UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ___________________
Commission File Number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2641992
- -------------------------------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4500 Park Granada, Calabasas, California 91302
- ------------------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(818) 225-3000
---------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 14, 1998
----- -------------------------------
Common Stock $.05 par value 111,863,353
<PAGE>
Page 2
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollar amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
August 31, February 28,
1998 1998
------------------ -------------------
<S> <C> <C>
Cash $ 32,710 $ 10,707
Mortgage loans and mortgage-backed securities held for sale 5,503,396 5,292,191
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 260,031 226,330
Mortgage servicing rights, net 3,880,270 3,612,010
Other assets 4,574,856 3,077,943
------------------ -------------------
Total assets $14,251,263 $12,219,181
================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $4,521,343 $3,945,606
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $8,530,351 $7,475,221
Drafts payable issued in connection with mortgage loan closings 467,598 764,285
Accounts payable, accrued liabilities and other 1,411,934 518,648
Deferred income taxes 998,298 873,084
------------------ -------------------
Total liabilities 11,408,181 9,631,238
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities
of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 500,000
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $0.05 par
value; issued and outstanding, 111,463,471 shares at August
31, 1998 and 109,205,579 shares at February 28, 1998 5,573 5,460
Additional paid-in capital 1,116,082 1,049,365
Accumulated other comprehensive income 23,871 3,697
Retained earnings 1,197,556 1,029,421
------------------ -------------------
Total shareholders' equity 2,343,082 2,087,943
------------------ -------------------
Total liabilities and shareholders' equity $14,251,263 $12,219,181
================== ===================
Borrower and investor custodial accounts $4,521,343 $3,945,606
================== ===================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Page 5
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollar amounts in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Six Months
Ended August 31, Ended August 31,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues
<S> <C> <C> <C> <C>
Loan origination fees $ 157,036 $ 65,155 $ 295,806 $ 118,654
Gain on sale of loans, net of commitment fees 171,805 95,396 330,832 185,631
-------------- -------------- -------------- --------------
Loan production revenue 328,841 160,551 626,638 304,285
Interest earned 188,289 103,682 368,241 185,862
Interest charges (178,662) (99,988) (347,082) (181,822)
-------------- -------------- -------------- --------------
Net interest income 9,627 3,694 21,159 4,040
Loan servicing income 251,483 221,768 494,174 436,083
Amortization and impairment/recovery of
mortgage servicing rights (440,962) (105,385) (590,304) (131,341)
Servicing hedge benefit (expense) 289,230 33,462 289,861 (11,281)
-------------- -------------- -------------- --------------
Net loan administration income 99,751 149,845 193,731 293,461
Commissions, fees and other income 43,938 33,685 90,894 64,634
Gain on sale of subsidiary - 57,381 - 57,381
-------------- -------------- -------------- --------------
Total revenues 482,157 405,156 932,422 723,801
Expenses
Salaries and related expenses 161,753 100,544 308,240 188,585
Occupancy and other office expenses 66,140 41,422 128,817 79,488
Guarantee fees 45,354 42,812 90,021 85,388
Marketing expenses 15,589 10,322 30,104 20,642
Other operating expenses 37,457 30,172 70,599 55,111
-------------- --------------
-------------- --------------
Total expenses 326,293 225,272 627,781 429,214
-------------- -------------- -------------- --------------
Earnings before income taxes 155,864 179,884 304,641 294,587
Provision for income taxes 60,787 70,155 118,810 114,889
-------------- -------------- -------------- --------------
NET EARNINGS $ 95,077 $ 109,729 $ 185,831 $ 179,698
============== ============== ============== ==============
Earnings per share
Basic $0.86 $1.03 $1.68 $1.69
Diluted $0.81 $0.98 $1.59 $1.63
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six Months
Ended August 31,
1998 1997
---------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 185,831 $ 179,698
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sale of available-for-sale securities (14,846) -
Gain on sale of subsidiary - (57,381)
Amortization and impairment/recovery of mortgage
servicing rights 590,304 131,341
Depreciation and other amortization 26,834 22,769
Deferred income taxes 118,810 114,574
Origination and purchase of loans held for sale (43,809,607) (19,921,289)
Principal repayments and sale of loans 43,598,402 18,767,433
---------------- ----------------
Increase in mortgage loans and mortgage-backed
securities held for sale (211,205) (1,153,856)
Increase in other assets (1,506,858) (686,831)
Increase in accounts payable and accrued liabilities 893,286 382,884
---------------- ----------------
Net cash provided (used) by operating activities 82,156 (1,066,802)
---------------- ----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (858,564) (473,653)
Purchase of property, equipment and leasehold
improvements - net (53,036) (32,290)
Proceeds from sale of available-for-sale securities 49,676 -
---------------- ----------------
Net cash used by investing activities (861,924) (505,943)
---------------- ----------------
Cash flows from financing activities:
Net (decrease) increase in warehouse debt and other
short-term borrowings (921,976) 1,319,563
Issuance of long-term debt 1,824,315 365,000
Repayment of long-term debt (143,896) (336,732)
Issuance of Company obligated mandatorily redeemable
securities of subsidiary trusts holding company guaranteed
related subordinated debt - 200,000
Issuance of common stock 61,024 41,292
Cash dividends paid (17,696) (17,071)
---------------- ----------------
Net cash provided by financing activities 801,771 1,572,052
---------------- ----------------
Net increase (decrease) in cash 22,003 (693)
Cash at beginning of period 10,707 18,269
================ ================
Cash at end of period $ 32,710 $ 17,576
================ ================
Supplemental cash flow information:
Cash used to pay interest $ 371,491 $ 188,589
Cash used to pay income taxes $ 1,279 $ 52
Noncash financing activities:
Unrealized gain (loss) on available-for-sale securities,
net of tax $ 20,174 $ (427)
The accompanying notes are an integral part of these statements.
</TABLE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended August 31, Ended August 31,
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
NET EARNINGS $95,077 $109,729 $185,831 $179,698
Other comprehensive income, net of taxes:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period 19,809 8,746 29,230 (427)
Less: reclassification adjustment for gains
included in net earnings (7,600) - (9,056) -
-------------- ------------- -------------- -------------
Other comprehensive income 12,209 8,746 20,174 (427)
-------------- ------------- -------------- -------------
COMPREHENSIVE INCOME $107,286 $118,475 $206,005 $179,271
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the quarter ended August 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 28, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on Form
10-K for the fiscal year ended February 28, 1998 of Countrywide Credit
Industries, Inc. (the "Company").
Certain amounts reflected in the consolidated financial statements for the
six-months period ended August 31, 1997 have been reclassified to conform to the
presentation for the six-months period ended August 31, 1998.
NOTE B - MORTGAGE SERVICING RIGHTS
The activity in mortgage servicing rights was as follows.
<TABLE>
<CAPTION>
--------------------------------------------- ---------------------- -----------------------
Six Months
Ended
(Dollar amounts in thousands) August 31, 1998
--------------------------------------------- -- ---------------- -- ------------------- ---
Mortgage Servicing Rights
<S> <C>
Balance at beginning of period $3,653,318
Additions 858,564
Scheduled amortization (268,986)
Hedge losses (gains) applied (317,267)
-------------------
Balance before valuation reserve
at end of period 3,925,629
-------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (41,308)
Reductions (additions) (4,051)
------------------
Balance at end of period (45,359)
==================
Mortgage Servicing Rights, net $3,880,270
==================
--------------------------------------------- -- ---------------- -- ------------------ ----
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Page 7
NOTE C - OTHER ASSETS
Other assets consisted of the following.
<TABLE>
<CAPTION>
------------------------------------------------------------------ -------------------- -------------------------
(Dollar amounts in thousands) August 31, 1998 February 28, 1998
------------------------------------------------------------------ -------------------- -------------------------
<S> <C> <C>
Servicing hedge instruments $ 1,266,694 $ 801,335
Trading securities 972,666 255,216
Receivables related to broker-dealer activities 586,282 148,976
Mortgage-backed securities retained in securitization 460,055 466,259
Rewarehoused FHA and VA loans 326,269 426,407
Servicing related advances 197,029 231,437
Loans held for investment 102,977 115,713
Accrued interest 96,814 84,601
Equity securities 89,598 96,152
Other 476,472 451,847
----------------- ----------------
$4,574,856 $3,077,943
================= ================
------------------------------------------------------------------ -- ----------------- --- ---------------- ----
</TABLE>
NOTE D - AVAILABLE FOR SALE SECURITIES
Amortized cost and fair value of available for sale securities were as
follows.
<TABLE>
<CAPTION>
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
August 31, 1998
---------------- - ------------------------------------ -- ----------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
<S> <C> <C> <C>
CMOs $171,766 $27,215 - $198,981
Equity Securities 7,315 11,917 - 19,232
================ ================= ================ ================
$179,081 $39,132 - $218,213
================ ================= ================ ================
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
</TABLE>
<TABLE>
<CAPTION>
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 28, 1998
---------------- - ------------------------------------ -- ----------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
<S> <C> <C> <C>
CMOs $204,234 - ($12,411) $191,823
Equity Securities 7,315 18,471 - 25,786
================ ================= ================ ================
$211,549 $18,471 ($12,411) $217,609
================ ================= ================ ================
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
</TABLE>
<PAGE>
NOTE E - NOTES PAYABLE
Notes payable consisted of the following.
