Harley W. Snyder
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
February 28, 1999
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 28, 1999
Page
---------------
Report of Independent Certified Public Accountants................................................. F-3
Financial Statements
Consolidated Balance Sheets................................................................... F-4
Consolidated Statements of Earnings........................................................... F-5
Consolidated Statement of Common Shareholders' Equity......................................... F-6
Consolidated Statements of Cash Flows......................................................... F-7
Consolidated Statements of Comprehensive Income............................................... F-8
Notes to Consolidated Financial Statements.................................................... F-9
Schedules
Schedule I - Condensed Financial Information of Registrant.................................... F-35
Schedule II - Valuation and Qualifying Accounts............................................... F-39
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Credit Industries, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 28, 1999 and 1998, and
the related consolidated statements of earnings, common shareholders' equity,
cash flows and comprehensive income for each of the three years in the period
ended February 28, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide Credit
Industries, Inc. and Subsidiaries as of February 28, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended February 28, 1999, in conformity
with generally accepted accounting principles.
In October 1998, the Company adopted Financial Accounting Standards Board
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This change is discussed in Note R of the Notes to Consolidated
Financial Statements.
We have also audited Schedules I and II for each of the three years in the
period ended February 28, 1999. In our opinion, such schedules present fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
April 21, 1999
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28,
(Dollar amounts in thousands, except per share data)
A S S E T S
1999 1998
<
------------------- -------------------
Cash $ 58,748 $ 10,707
Mortgage loans and mortgage-backed securities held for sale 6,231,220 5,292,191
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 311,741 226,330
Mortgage servicing rights, net 4,496,439 3,612,010
Other assets 4,550,108 3,041,973
------------------- -------------------
Total assets $15,648,256 $12,183,211
=================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $4,020,998 $3,945,606
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $9,935,759 $7,475,221
Drafts payable issued in connection with mortgage loan closings 1,083,499 764,285
Accounts payable, accrued liabilities and other 517,937 482,678
Deferred income taxes 1,092,176 873,084
------------------- -------------------
Total liabilities 12,629,371 9,595,268
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities
of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 500,000
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $0.05 par
value; issued and outstanding, 112,619,313 shares in 1999 and
109,205,579 shares in 1998 5,631 5,460
Additional paid-in capital 1,153,673 1,049,365
Accumulated other comprehensive (loss) income 3,697
(19,593)
Retained earnings 1,379,174 1,029,421
------------------- -------------------
Total shareholders' equity 2,518,885 2,087,943
------------------- -------------------
Total liabilities and shareholders' equity $15,648,256 $12,183,211
=================== ===================
Borrower and investor custodial accounts $4,020,998 $3,945,606
=================== ===================
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 28,
(Dollar amounts in thousands, except per share data)
1999 1998 1997
--------------- -------------- --------------
Revenues
Loan origination fees $ 623,531 $ 301,389 $ 193,079
Gain on sale of loans, net of commitment fees 699,433 417,427 247,450
--------------- -------------- --------------
Loan production revenue 1,322,964 718,816 440,529
Interest earned 1,029,066 584,076 457,005
Interest charges (983,829) (568,359) (423,447)
--------------- -------------- --------------
Net interest income 45,237 15,717 33,558
Loan servicing income 1,023,700 907,674 773,715
Amortization and impairment/recovery of
mortgage servicing rights (1,013,578) (561,804) (101,380)
Servicing hedge benefit (expense) 412,812 232,959 (125,306)
--------------- -------------- --------------
Net loan administration income 422,934 578,829 547,029
Commissions, fees and other income 187,867 138,217 91,346
Gain on sale of subsidiary - 57,381 -
--------------- -------------- --------------
Total revenues 1,979,002 1,508,960 1,112,462
Expenses
Salaries and related expenses 669,686 424,321 286,884
Occupancy and other office expenses 277,921 184,338 129,877
Guarantee fees 181,117 172,692 159,360
Marketing expenses 64,510 42,320 34,255
Other operating expenses 153,963 119,743 80,188
--------------- -------------- --------------
Total expenses 1,347,197 943,414 690,564
--------------- -------------- --------------
Earnings before income taxes 631,805 565,546 421,898
Provision for income taxes 246,404 220,563 164,540
--------------- -------------- --------------
NET EARNINGS $385,401 $ 344,983 $ 257,358
=============== ============== ==============
Earnings per share
Basic $3.46 $3.21 $2.50
Diluted $3.29 $3.09 $2.44
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Three years ended February 28, 1999
(Dollar amounts in thousands)
Accumulated Additional Other
Number Common Paid-in- Comprehensive Retained
of Shares Stock Capital Income (Loss) Earnings Total
-------------- ----------- -----------------------------------------------------------
Balance at February 29, 1996 102,242,329 $5,112 $820,183 - $494,460 $1,319,755
Cash dividends paid - common - - - - (32,989) (32,989)
Stock options exercised 1,000,798 50 15,337 - - 15,387
Tax benefit of stock options exercised - - 3,656 - - 3,656
Dividend reinvestment plan 2,198,563 110 60,040 - - 60,150
401(k) Plan contribution 79,878 4 2,038 - - 2,042
Issuance of common stock in business -
acquisition 573,990 29 16,688 - - 16,717
Other comprehensive loss, net of tax - - - (30,545) - (30,545)
Net earnings for the year - - - - 257,358 257,358
- ------------------------------------------------------------------- -----------------------------------------------------------
Balance at February 28, 1997 106,095,558 5,305 917,942 (30,545) 718,829 1,611,531
Cash dividends paid - common - - - - (34,391) (34,391)
Stock options exercised 839,479 42 14,645 - - 14,687
Tax benefit of stock options exercised - - 5,378 - - 5,378
Dividend reinvestment plan 2,179,939 109 108,511 - - 108,620
401(k) Plan contribution 90,603 4 2,889 - - 2,893
Other comprehensive income, net of tax - - - 34,242 - 34,242
Net earnings for the year - - - - 344,983 344,983
- -------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1998 109,205,579 5,460 1,049,365 3,697 1,029,421 2,087,943
Cash dividends paid - common - - - - (35,648) (35,648)
Stock options exercised 1,239,662 62 20,047 - - 20,109
Tax benefit of stock options exercised - - 11,456 - - 11,456
Dividend reinvestment plan 2,048,062 103 66,669 - - 66,772
401(k) Plan contribution 126,010 6 6,136 - - 6,142
Other comprehensive loss, net of tax - - - (23,290) - (23,290)
Net earnings for the year - - - - 385,401 385,401
- -------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------- -----------------------------------------------------------
Balance at February 28, 1999 112,619,313 $5,631 $1,153,673 ($19,593) $1,379,174 $2,518,885
===============================================================================================================================
The accompanying notes are an integral part of this statement.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Year ended February 28
(Dollar amounts in thousands)
1999 1998 1997
----------------- ----------------- -----------------
Cash flows from operating activities:
Net earnings $385,401 $344,983 $ 257,358
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sale of subsidiary - (57,381) -
Gain on sale of available-for-sale securities (56,801) (16,749) (4,339)
Amortization and impairment/recovery of mortgage
servicing rights 1,013,578 561,804 101,380
Depreciation and other amortization 49,210 44,930 40,378
Deferred income taxes 246,404 220,563 164,540
Origination and purchase of loans held for sale (92,880,538) (48,771,673) (37,810,761)
Principal repayments and sale of loans 91,941,509 46,059,454 39,970,876
----------------- ----------------- -----------------
Decrease (increase) in mortgage loans and mortgage-
backed securities held for sale (939,029) (2,712,219) 2,160,115
Increase in other assets (1,737,487) (1,144,103) (856,499)
Increase in accounts payable and accrued liabilities 35,259 302,404 96,712
----------------- ----------------- -----------------
Net cash provided (used) by operating activities (1,003,465) (2,455,768) 1,959,645
----------------- ----------------- -----------------
Cash flows from investing activities:
Additions to mortgage servicing rights, net (1,898,007) (1,149,988) (858,912)
Purchase of property, equipment and leasehold
Improvements, net (119,507) (70,896) (77,294)
Proceeds from sale of available-for-sale securities 231,555 72,747 27,001
----------------- ----------------- -----------------
Net cash used by investing activities (1,785,959) (1,148,137) (909,205)
----------------- ----------------- -----------------
Cash flows from financing activities:
Net (decrease) increase in warehouse debt and other
short-term borrowings (1,122,273) 1,513,974 (1,924,308)
Issuance of long-term debt 4,044,121 1,973,198 637,624
Repayment of long-term debt (142,096) (182,747) (113,773)
Issuance of Company - obligated mandatorily redeemable
capital trust pass-through securities of subsidiary trust
holding solely a Company guaranteed related
subordinated debt - 200,000 300,000
Issuance of common stock 93,361 126,309 84,831
Cash dividends paid (35,648) (34,391) (32,989)
----------------- ----------------- -----------------
Net cash (used) provided by financing activities 2,837,465 3,596,343 (1,048,615)
----------------- ----------------- -----------------
Net increase (decrease) in cash 48,041 (7,562) 1,825
Cash at beginning of period 10,707 18,269 16,444
================= ================= =================
Cash at end of period $ 58,748 $ 10,707 $ 18,269
================= ================= =================
Supplemental cash flow information:
Cash used to pay interest $ 876,236 $ 422,969 $ 309,575
Cash used to pay (refund from) income taxes $ 1,407 $ (1,645) $ 15
Noncash financing activities:
Issuance of common stock in business acquisition $ - $ - $ 16,717
Unrealized gain (loss) on available-for-sale securities,
net of tax $ (23,290) $ 34,242 $( 30,545)
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended February 28,
(Dollar amounts in thousands)
1999 1998 1997
---------------- ----------------- ---------------
NET EARNINGS $385,401 $344,983 $257,358
Other comprehensive income, net of taxes:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period 11,358 44,459 (27,899)
Less: reclassification adjustment for gains included
in net earnings (34,648) (10,217) (2,646)
-----------------
---------------- ----------------- ---------------
Other comprehensive (loss) income (23,290) 34,242 (30,545)
---------------- -----------------
================ ================= ===============
COMPREHENSIVE INCOME $362,111 $379,225 $226,813
================ ================= ===============
The accompanying notes are an integral
part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Countrywide Credit Industries, Inc. (the "Company") is a holding company,
which through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL"), is
engaged primarily in the mortgage banking business and as such originates,
purchases, sells and services mortgage loans throughout the United States. In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent and
all wholly-owned subsidiaries that are required to be consolidated under
generally accepted accounting principles. All material intercompany accounts and
transactions have been eliminated.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans and the carrying value of
mortgage-backed securities ("MBS") held for sale in the near term are adjusted
by gains and losses generated from corresponding hedging transactions entered
into to protect the value of the mortgage loans and MBS held for sale from
increases in interest rates. Hedging transactions also are entered into to
protect the value of the Company's short-term rate and point commitments to fund
mortgage loan applications in process (the "Committed Pipeline") from increases
in interest rates. Gains and losses generated from such hedging transactions are
deferred. Hedging losses are recognized currently if deferring such losses would
result in mortgage loans and MBS held for sale and the Committed Pipeline being
effectively valued in excess of their estimated net realizable value.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives using the straight-line method. Leasehold improvements
are amortized over the lesser of the life of the lease or service lives of the
improvements using the straight-line method.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Servicing Rights, Amortization and Impairment
The Company recognizes as separate assets the rights to service mortgage
loans for others, whether the servicing rights are acquired through a separate
purchase or through loan origination by allocating total costs incurred between
the loan and the servicing rights retained based on their relative fair values.
