Page 3
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 November 30, 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 January 13, 1999
----- -------------------------------
Common Stock $.05 par value 112,566,729
<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)
A S S E T S
<TABLE>
November 30, February 28,
1998 1998
------------------ -------------------
<S> <C> <C>
Cash $ 52,330 $ 10,707
Mortgage loans and mortgage-backed securities held for sale 7,779,742 5,292,191
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 282,097 226,330
Mortgage servicing rights, net 3,732,003 3,612,010
Other assets 4,356,671 3,041,973
------------------ -------------------
Total assets $16,202,843 $12,183,211
================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $5,444,408 $3,945,606
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $10,002,891 $7,475,221
Drafts payable issued in connection with mortgage loan closings 1,089,045 764,285
Accounts payable, accrued liabilities and other 1,156,852 482,678
Deferred income taxes 1,034,079 873,084
------------------ -------------------
Total liabilities 13,282,867 9,595,268
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities
of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 500,000
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $0.05 par
value; issued and outstanding, 111,957,095 shares at
November 30, 1998 and 109,205,579 shares at February 28, 1998 5,598 5,460
Additional paid-in capital 1,138,878 1,049,365
Accumulated other comprehensive income (11,075) 3,697
Retained earnings 1,286,575 1,029,421
------------------ -------------------
Total shareholders' equity 2,419,976 2,087,943
------------------ -------------------
Total liabilities and shareholders' equity $16,202,843 $12,183,211
================== ===================
Borrower and investor custodial accounts $5,444,408 $3,945,606
================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Page 3
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollar amounts in thousands, except earnings per share)
<TABLE>
Three Months Nine Months
Ended November 30, Ended November 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues
<S> <C> <C> <C> <C>
Loan origination fees $166,934 $ 78,907 $462,740 $ 197,561
Gain on sale of loans, net of commitment fees 186,241 103,323 517,073 288,954
-------------- -------------- -------------- --------------
Loan production revenue 353,175 182,230 979,813 486,515
Interest earned 184,869 119,743 556,294 305,605
Interest charges (177,751) (110,113) (528,017) (291,935)
-------------- -------------- -------------- --------------
Net interest income 7,118 9,630 28,277 13,670
Loan servicing income 261,349 234,499 755,523 670,582
Amortization and impairment/recovery of
mortgage servicing rights (243,726) (1,271,231) (375,067)
(680,927)
Servicing hedge benefit 533,030 161,506 822,891 150,225
-------------- -------------- -------------- --------------
Net loan administration income 113,452 152,279 307,183 445,740
Commissions, fees and other income 40,452 31,002 131,346 95,636
Gain on sale of subsidiary - - - 57,381
-------------- -------------- -------------- --------------
Total revenues 514,197 375,141 1,446,619 1,098,942
Expenses
Salaries and related expenses 176,015 110,458 484,255 299,043
Occupancy and other office expenses 73,391 49,179 202,208 128,667
Guarantee fees 45,634 43,467 135,655 128,855
Marketing expenses 17,085 9,711 47,189 30,353
Other operating expenses 41,464 30,878 112,063 85,989
-------------- --------------
-------------- --------------
Total expenses 353,589 243,693 981,370 672,907
-------------- -------------- -------------- --------------
Earnings before income taxes 160,608 131,448 465,249 426,035
Provision for income taxes 62,637 51,265 181,447 166,154
-------------- -------------- -------------- --------------
NET EARNINGS $97,971 $ 80,183 $283,802 $ 259,881
============== ============== ============== ==============
Earnings per share
Basic $0.88 $0.75 $2.56 $2.43
Diluted $0.84 $0.71 $2.43 $2.34
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
Nine Months
Ended November 30,
1998 1997
---------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 283,802 $ 259,881
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sale of available-for-sale securities (56,820) -
Gain on sale of subsidiary - (57,381)
Amortization and impairment/recovery of mortgage 1,271,231 375,065
servicing rights
Depreciation and other amortization 41,418 32,559
Deferred income taxes 181,848 181,509
Origination and purchase of loans held for sale (67,812,248) (32,654,304)
Principal repayments and sale of loans 65,324,697 30,740,856
---------------- ----------------
Increase in mortgage loans and mortgage-backed
securities held for sale (2,487,551) (1,913,448)
Increase in other assets (1,526,884) (1,191,679)
Increase in accounts payable and accrued liabilities 674,181 231,705
---------------- ----------------
Net cash provided (used) by operating activities (1,618,775) (2,081,789)
---------------- ----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (1,391,224) (785,057)
Purchase of property, equipment and leasehold
improvements - net (85,483) (52,922)
Proceeds from sale of available-for-sale securities 231,555 -
---------------- ----------------
Net cash used by investing activities (1,245,152) (837,979)
---------------- ----------------
Cash flows from financing activities:
Net (decrease) increase in warehouse debt and other
short-term borrowings (64,844) 1,580,560
Issuance of long-term debt 3,062,070 1,192,513
Repayment of long-term debt (144,796) (86,732)
Issuance of Company obligated mandatorily redeemable
securities of subsidiary trusts holding company guaranteed
related subordinated debt - 200,000
Issuance of common stock 79,768 58,302
Cash dividends paid (26,648) (25,706)
---------------- ----------------
Net cash provided by financing activities 2,905,550 2,918,937
---------------- ----------------
Net increase (decrease) in cash 41,623 (831)
Cash at beginning of period 10,707 18,269
================ ================
Cash at end of period $ 52,330 $ 17,438
================ ================
Supplemental cash flow information:
Cash used to pay interest $ 422,788 $ 286,310
Cash used to pay income taxes $ $
1,367 50
Noncash financing activities:
Unrealized gain (loss) on available-for-sale securities,
net of tax $ (14,772) $ 24,083
</TABLE>
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
Three Months Nine Months
Ended November 30, Ended November 30,
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
NET EARNINGS $97,971 $80,183 $283,802 $259,881
Other comprehensive income, net of taxes:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period (9,342) 24,510 19,888 24,083
Less: reclassification adjustment for gains
included in net earnings (25,604) - (34,660) -
-------------
-------------- ------------- -------------- -------------
Other comprehensive income (34,946) 24,510 (14,772) 24,083
-------------- ------------- -------------
============== ============= ==============
COMPREHENSIVE INCOME $63,025 $104,693 $269,030 $283,964
============== ============= ============== =============
</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 nine-month period ended November 30, 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
nine-month period ended November 30, 1997 have been reclassified to conform to
the presentation for the nine-month period ended November 30, 1998.
NOTE B - MORTGAGE SERVICING RIGHTS
The activity in mortgage servicing rights was as follows.
<TABLE>
--------------------------------------------- ---------------------- --------------------------
Nine Months
Ended
(Dollar amounts in thousands) November 30, 1998
--------------------------------------------- -- ---------------- -- ----------------------- --
Mortgage Servicing Rights
<S> <C>
Balance at beginning of period $3,653,318
Additions 1,391,224
Scheduled amortization (416,425)
Hedge losses (gains) applied (804,279)
-----------------------
Balance before valuation reserve
at end of period 3,823,838
-----------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (41,308)
Reductions (additions) (50,527)
-----------------------
Balance at end of period (91,835)
=======================
Mortgage Servicing Rights, net $3,732,003
=======================
--------------------------------------------- -- ---------------- -- ----------------------- --
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE C - OTHER ASSETS
Other assets consisted of the following.
<TABLE>
------------------------------------------------------------------ -------------------- -------------------------
(Dollar amounts in thousands) November 30, 1998 February 28,
1998
------------------------------------------------------------------ -------------------- -------------------------
<S> <C> <C>
Servicing hedge instruments $1,270,684 $ 801,335
Trading securities 831,260 243,947
Receivables related to broker-dealer activities 191,370 148,976
Mortgage-backed securities retained in securitization 484,686 466,259
Rewarehoused FHA and VA loans 435,148 426,407
Servicing related advances 207,940 231,437
Short term investment 175,000 -
Loans held for investment 120,051 115,713
Accrued interest 101,002 84,601
Equity securities 79,798 96,152
Other 459,732 427,146
----------------- ----------------
$4,356,671 $3,041,973
================= ================
</TABLE>
NOTE D - AVAILABLE FOR SALE SECURITIES
Amortized cost and fair value of available for sale securities were as
follows. In October 1998, mortgage-backed securities retained in securitization
were reclassified as available for sale securities; see note I.
<TABLE>
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
November 30, 1998
---------------- - ------------------------------------ -- ----------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
securities retained in
<S> <C> <C> <C> <C>
securitization $509,464 $ 265 ($25,043) $484,686
CMOs 32,380 4,504 - 36,884
Equity Securities 7,315 2,117 - 9,432
----------------
================ ================= ================
$549,159 $ 6,886 ($25,043) $531,002
================ ================= ================ ================
</TABLE>
<TABLE>
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
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>
------------------------------------------------------------------ -------------------- -------------------------
(Dollar amounts in thousands) November 30, February 28,
1998 1998
------------------------------------------------------------------ -------------------- -------------------------
<S> <C> <C>
Commercial paper $1,982,631 $2,119,330
Medium-term notes, Series A, B, C, D, E, F, G and Euro 6,982,255 4,137,185
Repurchase agreements 762,139 181,121
Subordinated notes 200,000 200,000
Unsecured notes payable 75,000 835,000
Other notes payable 866 2,585
================= ================
$10,002,891 $7,475,221
================= ================
</TABLE>
Revolving Credit Facility and Commercial Paper
As of November 30, 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 expires on 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 commercial paper program.
No amount was outstanding under either revolving credit facility at November 30,
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 nine months ended November 30, 1998 was 5.56%. The weighted average
borrowing rate on commercial paper outstanding as of November 30, 1998 was
5.36%.