<TABLE>
<CAPTION>
------------------------------------------------------------------ -------------------- -------------------------
(Dollar amounts in thousands August 31, 1998 February 28, 1998
------------------------------------------------------------------ -------------------- -------------------------
<S> <C> <C>
Commercial paper $1,884,208 $2,119,330
Medium-term notes, Series A, B, C, D, E, F, G and Euro 5,819,500 4,137,185
Repurchase agreements 625,954 181,121
Subordinated notes 200,000 200,000
Unsecured notes payable - 835,000
Other notes payable 689 2,585
================= ================
$8,530,351 $7,475,221
================= ================
------------------------------------------------------------------ -- ----------------- --- ---------------- ----
</TABLE>
Revolving Credit Facility and Commercial Paper
As of August 31, 1998, Countrywide Home Loans, Inc. ("CHL"), the Company's
mortgage banking subsidiary, had an unsecured credit agreement (revolving credit
facility) with forty-five commercial banks permitting CHL to borrow an aggregate
maximum amount of $4.0 billion. This revolving credit facility consists of a
five year facility of $3.0 billion, which expires on September 24, 2002, and a
one year facility of $1.0 billion which was extended on September 23, 1998 to
September 22, 1999. The facility contains various financial covenants and
restrictions, certain of which limit the amount of dividends that can be paid by
the Company or CHL. As consideration for the facility, CHL pays annual
commitment fees of $3.8 million. On April 15, 1998, CHL entered into an
additional one year unsecured credit agreement (revolving credit facility),
which expires April 14, 1999, with sixteen of the forty-five banks referenced
above for total commitments of $1.3 billion. This facility contains terms
consistent with the $4.0 billion revolving credit facility and as consideration
for the facility, CHL pays annual commitment fees of $1.05 million. The purpose
of the revolving credit facilities is to provide liquidity back-up for CHL's
$5.3 billion commercial paper program. No amount was outstanding under either
revolving credit facility at August 31, 1998.
The interest rate on direct borrowings is based on a variety of sources,
including the prime rate and the London Interbank Offered Rates ("LIBOR") for
U.S. dollar deposits. This interest rate varies, depending on CHL's credit
ratings. The weighted average borrowing rate on commercial paper borrowings for
the six months ended August 31, 1998 was 5.59%. The weighted average borrowing
rate on commercial paper outstanding as of August 31, 1998 was 5.59%.
<PAGE>
NOTE E - NOTES PAYABLE (Continued)
Medium-Term Notes
As of August 31, 1998, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission or
issued by CHL pursuant to its Euro medium-term note program were as follows.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
----------------------- ----------------------------
------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------ ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 5.27 % 8.43 % Apr. 1999 Mar. 2004
Series D 75,000 385,000 460,000 6.00 % 6.88 % Aug. 2000 Sep. 2005
Series E 310,000 690,000 1,000,000 5.75 % 7.45 % Feb. 2000 Oct. 2008
Series F 656,000 1,344,000 2,000,000 5.59 % 7.00 % Oct. 1999 May 2013
Series G 550,000 25,000 575,000 5.66 % 7.00 % Jul. 1999 Aug. 2018
Euro Notes 855,000 - 855,000 5.69 % 6.16 % Jul. 1999 Aug. 2008
------------------------------------------
Total $ 2,654,000 $ 3,165,500 $ 5,819,500
==========================================
</TABLE>
- --------------------------------------------------------------------------------
As of August 31, 1998, all of the outstanding fixed-rate notes had been
effectively converted through interest rate swap agreements to floating-rate
notes. The weighted average borrowing rate on medium-term note borrowings for
the six months ended August 31, 1998, including the effect of the interest rate
swap agreements, was 6.08%.
Repurchase Agreements
As of August 31, 1998, the Company had entered into short-term financing
arrangements to sell mortgage-backed securities ("MBS") under agreements to
repurchase. The weighted average borrowing rate for the six months ended August
31, 1998 was 5.64%. The weighted average borrowing rate on repurchase agreements
outstanding as of August 31, 1998 was 5.69%. The repurchase agreements were
collateralized by MBS. All MBS underlying repurchase agreements are held in
safekeeping by broker-dealers, and all agreements are to repurchase the same or
substantially identical MBS.
NOTE E - NOTES PAYABLE (Continued)
Pre-Sale Funding Facilities
As of August 31, 1998, CHL had uncommitted revolving credit facilities with
the Federal National Mortgage Association ("Fannie Mae") and the Federal Home
Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by
conforming mortgage loans which are in the process of being pooled into MBS.
Interest rates are based on LIBOR, federal funds and/or the prevailing rates for
MBS repurchase agreements. The weighted average borrowing rate for all such
facilities for the six months ended August 31, 1998 was 5.70%. As of August 31,
1998, the Company had no outstanding borrowings under any of these facilities.
NOTE F - FINANCIAL INSTRUMENTS
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
<TABLE>
<CAPTION>
- ------------------------------------- ------------------- -------------------- ------------------- ---------------------
(Dollar amounts in millions) Balance, Balance,
February 28, 1998 Dispositions/ August 31,
Additions Expirations 1998
- ------------------------------------- ------------------- -------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Interest Rate Floors $33,000 7,500 (5,500) $35,000
Long Call Options on
Interest Rate Futures $79,400 26,520 (42,720) $63,200
Long Put Options on
Interest Rate Futures $ 9,800 15,350 (1,350) $23,800
Short Call Options on
Interest Rate Futures $ - 20,000 (16,000) $ 4,000
Interest Rate Futures $ 5,000 10,000 - $15,000
Capped Swaps $ 1,000 - - $ 1,000
Interest Rate Swaps $ 3,900 7,500 - $11,400
Interest Rate Cap $ 4,500 - - $ 4,500
Swaptions $ 1,850 17,500 - $19,350
Options on Callable
Pass-through Certificates $ 2,561 800 - $ 3,361
- ------------------------------------- ------------------- -------------------- ------------------- ---------------------
</TABLE>
NOTE G - LEGAL PROCEEDINGS
For a discussion of Briggs v. Countrywide, et. al and two similar cases, see the
Company's report on Form 10Q for the quarter ended May 31, 1998.
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position or results of operations
of the Company and its subsidiaries.
NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for CHL was as follows.
<TABLE>
<CAPTION>
-- ----------------------------------------- ---- ------------------------------------------------- ---------
(Dollar amounts in thousands) August 31, 1998 February 28, 1998
-- ---------------------------------------------- --------------------------- -- ----------------------------
Balance Sheets:
Mortgage loans and mortgage-backed
<S> <C> <C>
securities held for sale $ 5,503,396 $ 5,292,191
Other assets 7,024,914 6,216,382
============== ==============
Total assets $12,528,310 $11,508,573
============== ==============
Debt $ 8,964,797 $ 8,747,794
Other liabilities 1,366,228 1,027,884
Equity 2,197,285 1,732,895
============== ==============
Total liabilities and equity $12,528,310 $11,508,573
============== ==============
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
</TABLE>
<TABLE>
<CAPTION>
--- ----------------------------------------- --- -------------------------------------------------- --------
(Dollar amounts in thousands) Six Months Ended August 31,
--------------- ---------- ---------------
1998 1997
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
Statements of Earnings:
<S> <C> <C>
Revenues $790,473 $587,995
Expenses 542,574 387,833
Provision for income taxes 96,681 77,747
=============== ===============
Net earnings $151,218 $122,415
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
</TABLE>
NOTE I - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This statement becomes effective in the fiscal year ending February
28, 2001. The Company has not yet determined the impact on the Consolidated
Financial Statements upon adoption of this Standard.
NOTE J - SUBSEQUENT EVENTS
On September 23, 1998, CHL entered into an extension of its one year
revolving credit facility which extended that facility to September 22, 1999.
On September 23, 1998, the Company declared a cash dividend of $0.08 per common
share payable November 2, 1998 to shareholders of record on October 15, 1998.
NOTE K - EARNINGS PER SHARE
On February 28, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS No. 128"), which supersedes
Accounting Principles Board Opinion No. 15 of the same name. SFAS No. 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards. SFAS No.128 was effective for financial
statements issued for periods ending after December 15, 1997, with earlier
applicationnot permitted. Upon adoption, all prior EPS data was restated.
Basic EPS is determined using net income divided by the weighted average
shares outstanding during the period. Diluted EPS is computed by dividing net
income by the weighted average shares outstanding, assuming all dilutive
potential common shares were issued.
The following table presents basic and diluted EPS for the three and six month
periods ended August 31, 1998 and 1997, computed under the provisions of SFAS
No. 128.
<TABLE>
<CAPTION>
- ------------------------ -- -- ----- ------------------------------------ -- ----- ------
Three Months Ended August 31,
-- -- ----- ------------------------------------ -- ----- ------
1998 1997
----------- -------- --------- --------- --------- ----------
(Dollar amounts in
thousands, except per Net Per-Share Net Per-Share
share data) Earnings Shares Amount Earnings Shares Amount
- ------------------------ -------- -------- --------- --------- -------- ----------
Net earnings $ 95,077 $109,729
=========== =========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C>
to common shareholders $ 95,077 111,153 $ 0.86 $109,729 107,052 $1.03
Effect of dilutive
stock options - 6,207 - 4,271
----------- -------- --------- ---------
Diluted EPS
Net earnings available
to common shareholders $ 95,077 117,360 $ 0.81 $109,729 111,323 $0.98
=========== ======== ========= ========= ========= ----------
</TABLE>
- ------------------------ ----------- -------- --------- -- --------- ---------
<TABLE>
<CAPTION>
- ------------------------ -- -- ----- ------------------------------------ -- ----- ------
Six Months Ended August 31,
-- -- ----- ------------------------------------ -- ----- ------
1998 1997
----------- -------- --------- ---------- -------- ----------
(Dollar amounts in
thousands, except per Net Per-Share Net Per-Share
share data) Earnings Shares Amount Earnings Shares Amount
- ------------------------ --------- -------- --------- --------- -------- ----------
Net earnings $ 185,831 $ 179,698
=========== ==========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C>
to common shareholders $ 185,831 110,640 $ 1.68 $ 179,698 106,655 $1.69
Effect of dilutive
stock options - 6,260 - 3,588
----------- -------- ---------- --------
Diluted EPS
Net earnings available
to common shareholders $ 185.831 116,900 $ 1.59 $ 179,698 110,243 $1.63
=========== ======== ========= ========== ======== ----------
</TABLE>
- ------------------------ ----------- -------- --------- -- ---------- --------
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Page 21
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q may contain forward-looking statements that reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate," "should" and other expressions
which indicate future events and trends identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. The following
factors could cause actual results to differ materially from historical results
or those anticipated: (1) the level of demand for mortgage credit, which is
affected by such external factors as the level of interest rates, the strength
of the various segments of the economy and demographics of the Company's lending
markets; (2) the direction of interest rates; (3) the relationship between
mortgage interest rates and the cost of funds; (4) federal and state regulation
of the Company's mortgage banking operations; and (5) competition within the
mortgage banking industry.