Amortization of mortgage servicing rights ("MSRs") is based on the ratio of net
servicing income received in the current period to total net servicing income
projected to be realized from the MSRs. Projected net servicing income is in
turn determined by the estimated future balance of the underlying mortgage loan
portfolio, which declines over time from prepayments and scheduled loan
amortization. The Company estimates future prepayment rates based on current
interest rate levels, other economic conditions and market forecasts, as well as
relevant characteristics of the servicing portfolio, such as loan types, note
rate stratification and recent prepayment experience. MSRs are periodically
evaluated for impairment, which is recognized in the statement of earnings
during the applicable period through additions to an impairment reserve. For
purposes of performing its impairment evaluation, the Company stratifies its
servicing portfolio on the basis of certain risk characteristics including loan
type (fixed or adjustable) and note rate.
To mitigate the effect on earnings of higher amortization and impairment of
MSRs resulting from increased prepayment activity that generally occurs when
interest rates decline, the Company acquires financial instruments, including
derivatives, that increase in aggregate value when interest rates decline (the
"Servicing Hedge"). These financial instruments include interest rate floors,
options on interest rate futures and MBS, interest rate futures, interest rate
swaps with the Company's maximum payment capped ("Capped Swaps"), interest rate
swaps, interest rate caps, options on interest rate swaps ("Swaptions"), options
on callable pass-through certificates ("options on CPCs") and certain tranches
of collateralized mortgage obligations ("CMOs"). The value of the interest rate
floors, options on interest rate futures, Capped Swaps, interest rate caps,
Swaptions, and options on CPC is derived from an underlying instrument or index;
however, the notional or contractual amount is not recognized on the balance
sheet. The cost of these instruments is charged to expense (and deducted from
net loan administration income) over the life of the contract. Unamortized costs
are included in Other Assets on the balance sheet. The basis of the MSRs is
adjusted for realized and unrealized gains and losses in the derivative
financial instruments that qualify for hedge accounting.
Qualitative Disclosures About Market Risk
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are
counter-cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its Committed Pipeline, mortgage loan inventory and MBS
held for sale, MSRs, mortgage-backed securities retained in securitizations,
trading securities and debt securities. The overall objective of the Company's
interest rate risk management policies is to offset changes in the values of
these items resulting from changes in interest rates. The Company does not
speculate on the direction of interest rates in its management of interest rate
risk.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
To qualify for hedge accounting, the derivative contract positions must be
designated as a hedge and be effective in reducing the market risk of an
existing asset, liability or Committed Pipeline. The effectiveness of the
derivative contracts is evaluated on an initial and ongoing basis using
quantitative measures of correlation. If a derivative contract no longer
qualifies as a hedge, any subsequent changes in fair value are recognized
currently in earnings.
If a derivative contract that qualifies as a hedge is sold, matures or is
terminated, any resulting intrinsic gain or loss adjusts the basis of the
underlying item. Unamortized premiums associated with the time value of such
contracts are recognized in income. If a designated underlying item is no longer
held, any previously unrecognized gain or loss on the related derivative is
recognized in earnings and the derivative contract is subsequently accounted for
at fair value.
Trading Securities
The Company's MBS held for sale in the near term are classified as trading
securities and are included with mortgage loans on the consolidated balance
sheet. Trading securities are recorded at fair value, with the change in fair
value during the period included in earnings. The fair value of MBS held for
sale in the near term is based on quoted market prices.
Financial instruments held by the Company's broker-dealer subsidiary are
included in Other Assets. These financial instruments, including derivative
contracts, are recorded at fair value on a trade date basis, and gains and
losses, both realized and unrealized, are included in Gain on Sale of Loans.
Available for Sale Securities
The Company has designated its investments in certain tranches of CMOs,
certain other equity securities and mortgage-backed securities retained in the
Company's securitizations as available for sale securities, which are included
in Other Assets. Mortgage-backed securities retained in the Company's
securtizations consist of sub-prime and home equity residual interests
("Residuals") and interest-only and principal-only certificates on prime credit
quality first mortgage loans. The timing and amount of cash flows on these
securities are significantly influenced by prepayments on the underlying loans
and estimated foreclosure losses to the extent the Company has retained the risk
of such losses. The fair value of these securities is determined by discounting
future cash flows using discount rates that approximate current market rates.
As of February 28, 1999, the Company used discount rates for sub-prime and
home equity mortgage-backed residuals of 25% and 18%, respectively; annual
prepayment estimates of 22% to 49% and 30%, respectively; and lifetime credit
loss estimates of 1.0% to 6.1% and 1.3% of the original principal balances of
the underlying loans, respectively.
The available for sale securities are measured at fair value. Unrealized
gains or losses, net of deferred income taxes, are excluded from earnings and
reported as a separate component of shareholders' equity until realized.
Realized gains and losses on sales of securities are computed by the specific
identification method at the time of disposition and are recorded in earnings.
Unrealized losses that are other than temporary are recognized in earnings.
Loan Origination Fees
Loan fees, discount points and certain direct origination costs are recorded
as an adjustment of the cost of the loan and are recorded in earnings when the
loan is sold.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Commitment Fees
Deferred commitment fees, included in Other Assets, primarily consist of put
and call option fees on MBS. Option fees are amortized over the life of the
option to reflect the decline in its time value. Any unamortized option fees are
charged to income when the related option is exercised.
Investment In Non-Consolidated Subsidiaries
The Company has an investment in CWHL Funding, Inc., a bankruptcy remote,
wholly-owned subsidiary. This subsidiary was established to facilitate the sale
of certain defaulted mortgage loans repurchased in the ordinary course of
business from Ginnie Mae MBS serviced by the Company. As of February 28, 1999,
the Company's investment in CWHL Funding, Inc. was $73.7 million. As of February
28, 1998, the Company's investment in CWHL Funding, Inc. was $56.4 million.
Interest Income Recognition
Interest income is accrued as earned. Loans are placed on non-accrual status
when any portion of principal or interest is ninety days past due or earlier
when concern exists as to the ultimate collectibility of principal or interest.
Loans return to accrual status when principal and interest become current and
are anticipated to be fully collectible.
Loan Servicing Income
Loan servicing income represents fees earned for servicing residential
mortgage loans for investors and related ancillary income, including late
charges. Servicing income is recognized as earned, unless collection is
doubtful.
Interest Rate Swap Agreements
The amount to be received or paid under the interest rate swap agreements
associated with the Company's debt and custodial accounts is accrued and is
recognized as an adjustment to net interest income. The related amount payable
to or receivable from counterparties is included in accounts payable and accrued
liabilities.
Advertising Costs
The Company generally charges to expense the production costs of advertising
the first time the advertising takes place, except for direct-response
advertising, which is capitalized and amortized over the expected period of
future benefits. Advertising expense was $46.0 million, $32.6 million and $26.6
million for the years ended February 28, 1999, 1998 and 1997, respectively.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company recognizes compensation cost related to its stock option
plans only to the extent that the fair value of the shares at the grant date
exceeds the exercise price.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company utilizes an asset and liability approach in its accounting for
income taxes. This approach requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences
between the financial statement and tax basis carrying amounts of assets and
liabilities.
Earnings Per Share
Basic earnings per share ("EPS") is determined using net income divided by
the weighted average shares outstanding during the period. Diluted EPS is
computed by dividing net income by the weighted average shares outstanding,
assuming all dilutive potential common shares were issued.