<PAGE>
NOTE E - NOTES PAYABLE (Continued)
Medium-Term Notes
As of November 30, 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>
- - -----------------------------------------------------------------------------------------------------------------
(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>
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. Aug. 2005
1999
Series C 208,000 197,000 405,000 3.88% 8.43% Apr. Mar. 2004
1999
Series D 75,000 385,000 460,000 5.57% 6.88% Aug. 2000 Sep. 2005
Series E 310,000 690,000 1,000,000 5.37% 7.45% Feb. 2000 Oct. 2008
Series F 656,000 1,344,000 2,000,000 5.09% 7.00% Oct. 1999 May 2013
Series G 919,000 581,000 1,500,000 5.19% 7.00% Jul. 1999 Nov. 2018
Euro Notes 1,019,600 73,155 1,092,755 5.22% 6.30% Jul 1999 Aug. 2008
------------------------------------------
Total $3,187,600 $3,794,655 $6,982,255
==========================================
</TABLE>
As of November 30, 1998, principally 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 nine months ended November 30, 1998, including the effect of
the interest rate swap agreements, was 6.01%. See Note J.
On October 30, 1998, the Company filed a $2.0 billion shelf registration
with the Securities and Exchange Commission ("SEC") covering Series H
Medium-Term Notes. The Company intends to use the proceeds from the sale of the
medium-term notes for general corporate purposes, which may include retirement
of indebtedness of the Company and investment in servicing rights through the
current production of loans and the bulk acquisition of contracts to service
loans.
Repurchase Agreements
As of November 30, 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 nine months ended
November 30, 1998 was 5.56%. The weighted average borrowing rate on repurchase
agreements outstanding as of November 30, 1998 was 5.20%. 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.
<PAGE>
NOTE E - NOTES PAYABLE (Continued)
In addition, on November 25, 1998, CHL entered into a $1.5 billion committed
mortgage loan repurchase facility, with four commercial banks. The facility has
a maturity date of November 24, 1999. As consideration for this facility, CHL
pays annual commitment fees of $1.9 million. CHL may sell, subject to an
obligation to repurchase, conforming and non-conforming mortgage loans under the
mortgage loan repurchase agreement. There were no outstanding amounts under this
facility as of November 30, 1998.
Pre-Sale Funding Facilities
As of November 30, 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
both facilities for the nine months ended November 30, 1998 was 5.65%. As of
November 30, 1998, the Company had no outstanding borrowings under these
facilities.
NOTE F - FINANCIAL INSTRUMENTS
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
<TABLE>
- - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
(Dollar amounts in millions) Balance, Balance,
February 28, 1998 Dispositions/ November 30,
Additions Expirations 1998
- - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Interest Rate Floors $33,000 9,500 (18,000) $24,500
Long Call Options on
Interest Rate Futures $79,400 38,320 (107,420) $10,300
Long Put Options on
Interest Rate Futures $ 9,800 64,880 (19,180) $55,500
Short Call Options on
Interest Rate Futures $ - 41,800 (41,500) $ 300
Short Put Options on
Interest Rate Futures $ - 5,030 (2,030) $ 3,000
Interest Rate Futures $ 5,000 36,425 (18,925) $22,500
Capped Swaps $ 1,000 - $ 1,000
-
Interest Rate Swaps $ 3,900 7,500 (500) $10,900
Interest Rate Cap $ 4,500 - $ 4,500
-
Swaptions $ 1,850 28,500 (1,800) $28,550
Options on Callable
Pass-through $ 2,561 1,800 - $ 4,361
Certificates
</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>
-- ----------------------------------------- ---- ------------------------------------------------- ---------
(Dollar amounts in thousands) November 30, 1998 February 28, 1998
-- ---------------------------------------------- --------------------------- -- ----------------------------
Balance Sheets:
Mortgage loans and mortgage-backed
<S> <C> <C>
securities held for sale $ 7,779,742 $ 5,292,191
Other assets 7,339,737 6,216,382
============== ==============
Total assets $15,119,479 $11,508,573
============== ==============
Debt $10,859,223 $ 8,747,794
Other liabilities 2,004,542 1,027,884
Equity 2,255,714 1,732,895
============== ==============
Total liabilities and equity $15,119,479 $11,508,573
============== ==============
</TABLE>
<TABLE>
--- ----------------------------------------- --- -------------------------------------------------- --------
(Dollar amounts in thousands) Nine Months Ended November 30,
--------------- ---------- ---------------
1998 1997
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
Statements of Earnings:
<S> <C> <C>
Revenues $1,224,689 $914,084
Expenses 844,303 603,599
Provision for income taxes 148,351 120,774
=============== ===============
Net earnings $232,035 $189,711
=============== ===============
</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 upon adoption of this
standard on the Consolidated Financial Statements.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No.65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interest
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998 and, as a consequence, reclassified
mortgage-backed securities retained in securitization as available for sale
securities.
NOTE J - SUBSEQUENT EVENTS
On December 16, 1998, the Company declared a cash dividend of $0.08 per
common share payable on February 1, 1999 to shareholders of record on January
15, 1999.
On December 7, 1998, CHL entered into a committed short-term financing
arrangement to sell conforming mortgage loans under agreement to repurchase. The
facility has a maturity date of December 6, 1999. As consideration for this
facility, CHL paid annual commitment fees of $0.2 million.
On December 15, 1998, CHL issued DM 1,000 million, 5 1/4% Deutsche Mark
Notes due in 2005. CHL utilized a cross-currency swap to convert the fixed-rate
Deutsche Mark borrowing into floating US dollars. On December 15, 1998, the DM
1,000 million was converted into $593 million.
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. 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 the computation of basic and diluted EPS for the
three and nine month periods ended November 30, 1998 and 1997, under the
provisions of SFAS No. 128.
<TABLE>
- - ----------------------- -- -- ----- ------------------------------------ -- ----- ------
Three Months Ended November 30,
-- -- ----- ------------------------------------ -- ----- ------
1998 1997
----------- -------- --------- --------- --------- ----------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- - -------------------------------------------------------- ------------------------------
<S> <C> <C>
Net earnings $97,971 $ 80,183
=========== =========
Basic EPS
Net earnings available
to common shareholders $ 97,971 111,923 $ 0.88 $ 80,183 107,572 $0.75
Effect of dilutive
stock options - 5,071 - 4,918
----------- -------- --------- ---------
Diluted EPS
Net earnings available
to common shareholders $ 97,971 116,994 $ 0.84 $ 80,183 112,490 $0.71
=========== ======== ========= ========= ======== ========
</TABLE>
- - -
<TABLE>
- - ------------------------ -- -- ----- ------------------------------------ -- ----- ------
Nine Months Ended November30,
-- -- ----- ------------------------------------ -- ----- ------
1998 1997
----------- -------- --------- ---------- -------- ----------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- - ------------------------------------------------------- ------------------------------
<S> <C> <C>
Net earnings $283,802 $ 259,881
=========== ==========
Basic EPS
Net earnings available
to common shareholders $ 283,802 111,065 $ 2.56 $ 259,881 107,111 $ 2.43
Effect of dilutive
stock options - 5,749 - 4,062
----------- -------- ---------- --------
Diluted EPS
Net earnings available
to common shareholders $ 283,802 116,814 $ 2.43 $ 259,881 111,173 $ 2.34
=========== ======== ========= ========== ======= ========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 November 30, 1998 Compared to Quarter Ended November 30, 1997
Revenues for the quarter ended November 30, 1998 increased 37% to $514.2
million from $375.1 million for the quarter ended November 30, 1997. Net
earnings increased 22% to $98.0 million for the quarter ended November 30, 1998
from $80.2 million for the quarter ended November 30, 1997. The increase in
revenues and net earnings for the quarter ended November 30, 1998 compared to
the quarter ended November 30, 1997 was primarily attributable to higher loan
production volume for the quarter ended November 30, 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 November 30, 1998 compared to
the quarter ended November 30, 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 November 30, 1998 over the quarter ended November
30, 1997.
The total volume of loans produced increased 89% to $24.0 billion for the
quarter ended November 30, 1998 from $12.7 billion for the quarter ended
November 30, 1997. The increase in loan production was primarily due to
increased loan refinance activity, driven by generally lower interest rates that
prevailed during the quarter ended November 30, 1998 compared to the quarter
ended November 30, 1997, as well as to the continued expansion of the Company's
Consumer Markets and Wholesale Lending Divisions. Refinancings totaled $14.2
billion, or 59% of total fundings, for the quarter ended November 30, 1998, as
compared to $5.1 billion, or 40% of total fundings, for the quarter ended
November 30, 1997. Fixed-rate mortgage loan production totaled $22.9 billion, or
96% of total fundings, for the quarter ended November 30, 1998, as compared to
$9.9 billion, or 77% of total fundings, for the quarter ended November 30, 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>
- - ------------------------------------------- ------------------------------------
(Dollar amounts in millions) Three Months Ended November 30,
- - ------------------------------------------- ------------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Consumer Markets Division $8,037 $ 3,437
Wholesale Lending Division 7,601 4,194
Correspondent Lending Division 8,185 5,041
Full Spectrum Lending, Inc. 180 61
============= =============
Total Loan Volume $24,003 $12,733
============= =============
Electronic Commerce (1) $848 $26
</TABLE>
(1) Includes loans sourced through the Company's website of $205 million
and $26 million for the quarters ended November 30, 1998 and November 30, 1997
respectively, as well as loans submitted to the Correspondent Lending Division
via its correspondent website of $643 million for the quarter ended November 30,
1998.
- - --------------------------------------------------------------------------------
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 $625 million of
home equity loans funded in the quarter ended November 30, 1998 and $372 million
funded in the quarter ended November 30, 1997. Sub-prime loan production, which
is also included in the Company's total production volume, was $603 million in
the quarter ended November 30, 1998 and $427 million in the quarter ended
November 30, 1997.