RESULTS OF OPERATIONS
Quarter Ended August 31, 1998 Compared to Quarter Ended August 31, 1997
Revenues from ongoing operations for the quarter ended August 31, 1998
increased 39% to $482.2 million from $347.8 million for the quarter ended August
31, 1997. Net earnings from ongoing operations increased 27% to $95.1 million
for the quarter ended August 31, 1998 from $74.7 million for the quarter ended
August 31, 1997. Both revenues and net earnings from ongoing operations for the
quarter ended August 31, 1997 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 the quarter ended August 31, 1998 compared to the
quarter ended August 31, 1997 was primarily attributable to higher loan
production volume for the quarter ended August 31, 1998. An increase in the size
of the Company's servicing portfolio also contributed to the increase in
revenues and net earnings for the quarter ended August 31, 1998 compared to the
quarter ended August 31, 1997. These positive factors were partially offset by
an increase in amortization of the servicing asset and an increase in expenses
for the quarter ended August 31, 1998 over the quarter ended August 31, 1997.
The total volume of loans produced increased 117% to $22.9 billion for the
quarter ended August 31, 1998 from $10.6 billion for the quarter ended August
31, 1997. The increase in loan production was primarily due to generally lower
interest rates that prevailed during the quarter ended August 31, 1998 compared
to the quarter ended August 31, 1997, as well as to the continued expansion of
the Company's Consumer Markets and Wholesale Lending Divisions. Refinancings
totaled $11.4 billion, or 50% of total fundings, for the quarter ended August
31, 1998, as compared to $3.0 billion, or 28% of total fundings, for the quarter
ended August 31, 1997. Fixed-rate mortgage loan production totaled $21.7
billion, or 95% of total fundings, for the quarter ended August 31, 1998, as
compared to $7.3 billion, or 70% of total fundings, for the quarter ended August
31, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Total loan volume in the Company's production Divisions is summarized below.
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Three Months Ended August 31,
- -------------------------------------------- ------------------------------------ --------
1998 1997
------------- -------------
<S> <C> <C>
Consumer Markets Division $ 7,258 $ 3,025
Wholesale Lending Division 7,527 3,169
Correspondent Lending Division 7,962 4,367
Full Spectrum Lending, Inc. 187 -
============= =============
Total Loan Volume $22,934 $10,561
============= =============
</TABLE>
- -------------------------------------------- ------------- -------- -----------
The factors that affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's product
offerings, the level of mortgage lending activity in each Division's market and
the success of each Division's sales and marketing efforts.
Included in the Company's total volume of loans produced is $613 million of
home equity loans funded in the quarter ended August 31, 1998 and $377 million
funded in the quarter ended August 31, 1997. Sub-prime loan production, which is
also included in the Company's total production volume, was $872 million in the
quarter ended August 31, 1998 and $388 million in the quarter ended August 31,
1997.
At August 31, 1998 and 1997, the Company's pipeline of loans in process was
$13.1 billion and $6.0 billion, respectively. Historically, approximately 43% to
77% of the pipeline of loans in process has funded. In addition, at August 31,
1998, the Company had committed to make loans in the amount of $1.3 billion,
subject to property identification and approval of the loans (the "LOCK 'N SHOP
(R) Pipeline"). At August 31, 1997, the LOCK 'N SHOP Pipeline was $1.2 billion.
For the quarters ended August 31, 1998 and 1997, the Company received 287,748
and 153,223 new loan applications, respectively, at an average daily rate of
$499 million and $252 million, respectively. The factors that affect the
percentage of applications received and funded during a given time period
include the movement and direction of interest rates, the average length of loan
commitments issued, the creditworthiness of applicants, the production
Divisions' loan processing efficiency and loan pricing decisions.
Loan origination fees increased during the quarter ended August 31, 1998 as
compared to the quarter ended August 31, 1997 due to higher production and a
change in the Divisional mix. 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
the quarter ended August 31, 1998 than in the quarter ended August 31, 1997.
Gain on sale of loans improved in the quarter ended August 31, 1998 as compared
to the quarter ended August 31, 1997 primarily due to higher loan production
volume during the quarter ended August 31, 1998. The sale of home equity loans
contributed $17.3 million and $16.1 million to gain on sale of loans in the
quarters ended August 31, 1998 and 1997, respectively. Sub-prime loans
contributed $26.9 million and $18.2 million to the gain on sale of loans for the
quarters ended August 31, 1998 and 1997, respectively. In general, loan
origination fees and gain (loss) on sale of loans are affected by numerous
factors including the volume and mix of loans produced and sold, loan pricing
decisions, interest rate volatility and the general direction of interest rates.
<PAGE>
Net interest income (interest earned net of interest charges) increased to
$9.6 million for the quarterended August 31, 1998 from $3.7 million for the
quarter ended August 31, 1997. Net interest income is principally a function of:
(i) net interest income earned from the Company's mortgage loan inventory ($31.8
million and $18.3 million for the quarters ended August 31, 1998 and 1997,
respectively); (ii) interest expense related to the Company's investment in
servicing rights ($88.5 million and $51.5 million for the quarters ended August
31, 1998 and 1997, respectively) and (iii) interest income earned from the
custodial balances associated with the Company's servicing portfolio ($66.3
million and $34.5 million for the quarters ended August 31, 1998 and 1997,
respectively). The Company earns interest on, and incurs interest expense to
carry, mortgage loans held in inventory. The increase in net interest income
from the mortgage loan inventory was primarily attributable to higher production
levels. The increase in interest expense on the investment in servicing rights
resulted primarily from a larger servicing portfolio and an increase in the
payments of interest to certain investors pursuant to customary servicing
arrangements with regard to paid-off loans in excess of the interest earned on
these loans through their respective payoff dates ("Interest Costs Incurred on
Payoffs"). The increase in net interest income earned from the custodial
balances was related to an increase in the average custodial balances (caused by
growth of the servicing portfolio and an increase in the amount of prepayments)
from the quarter ended August 31, 1997 to the quarter ended August 31, 1998.
During the quarter ended August 31, 1998, loan servicing income was
positively affected by the continued growth of the loan servicing portfolio. At
August 31, 1998, the Company serviced $195 billion of loans (including $2.4
billion of loans subserviced for others) compared to $169 billion (including
$5.3 billion of loans subserviced for others) at August 31, 1997, a 15%
increase. The growth in the Company's servicing portfolio during the quarter
ended August 31, 1998 was the result of loan production volume and the
acquisition of bulk servicing rights, partially offset by prepayments, partial
prepayments, scheduled amortization of mortgage loans and the transfer out of
$6.5 billion of subservicing. The weighted average interest rate of the mortgage
loans in the Company's servicing portfolio at August 31, 1998 and 1997 was 7.7%
and 7.8%, respectively. It is the Company's strategy to build and retain its
servicing portfolio because of the returns the Company can earn from such
investment and because the Company believes that servicing income is
counter-cyclical to loan production income. See "Prospective Trends - Market
Factors."
During the quarter ended August 31, 1998, the annual prepayment rate of the
Company's servicing portfolio was 26% compared to 13% for the quarter ended
August 31, 1997. In general, the prepayment rate is affected by the level of
refinance activity, which in turn is driven by the relative level of mortgage
interest rates, and activity in the home purchase market. The increase in the
prepayment rate from the quarter ended August 31, 1997 to the quarter ended
August 31, 1998 was primarily attributable to the increase in refinance activity
caused by lower interest rates during the quarter ended August 31, 1998 than
during the quarter ended August 31, 1997.
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. In addition, to mitigate the effect on
earnings of impairment that may result from increased current and projected
future prepayment activity, the Company acquires financial instruments,
including derivative contracts, that increase in aggregate value when interest
rates decline (the "Servicing Hedge"). These financial instruments include
options on interest rate futures and MBS, interest rate futures, interest rate
floors, interest rate swaps, interest rate swaps (with the Company's maximum
payment capped) ("Capped Swaps"), options on interest rate swaps ("Swaptions"),
interest rate caps, certain tranches of collateralized mortgage obligations
("CMOs") and options on callable pass-through certificates ("options on CPC").
With the Capped Swaps, the Company receives and pays interest on a specified
notional amount. The rate received is fixed; the rate paid is adjustable, is
indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR")
and has a specified maximum or "cap".
With Swaps, the Company receives and pays interest on a specified notional
amount. The rate received is fixed; the rate paid is adjustable and is indexed
to LIBOR.
With the Swaptions, the Company has the option to enter into a
receive-fixed, pay-floating interest rate swap at a future date or to settle the
transaction for cash.
The CMOs, which consist primarily of P/O securities, have been purchased at
deep discounts to their par values. As interest rates decrease, prepayments on
the collateral underlying the CMOs should increase. This should result in a
decline in the average lives of the P/O securities and a corresponding increase
in the present values of their cash flows. Conversely, as interest rates
increase, prepayments on the collateral underlying the CMOs should decrease.