The following table presents basic and diluted EPS for the years ended
February 28, 1999, 1998 and 1997.
- ------------------------ --------- --------- --------- -- - ----------------------------- -- -- ------- ---------- -----
Years ended February 28,
--------- --------- --------- -- - ----------------------------- -- -- ------- ---------- -----
1999 1998 1997
--------- --------- --------- ---------- --------- --------- --------- --------- ---------
Per-Share Per-Share Per-Share
(Amounts in thousands, Net Amount Net Amount Net Amount
except per share data) Earnings Shares Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- --------- --------- ---------
========= ========== =========
Net earnings $385,401 $344,983 $257,358
========= ========== =========
Basic EPS
Net earnings available
to common shareholders $385,401 111,414 $3.46 $344,983 107,491 $3.21 $257,358 103,112 $2.50
Effect of Dilutive
Stock Options - 5,631 - 4,035 - 2,565
--------- --------- ---------- --------- --------- ---------
Diluted EPS
Net earnings available
to common shareholders $385,401 117,045 $3.29 $344,983 111,526 $3.09 $257,358 105,677 $2.44
========= ========= ========== ========= ========= =========
- ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- --------- ---------
Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 28, 1998 and 1997 have been reclassified to conform to the
presentation for the year ended February 28, 1999.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
--------------------------------------------- --------------------------------------------------------------------
February 28,
----------------- -- -------------- -----
(Dollar amounts in thousands) 1999 1998
--------------------------------------------------------------------- -- ----------------- -- -------------- -----
Buildings $ 97,339 $ 84,526
Office equipment 305,092 223,792
Leasehold improvements 42,578 28,136
----------------- --------------
445,009 336,454
Less: accumulated depreciation and amortization (167,449) (133,353)
----------------- --------------
277,560 203,101
Land 34,181 23,229
================= ==============
$311,741 $226,330
================= ==============
--------------------------------------------------------------------- -- ----------------- -- -------------- -----
Depreciation and amortization expense amounted to $40.3 million, $31.8
million and $29.0 million for the years ended February 28, 1999,1998 and 1997,
respectively.
NOTE C - MORTGAGE SERVICING RIGHTS
Entries to mortgage servicing rights for the years ended February 28, 1999,
1998 and 1997 were as follows.
----------------------------------------------- -- -------------------------------------------------------------
February 28,
---------------- --- ---------------- --- ---------------- --
(Dollar amounts in thousands) 1999 1998 1997
----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
Mortgage Servicing Rights
Balance at beginning of period $3,653,318 $3,026,494 $2,385,299
Additions, net 1,898,007 1,149,988 858,912
Scheduled amortization (556,373) (300,312) (220,099)
Hedge losses (gains) applied (403,761) (222,852) 59,753
Reclassification of rights in excess of
Minimum contractually specified
Servicing fees - - (57,371)
---------------- ---------------- ----------------
Balance before valuation reserve
at end of period 4,591,191 3,653,318 3,026,494
---------------- ---------------- ----------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (41,308) (2,668) (61,634)
Reductions (additions) (53,444) (38,640) 58,966
---------------- ---------------- ----------------
Balance at end of period (94,752) (41,308) ( 2,668)
================ ================ ================
Mortgage Servicing Rights, net $4,496,439 $3,612,010 $3,023,826
================ ================ ================
----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
The estimated fair value of mortgage servicing rights was $4.7 billion and
$3.7 billion as of February 28, 1999 and 1998, respectively. The fair value was
determined by discounting estimated net future cash flows from mortgage
servicing activities using discount and prepayment rates that approximate
current market rates.
NOTE D - OTHER ASSETS
Other assets as of February 28, 1999 and 1998 included the following.
------------------------------------------------------------ -----------------------------------------------------
February 28,
----------------- --- ---------------- ---
(Dollar amounts in thousands) 1999 1998
-------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Trading securities $ 1,460,446 $ 243,947
Servicing hedge instruments 991,401 801,335
Mortgage-backed securities retained in securitization 500,631 466,259
Receivables related to broker-dealer activities 401,232 148,976
Rewarehoused FHA and VA loans 216,598 426,407
Servicing related advances 199,143 231,437
Loans held for investment 125,236 115,713
Accrued interest 102,093 84,601
Equity securities 59,875 96,152
Other 493,453 427,146
----------------- ----------------
$4,550,108 $3,041,973
================= ================
-------------------------------------------------------------------- -- -------
NOTE E - AVAILABLE FOR SALE SECURITIES
Amortized cost and fair value of available for sale securities as of
February 28, 1999 and 1998 were as follows. In October 1998, mortgage-backed
securities retained in securitization were reclassified as available for sale
securities; see note R.
---------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 28, 1999
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
securities retained in
securitization $519,321 - ($18,690) $500,631
CMOs 32,514 312 - 32,826
Equity securities 42,498 3,098 (16,904) 28,692
================ ================= ================ ================
$594,333 $3,410 ($35,594) $562,149
================ ================= ================ ================
---------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 28, 1998
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
CMOs $204,234 - ($12,411) $191,823
Equity securities 7,315 18,471 - 25,786
---------------- ----------------- ---------------- ----------------
$211,549 $18,471 ($12,411) $217,609
================ ================= ================ ================
NOTE F - NOTES PAYABLE
Notes payable consisted of the following.
------------------------------------------------------------ -----------------------------------------------------
February 28,
----------------- --- ---------------- ---
(Dollar amounts in thousands) 1999 1998
-------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Commercial paper $176,559 $2,119,330
Medium-term notes, Series A, B, C, D, E, F, G, H
and Euro Notes 8,039,824 4,137,185
Repurchase agreements 1,517,405 181,121
Subordinated notes 200,000 200,000
Unsecured notes payable - 835,000
Other notes payable 1,971 2,585
================= ================
$9,935,759 $7,475,221
================= ================
Commercial Paper and Backup Credit Facilities
As of February 28, 1999, CHL, the Company's mortgage banking subsidiary, had
unsecured credit agreements (revolving credit facilities) with consortiums of
commercial banks permitting CHL to borrow an aggregate maximum amount of $5.3
billion. The facilities included a $4.0 billion revolving credit facility with
forty-four commercial banks consisting of: (i) a five-year facility of $3.0
billion, which expires on September 24, 2002, and (ii) a one-year facility of
$1.0 billion which expires on September 22, 1999. As consideration for the
facility, CHL pays annual commitment fees of $3.8 million. There is an
additional one-year facility, which expired April 14, 1999, with sixteen of the
forty-four banks referenced above for total commitments of $1.3 billion. As
consideration for the facility, CHL pays annual commitment fees of $1.0 million.
CHL renewed this facility. See Note O - "Subsequent Events". In addition, on
November 25, 1998, CHL entered into a $1.5 billion committed mortgage loan
conduit facility, with four commercial banks. The facility has a maturity date
of November 24, 1999. As a consideration for this facility, CHL pays annual
commitment fees of $1.9 million. Loans made under this facility are secured by
conforming and non-conforming mortgage loans. These facilities contain various
financial covenants and restrictions, certain of which limit the amount of
dividends that can be paid by the Company or CHL. The purpose of these credit
facilities is to provide liquidity backup for CHL's commercial paper program. No
amount was outstanding under these revolving credit facilities at February 28,
1999. The weighted average borrowing rate on commercial paper borrowings for the
year ended February 28, 1999 was 5.47%. The weighted average borrowing rate on
commercial paper outstanding as of February 28, 1999 was 5.24%.
NOTE F - NOTES PAYABLE (Continued)
Medium-Term Notes
As of February 28, 1999, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission or
issued by CHL pursuant to its Euro medium-term note program were as follows.
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
---------------------- ----------------------------
-------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- -------------- -------------
Series A - $173,500 $173,500 7.29% 8.79% Mar. 1999 Mar. 2002
Series B - 351,000 351,000 6.08% 6.98% Jul. 1999 Aug. 2005
Series C 208,000 197,000 405,000 4.56% 8.43% Apr. 1999 Mar. 2004
Series D 75,000 385,000 460,000 5.35% 6.88% Aug. 2000 Sep. 2005
Series E 310,000 690,000 1,000,000 5.12% 7.45% Feb. 2000 Oct. 2008
Series F 656,000 1,344,000 2,000,000 4.99% 7.00% Oct. 1999 May 2013
Series G 919,000 581,000 1,500,000 4.94% 7.00% Jul. 1999 Nov. 2018
Series H 114,500 300,000 414,500 4.99% 7.00% Dec. 1999 Dec. 2018
Euro Notes 1,019,600 716,224 1,735,824 4.97% 6.00% Jul. 1999 Jan. 2009
-------------------------------------------
Total $3,302,100 $4,737,724 $8,039,824
===========================================
As of February 28, 1999, substantially all of the outstanding fixed-rate
notes had been effectively converted through interest rate swap agreements to
floating-rate notes. The weighted average borrowing rate on medium-term note
borrowings for the year ended February 28, 1999, including the effect of the
interest rate swap agreements, was 5.92%. During Fiscal 1999, CHL issued $666.2
million foreign currency denominated fixed-rate notes pursuant to its Euro
medium-term note program. Such notes are denominated in Deutsche marks, French
Francs and Portuguese Escudos. The Company manages the associated foreign
currency risk by entering into currency swaps. The terms of the currency swaps
effectively translate the foreign currency denominated medium-term notes into
U.S. dollars.