At November 30, 1998 and 1997, the Company's pipeline of loans in process
was $16.2 billion and $7.9 billion, respectively. Historically, approximately
43% to 77% of the pipeline of loans in process have funded. In addition, at
November 30, 1998, the Company had committed to make loans in the amount of $1.2
billion, subject to property identification and approval of the loans (the "LOCK
'N SHOP (R) Pipeline"). At November 30, 1997, the LOCK 'N SHOP Pipeline was $1.1
billion. For the quarters ended November 30, 1998 and 1997, the Company received
331,903 and 180,702 new loan applications, respectively, at an average daily
rate of $596 million and $315 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 November 30, 1998
as compared to the quarter ended November 30, 1997 due to higher production and
a change in the Divisional mix. The Consumer Markets Division (which, due to its
higher cost structure, charges higher origination fees per dollar loaned)
comprised a greater percentage of total production in the quarter ended November
30, 1998 than in the quarter ended November 30, 1997. Gain on sale of loans
improved in the quarter ended November 30, 1998 as compared to the quarter ended
November 30, 1997 primarily due to higher loan production volume during the
quarter ended November 30, 1998. The sale of home equity loans contributed $13.5
million and $17.8 million to gain on sale of loans in the quarters ended
November 30, 1998 and 1997, respectively. Sub-prime loans contributed $20.6
million and $13.0 million to the gain on sale of loans for the quarters ended
November 30, 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.
Net interest income (interest earned net of interest charges) decreased to
$7.1 million for the quarter ended November 30, 1998 from $9.6 million for the
quarter ended November 30, 1997. Net interest income is principally a function
of: (i) net interest income earned from the Company's mortgage loan inventory
($24.4 million and $21.4 million for the quarters ended November 30, 1998 and
1997, respectively); (ii) interest expense related to the Company's investment
in servicing rights ($88.9 million and $56.2 million for the quarters ended
November 30, 1998 and 1997, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($70.0
million and $41.9 million for the quarters ended November 30, 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 November 30, 1997 to the quarter ended November 30, 1998.
During the quarter ended November 30, 1998, loan servicing income was
positively affected by the continued growth of the loan servicing portfolio. At
November 30, 1998, the Company serviced $205.4 billion of loans (including $2.3
billion of loans subserviced for others) compared to $175.2 billion (including
$6.2 billion of loans subserviced for others) at November 30, 1997, a 17%
increase. The growth in the Company's servicing portfolio during the quarter
ended November 30, 1998 was the result of loan production volume and the
acquisition of bulk servicing rights, partially offset by prepayments, partial
prepayments and scheduled amortization of mortgage loans. The weighted average
interest rate of the mortgage loans in the Company's servicing portfolio at
November 30, 1998 and 1997 was 7.6% 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 November 30, 1998, the annual prepayment rate of
the Company's servicing portfolio was 30% compared to 16% for the quarter ended
November 30, 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 November 30, 1997 to the quarter ended
November 30, 1998 was primarily attributable to the increase in refinance
activity caused by lower interest rates during the quarter ended November 30,
1998 than during the quarter ended November 30, 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
areceive-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 subject to certain restrictions on the minimum price of the underlying
security in some cases.
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 $73.0 million. With respect to the Capped Swaps contracts
entered into by the Company as of November 30, 1998, the Company estimates that
its maximum exposure to loss over the contractual term is $21.0 million. With
respect to the Swap contracts entered into by the Company as of November 30,
1998, the Company estimates that its maximum exposure to loss over the
contractual term is $237.0 million. In the quarter ended November 30, 1998, the
Company recognized a net benefit of $533.0 million from its Servicing Hedge. The
net benefit included unrealized net gains of $174.7 million and net realized
gains of $358.3 million from the sale of various financial instruments that
comprise the Servicing Hedge and premium amortization. In the quarter ended
November 30, 1997, the Company recognized a net benefit of $161.5 million from
its Servicing Hedge. The net benefit included unrealized gains of $148.0 million
and net realized gains of $13.5 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 November 30, 1998 totaling $680.9 million (consisting of amortization
amounting to $147.4 million and impairment of $533.5 million), compared to
$243.7 million of amortization and impairment (consisting of amortization
amounting to $76.8 million and impairment of $166.9 million) in the quarter
ended November 30, 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>
Salaries and related expenses are summarized below for the quarters ended
November 30, 1998 and 1997.
<TABLE>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended November 30, 1998
thousands)
------------------------------ -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $56,175 $13,502 $23,347 $10,124 $103,148
Incentive Bonus 41,148 529 5,500 5,570 52,747
Payroll Taxes and Benefits 12,664 3,048 2,893 1,515 20,120
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $109,987 $17,079 $31,740 $17,209 $176,015
============ ============= ============= ============= ------------
Average Number of 5,849 2,026 1,885 695 10,455
Employees
</TABLE>
<PAGE>
<TABLE>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended November 30, 1997
thousands)
-------------------------------- -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $35,462 $11,262 $17,853 $6,514 $71,091
Incentive Bonus 20,826 316 4,096 2,606 27,844
Payroll Taxes and Benefits 5,373 2,138 3,440 572 11,523
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $61,661 $13,716 $25,389 $9,692 $110,458
============ ============= ============= ============= ------------
Average Number of Employees 3,452 1,669 1,431 488 7,040
</TABLE>
The amount of salaries increased during the quarter ended November 30, 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 November 30, 1998 increased primarily due to higher
production and a change in production mix.
Occupancy and other office expenses for the quarter ended November 30, 1998
increased to $73.4 million from $49.2 million for the quarter ended November 30,
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 November 30, 1998, guarantee fees increased 5% to $45.6 million
from $43.5 million for the quarter ended November 30, 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 November 30, 1998 increased 76% to
$17.1 million from $9.7 million for the quarter ended November 30, 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 November 30, 1998 increased
from the quarter ended November 30, 1997 by $10.6 million, or 34%. This increase
was due primarily to higher loan production and growth in the Company's
non-mortgage banking subsidiaries in the quarter ended November 30, 1998 as
compared to the quarter ended November 30, 1997.
Profitability of Loan Production and Servicing Activities
In the quarter ended November 30, 1998, the Company's pre-tax earnings from
its loan production activities (which include loan origination and purchases,
warehousing and sales) were $141.5 million. In the quarter ended November 30,
1997, the Company's comparable pre-tax earnings were $62.9 million. The increase
of $78.6 million was primarily attributable to increased production and a shift
in production mix towards the Consumer Markets Division. These positive results
were partially offset by higher production costs. In the quarter ended November
30, 1998, the Company's pre-tax earnings 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 $4.9 million as compared to
pre-tax income of $58.4 million in the quarter ended November 30, 1997. The
decrease of $53.5 million was primarily attributed to the increased amortization
of the servicing asset and Interest Costs Incurred on Payoffs due to declining
interest rates and an increase in prepayments from the quarter ended November
30, 1997 to the quarter ended November 30, 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 and flood insurance, escrow services, home appraisals,
credit reporting, securities brokerage and servicing rights brokerage. For the
quarter ended November 30, 1998, these activities contributed $14.2 million to
the Company's pre-tax income compared to $10.2 million for the quarter ended
November 30, 1997. This increase in pre-tax income primarily results from
improved performance of the title insurance, flood insurance, escrow and Capital
Markets business.
Nine Months Ended November 30, 1998 Compared to Nine Months Ended November
30, 1997
Revenues from ongoing operations for the nine months ended November 30, 1998
increased 39% to $1.4 billion from $1.0 billion for the nine months ended
November 30, 1997. Net earnings from ongoing operations increased 26% to $283.8
million for the nine months ended November 31, 1998 from $224.9 million for the
nine months ended November 30, 1997. Both revenues and net earnings from ongoing
operations for the nine months ended November 30, 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 nine months ended
November 30, 1998 compared to the nine months ended November 30, 1997 was
primarily attributable to higher loan production for the nine months ended
November 30, 1998. This positive factor was partially offset by an increase in
amortization and net impairment of the servicing asset and an increase in
expenses for the nine months ended November 30, 1998 over the nine months ended
November 30, 1997.
The total volume of loans produced increased 108% to $67.8 billion for the
nine months ended November 30, 1998 from $32.7 billion for the nine months ended
November 30, 1997. Refinancings totaled $37.6 billion, or 55% of total fundings,
for the nine months ended November 30, 1998, as compared to $10.9 billion, or
33% of total fundings, for the nine months ended November 30, 1997. Fixed-rate
loan production totaled $64.0 billion, or 94% of total fundings, for the nine
months ended November 30, 1998, as compared to $23.6 billion, or 72% of total
fundings, for the nine months ended November 30, 1997.
Included in the Company's total volume of loans produced are $1.7 billion of
home equity loans funded in the nine months ended November 30, 1998 and $1.0
billion funded in the nine months ended November 30, 1997. Sub-prime credit
quality loan production, which is also included in the Company's total
production volume, was $2.0 billion for the nine months ended November 30, 1998
and $1.1 billion during the nine months ended November 30, 1997.
Total loan volume in the Company's production divisions is summarized below.
<TABLE>
- - -------------------------------------------- -----------------------------------
(Dollar amounts in millions) Nine Months Ended November 30,
- - -------------------------------------------- -----------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Consumer Markets Division $21,294 $ 8,752
Wholesale Lending Division 22,590 10,024
Correspondent Lending Division 23,434 13,760
Full Spectrum Lending, Inc. 494 118
------------- ------------
Total Loan Volume $67,812 $32,654
============= ============
Electronic Commerce (1) $1,403 $33
</TABLE>
(1) Includes loans sourced through the Company's website of $440 million and
$33 million for the nine months ended November 30, 1998 and November 30,
1997, respectively, as well as loans submitted to the Correspondent Lending
Division via its correspondent website of $963 million for the nine months
ended November 30, 1998.
- - --------------------------------------------------------------------------------
Loan origination fees increased during the nine months ended November 30,
1998 as compared to the nine months ended November 30, 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 nine months ended
November 30, 1998 than in the nine months ended November 30, 1997. Gain on sale
of loans improved during the nine months ended November 30, 1998 as compared to
the nine months ended November 30, 1997 primarily due to higher production.