These changes should result in an increase in the average lives of the P/O
securities and a decrease in the present values of their cash flows.
An option on CPC gives the holder the right to call a mortgage-backed
security at par and receive the remaining cash flows from the particular pool.
This option has a one year lockout, meaning it cannot be exercised until the end
of the first year. After the lockout period, the option can be exercised at
anytime.
The Servicing Hedge is designed to protect the value of the investment in
mortgage servicing rights ("MSRs") from the effects of increased prepayment
activity that generally results from declining interest rates. To the extent
that interest rates increase, the value of the MSRs increases while the value of
the hedge instruments declines. With respect to the floors, options, caps,
Swaptions, options on CPC and CMOs, the Company is not exposed to loss beyond
its initial outlay to acquire the hedge instruments. The Company's exposure to
loss on futures is related to changes in the Eurodollar rate over the life of
the contract. The Company estimates that its maximum exposure to loss over the
contractual term is $41.0 million. With respect to the Capped Swaps contracts
entered into by the Company as of August 31, 1998, the Company estimates that
its maximum exposure to loss over the contractual term is $29.9 million. With
respect to the Swap contracts entered into by the Company as of August 31, 1998,
the Company estimates that its maximum exposure to loss over the contractual
term is $229.0 million. In the quarter ended August 31, 1998, the Company
recognized a net benefit of $289.2 million from its Servicing Hedge. The net
benefit included unrealized net gains of $268.0 million and net realized gains
of $21.2 million from premium amortization and the sale of various financial
instruments that comprise the Servicing Hedge. In the quarter ended August 31,
1997, the Company recognized a net benefit of $33.5 million from its Servicing
Hedge. The net benefit included unrealized gains of $30.6 million and net
realized gains of $2.9 million from premium amortization and the sale of various
financial instruments that comprise the Servicing Hedge. There can be no
assurance that the Servicing Hedge will generate gains in the future, or if
gains are generated, that they will fully offset impairment of the MSRs.
The Company recorded amortization and impairment of its MSRs in the quarter
ended August 31, 1998 totaling $441.0 million (consisting of amortization
amounting to $136.1 million and impairment of $304.9 million), compared to
$105.4 million of amortization and impairment (consisting of amortization
amounting to $71.2 million and impairment of $34.2 million) in the quarter ended
August 31, 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.
<PAGE>
<TABLE>
<CAPTION>
Salaries and related expenses are summarized below for the quarters ended
August 31, 1998 and 1997.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended August 31, 1998
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $49,618 $11,475 $22,414 $10,361 $93,868
Incentive Bonus 37,658 151 4,769 5,030 47,608
Payroll Taxes and Benefits 12,121 2,499 4,048 1,609 20,277
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $99,397 $14,125 $31,231 $17,000 $161,753
============ ============= ============= ============= ------------
Average Number of 5,122 1,750 1,764 744 9,380
Employees
</TABLE>
-- --------------------------- -- ------------ -- ------------- -- ---------
<PAGE>
<TABLE>
<CAPTION>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended August 31, 1997
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $31,601 $10,920 $17,169 $5,646 $ 65,336
Incentive Bonus 18,681 319 4,196 2,908 26,104
Payroll Taxes and Benefits 4,961 1,967 1,648 528 9,104
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $55,243 $13,206 $23,013 $9,082 $100,544
============ ============= ============= ============= ------------
Average Number of 3,093 1,619 1,369 422 6,504
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
</TABLE>
The amount of salaries increased during the quarter ended August 31, 1998
reflecting the Company's strategy of expanding and enhancing its Consumer
Markets and Wholesale branch networks, including new retail sub-prime branches.
In addition, growth in the Company's non-mortgage banking subsidiaries and a
larger servicing portfolio contributed to the increase. Incentive bonuses earned
during the quarter ended August 31, 1998 increased primarily due to higher
production and a change in production mix.
Occupancy and other office expenses for the quarter ended August 31, 1998
increased to $66.1 million from $41.4 million for the quarter ended August 31,
1997 primarily due to: (i) the continued effort by the Company to expand its
retail branch network, particularly outside of California; (ii) higher loan
production; (iii) a larger servicing portfolio; and (iv) growth in the Company's
non-mortgage banking activities.
Guarantee fees represent fees paid to guarantee timely and full payment of
principal and interest on MBS and whole loans sold to permanent investors and to
transfer the credit risk of the loans in the servicing portfolio. For the
quarter ended August 31, 1998, guarantee fees increased 6% to $45.4 million from
$42.8 million for the quarter ended August 31, 1997. The increase resulted from
an increase in the servicing portfolio, changes in the mix of permanent
investors and terms negotiated at the time of loan sales.
Marketing expenses for the quarter ended August 31, 1998 increased 51% to
$15.6 million from $10.3 million for the quarter ended August 31, 1997,
reflecting the increased level of mortgage originations, particularly
refinances, as well as the Company's continued implementation of a marketing
plan to increase consumer brand awareness of the Company in the residential
mortgage market.
Other operating expenses for the quarter ended August 31, 1998 increased
from the quarter ended August 31, 1997 by $7.3 million, or 24%. This increase
was due primarily to higher loan production and growth in the Company's
non-mortgage banking subsidiaries in the quarter ended August 31, 1998 as
compared to the quarter ended August 31, 1997.
Profitability of Loan Production and Servicing Activities
In the quarter ended August 31, 1998, the Company's pre-tax earnings from
its loan production activities (which include loan origination and purchases,
warehousing and sales) were $146.6 million. In the quarter ended August 31,
1997, the Company's comparable pre-tax earnings were $49.6 million. The increase
of $97.0 million was primarily attributable to increased production and a shift
in production mix towards the Consumer Markets and Wholesale Divisions. These
positive results were partially offset by higher production costs. In the
quarter ended August 31, 1998, the Company's pre-tax loss from its loan
servicing activities (which include administering the loans in the servicing
portfolio, selling homeowners and other insurance, acting as tax payment agent,
marketing foreclosed properties and acting as reinsurer) was $2.4 million as
compared to pre-tax income of $60.6 million in the quarter ended August 31,
1997. The decrease of $63.0 million was primarily attributed to the increased
amortization of the servicing asset and Interest Costs Incurred on Payoffs due
to declining interest rates and increase in prepayments from the quarter ended
August 31, 1997 to the quarter ended August 31, 1998. These negative factors
were partially offset by the increase in servicing fees, miscellaneous income
and interest earned on escrow balances derived by the larger servicing
portfolio.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title insurance and escrow services, home appraisals, securities
brokerage and servicing rights brokerage. For the quarter ended August 31, 1998,
these activities contributed $11.7 million to the Company's pre-tax income
compared to $12.3 million for the quarter ended August 31, 1997.
During the quarter ended August 31, 1997, Countrywide Asset Management
Corporation, a subsidiary of the Company, was sold to INMC Mortgage Holdings,
Inc. ("INMC"), a publicly traded real estate investment trust for 3.44 million
shares of INMC stock. The impact of this sale on earnings was a $57.4 million
gain on sale recorded in the second quarter of fiscal 1998.
Six Months Ended August 31, 1998 Compared to Six Months Ended August 31, 1997
Revenues from ongoing operations for the six months ended August 31, 1998
increased 40% to $932.4 million from $666.4 million for the six months ended
August 31, 1997. Net earnings from ongoing operations increased 28% to $185.8
million for the six months ended August 31, 1998 from $144.7 million for the six
months ended August 31, 1997. Both revenues and net earnings from ongoing
operations for the six months ended August 31, 1997 exclude a nonrecurring
pre-tax gain of $57.4 million from the sale of a subsidiary. The increase in
revenues and net earnings from ongoing operations for the six months ended
August 31, 1998 compared to the six months ended August 31, 1997 was primarily
attributable to higher loan production for the six months ended August 31, 1998.
These positive factors were partially offset by an increase in amortization and
net impairment of the servicing asset and an increase in expenses for the six
months ended August 31, 1998 over the six months ended August 31, 1997.
The total volume of loans produced increased 120% to $43.8 billion for the
six months ended August 31, 1998 from $19.9 billion for the six months ended
August 31, 1997. Refinancings totaled $23.3 billion, or 53% of total fundings,
for the six months ended August 31, 1998, as compared to $5.8 billion, or 29% of
total fundings, for the six months ended August 31, 1997. Fixed-rate loan
production totaled $41.1 billion, or 94% of total fundings, for the six months
ended August 31, 1998, as compared to $13.7 billion, or 69% of total fundings,
for the six months ended August 31, 1997.
Included in the Company's total volume of loans produced are $1.1 billion of
home equity loans funded in the six months ended August 31, 1998 and $673
million funded in the six months ended August 31, 1997. Sub-prime credit quality
loan production, which is also included in the Company's total production
volume, was $1.4 billion for the six months ended August 31, 1998 and $670
million during the six months ended August 31, 1997.
Total loan volume in the Company's production divisions is summarized
below.
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Six Months Ended August 31,
- -------------------------------------------- ------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Consumer Markets Division $13,259 $ 5,372
Wholesale Lending Division 14,989 5,831
Correspondent Lending Division 15,249 8,718
Full Spectrum Lending, Inc. 313 -
------------- -------------
Total Loan Volume $43,810 $19,921
============= =============
- -------------------------------------------- ------------- -------- ------------- --------
</TABLE>
Loan origination fees increased during the six months ended August 31, 1998
as compared to the six months ended August 31, 1997 due to higher production and
change in the Divisional mix. The Consumer Markets Division and the Wholesale
Lending Division (which, due to their cost structures, charge higher origination
fees per dollar loaned than the Correspondent Division), comprised a greater
percentage of total production in the six months ended August 31, 1998 than in
the six months ended August 31, 1997. Gain on sale of loans improved during the
six months ended August 31, 1998 as compared to the six months ended August 31,
1997 primarily due to higher production.