Repurchase Agreements
The Company routinely enters into short-term financing arrangements to sell
MBS under agreements to repurchase. The weighted average borrowing rate for the
year ended February 28, 1999 was 5.36%. The weighted average borrowing rate on
repurchase agreements outstanding as of February 28, 1999 was 4.95%.
NOTE F - NOTES PAYABLE (Continued)
The repurchase agreements were collateralized by MBS. All MBS underlying
repurchase agreements are held in safekeeping by broker-dealers. All agreements
are to repurchase the same or substantially identical MBS.
Subordinated Notes
The 8.25% subordinated notes are due July 15, 2002. Interest is payable
semi-annually on each January 15 and July 15. The subordinated notes are not
redeemable prior to maturity and are not subject to any sinking fund
requirements.
Pre-Sale Funding Facilities
As of February 28, 1999, CHL had uncommitted revolving credit facilities
with the Federal National Mortgage Association ("Fannie Mae") and the Federal
Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are
secured by conforming mortgage loans which are in the process of being pooled
into MBS. The weighted average borrowing rate for all such facilities for the
year ended February 28, 1999 was 5.68%. As of February 28, 1999, the Company had
no outstanding borrowings under any of these facilities.
Maturities of notes payable are as follows.
------------------ ------------------------------------------- ----------------------------------------------
Year ending February 28(29), (Dollar amounts in thousands)
------------------ ------------------------------------------- ----------------------------------------------
2000 $3,982,435
2001 922,000
2002 522,000
2003 938,500
2004 863,000
Thereafter 2,707,824
=================
$9,935,759
=================
------------------ ------------------------------------------- -------- ------------------- -----------------
NOTE G - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
On December 11, 1996, Countrywide Capital I (the "Subsidiary Trust I"), a
subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through
Securities (the "8% Capital Securities"). In connection with the Subsidiary
Trust I issuance of the 8% Capital Securities, CHL issued to the Subsidiary
Trust I, $309 million of its 8% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debt Securities I"). The Subordinated Debt
Securities I are due on December 15, 2026 with interest payable semi-annually on
June 15 and December 15 of each year. The Company has the right to redeem at
par, plus accrued interest, the 8% Capital Securities any time on or after
December 15, 2006. The sole assets of the Subsidiary Trust I are, and will be,
the Subordinated Debt Securities I.
On June 4, 1997, Countrywide Capital III (the "Subsidiary Trust III"), a
subsidiary of the Company, issued $200 million of 8.05% Subordinated Capital
Income Securities, Series A (the "8.05% Capital Securities"). In connection with
the Subsidiary Trust III issuance of 8.05% Capital Securities, CHL issued to the
Subsidiary Trust
NOTE G - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS (Continued)
III, $206 million of its 8.05% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debt Securities III"). The Subordinated Debt
Securities III are due on June 15, 2027 with interest payable semi-annually on
June 15 and December 15 of each year. The sole assets of the Subsidiary Trust
III are, and will be, the Subordinated Debt Securities III.
On December 24, 1997, Subsidiary Trust III completed an exchange offer
pursuant to which newly issued capital securities (the "New 8.05% Capital
Securities") were exchanged for all of the outstanding 8.05% Capital Securities.
The New 8.05% Capital Securities are identical in all material respects to the
8.05% Capital Securities, except that the New 8.05% Capital Securities have been
registered under the Securities Act of 1933, as amended.
In relation to Subsidiary Trusts I and III, CHL has the right to defer
payment of interest by extending the interest payment period, from time to time,
for up to 10 consecutive semi-annual periods. If interest payments on the
Debentures are so deferred, the Company and CHL may not declare or pay dividends
on, or make a distribution with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any of its capital stock.
NOTE H - INCOME TAXES
Components of the provision for income taxes were as follows.
---- ------------------------------ ------------------------------------------------------------ --------
Year ended February 28,
---------------- -- ------------- -- ------------- ---
---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- ---
---------------- -- ------------- -- ------------- ---
(Dollar amounts in thousands) 1999 1998 1997
---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- ---
Federal expense - deferred $204,186 $181,228 $135,991
State expense - deferred 42,218 39,335 28,549
================ ============= =============
$246,404 $220,563 $164,540
================ ============= =============
The following is a reconciliation of the statutory federal income tax rate
to the effective income tax rate as reflected in the consolidated statements of
earnings.
---- ------------------------------ ------------------------------------------------------------ --------
Year ended February 28,
--------------- -- -------------- --- ------------ ---
1999 1998 1997
---- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income and franchise taxes, net
of federal tax effect 4.0 4.0 4.0
=============== ============== ============
Effective income tax rate 39.0% 39.0% 39.0%
=============== ============== ============
---- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
NOTE H - INCOME TAXES (Continued)
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below.
----- ------------------------------------------- -------------------------------------------------- -----
February 28,
-------------------------------------------------- -----
(Dollar amounts in thousands) 1999 1998
----------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Net operating losses $ 198,204 $152,279
State income and franchise taxes 59,752 49,649
Reserves, accrued expenses and other 41,898 28,033
--------------- ---------------
Total deferred income tax assets 299,854 $229,961
--------------- ---------------
Deferred income tax liabilities:
Mortgage servicing rights 1,368,349 1,079,364
Gain on sale of subsidiary 23,681 23,681
--------------- ---------------
Total deferred income tax liabilities 1,392,030 1,103,045
--------------- ---------------
Deferred income taxes $1,092,176 $873,084
=============== ===============
As of February 28, 1999, the Company had net operating loss carryforwards
for federal income tax purposes totalling $542.7 million that expire as follows:
$12.3 million in 2003, $19.7 million in 2004, $3.2 million in 2006, $5.1 million
in 2008, $131.4 million in 2009, $74.0 million in 2010, $41.0 million in 2011,
$84.1 million in 2012, and $72.0 million in 2013, and $99.9 million in 2019.
NOTE I - FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company utilizes a variety of derivative financial instruments to manage
interest-rate risk. These instruments include interest rate floors, MBS
mandatory forward sale and purchase commitments, options to sell or buy MBS,
treasury futures and interest rate futures, options on CPC, interest rate caps,
Capped Swaps, Swaptions, interest rate futures and interest rate swaps. These
instruments involve, to varying degrees, elements of interest-rate and credit
risk. In addition, the Company manages foreign currency exchange rate risk with
foreign currency swaps. Substantially all of the Company's derivative financial
instruments are held or issued for purposes other than trading.
The Company has potential exposure to credit loss in the event of
nonperformance by the counterparties to the various over-the-counter
instruments. The Company manages this credit risk by selecting only well
established, financially strong counterparties, spreading the credit risk
amongst many such counterparties, and by placing contractual limits on the
amount of unsecured credit risk from any one counterparty. The Company's
exposure to credit risk in the event of default by a counterparty is the current
cost of replacing the contracts net of any available margins retained by the
Company, a custodian or the Mortgage-Backed Securities Clearing Corporation (the
"MBSCC"), which is an independent clearing agent.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
The total amount of counterparty credit exposure as of February 28, 1999,
before and after applicable margin accounts held, was as follows:
- --------------------------------------------------------------- ------------------------------------------
(Dollar amounts in millions) As of February 28, 1999
- --------------------------------------------------------------- ------------------------------------------
Interest rate floors $402.1
Swaptions 271.1
MBS mandatory delivery and purchase commitments 199.8
Interest rate swaps 93.2
Interest rate caps 40.4
Capped swaps 3.1
------------------
Total credit exposure before margin accounts held 1,009.7
Less: Margin accounts held (542.6)
==================
Net unsecured credit exposure $467.1
==================
Hedge of Committed Pipeline and Mortgage Loan Inventory
As of February 28, 1999, the Company had $6.2 billion of closed mortgage
loan and MBS held in inventory, including $5.9 billion fixed-rate and $0.3
billion adjustable-rate (the "Inventory"). In addition, as of February 28, 1999,
the Company had short-term rate and point commitments amounting to approximately
$7.5 billion (including $7.0 billion fixed-rate and $0.5 billion
adjustable-rate) to fund mortgage loan applications in process and an additional
$2.1 billion of mortgage loan applications in process subject to property
identification and borrower qualification (the "Committed Pipeline").
Substantially all of these commitments are for periods of 60 days or less.
(After funding and sale of the mortgage loans, the Company's exposure to credit
loss in the event of nonperformance by the mortgagor is limited as described in
Note J).
In order to mitigate the risk that a change in interest rates will result
in a decline in the value of the Company's Committed Pipeline or Inventory, the
Company enters into hedging transactions. The Inventory is hedged with forward
contracts for the sale of loans and net sales of MBS, including options to sell
MBS where the Company can exercise the option on or prior to the anticipated
settlement date of the MBS. Due to the variability of closings in the Company's
Committed Pipeline, which is driven primarily by interest rates, the Company's
hedging policies require that substantially all of the Committed Pipeline be
hedged with a combination of options for the purchase and sale of MBS and
treasury futures in addition to forward contracts for the sale of MBS. As of
February 28, 1999, the notional amount of options to purchase and sell MBS
aggregated $2.0 billion and $6.8 billion, respectively. In addition, as of
February 28, 1999, the notional amount of options to purchase and sell treasury
futures aggregated $0.2 billion and $0.1 billion, respectively. The Company had
net forward contracts to sell MBS that amounted to $6.8 billion (including
forward contracts to sell MBS of $15.4 billion and to purchase MBS of $8.6
billion). The MBS that are to be delivered under these contracts and options are
either fixed or adjustable-rate, and are generally corresponding with the
composition of the Company's Inventory and Committed Pipeline.