Net interest income (interest earned net of interest charges) increased to
$28.3 million for the nine months ended November 30, 1998, from $13.7 million
for the nine months ended November 30, 1997. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($86.2 million and $53.4 million for the nine months
ended November 30, 1998 and 1997, respectively); (ii) interest expense related
to the Company's investment in servicing rights ($263.1 million and $152.4
million for the nine months ended November 30, 1998 and 1997, respectively) and
(iii) interest income earned from the custodial balances associated with the
Company's servicing portfolio ($200.9 million and $106.0 million for the nine
months ended November 30, 1998 and 1997, respectively). The Company earns
interest on, and incurs interest expense to carry, mortgage loans held in its
warehouse. The increase in net interest income from mortgage loan inventory was
primarily attributable to increased production. The increase in interest expense
related to 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 nine
months ended November 30, 1997 to the nine months ended November 30, 1998.
During the nine months ended November 30, 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 nine months ended
November 30, 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 28% for
the nine months ended November 30, 1998 compared to 13% for the nine months
ended November 30, 1997. The increase in the prepayment rate from the nine
months ended November 30, 1997 to the nine months ended November 30, 1998 was
primarily attributable to the increase in refinance activity caused by lower
interest rates during the nine months ended November 30, 1998 than during the
nine months ended November 30, 1997.
During the nine months ended November 30, 1998, the Company recognized a net
benefit of $822.9 million from its Servicing Hedge. The net benefit included
unrealized gains of $447.4 million and net realized gains of $375.5 million from
the sale of various financial instruments that comprise the Servicing Hedge and
premium amortization. During the nine months ended November 30, 1997, the
Company recognized a net benefit of $150.2 million from its Servicing Hedge. The
net benefit included unrealized gains of $139.2 million and net realized gains
of $11.0 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 nine
months ended November 30, 1998 totaling $1.3 billion (consisting of normal
amortization amounting to $416.4 million and impairment of $854.8 million),
compared to amortization and impairment of its MSRs of $375.1 million
(consisting of normal amortization amounting to $213.8 million and impairment of
$161.3 million) in the nine months ended, November 30, 1997.
Salaries and related expenses are summarized below for the nine months ended
November 30, 1998 and 1997.
<TABLE>
-- --------------------------- -- -- --------- ------------------------------
(Dollar amounts in Nine months Ended November 30, 1998
thousands)
-------------- ------------------------------------------------- -- --- ---
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $149,277 $38,370 $65,972 $26,859 $280,478
Incentive Bonus 112,344 1,462 15,392 13,787 142,985
Payroll Taxes and Benefits 36,848 8,667 11,214 4,063 60,792
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $298,469 $48,499 $92,578 $44,709 $484,255
============ ============= ============= ============= -------------
Average Number of Employees 5,189 1,917 1,757 603 9,466
</TABLE>
<TABLE>
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- -----
(Dollar amounts in Nine months Ended November 30, 1997
thousands)
- - -- --------- ------------------------------------------------- -- --- --- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $ 95,626 $ 32,936 $ 51,079 $ 17,417 $ 197,058
Incentive Bonus 51,199 901 12,541 7,576 72,217
Payroll Taxes and Benefits 15,279 6,220 6,645 1,624 29,768
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $162,104 $40,057 $70,265 $ 26,617 $ 299,043
======== ============ ============= ============= =============
Average Number of Employees 3,132 1,637 1,364 434 6,567
</TABLE>
The amount of salaries increased during the nine months ended November 30,
1998 from the nine months ended November 30, 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 nine months ended November 30,
1998 increased to $202.2 million from $128.7 million for the nine months ended
November 30, 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 nine months ended November 30, 1998 increased 5% to
$135.7 million from $128.9 million for the nine months ended November 30, 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 nine months ended November 30, 1998 increased 55%
to $47.2 million from $30.4 million for the nine months ended November 30, 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 nine months ended November 30, 1998
increased from the nine months ended November 30, 1997 by $26.1 million, or 30%.
This increase was due primarily to higher loan production, a larger servicing
portfolio, increased reserves for bad debts, increased systems development and
growth in the Company's non-mortgage banking subsidiaries in the nine months
ended November 30, 1998 as compared to the nine months ended November 30, 1997.
Profitability of Loan Production and Servicing Activities
In the nine months ended November 30, 1998, the Company's pre-tax income
from its loan production activities (which include loan origination and
purchases, warehousing and sales) was $424.0 million. In the nine months ended
November 30, 1997, the Company's comparable pre-tax income was $158.1 million.
The increase of $265.9 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 nine months ended November 30, 1998, the Company's
pre-tax earnings 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 $1.9
million as compared to $178.8 million in the nine months ended November 30,
1997. The decrease of $176.9 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 the
nine months ended November 30, 1997 to the nine months ended November 30, 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 and flood insurance, escrow services, home appraisals,
credit reporting securities brokerage and servicing rights brokerage. For the
nine months ended November 30, 1998, these activities contributed $39.3 million
to the Company's pre-tax income compared to $31.8 million during the nine months
ended November 30, 1997. This increase in pre-tax income primarily results from
improved performance of the title insurance, and flood insurance, escrow and
Capital Markets businesses.
During the nine months ended November 30, 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 principal impact of this sale on earnings was a $57.4
million gain on sale recorded in the second quarter of fiscal 1998.
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
November 30, 1998, the Company estimates that a permanent 0.50% reduction in
interest rates, all else being constant, would result in a $0.2 million
after-tax gain related to its trading securities and a $34.5 million after-tax
loss related to its other financial instruments, for the fiscal year ended
February 28, 1999. The Company estimates that this combined after-tax loss of
$34.3 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 backed by revolving credit
facilities, 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.
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 nine months ended November 30, 1998, the
Company's operating activities used cash of approximately $1.6 billion. In the
nine months ended November 30, 1997, operating activities used approximately
$2.1 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 $1.2 billion for the nine months ended November 30, 1998 and $0.8 billion
for the nine months ended November 30, 1997.
Financing Activities Net cash provided by financing activities amounted to
$2.9 billion for the nine months ended November 30, 1998. Net cash provided by
financing activities amounted to $2.9 billion for the nine months ended November
30, 1997.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
For the month ended December 31, 1998, the Company received new loan
applications at an average daily rate of $569 million and at December 31, 1998,
the Company's pipeline of loans in process was $15.5 billion. This compares to a
daily application rate in the month end December 31, 1997 of $303 million and a
pipeline of loans in process at December 31, 1997 of $7.6 billion. The size of
the pipeline is generally an indication of the level of future fundings, as
historically 43% to 77% of the pipeline of loans in process has funded. In
addition, the Company's LOCK `N SHOP(R) Pipeline at December 31, 1998 was $1.1
billion and at December 31, 1997 was $769.1 million. 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 89% from quarter ended November 30, 1997 to
quarter end November 30, 1998. This increase was due to several factors. First,
mortgage interest rates generally were lower in the quarter ended November 30,
1998. This drove a 179% increase in refinance loan production in the quarter
ended November 30, 1998 as compared to the quarter ended November 30,1997. In
addition, home purchase market activity was stronger during the quarter ended
November 30, 1998 than in the quarter ended November 30, 1997. On top of the
increase in the loan origination market, the Company increased its market share
from the quarter ended November 30, 1997 to the quarter ended November 30, 1998,
in arge part due to its ongoing expansion of the Consumer Markets and Wholesale
Divisions.
The annual prepayment rate in the servicing portfolio increased from 16% for
the quarter ended November 30, 1997 to 30% for the quarter ended November 30,
1998 due to lower interest rates in the quarter ended November 30, 1998 than in
the quarter ended November 30, 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 several 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 23% of its total production during the quarter ended
November 30, 1998 and 26% during the quarter ended November 30, 1997. The
Company is continuing its efforts to expand its production capacity outside of
California. Some regions in which the Company operates may have experienced
slower economic growth, and real estate financing activity in these regions may
have 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
3.61% at November 30, 1998 from 4.29% at November 30, 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 46% and
49% of the portfolio at November 30, 1998 and November 30, 1997, respectively.
The weighted average age of the portfolio is 27 months at November 30, 1998 and
November 30, 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 November 30, 1998 from 0.62% at November
30, 1997 primarily due to the sale of $347 million of mortgage loans in
foreclosure as of November 30, 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 November 30, 1998,
the Company had investments in such subordinated interests amounting to $261
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 such mortgage loan would 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 November 30, 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 decline in value of the Servicing Hedge; 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.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No.65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interest
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998 and reclassified mortgage-backed
securities retained in securitization as available for sale securities.
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 December 31, 1998 the Company has substantially
reprogrammed and re-engineered the system to incorporate four-digit century date
fields or appropriate widowing techniques, tested the function and accuracy of
the reprogrammed fields, implemented the revised code and forward-date tested
the more than 17,000 production programs on the AS/400. Programming errors
discovered
in the forward-date testing process are being corrected, and the Company
anticipates that the revisions will be forward-date tested before January 31,
1999.
Many of the Company's Client Server applications have been developed
in-house and in a Year 2000 compliant format. The majority of these applications
interface with the AS/400. The Company has reviewed each of its mission critical
Client Server applications to confirm their Year 2000 readiness. Additionally,
as part of this project, the Company has tested the interfaces between the
individual mission critical Client Server applications and the AS/400 to confirm
that accurate data is exchanged with the revised AS/400 programs. All but one of
the Company's mission critical Client Server applications have been forward-date
tested. The programming errors discovered in the forward-date testing process
are being corrected, and the Company anticipates that the revisions will be
forward-date tested before January 31, 1999. The Company estimates that
forward-date testing of the remaining mission critical Client Server
applications and most of its less critical applications will be completed by
June 30, 1999.