Net interest income (interest earned net of interest charges) increased to
$21.2 million for the six months ended August 31, 1998 from $4.0 million for the
six months ended August 31, 1997. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($61.8 million and $32.1 million for the six months
ended August 31, 1998 and 1997, respectively); (ii) interest expense related to
the Company's investment in servicing rights ($174.2 million and $96.1 million
for the six months ended August 31, 1998 and 1997, respectively) and (iii)
interest income earned from the custodial balances associated with the Company's
servicing portfolio ($130.9 million and $64.1 million for the six months ended
August 31, 1998 and 1997, respectively). The Company earns interest on, and
incurs interest expense to carry, mortgage loans held in its warehouse. The
increase in interest expense on the investment in servicing rights resulted
primarily from a larger servicing portfolio and an increase in interest costs
incurred on payoffs. The increase in net interest income earned from the
custodial balances was related to an increase in the average custodial balances
(caused by growth of the servicing portfolio and an increase in the amount of
prepayments) from the six months ended August 31, 1997 to the six months ended
August 31, 1998.
During the six months ended August 31, 1998, loan servicing income was
positively affected by the continued growth of the loan servicing portfolio. The
growth in the Company's servicing portfolio during the six months ended August
31, 1998 was the result of loan production volume and the acquisition of bulk
servicing rights, partially offset by prepayments, partial prepayments,
scheduled amortization of mortgage loans and the transfer out of $6.5 billion of
subservicing.
The annual prepayment rate of the Company's servicing portfolio was 27% for
the six months ended August 31, 1998 compared to 12% for the six months ended
August 31, 1997. The increase in the prepayment rate from the six months ended
August 31, 1997 to the six months ended August 31, 1998 was primarily
attributable to the increase in refinance activity caused by lower interest
rates during the six months ended August 31, 1998 than during the six months
ended August 31, 1997.
During the six months ended August 31, 1998, the Company recognized a net
benefit of $289.9 million from its Servicing Hedge. The net benefit included
unrealized gains of $272.7 million and net realized gains of $17.2 million from
the amortization and sale of various financial instruments that comprise the
Servicing Hedge. During the six months ended August 31, 1997, the Company
recognized a net expense of $11.3 million from its Servicing Hedge. The net
expense included unrealized losses of $8.7 million and net realized losses of
$2.6 million from the amortization and sale of various financial instruments
that comprise the Servicing Hedge.
The Company recorded amortization and impairment of its MSRs in the six
months ended August 31, 1998 totaling $590.3 million (consisting of normal
amortization amounting to $269.0 million and impairment of $321.3 million),
compared to amortization and net recovery of its MSRs of $131.3 million
(consisting of normal amortization amounting to $136.9 million and net recovery
of $5.6 million) in the six months ended August 31, 1997.
Salaries and related expenses are summarized below for the six months ended
August 31, 1998 and 1997.
<TABLE>
<CAPTION>
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- -----
(Dollar amounts in Six Months Ended August 31, 1998
thousands)
-- --------- ------------------------------------------------- -- --- --- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $ 93,103 $23,435 $42,625 $18,168 $177,331
Incentive Bonus 71,196 481 9,892 8,669 90,238
Payroll Taxes and Benefits 24,183 5,325 8,321 2,842 40,671
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $188,482 $29,241 $60,838 $29,679 $308,240
============ ============= ============= ============= -------------
Average Number of 4,859 1,795 1,693 625 8,972
Employees
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
</TABLE>
-- --------------------------- -- -- --------- -----------------------------
(Dollar amounts in Six Months Ended August 31, 1997
thousands)
-- --------- ------------------------------
<TABLE>
<CAPTION>
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C>
Base Salaries $ 60,164 $ 21,675 $ $ 10,902 $ 125,967
33,226
Incentive Bonus 30,373 585 8,445 4,970 44,373
Payroll Taxes and Benefits 9,905 4,082 3,206 1,052 18,245
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $100,442 $ $ $ 16,924 $ 188,585
26,342 44,877
============ ============= ============= ============= -------------
Average Number of 2,972 1,621 1,330 408 6,331
Employees
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
</TABLE>
The amount of salaries increased during the six months ended August 31, 1998
from the six months ended August 31, 1997 primarily due to an increased number
of employees resulting from expansion of the Consumer Markets and Wholesale
division branch networks, including new retail sub-prime branches. In addition,
a larger servicing portfolio and growth in the Company's non-mortgage banking
activities also contributed to the increase. The increase in incentive bonuses
was due primarily to the increased production.
Occupancy and other office expenses for the six months ended August 31, 1998
increased to $128.8 million from $79.5 million for the six months ended August
31, 1997, primarily due to: (i) the continued effort by the Company to expand
its retail branch network, particularly outside California; (ii) higher loan
production; (iii) a larger servicing portfolio; and (iv) growth in the Company's
non-mortgage banking activities.
Guarantee fees for the six months ended August 31, 1998 increased 5% to
$90.0 million from $85.4 million for the six months ended August 31, 1997. This
increase resulted from an increase in the servicing portfolio, changes in the
mix of permanent investors and terms negotiated at the time of loan sales.
Marketing expenses for the six months ended August 31, 1998 increased 46% to
$30.1 million from $20.6 million for the six months ended August 31, 1997,
reflecting the increased level of mortgage originations, particularly
refinances, as well as the Company's continued implementation of a marketing
plan to increase brand awareness of the Company in the residential mortgage
market.
Other operating expenses for the six months ended August 31, 1998 increased
from the six months ended August 31, 1997 by $15.5 million, or 28%. This
increase was due primarily to higher loan production, a larger servicing
portfolio, increased systems development and growth in the Company's
non-mortgage banking subsidiaries in the six months ended August 31, 1998 as
compared to the six months ended August 31, 1997.
Profitability of Loan Production and Servicing Activities
In the six months ended August 31, 1998, the Company's pre-tax income from
its loan production activities (which include loan origination and purchases,
warehousing and sales) was $282.6 million. In the six months ended August 31,
1997, the Company's comparable pre-tax income was $95.3 million. The increase of
$187.3 million was primarily attributable to increased production and a shift in
production mix towards the Consumer Markets and Wholesale Divisions. These
positive results were partially offset by higher production costs. In the six
months ended August 31, 1998, the Company's pre-tax loss from its loan servicing
activities (which include administering the loans in the servicing portfolio,
selling homeowners and other insurance, acting as tax payment agent and
marketing foreclosed properties) was $3.0 million as compared to an income of
$120.3 million in the six months ended August 31, 1997. The decrease of $123.3
million was principally attributed to the increased amortization and impairment
of the servicing asset and Interest Costs Incurred on Payoffs due to declining
interest rates and increase in prepayments from August 31, 1997 to August 31,
1998. These negative factors were partially offset by an increase in servicing
fees, miscellaneous income and interest earned on escrow balances derived by the
larger servicing portfolio.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title insurance and escrow services, home appraisals, securities
brokerage and servicing rights brokerage. For the six months ended August 31,
1998, these activities contributed $25.0 million to the Company's pre-tax income
compared to $21.5 million during the six months ended August 31, 1997. This
increase in pre-tax income primarily results from improved performance of the
title insurance, escrow and Capital Markets businesses.
QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are
counter-cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its committed pipeline, mortgage loan inventory and MBS
held for sale, MSRs, MBS retained in securitizations and debt securities. The
overall objective of the Company's interest rate risk management policies is to
offset changes in the values of these items resulting from changes in interest
rates. The Company does not speculate on the direction of interest rates in its
management of interest rate risk.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that quantify the net financial impact of changes
in interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses incorporate scenarios including selected
hypothetical (instantaneous) parallel shifts in the yield curve. Various
modeling techniques are employed to value the financial instruments. For
mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread
("OAS") model is used. The primary assumptions used in this model are the
implied market volatility of interest rates and prepayment speeds. For options
and interest rate floors, an option-pricing model is used. The primary
assumption used in this model is implied market volatility of interest rates.
MSRs and residual interests are valued using discounted cash flow models. The
primary assumptions used in these models are prepayment rates, discount rates
and credit losses.
Utilizing the sensitivity analyses described above, as of the quarter ended
August 31, 1998, the Company estimates that a permanent 0.50% reduction in
interest rates, all else being constant, would result in a $10.4 million
after-tax loss related to its trading securities and a $3.2 million after-tax
gain related to its other financial instruments, for the fiscal year ended
February 28, 1999. The Company estimates that this combined after-tax loss of
$7.2 million is the largest such loss that would occur within the range of
reasonably possible interest rate changes. These sensitivity analyses are
limited by the fact that they are performed at a particular point in time and do
not incorporate other factors that would impact the Company's financial
performance in such a scenario. Consequently, the preceding estimates are not
and should not be viewed as a forecast.
INFLATION
Inflation affects the Company in the areas of loan production and servicing.
Interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. Historically, as interest rates increase, loan
production, particularly from loan refinancings, decreases, although in an
environment of gradual interest rate increases, purchase activity may actually
be stimulated by an improving economy or the anticipation of increasing real
estate values. In such periods of reduced loan production, production margins
may decline due to increased competition resulting from overcapacity in the
market. In a higher interest rate environment, servicing-related earnings are
enhanced because prepayment rates tend to slow down thereby extending the
average life of the Company's servicing portfolio thereby reducing amortization
and impairment of the MSRs. In addition, Interest Costs Incurred on Payoffs
decline and the rate of interest earned from the custodial balances tends to
increase. Conversely, as interest rates decline, loan production, particularly
from loan refinancings, increases. However, during such periods, prepayment
rates tend to accelerate (principally on the portion of the portfolio having a
note rate higher than the then-current interest rates), thereby decreasing the
average life of the Company's servicing portfolio and adversely impacting its
servicing-related earnings primarily due to increased amortization and
impairment of the MSRs, a decreased rate of interest earned from the custodial
balances and increased Interest Costs Incurred on Payoffs. The impact of
changing interest rates on servicing-related earnings are reduced by performance
of the Servicing Hedge, which is designed to mitigate the impact on earnings of
impairment that may result from declining interest rates.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently utilizes commercial paper supported by the revolving credit
facility, medium-term notes, MBS repurchase agreements, subordinated notes,
pre-sale funding facilities, unsecured short-term bank loans, an optional cash
purchase feature in the dividend reinvestment plan, redeemable capital trust
pass-through securities and cash flow from operations. In addition, in the past
the Company has utilized whole loan repurchase agreements, servicing-secured
bank facilities, private placements of unsecured notes and other financings,
direct borrowings from the revolving credit facility and public offerings of
common and preferred stock.
Current conditions in the global financial markets have made it more
difficult for corporations, in particular financial institutions, to raise
capital on terms similar to that realized in the recent past. In general,
corporate debt investors are requiring higher spreads between corporate bonds
and U.S. treasury securities and are less inclined to invest on a long-term
basis. As a result, the Company has experienced some widening in spreads on its
short-term and long-term debt. The Company does not expect these current
conditions to have a material adverse impact either on its financial condition
or results of operations.
Certain of the debt obligations of the Company and Countrywide Home Loans,
Inc. ("CHL") contain various provisions that may affect the ability of the
Company and CHL to pay dividends and remain in compliance with such obligations.
These provisions include requirements concerning net worth, current ratio and
other financial covenants. These provisions have not had, and are not expected
to have, an adverse impact on the ability of the Company and CHL to pay
dividends.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its operations through the public and private
capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
In connection with its derivative contracts, the Company may be required to
deposit cash or certain government securities or obtain letters of credit to
meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and liquidity.
Cash Flows
Operating Activities In the six months ended August 31, 1998, the Company's
operating activities provided cash of approximately $0.1 billion. In the six
months ended August 31, 1997, operating activities used approximately $1.1
billion, primarily to support the increase in its mortgage loans and MBS held
for sale.
Investing Activities The primary investing activity for which cash was used
by the Company was the investment in MSRs. Net cash used by investing activities
was $0.9 billion for the six months ended August 31, 1998 and $0.5 billion for
the six months ended August 31, 1997.
Financing Activities Net cash provided by financing activities amounted to $0.8
billion for the six months ended August 31, 1998. Net cash provided by financing
activities amounted to $1.6 billion for the six months ended August 31, 1997.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
For the month ended September 30, 1998, the Company received new loan
applications at an average daily rate of $625 million and at September 30, 1998,
the Company's pipeline of loans in process was $15.9 billion. This compares to a
daily application rate in the month end September 30, 1997 of $295 million and a
pipeline of loans in process at September 30, 1997 of $6.8 billion. The size of
the pipeline is generally an indication of the level of future fundings, as
historically 43% to 77% of the pipeline of loans in process has funded. In
addition, the Company's LOCK `N SHOP(R) Pipeline at September 30, 1998 was $1.5
billion and at September 30, 1997 was $1.1 billion. Future application levels
and loan fundings are dependent on numerous factors, including the level of
demand for mortgage credit, the extent of price competition in the market, the
direction of interest rates, seasonal factors and general economic conditions.
Market Factors
Loan production increased 117% from quarter ended August 31, 1997 to quarter
ended August 31, 1998. This increase was due to several factors. First, mortgage
interest rates generally were lower in the quarter ended August 31, 1998. This
drove a 285% increase in refinance loan production in the quarter ended August
31, 1998 as compared to the quarter ended August 31,1997. In addition, home
purchase market activity was stronger during the quarter ended August 31, 1998
than in the quarter ended August 31, 1997. On top of the increase in the loan
origination market, the Company increased its market share from the quarter
ended August 31, 1997 to the quarter ended August 31, 1997, in larger part, due
to its ongoing expansion of the Consumer Markets and Wholesale Divisions.
The annual prepayment rate in the servicing portfolio increased from 13% for
the quarter ended August 31, 1997 to 26% for the quarter ended August 31, 1998
due to lower interest rates in the quarter ended August 31, 1998 than in the
quarter ended August 31, 1997.
The Company's primary competitors are commercial banks, savings and loans,
mortgage banking subsidiaries of diversified companies, as well as other
mortgage bankers. Over the past three years, certain commercial banks have
expanded their mortgage banking operations through acquisition of formerly
independent mortgage banking companies and through internal growth. The Company
believes that these transactions and activities have not had a material impact
on the Company or on the degree of competitive pricing in the market.
The Company's California mortgage loan production (measured by principal
balance) constituted 25% of its total production during the quarter ended August
31, 1998 and 24% during the quarter ended August 31, 1997. 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 negatively
impacted. To the extent the Company's loan production is concentrated in a
particular geographic region, the Company's operations will be adversely
affected if that region experiences slow or negative economic growth resulting
in decreased residential real estate lending activity.
The delinquency rate in the Company-owned servicing portfolio decreased to
3.64% at August 31, 1998 from 4.25% at August 31, 1997. The proportion of
government and high loan-to-value conventional loans, which tend to experience
higher delinquency rates than low loan-to-value conventional loans, was 47% and
49% of the portfolio at August 31, 1998 and August 31, 1997, respectively. The
weighted average age of the portfolio is 29 months at August 31, 1998 and August
31, 1997. Delinquency rates tend to increase as loans age, generally reaching a
peak at three to five years of age. However, because the loans in the portfolio
are generally serviced on a non-recourse basis, the Company's exposure to credit
loss is substantially limited. Further, related late charge income has
historically been sufficient to offset incremental servicing expenses resulting
from an increased delinquency rate.
The percentage of loans in the Company's owned servicing portfolio that are
in foreclosure decreased to 0.36% at August 31, 1998 from 0.63% at August 31,
1997 primarily due to the sale of $314 million of mortgage loans in foreclosure
as of August 31, 1998. Because the Company services substantially all
conventional and FHA loans on a non-recourse basis, foreclosure losses are
generally the responsibility of the investor or insurer and not the Company. The
Company retains credit risk on the home equity and sub-prime loans it
securitizes through retention of a subordinated interest. At August 31, 1998,
the Company had investments in such subordinated interests amounting to $260
million. While the Company generally does not retain credit risk with respect to
the prime credit quality first mortgage loans it sells, it does have potential
liability under representations and warranties made to purchasers and insurers
of the loans. In the event of a breach of the representations and warranties,
the Company may be required to repurchase a mortgage loan and any subsequent
credit loss on the mortgage loan may be borne by the Company. In addition, the
Company is exposed to credit losses on loans partially guaranteed by the
Department of Veterans Administration ("VA") for any amount of loss above such
partial guarantee. Loans which are partially guaranteed by the VA totaled 8.0%
of the Company's servicing portfolio at August 31, 1998.
Servicing Hedge
As previously discussed, the Company's Servicing Hedge is designed to
protect the value of its investment in MSRs from the effects of increased
prepayment activity that generally results from declining interest rates. In
periods of increasing interest rates, the value of the Servicing Hedge generally
declines and the value of MSRs generally increases. There can be no assurance
that, in periods of increasing interest rates, the increase in value of the MSRs
will offset the amount of Servicing Hedge expense; or in periods of declining
interest rates, that the Company's Servicing Hedge will generate gains, or if
gains are generated, that they will fully offset impairment of the MSRs.
Implementation of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This statement will become effective in the fiscal year ended
February 28, 2001. The impact of the adoption of this statement on the Company's
financial statements is not known at this time.
Year 2000 Update
The Company has five distinct Year 2000 Projects, each of which focuses on a
particular critical area.
The Company's primary platform is the IBM AS/400 which contains all of the
data relating to the origination and servicing of the home loans in the
Company's portfolio. As of September 1998, the Company has reprogrammed and
re-engineered the system to incorporate four-digit century date fields, tested
the function and accuracy of the reprogrammed fields and implemented the revised
code in more than 17,000 programs on the AS/400. The Company has begun
forward-date testing and estimates that it will be completed before December 31,
1998. Unanticipated systems incompatibilities, testing complexities or
scheduling conflicts could result in complications and delays of forward-date
testing.
Many of the Company's Client Server applications have been developed
in-house and in a Year 2000 compliant format. The majority of those applications
interface with the AS/400. The Company is reviewing each of its mission critical
Client Server applications to confirm their Year 2000 readiness. Additionally,
as part of this project, the Company is testing 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. The Company
estimates that 60% of its mission critical Client Server applications have been
forward-date tested. The Company presently anticipates that all mission critical
Client Server applications will be remediated by November 30, 1998 and that
forward-date testing of those applications will be completed by December 31,
1998.
The Company's Infrastructure Project is responsible for inventorying the
personal computers used by the Company's employees nationwide to determine the
Year 2000 readiness of the hardware of each. This process is approximately 85%
complete. Where necessary, older computers and related hardware which are not
Year 2000 compliant will be replaced before December 31, 1999. As part of the
Infrastructure Project, the Company is also identifying "shrink-wrapped" and
desktop software purchased company-wide, as well as desktop software supporting
individuals and individual business units, in order to determine whether the
vendor is bringing its products into compliance. This Project also monitors
websites and other available information of software and hardware vendors and
disseminates the latest available information to those business units relying on
the product. In the event the products are not or will not be compliant, the
Company is assessing its needs for the applications. With respect to
non-compliant software, the Company will either seek alternative sources of
similar applications, develop its own applications or attempt to obtain the
source code and the vendor's authorization to re-engineer it.