The Company is generally not exposed to significant losses nor will it
realize significant gains related to its Inventory or Committed Pipeline due to
changes in interest rates, net of gains or losses on associated hedge positions.
The correlation between the Inventory, and the Committed Pipeline and the
associated hedge instruments is very high due to their similarity. However, the
Company is exposed to the risk that the actual closings in the Committed
Pipeline may deviate from the estimated closings for a given change in interest
rates. Although interest rates are the primary determinant, the actual loan
closings from the Committed Pipeline are influenced by many factors, including
the composition of the Committed Pipeline and remaining commitment periods. The
Company's estimated closings are based on historical data of loan closings as
influenced by recent developments.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Servicing Hedge
The Company manages its exposure to interest rate risk primarily through
balancing its loan production and loan servicing operations which are counter
cyclical in nature. In order to further mitigate the effect on earnings of
higher amortization and impairment of MSRs resulting from increased prepayment
activity that generally occurs when interest rates decline, the Company
maintains a portfolio of financial instruments, including derivative contracts,
that increase in aggregate value when interest rates decline (the Servicing
Hedge). The financial instruments that form the Servicing Hedge include options
on interest rate futures and MBS, interest rate floors, interest rate swaps,
interest rate caps, Capped Swaps, Swaptions, options on CPC, interest rate
futures and certain tranches of CMOs.
The CMOs, which consist primarily of principal-only ("P/O") securities, have
been purchased at deep discounts to their par values. As interest rates decline,
prepayments on the collateral underlying the CMOs should increase which should
result in a decline in the average lives of the P/O securities and an increase
in the present values of their cash flows. As of February 28, 1999, the carrying
value of CMOs included in the Servicing Hedge was approximately $32.8 million.
The following table summarizes the notional amounts of derivative contracts
included in the Servicing Hedge.
- -------------------------------------- -------------------- -------------------- ------------------ ---------------------
(Dollar amounts in millions) Balance, Dispositions/ Balance,
February 28, 1998 Additions Expirations February 28,
1999
- -------------------------------------- -------------------- -------------------- ------------------ ---------------------
Interest Rate Floors $33,000 19,000 (19,000) $33,000
Long Call Options on
Interest Rate Futures $79,400 60,320 (107,720) $32,000
Long Put Options on
Interest Rate Futures $9,800 65,880 (21,080) $54,600
Short Call Options on
Interest Rate Futures - 63,800 (41,800) $22,000
Short Put Options on -
Interest Rate Futures 6,750 (6,030) $720
Interest Rate Futures $5,000 36,425 (18,925) $22,500
Capped Swaps $1,000 - - $1,000
Interest Rate Swaps $3,900 11,750 (500) $15,150
Interest Rate Cap $4,500 - - $4,500
Swaptions $1,850 32,500 (1,800) $32,550
Options on Callable Pass-through
Certificates $2,561 2,000 - $4,561
- -------------------------------------- -------------------- -------------------- ------------------ ---------------------
The Servicing Hedge is intended to protect the value of the investment in
MSRs from the effects of increased prepayment activity that generally results
from declining interest rates. Should interest rates increase, the value of the
MSRs generally will increase while the value of the Servicing Hedge will
decline. With respect to the options, Swaptions, floors, caps, options on CPC
and CMOs included in the Servicing Hedge, the Company is not exposed to loss
beyond its initial outlay to acquire the instruments plus any unrealized gains
recognized to date. With respect to the Capped Swaps contracts entered into by
the Company as of February 28, 1999, the Company estimates that its maximum
exposure to loss over the contractual term is $19.5 million. With respect to the
Swap contracts entered into by the Company as of February 28, 1999, the Company
estimates that its maximum exposure to loss over the contractual term is $382.0
million. The Company's exposure to loss on futures is related to changes in the
London Interbank Offered Rate("LIBOR") rate over the life of the contract. The
Company estimates that its maximum exposure to loss over the contractual term is
$88.0 million.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
There can be no assurance that the Servicing Hedge will generate gains in
the future, or if gains are generated, that they will fully offset impairment of
the MSRs.
Interest Rate Swaps
As of February 28, 1999, CHL had interest rate swap contracts, in addition
to those included in the Servicing Hedge, with certain financial institutions
having notional principal amounts totaling $5.7 billion. The effect of these
contracts is to enable CHL to convert its fixed-rate long term debt borrowings
to LIBOR-based floating-rate cost borrowings (notional amount $3.7 billion), to
convert its foreign currency denominated fixed rate medium-term notes to U.S.
dollar LIBOR-based floating-rate cost borrowings (notional amount $0.7 billion),
to convert a portion of its commercial paper and medium-term note borrowings
from one floating-rate index to another (notional amount $0.4 billion) and to
convert the earnings rate on the custodial accounts held by CHL from floating to
fixed (notional amount $0.9 billion). Payments are due periodically through the
termination date of each contract. The agreements expire between March 1999 and
June 2027.
The interest rate swap agreements related to debt had an average fixed rate
(receive rate) of 5.68% and an average floating rate indexed to 3-month LIBOR
(pay rate) of 5.29% on February 28, 1999. The interest rate swap agreements
related to custodial accounts had an average fixed rate (receive rate) of 7.11%
and an average floating rate indexed to 1 to 3-month LIBOR (pay rate) of 5.03%
on February 28, 1999.
Broker-Dealer Financial Instruments
Countrywide Securities Corporation utilizes a variety of financial
instruments for trading purposes and to manage interest-rate risk. These
instruments include MBS mandatory forward sale and purchase commitments as well
as short sales of cash market U.S.
Treasury securities.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of February 28, 1999 and 1998 is made by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
---- ------------------------------------------------- --------------------------------- --- ----------------------------
February 28, 1999 February 28, 1998
--------------------------------- --- ----------------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) Amount fair value amount fair value
---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- -------------
Assets:
Mortgage loans and mortgage-backed securities
held for sale $6,231,220 $6,231,220 $5,292,191 $5,292,191
Items included in other assets:
Trading securities 1,460,446 1,460,446 243,947 243,947
Loans held for investment 125,236 125,236 115,713 115,713
Receivables related to broker-dealer activiti401,232 401,232 148,976 148,976
Reverse repurchase agreements 76,246 76,246 53,560 53,560
CMOs purchased 32,826 32,826 191,823 191,823
Mortgage-backed securities retained in
Securitizations 500,631 500,631 466,259 466,259
Equity Securities - restricted and unrestricte59,875 46,971 96,152 116,322
Rewarehoused FHA and VA loans 216,598 216,598 426,407 426,407
Liabilities:
Notes payable 9,935,759 9,883,859 7,475,221 7,589,593
Securities sold not yet purchased 84,775 84,775 83,445 83,445
Derivatives:
Interest rate floors 426,838 402,061 378,023 373,964
Forward contracts on MBS 12,775 120,709 - (5,719)
Options on MBS 34,883 62,475 33,290 24,125
Options on interest rate futures 18,261 15,729 32,093 13,546
Options on callable pass-through certificates 55,593 36,460 34,451 44,278
Interest rate caps 77,508 40,437 83,512 41,319
Capped Swaps 8,470 3,092 5,405 ( 1,795)
Swaptions 337,703 271,073 27,213 27,213
Interest rate futures 57,280 57,280 ( 3,359) ( 3,359)
Interest rate swaps 43,570 93,205 44,717 155,229
Short-term commitments to extend credit - 26,400 - 38,525
---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of February 28, 1999 and 1998 are based on
pertinent information that was available to management as of the respective
dates. Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair values.
Mortgage Loans and Mortgage-Backed Securities Held for Sale
Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
Collateralized Mortgage Obligations
Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and market
consensus prepayment rates.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Mortgage-backed securities retained in securitization
Fair value is estimated by discounting future cash flows using discount
rates that approximate current market rates and market consensus prepayment
rates.
Derivatives
Fair value is defined as the amount that the Company would receive or pay to
terminate the contracts at the report date. Market or dealer quotes are
available for many derivatives; otherwise, pricing or valuation models are
applied to utilizing current market information to estimate fair value.
Notes Payable
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
NOTE J - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. Although
it is difficult to predict the ultimate outcome of these proceedings, management
believes, based on discussions with counsel, that any ultimate liability will
not materially affect the consolidated financial position or results of
operations of the Company and its subsidiaries.
Commitments to Buy or Sell Mortgage-Backed Securities and Other Derivatives
Contracts
In connection with its open commitments to buy or sell MBS and other
derivative contracts, the Company may be required to maintain margin deposits.
With respect to the MBS commitments, these requirements are generally greatest
during periods of rapidly declining interest rates. With respect to other
derivative contracts, margin requirements are generally greatest during periods
of increasing interest rates.
Lease Commitments
The Company leases office facilities under lease agreements extending
through December, 2011. Future minimum annual rental commitments under these
non-cancelable operating leases with initial or remaining terms of one year or
more are as follows.
----- ------------------------------------------ -----------------------------------
Year ending February 28(29), (Dollar amounts in thousands)
----- ------------------------------- -------------------- -------------- ----------
2000 $31,200
2001 25,627
2002 21,483
2003 16,042
2004 9,351
Thereafter 44,743
==============
$148,446
==============
Rent expense was $44.7 million, $30.2 million and $22.3 million for the
years ended February 28, 1999, 1998 and 1997, respectively.