The Company's Infrastructure Project has inventoried the personal computers
used by the Company's employees nationwide to determine the Year 2000 readiness
of these computers. Where necessary, older computers and related hardware which
are not Year 2000 compliant will be upgraded or replaced before December 31,
1999. As part of the Infrastructure Project, the Company also identified
"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, and
approximately 95% of those systems have been forward-date tested. The Company
anticipates that the remaining systems and components will be forward-date
tested prior to February 28, 1999. Additionally, the Infrastructure Project
personnel, along with personnel from the Company's Facilities and Property
Management Departments, have evaluated building systems of the Company's
corporate facilities to assess whether they will operate satisfactorily in the
Year 2000 and beyond. These building systems include energy management,
environmental, and safety and security systems. Where necessary, non-compliant
systems or components will be upgraded or replaced before December 31, 1999.
The Communications Project personnel have developed a database for
collecting information regarding the Year 2000 status of the Company's strategic
business partners and other vendors and suppliers. Individual business units
identify 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. In December
1998, the Company successfully completed company-wide testing of electronic
interfaces with FHLMC. Similar testing with FNMA is scheduled for January 1999.
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 $20 million has been incurred through November 30, 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 13 of this Form
10Q.
<PAGE>
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
4.19 Form of Medium-Term Notes, Series H (fixed rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and
333-66467-01) filed with the SEC on October 30, 1998).
4.20 Form of Medium-Term Notes, Series H (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-66467
and 333-66467-01) filed with the SEC on October 30, 1998).
10.8.3 Amendment to Revolving Credit Agreement dated as of the 25th day of
November,1998 by and among CHL, the Lenders under (as that term is
defined in)the Revolving Credit Agreement dated as of September
24, 1997, and Bankers Trust Company as Credit Agent.
10.8.4 Amendment to Revolving Credit Agreement dated as of the 20th day
of November, 1998 by and among CHL, the Lenders under (as that term
is defined in) the Revolving Credit Agreement dated as of April 15,
1998 and Royal Bank of Canada, as lead administrative agent for the
Lenders.
10.24.1 Amended and Restated Split-Dollar Life Insurance Agreement.
10.27.1 First Amendment to Change in Control Severance Plan.
(b) Reports on Form 8-K. None.
<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: January 14, 1999
------------------------
Stanford L. Kurland
Senior Managing Director and
Chief Operating Officer
DATE: January 14, 1999
------------------------
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: January 14, 1999 /s/ Stanford L. Kurland
------------------------
Senior Managing Director and
Chief Operating Officer
DATE: January 14, 1999 /s/ Carlos M. Garcia
------------------------
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Document Description
4.19 Form of Medium-Term Notes, Series H (fixed rate) of CHL (incorporated
by reference to Exhibit 4.3 to the registration statement on Form S-3
of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed
with the SEC on October 30, 1998).
4.20 Form of Medium-Term Notes, Series H (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and
333-66467-01) filed with the SEC on October 30, 1998).
10.8.3 Amendment to Revolving Credit Agreement dated as of the 25th day
of November,1998 by and among CHL, the Lenders under (as that term is
defined in)the Revolving Credit Agreement dated as of September 24,
1997, and Bankers Trust Company as Credit Agent.
10.8.4 Amendment to Revolving Credit Agreement dated as of the 20th day of
November, 1998 by and among CHL, the Lenders under (as that term is
defined in) the Revolving Credit Agreement dated as of April 15, 1998
and RoyalBank of Canada, as lead administrative agent for the
Lenders.
10.24.1 Amended and Restated Split-Dollar Life Insurance Agreement.
10.27.1 First Amendment to Change in Control Severance Plan.
AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment")
is made and dated as of the 25th day of November, 1998 by and among COUNTRYWIDE
HOME LOANS, INC. (the "Company"), the Lenders under (and as that term and
capitalized terms not otherwise defined herein are defined in) the Revolving
Credit Agreement described below, and 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,
the Credit Agent and others (as amended, extended and replaced from time to
time, the "Revolving Credit Agreement"), the Lenders agreed to extend credit to
the Company on the terms and subject to the conditions set forth therein.
B. The Company has requested that the Lenders currently party
to the Revolving Credit Agreement agree to amend the Revolving Credit Agreement
in certain respects as provided more particularly herein.
NOW, THEREFORE, in consideration of the above Recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Amendment of Negative Covenant. To reflect the agreement of
the Lenders to exclude certain of the Company's Advances to Affiliates from the
limitations thereon set forth in the Revolving Credit Agreement, Paragraph 10(g)
of the Revolving Credit Agreement is hereby amended to read in its entirety as
follows:
"10(g) Investments; Advances; Receivables. Make or commit to
make any advance, loan or extension of credit ("Advances") to, or hold
any receivable ("Receivable") of, or make or commit to make any capital
contribution to, or purchase any stock, bonds, notes, debentures or
other securities ("Investments") of, or make any other investment in,
any Person, except: (1) Advances constituting Mortgage Loans made in
the ordinary course of the Company's business and (2) Investments in,
unsecured and secured Advances to, and Receivables of, any Affiliate
(and Servicing Pass-Through Ventures which are not otherwise
Affiliates) in an aggregate amount not to exceed ten percent (10%) of
the net worth of the Company determined in accordance with GAAP;
provided, however, that: (i) any unsecured Advances made by the Company
to any Affiliate must be funded with equity of the Company, (ii) any
secured Advances made by the Company to any Affiliate must be fully
secured on a first priority, perfected basis, by readily marketable
securities pledged by such Affiliate, and (iii) for purposes of
determining the Company's compliance with the requirements of
subparagraph (2) above Advances to Affiliates shall not include
Advances made by the Company to any of Countrywide Capital Markets,
Inc. ("CCMI"), Countrywide Securities Corporation ("CSI") and/or
Countrywide Servicing Exchange, Inc. ("CSEI") which Advances are
secured on a first priority, perfected basis by Mortgage-Backed
Securities owned by any of CCMI, CSC or CSEI."
2. 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.
3. 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.
4. 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.
5.Representations and Warranties. The Company hereby
represents and warrants to the Credit Agent and each of the
Lenders that at the date hereof and at and as of the Amendment
Effective Date:
(a) Each of the Company and the Parent has
the corporate power and authority and the legal right to execute, deliver and
perform this Amendment and has takenall necessary corporate action to authorize
the execution, delivery and performance of this Amendment. This Amendment
has been duly executed anddelivered 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.
6. No Other Amendment. Except as expressly
amended hereby, the Credit Documentsshall remain in full force and effect as
written and amended to date.
7. Counterparts. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first above written.
COUNTRYWIDE HOME LOANS, INC.,
a New York corporation
By
Name
Title
BANKERS TRUST COMPANY,
as Credit Agent
By
Name
Title
<PAGE>
THE ASAHI BANK, LTD., LOS ANGELES AGENCY, as a Lender
By
Name
Title
BANCA CRT S.p.A., as a Lender
By
Name
Title
By
Name
Title
BANCA DI NAPOLI S.p.A., NEW YORK BRANCH, as a Lender
By
Name
Title
By
Name
Title
BANCA DI ROMA, SAN FRANCISCO BRANCH, as a Lender
By
Name
Title
By
Name
Title
BANCA MONTE DEI PASCHI DI SIENA S.p.A., NEW YORK BRANCH, as a Lender
By
Name
Title
By
Name
Title
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender
By
Name
Title
BANK OF HAWAII, as a Lender
By
Name
Title
BANK OF MONTREAL, as a Lender
By
Name
Title
THE BANK OF NEW YORK, as a Lender
By
Name
Title
BANK OF TOKYO - MITSUBISHI TRUST COMPANY, as a Lender
By
Name
Title
BANK ONE, TEXAS, N.A., as a Lender
By
Name
Title
BANKERS TRUST COMPANY, as a Lender
By
Name
Title
BANQUE NATIONALE DE PARIS, as a Lender
By
Name
Title
By
Name
Title
PARIBAS, as a Lender
By
Name
Title
By
Name
Title
BARCLAYS BANK PLC, as a Lender
By
Name
Title
THE DAI-ICHI KANGYO BANK, LTD.,
LOS ANGELES AGENCY, as a Lender
By
Name
Title
<PAGE>
BAYERISCHE LANDESBANK GIROZENTRALE, CAYMAN ISLANDS BRANCH, as a Lender
By ________________________________________________________
Name ______________________________________________________
Title _____________________________________________________
By ________________________________________________________
Name ______________________________________________________
Title _____________________________________________________
CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender
By
Name
Title
THE CHASE MANHATTAN BANK, as a Lender
By
Name
Title
CREDIT LYONNAIS, SAN FRANCISCO BRANCH, as a Lender
By
Name
Title _____________________________________________________
DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a Lender
By
Name
Title
By
Name
Title
THE FIFTH THIRD BANK, as a Lender
By
Name
Title
THE FIRST NATIONAL BANK OF CHICAGO, as a Lender
By
Name
Title
FIRST UNION NATIONAL BANK, as a Lender
By
Name
Title
FLEET BANK, N.A., as a Lender
By
Name
Title
THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, as a Lender
By
Name
Title
THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY, as a Lender
By
Name
Title
KBC BANK N.V., as a Lender
By
Name
Title
By ________________________________________________________
Name ______________________________________________________
Title _____________________________________________________
LASALLE NATIONAL BANK, as a Lender
By
Name
Title
THE LONG TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as a
Lender
By
Name
Title
MELLON BANK, N.A., as a Lender
By
Name
Title
THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY, as a Lender
By
Name
Title
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Lender
By
Name
Title
NATIONSBANK, N.A., as a Lender
By
Name
Title
NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN
ISLANDS BRANCH, as a Lender
By
Name
Title
By
Name
Title
ROYAL BANK OF CANADA, as a Lender
By
Name
Title
THE SAKUR BANK LIMITED, LOS ANGELES AGENCY, as a Lender
By
Name
Title
By
Name
Title
STAR BANK, NATIONAL ASSOCIATION, as a Lender
By
Name
Title
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender
By
Name
Title
THE TOYO TRUST AND BANKING CO., LTD., LOS ANGELES AGENCY, as a Lender
By
Name
Title
UNION BANK OF CALIFORNIA, N.A., as a Lender
By
Name
Title
U. S. BANK NATIONAL ASSOCIATION, formerly known as U.S. National Bank
of Oregon, as a Lender,
By
Name
Title
WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS
BRANCH, as a Lender
By
Name
Title
ACKNOWLEDGED and AGREED TO as of the date first written above:
COUNTRYWIDE CREDIT INDUSTRIES, INC.,
a Delaware corporation
By _______________________________________________
Name _____________________________________________
Title ____________________________________________
<PAGE>
AMENDMENT TO REVOLVING CREDIT AGREEMENT
__________________ THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT (the
"Amendment") is made and dated as of the 20th day of November, 1998 by and among
COUNTRYWIDE HOME LOANS, INC. (the "Company") the Lenders under (and as that term
and capitalized terms not otherwise defined herein are defined in) the Revolving
Credit Agreement described below and ROYAL BANK OF CANADA, as lead
administrative agent for the Lenders (in such capacity, the "Lead Agent").