The Infrastructure Project has inventoried, assessed and completed necessary
corrective action with respect to the Company's mission critical wide area
network components, telecommunications systems and unique business systems.
These systems are scheduled for forward-date testing which the Company
anticipates will be completed by December 31, 1998. Additionally, the
Infrastructure Project personnel, along with personnel from the Company's
Facilities and Property Management Departments, are evaluating 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. The Company
estimates this process will be completed by June 1999.
The Communications Project personnel have developed a database for
collecting information regarding the Year 2000 status of the Company's strategic
business partners and other vendors and suppliers. Individual business units
identify in the database contact information regarding their respective business
partners, vendors and suppliers, and the database tracks the inquiry made of
each such entity, that entity's response to the Company's inquiry and the
Company's response to each entity's inquiry. Analysis of the information
contained in the database and development of additional features and functions
of the database are ongoing. The goal is to achieve a reasonable understanding
of the Year 2000 readiness and contingency plans of the Company's business
partners, vendors and suppliers well in advance of the Year 2000.
Additionally, the Communications Project personnel represent the Company in
its participation as one of the leading mortgage banking companies involved in
the Mortgage Bankers Association (MBA) inter-industry testing project. Other
participants include GNMA, FNMA and FHLMC, as well as banks, insurance companies
and credit bureaus. The MBA project involves inter-industry testing of
transactions from loan origination, secondary marketing and loan servicing areas
and its mission is to make sure the various interfaces work together across the
entire industry.
Contingency Planning
The Company has retained a vendor specializing in business continuity
planning to review its business continuity procedures on a company-wide basis
and assist in its assessment of the contingency plans of each business unit, as
well as those of mission critical business partners, vendors and suppliers. The
Year 2000 aspect of this process is expected to be completed in early 1999. The
business analysis aspect of the contingency planning process also serves as a
means of verifying the Company's existing inventories of Client Server
applications, Infrastructure hardware and software, business partners, vendors
and suppliers and external and internal interfaces.
Costs
The total cost associated with the Company's Year 2000 efforts is not
expected to be material to the Company's financial position. These costs are
being expensed by the Company during the period in which they are incurred. The
estimated total cost of the Year 2000 Project is approximately $36 million, of
which $16 million has been incurred through August 31, 1998.
Risks
Due to the global nature of the Year 2000 issue, the Company cannot
determine all of the consequences the Year 2000 may have on its business and
operations. The Company believes that in light of the efforts of its Year 2000
Projects, including the Contingency Planning aspect, the possibility of material
business interruptions is unlikely. However, there may be instances where the
Company will rely on third party information which may be unreliable or
unverifiable. The Company cannot be assured that third parties upon which it
relies, including utilities and telecommunications service providers, will not
have business interruptions which could have an adverse effect on the Company.
Forward-looking statements contained in this Year 2000 Update should be read
in conjunction with the Company's disclosures under the heading:
"FORWARD-LOOKING STATEMENTS" which appears in Item 2 on page of this Form 10Q.
<PAGE>
Page 28
PART II. OTHER INFORMATION
Item 5. Other Information
Any proposal that a stockholder wishes to present for
consideration at the 1999 Annual Meeting of Stockholders must be received by the
Company no later than February 9, 1999 for inclusion in the 1999 Notice of
Annual Meeting, Proxy Statement and Proxy. Any other proposal that a stockholder
wishes to bring before the 1999 Annual Meeting of Stockholders must also be
received by the Company no later than February 9, 1999. All proposals must
comply with the applicable requirements or conditions established by the
Securities and Exchange Commission and Article II, Section 13 of the Company's
Bylaws, which requires among other things, certain information to be provided in
connection with the submission of stockholder proposals. All proposals must be
directed to the Secretary of the Company at 4500 Park Granada, MSN CH-19,
Calabasas, California 91302.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.17 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).
10.8.1 Short Term Facility Extension Amendment dated as of the 23rd day of
September 1998 by and among Countrywide Home Loans, Inc., the Short
Term Lenders under the Revolving Credit Agreement dated as of
September 24, 1997 and Bankers Trust Company, as Credit Agent.
10.22.5 Fifth Amendment to the Amended and Restated 1993 Stock Option Plan.
(b) Reports on Form 8-K. None.
<PAGE>
Page 29
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: October 14, 1998
--------------------------------------
Stanford L. Kurland
Senior Managing Director and
Chief Operating Officer
DATE: October 14, 1998
--------------------------------------
Carlos M. Garcia
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: October 14, 1998 /s/ Stanford L. Kurland
--------------------------------------
Senior Managing Director and
Chief Operating Officer
DATE: October 14, 1998 /s/ Carlos M. Garcia
--------------------------------------
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
Page 30
EXHIBIT INDEX
Exhibit Number Document Description
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).
10.8.1 Short Term Facility Extension Amendment dated as of the
23rd day of September 1998 by and among Countrywide Home
Loans, Inc., the Short Term Lenders under the Revolving
Credit Agreement dated as of September 24, 1997 and
Bankers Trust Company, as Credit Agent.
10.22.5 Fifth Amendment to the Amended and Restated 1993 Stock
Option Plan.
<PAGE>
<PAGE>
SHORT TERM FACILITY EXTENSION AMENDMENT
THIS SHORT TERM FACILITY EXTENSION AMENDMENT (the "Amendment")
is made and dated as of the 23rd day of September, 1998 by and among COUNTRYWIDE
HOME LOANS, INC. (the "Company"), the Short Term Lenders under (and as that term
and capitalized terms not otherwise defined herein are defined in) the Revolving
Credit Agreement described below) and BANKERS TRUST COMPANY, as Credit Agent (in
such capacity, the "Credit Agent").
RECITALS
A. Pursuant to that certain Revolving Credit Agreement dated as of September 24,
1997 by and among the Company, the Lenders party thereto, including, without
limitation, the Short Term Lenders, the Credit Agent and others (as amended,
extended and replaced from time to time, the "Revolving Credit Agreement"), the
Short Term Lenders agreed to extend credit to the Company in the form of a
364-day revolving credit facility.
B. The Company has requested that the Short Term Lenders currently party to the
Revolving Credit Agreement agree to extend the Short Term Facility Maturity Date
and certain of such Short Term Lenders have agreed to do so on the terms and
subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the above Recitals and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1.Extension of Maturity Date. To reflect the agreement of the Short Term Lenders
to extend the Short Term Facility Maturity Date, effective as of the Amendment
Effective Date (as defined in Paragraph 6 below), the definition of "Short Term
Facility Maturity Date" set forth in the Glossary attached to the Revolving
Credit Agreement is hereby amended to delete the date "September 23, 1998"
appearing therein and to replace the same with the date "September 22, 1999".
2.Extension of Short Term Facility Fee Letter. To reflect the agreement of the
Company to continue to pay to the Short Term Lenders a facility fee during the
period from the current Short Term Facility Date to the Short Term Facility
Maturity Date as extended hereunder, the Company hereby reaffirms the Short Term
Facility Fee Letter dated as of September 24, 1997 and agrees that the "Short
Term Facility Maturity Date" referred to therein shall mean the Short Term
Facility Maturity Date as extended hereunder.
3.Revised Commitment Schedule. To reflect certain changes in the financial
institutions which will be participating in the Short Term Facility as extended
hereby and other modifications in the Short Term Facility Credit Limit and the
Short Term Facility Percentage Shares of the Short Term Lenders participating in
the Short Term Facility as extended hereby, the Commitment Schedule is hereby
revised as of the Amendment Effective Date consistent with Amendment Schedule I
attached hereto.
4.Reaffirmation of Loan Documents. The Company hereby affirms and agrees that
(a) the execution and delivery by the Company of and the performance of its
obligations under this Amendment shall not in any way amend, impair, invalidate
or otherwise affect any of the obligations of the Company or the rights of the
Credit Agent, the Lenders or any other Person under the Revolving Credit
Agreement or any other Credit Document, (b) the term "Obligations" as used in
the Credit Documents includes, without limitation, the Obligations of the
Company under the Revolving Credit Agreement as amended hereby, and (c) the
Revolving Credit Agreement as amended hereby and the other Credit Documents
remain in full force and effect.
5.Reaffirmation of Guaranties. By executing this Amendment as provided below,
the Parent acknowledges the terms and conditions of this Amendment and affirms
and agrees that (a) the execution and delivery by the Company and the
performance of its obligations under this Amendment shall not in any manner or
to any extent affect any of the obligations of the Parent or the rights of the
Credit Agent, the Lenders or any other Person under the Guaranty, the
Subordination Agreement or any other document or instrument made or given by the
Parent in connection therewith, (b) the term "Obligations" as used in the
Guaranty and the Subordination Agreement includes, without limitation, the
Obligations of the Company under the Revolving Credit Agreement as amended
hereby, and (c) the Guaranty and the Subordination Agreement remain in full
force and effect.
6.Amendment Effective Date. This Amendment shall be effective as of the day and
year first above written upon the date (the "Amendment Effective Date") that
there has been delivered to the Credit Agent:
(a)A copy of this Amendment, duly executed by each party hereto and acknowledged
by the Parent; and
(b)Such corporate resolutions, incumbency certificates and other authorizing
documentation as the Credit Agent may request.
As required pursuant to Paragraph 13(b) of the Revolving Credit Agreement,
following the Amendment Effective Date the Credit Agent shall provide a copy of
this Amendment, including the Commitment Schedule effective as of the Amendment
Effective Date, to all parties to the Credit Documents.