NOTE J - COMMITMENTS AND CONTINGENCIES (Continued)
Restrictions on Transfers of Funds
The Company and certain of its subsidiaries are subject to regulatory and/or
credit agreement restrictions which limit their ability to transfer funds to the
Company through intercompany loans, advances or dividends. Pursuant to the
revolving credit facilities as of February 28, 1999, the Company is required to
maintain $1.3 billion in consolidated net worth and CHL is required to maintain
$1.2 billion of net worth, as defined in the credit agreement.
Loan Servicing
As of February 28, 1999, 1998 and 1997, the Company serviced loans totaling
approximately $215.5 billion, $182.9 billion and $158.6 billion, respectively.
Included in the loans serviced as of February 28, 1999, 1998 and 1997 were loans
being serviced under subservicing agreements with total principal balances of
$2.2 billion, $6.7 billion and $3.9 billion, respectively. The loans are
serviced under a variety of servicing contracts. In general, these contracts
include guidelines and procedures for servicing the loans, remittance
requirements and reporting requirements, among other provisions.
Conforming conventional loans serviced by the Company (60% of the servicing
portfolio as of February 28, 1999) are primarily included in either Fannie Mae
MBS or Freddie Mac participation certificates ("PCs"). Such servicing is done on
a non-recourse basis, whereby credit losses are generally borne by Fannie Mae or
Freddie Mac and not the Company. The government loans serviced by the Company
are included in either Ginnie Mae MBS, Fannie Mae MBS, or Freddie Mac PCs. The
government loans are either insured against loss by the Federal Housing
Administration (18% of the servicing portfolio as of February 28, 1999) or
partially guaranteed against loss by the Department of Veterans Affairs (7% of
the servicing portfolio as of February 28, 1999). In addition, jumbo mortgage
loans (15% of the servicing portfolio as of February 28, 1999) are primarily
included in "private label" MBS and serviced on a non-recourse basis.
Properties securing the mortgage loans in the Company's servicing portfolio
are geographically dispersed throughout the United States. As of February 28,
1999, approximately 30% and 5% of the mortgage loans (measured by unpaid
principal balance) in the Company's servicing portfolio are secured by
properties located in California and Texas, respectively. No other state
contains more than 5% of the properties securing mortgage loans.
Generally, the Company is not exposed to credit risk. Because the Company
services substantially all conventional loans on a non-recourse basis, credit
losses are normally borne by the investor or insurer and not the Company. The
Company retains primary credit risk on the home equity and sub-prime loans it
securitizes through retention of a subordinated interest. As of February 28,
1999, the Company had investments in such subordinated interests that amounted
to $274 million. While the Company generally does not retain credit risk with
respect to the prime credit quality first mortgage loans it sells, it does have
potential liability under representations and warranties made to purchasers and
insurers of the loans. In the event of a breach of the representations and
warranties, the Company may be required to repurchase a mortgage loan and any
subsequent loss on the mortgage loan may be borne by the Company. Similarly,
government loans serviced by the Company (25% of the Company's servicing
portfolio as of February 28, 1999) are insured by the Federal Housing
Administration or partially guaranteed against loss by the Department of
Veterans Affairs. The Company is exposed to credit losses to the extent that the
partial guarantee provided by the Department of Veterans Affairs is inadequate
to cover the total credit losses incurred.
NOTE K - EMPLOYEE BENEFITS
Stock Option Plans
The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and directors.
Options are generally granted at the average market price of the Company's
common stock on the date of grant and are exercisable beginning one year from
the date of grant and expire up to eleven years from the date of grant.
Stock options transactions under the Plans were as follows.
- ----------------------------------------------------------------------------------------------------------------
Year ended February 28,
------------------------------------------------------
1999 1998 1997
- ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- --
Number of Shares:
Outstanding options at beginning of year 11,151,799 10,241,862 6,911,180
Options granted 1,648,647 1,836,169 4,516,237
Options exercised (1,239,662) (839,479) (1,000,798)
Options expired or cancelled (63,740) (86,753) (184,757)
============== ============== ==============
Outstanding options at end of year 11,497,044 11,151,799 10,241,862
============== ============== ==============
Weighted Average Exercise Price:
Outstanding options at beginning of year $20.57 $19.03 $15.67
Options granted 46.71 27.09 23.14
Options exercised 15.90 16.07 14.26
Options expired or canceled 25.11 21.17 19.38
-------------- --------------
--------------
Outstanding options at end of year $24.81 $20.57 $19.03
Options exercisable at end of year 6,514,039 5,407,177 3,862,565
Options available for future grant 5,840,713 1,920,487 3,078,591
- ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- --
NOTE K - EMPLOYEE BENEFITS (Continued)
Status of the outstanding stock options under the Plans as of February 28,
1999 was as follows:
- ----------------------------------------------------------------------------------------------------------------
Outstanding Options Exercisable Options
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Life Number Price Number Price
------------------- --------------- -------------- ------------- ------------- -------------
$2.80 - $16.19 3.4 years 1,537,774 $13.33 1,537,774 $13.33
$16.81 - $18.56 5.6 1,838,787 17.72 1,595,926 17.59
$19.50 - $23.06 5.8 1,392,921 22.19 1,028,329 21.96
$23.19 - $26.63 7.3 3,415,440 23.23 1,962,467 23.25
$27.06 - $45.98 8.3 1,687,304 27.22 388,793 27.13
$46.72 - $53.00 9.3 1,624,818 46.75 750 47.44
=================== =============== ============== ============= ============= -------------
$2.80 - $53.00 6.8 years 11,497,044 $24.81 6,514,039 $19.55
=================== =============== ============== ============= ============= -------------
- ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- -------------
Had the estimated fair value of the options granted during the period been
included in compensation expense, the Company's net earnings and earnings per
share would have been as follows:
- ------------------------------------------- ----------------------------------------------------
(Dollar amounts in thousands, Year ended February 28,
----------------------------------------------------
except per share data) 1999 1998 1997
- ------------------------------------------- ----------------- ---------------- -----------------
Net Earnings
As reported $385,401 $344,983 $257,358
Pro forma $366,118 $335,043 $241,115
Basic Earnings Per Share
As reported $3.46 $3.21 $2.50
Pro forma $3.29 $3.12 $2.34
Diluted Earnings Per Share
As reported $3.29 $3.09 $2.44
Pro forma $3.13 $3.00 $2.28
- ------------------------------------------- ----------------- ---------------- -----------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model that has been modified to consider cash
dividends to be paid. The following weighted-average assumptions were used for
grants in Fiscal 1999, 1998 and 1997, respectively: dividend yield of 0.72%,
1.18% and 1.38%; expected volatility of 40%, 28% and 26%; risk-free interest
rates of 5.5%, 6.5% and 6.6% and expected lives of five years for options
granted in all three years. The average fair value of options granted during
Fiscal 1999, 1998 and 1997 was $19.20, $8.89 and $7.15, respectively.
Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the minimum
funding standards of ERISA.
NOTE K - EMPLOYEE BENEFITS (Continued)
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
---- ----------------------------------------- ---- ------------------------------------------------------ ---
Year ended February 28,
---- ----------------------------------------- ---- ------------------------------------------------------ ---
-- ------------- --- ------------
(Dollar amounts in thousands) 1999 1998
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Change in benefit obligation
Benefit obligation at beginning of year $23,933 $18,504
Service cost 4,715 3,241
Interest cost 1,772 1,273
Actuarial loss (gain) 549 (1,497)
Benefits paid (364) (334)
Change in discount rate (828) 2,746
============= ============
Benefit obligation at end of year $29,777 $23,933
============= ============
Change in plan assets
Fair value of plan assets at beginning of year $18,152 $13,677
Actual return on plan assets 1,948 2,525
Employer contribution 3,039 2,284
Benefits paid (364) (334)
============= ============
Fair value of plan assets at end of year $22,775 $18,152
============= ============
Funded status at end of year ($ 7,002) ($ 5,781)
Unrecognized net actuarial loss 151 809
Unrecognized prior service cost 1,024 1,123
Unrecognized transaction asset (212) (283)
------------- ------------
Net amount recognized ($ 6,039) ($4,132)
============= ============
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
The following table sets forth the components of net periodic benefit cost
for 1999 and 1998.
--------------------------------------------------------------------------------------------------------------
Year ended February 28,
--------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1999 1998
--- ------------------------------------------------- -- -------------- -- --------------- -- ------------- --
Service cost $4,715 $3,241
Interest cost 1,772 1,273
Expected return on plan assets (1,569) (1,182)
Amortization of prior service cost 99 99
Amortization of unrecognized transition asset (70) (70)
--------------- -------------
Net periodic benefit cost $4,947 $3,361
=============== =============
The weighted-average assumptions used in calculating the amounts above were:
---- ----------------------------------------- ---- ------------------------------------------------------ ---
Year ended February 28,
---- ----------------------------------------- ---- ------------------------------------------------------ ---
-- ------------- --- ------------
1999 1998
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Discount rate 7.40% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.00% 4.00%
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Pension expense for the years ended February 28, 1999, 1998 and 1997 was
$4.9 million, $3.4 million and $2.5 million, respectively. The Company makes
contributions to the Plan in amounts that are deductible in accordance with
federal income tax regulations.