RECITALS
__________________ A. Pursuant to that certain Revolving Credit Agreement dated
as of April 15, 1998 by and among the Company, the Lenders signatory thereto,
the Lead Agent, The Bank of New York ("BNY"), as co-administrative agent, Morgan
Guaranty Trust Company of New York ("MGTC"), as syndication agent, Credit
Lyonnais, San Francisco Branch ("CL"), as documentation agent, RBC, as arranger,
BNY, MGTC and CL, as co-arrangers and the Lenders acting as co-agents, as
indicated on the signature pages thereof (as amended, extended and replaced from
time to time, the "Revolving Credit Agreement"), the Lenders agreed to extend
credit to the Company on the terms and subject to the conditions set forth
therein.
__________________ B. The Company has requested that the Lenders currently party
to the Revolving Credit Agreement agree to amend the Revolving Credit Agreement
in certain respects as provided more particularly herein.
__________________ NOW, THEREFORE, in consideration of the above Recitals and
for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
__________________ 1. Amendment of Negative Covenant. To reflect the agreement
of the Lenders to exclude certain of the Company's Advances to Affiliates from
the limitations thereon set forth in the Revolving Credit Agreement, Paragraph
10(g) of the Revolving Credit Agreement is hereby amended to read in its
entirety as follows:
"10(g) Investments; Advances; Receivables. Make or commit to
make any advance, loan or extension of credit ("Advances") to, or hold
any receivable ("Receivable") of, or make or commit to make any capital
contribution to, or purchase any stock, bonds, notes, debentures or
other securities ("Investments") of, or make any other investment in,
any Person, except: (1) Advances constituting Mortgage Loans made in
the ordinary course of the Company's business and (2) Investments in,
unsecured and secured Advances to, and Receivables of, any Affiliate
(and Servicing Pass-Through Ventures which are not otherwise
Affiliates) in an aggregate amount not to exceed ten percent (10%) of
the net worth of the Company determined in accordance with GAAP;
provided, however, that: (i) any unsecured Advances made by the Company
to any Affiliate must be funded with equity of the Company, (ii) any
secured Advances made by the Company to any Affiliate must be fully
secured on a first priority, perfected basis, by readily marketable
securities pledged by such Affiliate, and (iii) for purposes of
determining the Company's compliance with the requirements of
subparagraph (2) above Advances to Affiliates shall not include
Advances made by the Company to any of Countrywide Capital Markets,
Inc. ("CCMI"), Countrywide Securities Corporation ("CSI") and/or
Countrywide Servicing Exchange, Inc. ("CSEI") which Advances are
secured on a first priority, perfected basis by Mortgage-Backed
Securities owned by any of CCMI, CSC or CSEI."
2. Reaffirmation of Loan Documents. The
Company hereby affirms and agrees that (a) the execution and delivery by the
Company of and the performance of its obligations under this Amendment shall not
in any way amend, impair, invalidate or otherwise affect any of the obligations
of the Company or the rights of the Lead 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.
3. Reaffirmation of Guaranties. By executing
this Amendment as provided below, the Parent acknowledges the terms and
conditions of this Amendment and affirms and agrees that (a) the execution and
delivery by the Company and the performance of its obligations under this
Amendment shall not in any manner or to any extent affect any of the obligations
of the Parent or the rights of the Lead 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.
4.Amendment Effective Date. This Amendment
shall be effective as of the day and year first above written upon the date (the
"Amendment Effective Date") that there has been delivered to the Lead 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 Lead Agent may request.
5. Representations and Warranties. The Company hereby represents and
warrants to the Lead Agent and each of the Lenders that at the date hereof and
at and as of the Amendment Effective Date:
(a) Each of the Company and the
Parent has the corporate power and authority and the legal right to execute,
deliver and perform this Amendment and has taken all necessary corporate action
to authorize the execution, delivery and performance of this Amendment. This
Amendment has been duly executed and delivered on behalf of the Company and the
Parent and constitutes the legal, valid and binding obligation of such Person,
enforceable against such Person in accordance with its terms.
(b) Both prior to and after giving effect hereto: (1) the representations
and warranties of the Company and the Parent contained in the Credit Documents
are accurate and complete in all respects, and (2) there has not occurred an
Event of Default or Potential Default.
6. No Other Amendment. Except as expressly amended hereby, the Credit Documents
shall remain in full force and effect as written and amended to date.
7. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
COUNTRYWIDE HOME LOANS, INC.,
a New York corporation
By
Name
Title
ROYAL BANK OF CANADA, as Lead Administration Agent, Arranger and a
Lender
By
Name
Title
<PAGE>
THE BANK OF NEW YORK, as Co-Administrator Agent, a Co-Arranger, a
Co-Agent a and Lender
By
Name
Title
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Syndication Agent, a
Co-Arranger, a Co-Agent and a
Lender
By
Name
Title
CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent, a
Co-Arranger, a Co-Agent and a Lender
By
Name
Title
ABN AMRO BANK, N.V., as a Co-Agent and a Lender
By
Name
Title
By
Name
Title _____________________________________________________
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Co-Agent
and a Lender Agent
By
Name
Title
BARCLAYS BANK PLC, as a Co-Agent and a Lender
By
Name
Title
THE CHASE MANHATTAN BANK, as a Co-Agent and a Lender
By
Name
Title
DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a
Co-Agent and a Lender
By
Name
Title
By
Name
Title
NATIONSBANK OF TEXAS, N.A., as a Co-Agent and a Lender
By
Name
Title
BANQUE NATIONALE DE PARIS, as a Lender
By
Name
Title
By
Name
Title
CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender
By
Name
Title
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender
By
Name
Title
BANQUE PARIBAS, as a Lender
By
Name
Title
By
Name
Title
BANK ONE, TEXAS, N.A., as a Lender
By
Name
Title
BANK OF HAWAII, as a Lender
By
Name
Title
ACKNOWLEDGED and AGREED TO as of the day and year first written above:
COUNTRYWIDE CREDIT INDUSTRIES, INC.,
By _______________________________________________
Name _____________________________________________
Title ____________________________________________
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
This Split Dollar Life Insurance Agreement ("Agreement") is made, as of
____________, 199__, by and between Countrywide Credit Industries, Inc., a
Delaware corporation (the "Corporation"), and ____________ (the "Executive").
RECITALS
A. The Executive desires to insure his or her life for the benefit and
protection of his or her family or designated beneficiary under the Policy (as
defined below);
B. The Corporation desires to help the Executive provide certain
insurance for the benefit and protection of his or her family or designated
beneficiary by providing funds from time to time to pay the premiums due on
the Policy in accordance with this Agreement; and
C. The Executive, as Owner of the Policy, desires to assign
certain rights and interests in the Policy to the Corporation, to the
extent provided herein, as security for repayment of certain funds provided
by the Corporation for the acquisition and/or maintenance of the Policy.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the mutual
agreements and covenants set forth below, the parties to this Agreement agree as
follows:
1. Definitions. For purposes of this Agreement, unless otherwise
clearly apparent from the context, the following phrases or terms
shall have the following indicated meanings:
(a) "Aggregate Premiums Paid" shall mean, at any time, an amount equal to
(i) the cumulative premiums paid by the Corporation on the Policy, less (ii) any
Policy loans to the Corporation and accrued and unpaid interest thereon, less
(iii) any amounts, if any, received by the Corporation from the Executive for
life insurance coverage provided under this Agreement. Despite the foregoing,
Aggregate Premiums Paid shall not include extra benefit riders or agreements,
other than those providing additional life insurance coverage on the insured,
and shall not include premiums waived pursuant to the terms of any disability
waiver of a premium rider.
(b) "Base Annual Salary" shall mean the base annual
compensation, excluding bonuses, commissions,
overtime, relocation expenses, incentive payments,
non-monetary awards, directors fees and other fees,
paid to the Executive for employment services
rendered to the Corporation, before reduction for
compensation deferred pursuant to all qualified,
non-qualified and Code Section 125 plans of the
Corporation, in effect at the later of (1) March 1,
1997, (2) the date of an increase associated with a
promotion to a higher corporate title, or (3) the
date of entry into the Plan.
(c) "Benefit Measurement Date" shall mean the date on
which the first of any of the following events
occurs:
(i) The Executive's Termination of Employment;
(ii) Termination of this Agreement in accordance with Section 9 below; or
(iii) The Executive's death.
(iv) The Executive's Retirement
(d) "Cash Surrender Value" shall mean an amount that
equals, at any specified time, the cash surrender
value as determined under the terms of the Policy.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Collateral Assignment" shall mean an assignment made
by the Executive in favor of the Corporation in a
form mutually agreed to by the Corporation and the
Executive and accepted by the Insurer.