7.Representations and Warranties. The Company hereby represents and warrants to
the Credit Agent and each of the Short Term Lenders that at the date hereof and
at and as of the Amendment Effective Date:
(a)Each of the Company and the Parent has the corporate power and authority and
the legal right to execute, deliver and perform this Amendment and has taken all
necessary corporate action to authorize the execution, delivery and performance
of this Amendment. This Amendment has been duly executed and delivered on behalf
of the Company and the Parent and constitutes the legal, valid and binding
obligation of such Person, enforceable against such Person in accordance with
its terms.
(b)Both prior to and after giving effect hereto: (1) the representations and
warranties of the Company and the Parent contained in the Credit Documents are
accurate and complete in all respects, and (2) there has not occurred an Event
of Default or Potential Default.
8.No Other Amendment. Except as expressly amended hereby, the Credit Documents
shall remain in full force and effect as written and amended to date.
9.Counterparts. This Amendment may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original and all of
which when taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the day and year first above written.
COUNTRYWIDE HOME LOANS, INC.,
a New York corporation
By /s/___________________________________
Name Thomas Keith McLaughlin
Title Managing Director & Chief Financial Officer
BANKERS TRUST COMPANY,
as Credit Agent
By
Name
Title
BANCA CRT S.p.A., as a Short Term Lender
By
Name
Title
By
Name
Title
BANCA DI NAPOLI S.p.A., NEW YORK BRANCH, as a Short Term Lender
By
Name
Title
By
Name
Title __________________________________________________________________________
BANCA DI ROMA, SAN FRANCISCO BRANCH, as a Short Term Lender
By
Name
Title
By
Name
Title __________________________________________________________________________
<PAGE>
BANCA MONTE DEI PASCHI DI SIENA S.p.A., NEW YORK BRANCH, as a Short Term Lender
By
Name
Title
By
Name
Title
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Short Term Lender
By
Name
Title
BANK OF HAWAII, as a Short Term Lender
By
Name
Title
THE BANK OF NEW YORK, as a Short Term Lender
By
Name
Title
<PAGE>
BANK ONE, TEXAS, N.A., as a Short Term Lender
By
Name
Title
BANKERS TRUST COMPANY, as a Short Term Lender
By
Name
Title
BANQUE NATIONALE DE PARIS, as a Short Term Lender
By
Name
Title
By
Name
Title
PARIBAS, as a Short Term Lender
By
Name
Title
By
Name
Title
<PAGE>
BARCLAYS BANK PLC, as a Short Term Lender
By
Name
Title
BAYERISCHE LANDESBANK GIROZENTRALE, CAYMAN ISLANDS BRANCH,as a Short Term Lender
By _____________________________________________________________________________
Name _____________________________________________________ _____________________
Title __________________________________________________________________________
By _____________________________________________________________________________
Name ___________________________________________________________________________
Title __________________________________________________________________________
CANADIAN IMPERIAL BANK OF COMMERCE, as a Short Term Lender
By
Name
Title
THE CHASE MANHATTAN BANK, as a Short Term Lender
By
Name
Title
<PAGE>
CREDIT LYONNAIS, SAN FRANCISCO BRANCH, as a Short Term Lender
By
Name
Title
DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES,as a Short Term Lender
By
Name
Title
By
Name
Title
THE FIFTH THIRD BANK, as a Short Term Lender
By
Name
Title
THE FIRST NATIONAL BANK OF CHICAGO, as a Short Term Lender
By
Name
Title
<PAGE>
FIRST UNION NATIONAL BANK, as a Short Term Lender
By
Name
Title
FLEET NATIONAL BANK, as a Short Term Lender
By
Name
Title
THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, as a Short Term Lender
By
Name
Title
THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY,as a Short Term Lender
By
Name
Title
<PAGE>
KBC BANK N.V., as a Short Term Lender
By
Name
Title
By _____________________________________________________________________________
Name ___________________________________________________________________________
Title __________________________________________________________________________
LASALLE NATIONAL BANK, as a Short Term Lender
By
Name
Title
MELLON BANK, N.A., as a Short Term Lender
By
Name
Title
THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY, as a Short
Term Lender
By
Name
Title
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Short Term Lender
By
Name
Title
NATIONSBANK, N.A., as a Short Term Lender
By
Name
Title
NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS
BRANCH, as a Short Term Lender
By
Name
Title
By
Name
Title
ROYAL BANK OF CANADA, as a Short Term Lender
By
Name
Title
<PAGE>
STAR BANK, NATIONAL ASSOCIATION, as a Short Term Lender
By
Name
Title
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Short Term Lender
By
Name
Title
UNION BANK OF CALIFORNIA, N.A., as a Short Term Lender
By
Name
Title
U. S. BANK NATIONAL ASSOCIATION, formerly known as U.S. National Bank of Oregon,
as a Short Term Lender,
By
Name
Title
<PAGE>
WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS BRANCH, as
a Short Term Lender
By
Name
Title
ACKNOWLEDGED and AGREED TO as of the date first written above:
COUNTRYWIDE CREDIT INDUSTRIES, INC.,
a Delaware corporation
By /s/____________________________________________
Name Thomas Keith McLaughlin
Title Managing Director and Treasurer
<PAGE>
AMENDMENT SCHEDULE I
COUNTRYWIDE HOME LOANS, INC.
Revolving Credit Facilities
Commitment Schedule
as of September 23, 1998
[TO BE PROVIDED BY THE CREDIT AGENT]
AMENDMENT NUMBER FIVE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1993 STOCK OPTION PLAN
(AMENDED AND RESTATED AS OF MARCH 27, 1996)
WHEREAS, Countrywide Credit Industries, Inc. ( the "Company" ) desires to amend
its 1993 Stock Option Plan, amended and restated as of March 27, 1996, (the
"Plan"), to allow for the increase of the maximum number of Shares that may be
made the subject of Options granted;
NOW, THEREFORE, the Plan shall be amended as follows effective May 7, 1998:
1. Section 4(a) shall be amended to read as follows:
"(a) The maximum number of Shares that may be made the subject
of Options granted under the Plan is sixteen million (16,000,000);
provided, however, that the maximum number of Shares that may be the
subject of Options granted to any Eligible Employee from and after
March 27, 1996 and during the term of the Plan may not exceed three
million (3,000,000). Upon a Change in Capitalization the maximum number
of Shares shall be adjusted in number and kind pursuant to Section 8.
The Company shall reserve for the purposes of the Plan, out of its
authorized but unissued Shares or out of Shares held in the Company's
treasury, or partly out of each, such number of Shares as shall be
determined by the Board."
IN WITNESS WHEREOF, the Company has caused this Fifth
Amendment to be executed by its duly authorized officer this ____ day
of September, 1998.
Countrywide Credit Industries, Inc.
By: _____________________
Anne McCallion
Managing Director
Attest:
------------------------
Susan Bow
EVP Deputy General Counsel
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Six Months
Ended August 31,
1998 1997
---------------- -----------------
(Dollar amounts in thousands,
except per share data)
Basic
<S> <C> <C>
Net earnings applicable to common stock $185,831 $179,698
================ =================
Average shares outstanding 110,640 106,655
---------------- -----------------
Per share amount $1.68 $1.69
================ =================
Diluted
Net earnings applicable to common stock $185,831 $179,698
================ =================
Average shares outstanding 110,640 106,655
Net effect of dilutive stock options --
based on the treasury stock method using
the closing market price, if higher than
average market price. 6,260 3,588
---------------- -----------------
Total average shares 116,900 110,243
================ =================
Per share amount $1.59 $1.63
================ =================
</TABLE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of the
Company for the six months ended August 31, 1998 and 1997 and for the five
fiscal years ended February 28, 1998 computed by dividing net fixed charges
(interest expense on all debt plus the interest element (one-third) of operating
leases) into earnings (income before income taxes and fixed charges).
<TABLE>
<CAPTION>
Six Months Ended
August 31, Fiscal Years Ended February 29(28),
------------------------- ------------------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings $185,831 $179,698 $344,983 $257,358 $195,720 $ 88,407 $179,460
Income tax expense 118,810 114,889 220,563 164,540 130,480 58,938 119,640
Interest charges 347,082 181,822 424,341 316,705 281,573 205,464 219,898
Interest portion of rental
expense 3,436 2,306 10,055 7,420 6,803 7,379 6,372
------------ ------------ ------------- ------------ ------------- ------------ ------------
Earnings available to cover
fixed charges $655,159 $478,715 $999,942 $746,023 $614,576 $360,188 $525,370
============ ============ ============= ============ ============= ============ ============
Fixed charges
Interest charges $347,082 $181,822 $424,341 $316,705 $281,573 $205,464 $219,898
Interest portion of rental
expense 3,436 2,306 10,055 7,420 6,803 7,379 6,372
------------ ------------ ------------- ------------ ------------- ------------ ------------
Total fixed charges $350,518 $184,128 $434,396 $324,125 $288,376 $212,843 $226,270
============ ============ ============= ============ ============= ============ ============
Ratio of earnings to fixed
charges 1.87 2.60 2.30 2.30 2.13 1.69 2.32
============ ============ ============= ============ ============= ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> Aug-31-1998
<CASH> 32,710
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 412,719
<DEPRECIATION> 152,688
<TOTAL-ASSETS> 14,251,263
<CURRENT-LIABILITIES> 0
<BONDS> 5,819,500
0
0
<COMMON> 5,573
<OTHER-SE> 2,337,509
<TOTAL-LIABILITY-AND-EQUITY> 14,251,263
<SALES> 0
<TOTAL-REVENUES> 932,422
<CGS> 0
<TOTAL-COSTS> 627,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 304,641
<INCOME-TAX> 118,810
<INCOME-CONTINUING> 185,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 185,831
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.59
<FN>
</FN>
</TABLE>