NOTE L - SHAREHOLDERS' EQUITY
In February 1988, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock. As a result of stock splits and
stock dividends, 0.399 of a Right is presently associated with each outstanding
share of the Company's common stock issued prior to the Distribution Date (as
defined below). Each Right, when exercisable, entitles the holder to purchase
from the Company one one-hundredth of a share of Series A Participating
Preferred Stock, par value $0.05 per share, of the Company (the "Series A
Preferred Stock"), at a price of $145, subject to adjustments in certain cases
to prevent dilution.
The Rights are evidenced by the common stock certificates and are not
exercisable or transferable, apart from the common stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
common stock ("Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of common
stock, or the equivalent thereof, of the Company which, at the time of such
transaction, would have a market value of two times the exercise price of the
Right. The Board of Directors of the Company may delay the exercisability of the
Rights during the period in which they are exercisable only for Series A
Preferred Stock (and not common stock).
In the event that, after a person has become an Acquiring Person, the
Company is acquired in a merger or other business combination, as defined for
the purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise price
of the Right, that number of shares of common stock, or the equivalent thereof,
of the other party (or publicly-traded parent thereof) to such merger or
business combination which at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on the
earlier of February 28, 2002, consummation of certain merger transactions or
optional redemption by the Company prior to any person becoming an Acquiring
Person.
NOTE M - RELATED PARTY TRANSACTIONS
On July 1, 1997, the Company sold the assets, operations and employees of
Countrywide Asset Management Corporation ("CAMC"), a then wholly-owned
subsidiary of the Company, to IndyMac Mortgage Holdings, Inc. (formerly INMC
Mortgage Holdings, Inc.) ("INMC"). CAMC was formerly the manager of INMC. As
consideration, the Company received 3,440,800 newly issued common shares of
INMC. These shares are subject to resale restrictions which apply to the shares
from the date of issuance through up to three years. The transaction was
structured as a merger of CAMC with and into INMC.
Prior to the sale, CAMC received certain management fees and incentive
compensation. During the fiscal years ended February 28, 1998 and 1997, CAMC
earned $0.6 million and $1.6 million, respectively, in base management fees from
INMC and its subsidiaries. In addition, during the fiscal years ended 1998 and
1997, CAMC received $3.1 million and $8.6 million, respectively, in incentive
compensation.
Prior to the sale, CAMC incurred many of the expenses related to the
operations of INMC and its subsidiaries, including personnel and related
expenses, subject to reimbursement by INMC. During the fiscal years ended
February 28, 1998 and 1997, the amount of expenses incurred by CHL which were
allocated to CAMC and reimbursed by INMC totaled $16.0 million and $29.2
million, respectively.
Subsequent to the sale, the Company entered into an agreement with INMC
whereby the Company and certain affiliates agreed to provide certain services to
INMC during a transition period. During Fiscal 1999, CHL received $2.6 million
from INMC related to services provided in accordance with the agreement.
Additionally, during Fiscal 1999, the Company received $3.0 million of net
sublease income from INMC.
NOTE M - RELATED PARTY TRANSACTIONS (Continued)
INMC held an option to purchase conventional loans from CHL at the
prevailing market price. During the years ended February 28, 1999, 1998 and
1997, INMC purchased $460.2 million, $2.9 million and $51.5 million,
respectively, of conventional non-conforming mortgage loans from CHL pursuant to
this option. Additionally, during Fiscal 1999, CHL purchased $76.4 million of
loans from INMC.
During Fiscal 1999, CHL entered into an agreement pursuant to which CHL
assumed certain INMC recourse obligations with respect to the underlying
mortgage loans that INMC had previously sold to Freddie Mac. In consideration of
CHL's assumption of these recourse obligations, CHL received $6.0 million which
Management believes will exceed the actual loss experience. A portion of the
$6.0 million is subject to reimbursement to INMC based upon actual loss
experience on the loans.
During Fiscal 1999, CHL purchased servicing rights from INMC for $35.5
million related to a $2.7 billion portfolio of loans.
Prior to August 1998, CHL serviced mortgage loans issued by subsidiaries of
INMC. CHL received $1.7 million, $1.9 million and $0.6 million in subservicing
fees for the years ended February 28, 1999, 1998 and 1997, respectively. As of
February 28, 1999, CHL was no longer actively servicing mortgage loans issued by
subsidiaries of INMC.
NOTE N - SEGMENTS AND RELATED INFORMATION
The Company has three major segments: Loan Production, Loan Servicing and
Capital Markets. The Production segment is comprised of the Consumer Markets,
Wholesale and Correspondent Divisions and Full Spectrum Lending, Inc. ("the
Divisions"). The Loan Production segment originates and purchases conventional
mortgage loans, mortgage loans insured by the FHA and VA, home equity and
sub-prime loans and sells those loans to permanent investors. The Loan Servicing
segment services on a primarily non-recourse basis substantially all of the
mortgage loans originated and purchased by the Loan Production segment. In
addition, the Loan Servicing segment purchases bulk servicing contracts, also on
a non-recourse basis, to service single-family residential mortgage loans
originated by other lenders. The Capital Markets segment trades securities,
primarily mortgage-related securities, with broker-dealers and institutional
investors and, as an agent, facilitates the purchase and sale of bulk servicing
contracts. Included in the tables below labeled "Other" are the operating
segments that provide ancillary services and certain reclassifications to
conform management reporting to the consolidated financial statements. In
addition, for Fiscal Year 1998, "Other" includes a $57.4 million pre-tax gain on
the sale of a subsidiary.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (See Note A).
- --------------------------------------------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999
- -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
(Dollars in thousands) Loan Loan Capital Consolidated
Production Servicing Markets Other Total
- -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
Non-interest revenues $1,271,934 $506,258 $54,537 $101,036 $1,933,765
Interest earned 721,289 270,355 39,835 (2,413) 1,029,066
Interest charges (603,093) (351,397) (30,592) 1,253 (983,829)
----------- ----------- ------------ ------------ ------------
Net interest income (expense) 118,196 (81,042) 9,243 (1,160) 45,237
----------- ----------- ------------ ------------ ------------
Total revenue $1,390,130 $425,216 $63,780 $99,876 $1,979,002
=========== =========== ============ ============ ============
Segment earnings (pre-tax) $556,213 $24,340 $26,692 $24,560 $631,805
Segment assets $7,093,817 $6,589,224 $1,858,692 $106,523 $15,648,256
- -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE N - SEGMENT AND RELATED INFORMATION (Continued)
- ----------------------------------------------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998
- ------------------------------ ---- -- ------------ -- ----------- -- ----------- -- ------------- -- ------------- --
(Dollars in thousands) Loan Loan Capital Consolidated
Production Servicing Markets Other Total
- ------------------------------ ---- -- ------------ -- ----------- -- ----------- -- ------------- -- ------------- --
Non-interest revenues $685,160 $642,498 $39,717 $125,868 $1,493,243
Interest earned 421,714 3,555 7,810 584,076
150,997
Interest charges (347,240) (608) (827) (568,359)
(219,684)
------------ ----------- ----------- ------------- -------------
------------ ----------- ----------- ------------- -------------
Net interest income (expense) 74,474 2,947 6,983 15,717
(68,687)
------------ ----------- ----------- ------------- -------------
------------ ----------- ----------- ------------- -------------
Total revenue $759,634 $573,811 $42,664 $132,851 $1,508,960
============ =========== =========== ============= =============
============ =========== =========== ============= =============
Segment earnings (pre-tax) $245,121 $215,485 $19,737 $85,203 $565,546
Segment assets $5,969,661 $5,538,912 $295,270 $379,368 $12,183,211
- ------------------------------ ---- -- ------------ -- ----------- -- ----------- -- ------------- -- ------------- --
- --------------------------------------------------------------------------------------------------------------------
For the fiscal year ended February 28, 1997
- ------------------------------ ---- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
(Dollars in thousands) Loan Loan Capital Consolidated
Production Servicing Markets Other Total
- ------------------------------ ---- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
Non-interest revenues $420,944 $599,799 $28,236 $29,925 $1,078,904
Interest earned 336,771 116,937 1,603 1,694 457,005
Interest charges (275,153) (148,330) (109) 145 (423,447)
----------- ----------- ------------ ------------ ------------
Net interest income (expense) 61,618 (31,393) 1,494 1,839 33,558
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
Total revenue $482,562 $568,406 $29,730 $31,764 $1,112,462
=========== =========== ============ ============ ============
=========== =========== ============ ============ ============
Segment earnings (pre-tax) $141,912 $254,227 $12,866 $12,893 $421,898
Segment assets $2,898,920 $4,516,131 $104,640 $169,400 $7,689,091
- ------------------------------ ---- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --
NOTE O - SUBSEQUENT EVENTS
On March 24, 1999, the Company declared a cash dividend of $.10 per common
share payable April 30, 1999 to shareholders of record on April 14, 1999.
On April 14, 1999, CHL renewed its one-year revolving credit facility with
a revised limit of $1.0 billion. The new facility expires on April 12, 2000.
On May 12, 1999 the Company announced that it had entered into a definitive
agreement (the "Agreement") with Woolwich, plc ("Woolwich"), to form a joint
venture (the "Joint Venture") which will provide fee-based mortgage services in
Europe. Under the terms of the Agreement, the Company and Woolwich will each own
approximately 50% of the Joint Venture and will each provide up to approximately
$16 million to the initial capitalization of the Joint Venture. The Joint
Venture is expected to begin operations in the second half of 1999. Woolwich
will engage the Joint Venture to provide fee-based services to its loan
portfolio, which is equivalent to $40 billion, and to its mortgage origination
business, which produced approximately $10 billion in 1998.
NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data was as follows.
---- ----------------------------------------- ---- ------------------------------------------------- --------
Three months ended
(Dollar amounts in thousands, except per share dataMay 31 August 31 November 30 February 28
-------------- --------------- -------------- ----------------
----------------------------------------------- -------------- --------------- -------------- ----------------
Year ended February 28, 1999
Revenue $450,265 $482,157 $514,197 $532,383
Expenses 301,488 326,293 353,589 365,827
Provision for income taxes 58,023 60,787 62,637 64,957
Net earnings 90,754 95,077 97,971 101,599
Earnings per share(1)
Basic $0.82 $0.86 $0.88 $0.90
Diluted $0.78 $0.81 $0.84 $0.86
Year ended February 28, 1998
Revenue $318,645 $405,156 $375,141 $410,018
Expenses 203,942 225,272 243,693 270,507
Provision for income taxes 44,734 70,155 51,265 54,409
Net earnings $69,969 $109,729 $80,183 $85,102
Earnings per share(1)
Basic $0.66 $1.03 $0.75 $0.78
Diluted $0.64 $0.98 $0.71 $0.74
----------------------------------------------- -------------- --------------- -------------- ----------------
(1) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share amounts
may not equal the annual amount. This is caused by rounding and the
averaging effect of the number of share equivalents utilized throughout the
year, which changes with the market price of the common stock.
NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for Countrywide Home Loans, Inc. was as
follows.
---- ----------------------------------------- ---- ------------------------------------------------- ---------
February 28,
-------------- ----------- -------------- ---------
(Dollar amounts in thousands) 1999 1998
---- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $ 6,231,220 $ 5,292,191
Mortgage servicing rights, net 4,496,439 3,612,010
Other assets 2,955,382 2,604,372
============== ==============
Total assets $13,683,041 $11,508,573
============== ==============
Short- and long-term debt $9,910,966 $ 8,747,794
Other liabilities 1,434,727 1,027,884
Equity 2,337,348 1,732,895
============== ==============
Total liabilities and equity $13,683,041 $11,508,573
============== ==============
---- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (Continued)
----- ----------------------------------------- --- --------------------------------------------------- --------
Year ended February 28,
--------------- ---------- --------------- ---------
(Dollar amounts in thousands) 1999 1998
----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings:
Revenues $1,668,627 $1,260,657
Expenses 1,149,886 838,909
Provision for income taxes 202,308 164,166
=============== ===============
Net earnings $ 316,433 $ 257,582
=============== ===============
NOTE R - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement becomes
effective in the fiscal year ending February 28, 2001. The Company has not yet
determined the impact upon adoption of this standard on the Consolidated
Financial Statements.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No.65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interest
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998 and, as a consequence, reclassified
mortgage-backed securities retained in securitization as available-for-sale
securities.
-
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COUNTRYWIDE CREDIT INDUSTRIES, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
February 28,
-------------- -- --------------
1999 1998
-------------- --------------
Assets
Cash $ 852 $ -
Intercompany receivable 225,333 278,966
Investment in subsidiaries at equity in net assets 2,515,614 1,846,298
Equipment and leasehold improvements 79 88
Other assets 190,178 207,005
-------------- --------------
Total assets $2,932,056 $2,332,357
============== ==============
Liabilities and Shareholders' Equity
Intercompany payable $ 347,416 $ 133,240
Accounts payable and accrued liabilities 30,903 47,566
Deferred income taxes 23,681 56,039
--------------
--------------
Total liabilities 402,000 236,845
Common shareholders' equity
Common stock 5,631 5,460
Additional paid-in capital 1,153,673 1,049,364
Unrealized gain on available-for-sale securities (8,422) 11,267
Retained earnings 1,379,174 1,029,421
-------------- --------------
Total shareholders' equity 2,530,056 2,095,512
-------------- --------------
Total liabilities and shareholders' equity $2,932,056 $2,332,357
============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
Year ended February 28,
-------------- -- -------------- -- --------------
1999 1998 1997
-------------- -------------- --------------
Revenue
Interest earned $ 1,261 $ 6,421 $ 1,148
Interest charges (4,151) - -
-------------- -------------- --------------
Net interest income (2,890) 6,421
Gain on sale of subsidiary - 57,381 -
Dividend income 8,287 10,350 1,550
-------------- -------------- --------------
5,397 74,152
Expenses (3,772) (3,414) (3,398)
-------------- -------------- --------------
Earnings (loss) before income tax (provision) benefit and
equity in net earnings of subsidiaries 1,625 70,738
Income tax (provision) benefit (634) (27,588) 273
-------------- -------------- --------------
Earnings (loss) before equity in net earnings of subsidiaries 991 43,150
Equity in net earnings of subsidiaries 384,410 301,833 257,785
-------------- -------------- --------------
NET EARNINGS $385,401 $344,983 $257,358
============== ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(Dollar amounts in thousands)
Year ended February 28,
-------------- -- -------------- -- --------------
1999 1998 1997
-------------- -------------- --------------
Cash flows from operating activities:
Net earnings $385,401 $344,983 $257,358
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Earnings of subsidiaries (384,410) (301,833) (257,785)
Depreciation and amortization 28 26 24
Decrease (Increase) in other receivables and other assets 9,370 (85,647) (1,644)
(Decrease) Increase in accounts payable and accrued liabilities (50,154) 44,039 5,534
Gain on sale of subsidiary - (57,381) -
Gain on sale of available-for-sale securities - (2,593) -
-------------- -------------- --------------
Net cash provided (used) by operating activities (39,765) (58,406) 3,487
-------------- -------------- --------------
Cash flows from investing activities:
Net change in intercompany receivables and payables 267,809 (53,066) (44,901)
Investment in subsidiaries (284,906) 15,876 (6,832)
Proceeds from available-for-sale securities - 3,678 -
-------------- -------------- --------------
Net cash (used) provided by investing activities (17,097) (33,512) (51,733)
-------------- -------------- --------------
Cash flows from financing activities:
Issuance of common stock 93,362 126,309 81,235
Cash dividends paid (35,648) (34,391) (32,989)
-------------- -------------- --------------
Net cash provided (used) by financing activities 57,714 91,918 48,246
-------------- -------------- --------------
Net change in cash 852 - -
Cash at beginning of year - - -
-------------- -------------- --------------
Cash at end of year $ 852 $ - $ -
============== ============== ==============
Supplemental cash flow information:
Cash used to pay interest $ 97 - -
Cash used to pay income taxes - - -
Noncash financing activities - issuance of common stock
to acquire subsidiary - - $ 16,717
Unrealized gain (loss) on available-for-sale securities,
net of tax $ (19,689) $ 11,267 -
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF COMPREHENSIVE INCOME
Year Ended February 28,
(Dollar amounts in thousands)
Year ended February 28,
-------------- -- --------------
1999 1998
-------------- --------------
Net Earnings $385,401 $344,983
Other comprehensive income, net of taxes:
Unrealized gains (losses) on available for sale securities
Unrealized holding gains (losses) arising during the period: (19,689) 11,267
Less: reclassification adjustment for gains included in net earnings - -
-------------- --------------
Other comprehensive income (19,689) 11,267
============== ==============
COMPREHENSIVE INCOME $365,712 $356,250
============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended February 28, 1999
(Dollar amounts in thousands)
Column A Column B Column C Column D Column E
- ----------------------------------- -------------- --------------------------------- ----------------- --------------
Additions
---------------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
of period expenses accounts Deductions (1) of period
- ----------------------------------- -------------- --------------- ---------------- ------------------ -------------
Year ended February 28, 1999
Allowance for losses $34,678 $30,556 $ 346 $25,280 $40,300
Year ended February 28, 1998
Allowance for losses $24,749 $31,456 $ 296 $21,823 $34,678
Year ended February 28, 1997
Allowance for losses $15,635 $21,064 $ 242 $12,192 $24,749
- -----------------------------------
(1) Actual losses charged against reserve, net of recoveries and
reclassification.
Exhibit List
Exhibit
No. Description
---------- ------------------------------------------------------------
+4.16 First Supplemental Trust Deed dated 16th December, 1998,
modifying the provisions of a Trust Deed dated 1st May, 1998
among CHL, the Company and Bankers Trustee Company Limited, as
Trustee for Euro Medium Notes of CHL.
+10.2.1 Third Restated Employment Agreement by and between the
Company and David S. Loeb in effect as of March 1, 1999.
+10.4.1 Employment Agreement by and between the Company and Stanford
L. Kurland, dated as of March 1, 1999.
+10.7.1 First Amendment to Countrywide Credit Industries, Inc.
Deferred Compensation Plan Amended and Restated effective January
1, 1999.
+10.8.5 Second Amendment to Revolving Credit Agreement dated
as of the 14th day of April, 1999 by and among CHL, the
Lenders under (as that term is defined in ) the Revolving
Credit Agreement dated as of April 15, 1998 and Royal Bank
of Canada, as lead administrative agent for the Lenders.
+10.23.2* Amended and Restated Supplemental Executive
Retirement Plan (incorporated by reference to Exhibit
10.23.1 to the Company's Annual Report on Form 10-K dated
February 28, 1998).
21 Subsidiaries of Registrant.
24.1 Consent of Grant Thornton LLP.
11.1 Statement Regarding Computation of Earnings Per Share.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
27 Financial Data Schedules (included only with the electronic
filing with the SEC).
+Constitutes a management contract or compensatory plan or arrangement.