(g) "Collateral Interest" shall mean the Corporation's
rights and interests in the Policy, as set forth in
Section 6 below.
(h) "Executive's Death Benefit" shall mean an amount that
is equal to the result of multiplying the Executive's
Base Annual Salary by two (2).
(i) "Insurer" shall mean Aetna Life Insurance and Annuity Company and/or
Manufacturers Life Insurance Company.
(j) "Minimum Retirement Cash Value" shall mean, on the
Benefit Measurement Date, the minimum amount of cash
value that is needed in the Policy to maintain a
death benefit that is equal to one half of the
Executive's Death Benefit, determined on the Benefit
Measurement Date, assuming that the Policy will be
held without surrender, withdrawal or loan until the
Executive reaches age 90 and that the fixed interest
rate to be used to project earnings on the Policy up
to the specified age is the Insurer's announced
interest rate under the Policy on the Benefit
Measurement Date.
(k) "Plan" shall mean the plan described in Section 8(a) below.
(l) "Policy" shall mean the following policy or policies
on the life of the Executive that are issued by the
Insurer:
Policy Number Type of Policy Insurance Company
----------------------- ------------------- -----------------------------------
Universal Life Aetna Life Insurance and Annuity Company
-------------------
----------------------- ----------------------------------------------
Universal Life Manufacturers Life Insurance Company
----------------------- ------------------- -----------------------------------
(m) "Retirement" or "Retire" shall mean severance from
employment from the Corporation for any reason other
than an authorized leave of absence, death, or
Termination of Employment, on or after the attainment
of age sixty-five (65).
(n) "Tax Limitation Date" shall mean the date on which
the Policy will no longer be subject to those
provisions of Section 7702(f)(7) of the Code that
would cause any distribution or surrender from or
under the Policy to be taxed under that Section (or
Section 72 of the Code by reason of that Section).
(o) "Termination of Employment" shall mean the ceasing of
employment with the Corporation for any reason other
than death, an authorized leave of absence or a
disability that does not constitute a ceasing of
employment under the Corporation's employment
policies.
2. Acquisition of Policy; Ownership of Insurance. The parties to
this Agreement shall cooperate in applying for and obtaining the
Policy. The Policy shall be issued to the Executive, as the sole
and exclusive owner of the Policy, subject to the rights and
interests granted to the Corporation, as provided in this
Agreement and the Collateral Assignment.
3. Premium Payments on Policy.
(a) Payments and Reimbursements. Prior to the occurrence of the Benefit
Measurement Date, the Corporation shall pay to the Insurer, on or before each
applicable premium due date, all applicable premiums for the Policy. In the
event that the Corporation fails to make any such payment, the Executive may
make (but is not required to make) any such payment, and the Corporation shall
immediately reimburse the Executive for any amount so paid. All such premium
payments made by the Corporation under this Agreement shall constitute advances
by the Corporation to the Executive for which the Executive shall be responsible
for repayment in accordance with the terms of this Agreement, but only up to an
amount equal to the Corporation's Collateral Interest.
(b) Additional Compensation. Each calendar year, the Executive shall be
considered to have taxable compensation income for that portion of the premiums
paid by the Corporation that is equal in amount to the value of the "economic
benefit" derived by the Executive from the Policy's life insurance protection,
as determined for Federal income tax purposes under Revenue Rulings 64-328 and
66-110. The Corporation shall withhold from the Executive's Base Annual Salary,
or other compensation paid to the Executive, in a manner determined by the
Corporation, the Executive's share of FICA and other employment and income taxes
relating to that taxable amount.
4. Corporation's Rights. The Corporation's rights and interests in and to
the Policy shall be specifically limited to (i) the right to increase or
decrease Policy death benefits annually in accordance with maintaining the
"Executives Death Benefit" as defined in Section 1(h), (ii) the right to be paid
its Collateral Interest in accordance with Section 6 below, (iii) the rights
specified in the Collateral Assignment, and (iv) the right to obtain one or more
loans or advances on the Policy, provided, however, that any such loans shall
not, in the aggregate, exceed the Aggregate Premiums Paid by the Corporation at
any specified date without the written consent of the Executive.
5. Executive's Rights. Subject to the terms of this Agreement and
the Collateral Assignment, the Executive shall be the owner of
the Policy, and shall be entitled to exercise all rights in the
Policy while the Collateral Assignment is in effect, except for
the following, which may be exercised only in accordance with
Section 6:
(a) To borrow against or pledge the Policy; (b) To surrender,
cancel or assign the Policy; or (c) To take a distribution or
withdrawal from the Policy.
6. Collateral Interest.
(a) The Corporation's Collateral Interest in the Policy
shall be paid as soon as is reasonably practical
after the Benefit Measurement Date.
(b) On the Benefit Measurement Date, the Corporation's
interest in the Policy (the "Collateral Interest")
shall be determined in the following manner:
(i) If the Benefit Measurement Date occurs
due to the Executive's Termination of
Employment or the termination of this
Agreement by either party in accordance
with Section 9 below, the Corporation
shall be entitled to receive from the
Policy an amount equal to that portion
of the Policy's Cash Surrender Value
that does not exceed the Aggregate
Premiums Paid.
(ii) If the Benefit Measurement Date occurs
due to the death of the Executive
(except as provided in Section 6(b)(iii)
below), the Corporation shall be
entitled to that portion of the Policy's
death proceeds that exceeds the
Executive's Death Benefit.
(iii) If the Benefit Measurement Date occurs
due to the suicide of the Executive, and
the proceeds from the Policy are limited
by either a suicide or contestability
provision under the Policy, the
Corporation shall be entitled to that
portion of the Policy's Cash Surrender
Value and/or death proceeds that does
not exceed the Aggregate Premiums Paid.
(iv) If the Benefit Measurement Date occurs due to the Executive's
Retirement, the Corporation shall be entitled to receive from the Policy an
amount equal to that portion of the Policy's Cash Surrender Value that does not
exceed the Aggregate Premiums Paid. Despite the foregoing, if, on the Benefit
Measurement Date, the Policy's remaining Cash Surrender Value (after taking into
account the Corporation's Collateral Interest described in the preceding
sentence) is less than the Minimum Retirement Cash Value, then the Corporation's
Collateral Interest specified in the preceding sentence shall be reduced by the
amount that the Minimum Retirement Cash Value exceeds the remaining Cash
Surrender Value.
(c) If the Benefit Measurement Date is other than the
date of the Executive's death, the Corporation's
Collateral Interest in the Policy, as determined in
Section 6(b)(i) and (iv) above, shall be paid to the
Corporation in one of the following ways, as elected
by the Executive in writing within 30 days after the
date the Corporation first notifies the Executive in
writing of the occurrence of the Benefit Measurement
Date:
(i) By the Executive's surrender or partial
surrender of, or withdrawal from, the
Policy in an amount equal to the
Corporation's Collateral Interest and
payment of the proceeds to the
Corporation;
(ii) By the Executive taking a loan out on
the Policy in an amount equal to the
Corporation's Collateral Interest, and
payment of the loan proceeds to the
Corporation, provided that the
Corporation shall not be responsible for
any interest that may accrue on any such
loan;
(iii) By the Executive's payment to the
Corporation, from the Executive's
separate funds, an amount equal to the
Corporation's Collateral Interest; or
(iv) By the Executive's transfer of the
ownership of the Policy, and all rights
thereunder, to the Corporation.
(d) If the Benefit Measurement Date is the date of the
Executive's death, the Corporation's Collateral
Interest in the Policy, as determined in Section
6(b)(ii) above, shall be paid to the Corporation from
the Policy's proceeds as soon as is reasonably
practicable after the Executive's death.
(e) Despite Section 6(c) above and Section 6(f) below,
if, at the time of the Benefit Measurement Date, the
Tax Limitation Date has not occurred, (i) the
Corporation shall have the right, in its sole
discretion, to require the Executive to elect to pay
the Corporation's Collateral Interest in accordance
with Section 6(c)(ii) above, and (ii) the
Corporation's rights under Section 6(f) shall be
limited to taking a loan in accordance with Section
6(f)(ii) below.
(f) If the Executive fails to exercise any of the options under
Section 6(c) above, by delivering written notice of such election to the
Corporation no later than 30 days after the date the Corporation first
notifies the Executive in writing of the occurrence of the Benefit
Measurement Date, the Corporation shall be entitled to: (i) surrender the
Policy and receive the Policy's Cash Surrender Value, to the extent of the
Corporation's Collateral Interest, or (ii) take out a loan on the Policy in
an amount equal to the Corporation's Collateral Interest, with the loan
proceeds paid to the Corporation and the Corporation not responsible for
any interest that may accrue on such loan, or (iii) transfer the ownership
of and beneficial interest in the Policy to the Corporation. In the case of
(i) or (iii) above, the Corporation shall pay to the Executive the Cash
Surrender Value or death proceeds that remain after the Corporation has
been paid its Collateral Interest. (g) The Corporation agrees to keep
records of its premium payments and to furnish the Insurer with a statement
of its Collateral Interest whenever the Insurer requires such statement.
(h) Concurrent with the signing of this Agreement, the
Executive will collaterally assign the Policy to the
Corporation, in the form of the Collateral
Assignment, as security for the payment of the
Collateral Interest, which assignment shall not be
altered or changed without the consent of the
Corporation and the Executive.
(i) Promptly following the Executive's death, the Corporation and the
Executive's designated beneficiary under the Policy shall take all steps
necessary to collect the death proceeds of the Policy by submitting the
proper claims forms to the Insurer. The Corporation shall notify the
Insurer of the amount of the Executive's Death Benefit (except when the
Policy's proceeds are limited because of the Executive's death by suicide)
and the Corporation's Collateral Interest in the Policy at the time of such
death. Such amounts shall be paid, respectively, by the Insurer to the
Executive's designated beneficiary and the Corporation.
(j) If the Executive elects to retain the Policy in accordance with
Section 6(c) above, the Corporation shall (i) assign its Collateral
Interest in the Policy to the Executive, (ii) execute and file with the
Insurer an appropriate release of the Corporation's Collateral Interest in
the Policy and (iii) have no further interest in the Policy; provided that,
in all instances, the Corporation receives payment in full for its
Collateral Interest in the Policy. Further, the Executive hereby
acknowledges, understands and agrees that, upon the release of the
Corporation's Collateral Interest, the Corporation shall not have any
responsibility for the future performance of the Policy and shall have no
obligation to make any additional premium payments.
(k) If the Executive elects to transfer the Policy to the
Corporation, or the Corporation makes such an
election in accordance with Section 6(f)(iii) above,
the Executive agrees to execute within thirty (30)
days of such election all documents necessary to
transfer the Policy to the Corporation, and the
Executive shall have no further interest in and to
the Policy. Executive hereby appoints Corporation as
its lawful attorney-in-fact to execute any document
necessary to transfer the Policy to the Corporation
and not executed by Executive within thirty (30) days
of such election.
(l) Upon payment to the Corporation of its Collateral
Interest in accordance with this Section 6, this
Agreement, and the Executive's participation in the
Plan, shall terminate and neither party shall have
any further rights or obligations under the Agreement
or the Plan with respect to the Executive.
(m) The Corporation shall cooperate in effecting any full
or partial policy surrender, withdrawal or policy
loan requested by the Executive related to the
Executive's exercise of any options provided in
Section 6(c) above, provided that the Corporation
receives payment in full for its Collateral Interest
in the Policy. Moreover, the Executive shall
cooperate in effecting any right granted to the
Corporation under this Agreement.
7. Insurer.
(a) The Insurer is not a party to this Agreement, shall
in no way be bound by or charged with notice of its
terms, and is expressly authorized to act only in
accordance with the terms of the Policy. The Insurer
shall be fully discharged from any and all liability
under the Policy upon payment or other performance of
its obligations in accordance with the terms of the
Policy.
(b) The signature(s) required for the Insurer to
recognize the exercise of a right under the Policy
shall be specified in the Collateral Assignment.
8. Plan; Named Fiduciary; Claims Procedure.
(a) This Agreement is part of the Countrywide Credit
Industries, Inc. Split-Dollar Life Insurance Plan,
which consists of all Countrywide Credit Industries,
Inc. Split Dollar Life Insurance Agreements that so
reference their association with the Plan.
(b) The Corporation is the named fiduciary of the Plan for purposes of
this Agreement.
(c) The following claims procedure shall be followed in
handling any benefit claim under this Agreement and
the Plan:
(i) The Executive, or his or her beneficiary, if he or she is dead
(the "Claimant"), shall file a claim for benefits by notifying the
Corporation in writing. If the claim is wholly or partially denied, the
Corporation shall provide a written notice within 90 days specifying the
reasons for the denial, the provisions of this Agreement on which the
denial is based, and additional material or information, if any, that is
necessary for the Claimant to receive benefits. Such written notice shall
also indicate the steps to be taken by the Claimant if a review of the
denial is desired.
(ii) If a claim is denied, and a review is desired, the Claimant shall
notify the Corporation in writing within 60 days after receipt of written
notice of a denial of a claim. In requesting a review, the Claimant may
review plan documents and submit any written issues and comments the
Claimant feels are appropriate. The Corporation shall then review the claim
and provide a written decision within 60 days of receipt of a request for a
review. This decision shall state the specific reasons for the decision and
shall include references to specific provisions of this Agreement, if any,
upon which the decision is based.
(iii) In no event shall the Corporation's
liability under this Agreement exceed
the amount of proceeds from the Policy.
9. Amendment of Agreement; Termination. This Agreement shall not be
modified or amended except by a writing signed by the Corporation
and the Executive. Either party may terminate this Agreement, and
Executive's participation in the Plan, at any time provided that
the obligations of the party terminating the Agreement and the
Plan with respect to the Executive are performed in full under
the Agreement as of the time of the termination.
10. Binding Agreement. This Agreement shall be binding upon the
heirs, administrators, executors, successors and assigns of each
party to this Agreement. This Agreement is not assignable by the
Executive without the Corporation's consent.
11. State Law. This Agreement shall be subject to and be construed
under the internal laws of the State of California, without
regard to its conflicts of laws principles.
12. Validity. In case any provision of this Agreement shall be
illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts of this Agreement, but this
Agreement shall be construed and enforced as if such illegal or
invalid provision had never been inserted in this Agreement.
13. Not a Contract of Employment. The terms and conditions of this
Agreement shall not be deemed to constitute a contract of
employment between the Corporation and the Executive. Such
employment is hereby acknowledged to be an "at will" employment
relationship that can be terminated at any time for any reason,
with or without cause, unless expressly provided in a separate
written employment agreement. Nothing in this Agreement shall be
deemed to give the Executive the right to be retained in the
service of the Corporation or to interfere with the right of the
Corporation to discipline or discharge the Executive at any time.
14. Notice. Any notice or filing required or permitted to be given
under this Agreement to the Executive or the Corporation shall be
sufficient if in writing and hand-delivered, or sent by
registered or certified mail, to the address below:
To the Executive: ______________________
Address: ___________________________
To the Corporation:Managing Director, Human Resources
Countrywide Credit Industries, Inc.
4500 Park Granada
Calabasas, CA 91302-1613
or to such other address as may furnished to the Executive or the
Corporation, as the case may be, in writing in accordance with
this notice provision. Such notice shall be deemed given as of
the date of delivery or, if delivery is made by mail, as of the
date shown on the postmark on the receipt for registration or
certification. Any notice or filing required or permitted to be
given to the Executive or the Executive's beneficiary under this
Agreement shall be sufficient if in writing and hand-delivered,
or sent by mail, to the last known address of the Executive.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with regard to the subject matter of
this Agreement and supersedes all previous negotiations,
agreements and commitments in respect thereto. No oral
explanation or oral information by either of the parties to this
Agreement shall alter the meaning or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the date first written above.
"Corporation"
Countrywide Credit Industries, Inc.,
a Delaware corporation
By:
Its:
"Executive"
<PAGE>
FIRST AMENDMENT
TO
COUNTRYWIDE CREDIT INDUSTRIES, INC.
CHANGE IN CONTROL SEVERANCE PLAN
(As Adopted September 12, 1996)
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend the Countrywide Credit Industries, Inc. Change in Control Severance Plan
(As Adopted September 12, 1996) (the "Plan") to clarify the severance benefit
that Eligible Employee Classification is entitled to receive upon participation.
NOW, THEREFORE, APPENDIX A of the plan is hereby deleted in its
entirety as enumerated in Appendix A of the Plan and New APPENDIX A, attached
hereto as Exhibit A, is inserted in its place.
IN WITNESS WHEREOF, the Company has caused this FIRST AMENDMENT to be
executed this 30th day of September 1998.
Countrywide Credit Industries, Inc.
By ___________________________
Anne McCallion
Managing Director
Attest: ________________________
Susan Bow
Assistant Secretary
<PAGE>
Exhibit A
NEW APPENDIX A
Eligible Employee
Classifications Members
A Managing Directors
B Executive Vice Presidents and Operating Unit Presidents
C Countrywide Home Loans ("CHL"), Senior Vice Presidents and Operating Unit
Executive Vice Presidents
D First Vice Presidents, Vice Presidents and Regional Vice Presidents
E Branch Managers and all other Exempt Employees
F All Non-Exempt Employees
Salary Separation Payment
The Salary Separation Payment to which a Participant is entitled shall be based
on the Participant's employee classification as of the date immediately
preceding the date of the Participant's Qualifying Termination or, if greater,
as of the date on which the Change-in Control occurs, and shall equal the amount
described in the table below; provided, however, that the Salary Separation
Payment for each Participant who is a member of Employee Classification C, D, E
or F shall also include an additional amount equal to one-quarter (1/4) of one
month of Base Pay for each full year of service with the Company or Operating
Unit in excess of five (5) years; provided, further, however, that such
additional amount, if any, when added to the amount of Base Pay provided in the
table below, shall not exceed twelve (12) months Base Pay.
Employee
Classification Salary Separation Payment
A Two (2) years Base Pay (as defined in Section 6.1(a)) plus 200% of
the Average Bonus (as defined in Section 6.1(a)).
B One (1) year Base Pay plus 100% of the Average Bonus.
C Six (6) months Base Pay plus 50% of the Average Bonus.
D Four (4) months Base Pay plus 33% of the Average Bonus.
E Three (3) months Base Pay plus 25% of the Average Bonus.
F Two (2) months Base Pay plus 15% of the Average Bonus.
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
Nine Months
Ended November 30,
1998 1997
---------------- -----------------
(Dollar amounts in thousands,
except per share data)
Basic
<S> <C> <C>
Net earnings applicable to common stock $283,802 $259,881
================ =================
Average shares outstanding 111,065 107,111
---------------- -----------------
Per share amount $2.56 $2.43
================ =================
Diluted
Net earnings applicable to common stock $283,802 $259,881
================ =================
Average shares outstanding 111,065 107,111
Net effect of dilutive stock options --
based on the treasury stock method using
the closing market price, if higher than
average market price. 5,749 4,062
---------------- -----------------
Total average shares 116,814 111,173
================ =================
Per share amount $2.43 $2.34
================ =================
</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 nine months ended November 30, 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>
Nine Months Ended
November 30, Fiscal Years Ended February 29(28),
------------------------- ------------------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings $283,802 $259,881 $344,983 $257,358 $195,720 $ 88,407 $179,460
Income tax expense 181,447 166,154 220,563 164,540 130,480 58,938 119,640
Interest charges 528,017 291,935 424,341 316,705 281,573 205,464 219,898
Interest portion of rental
Expense 3,914 2,703 10,055 7,420 6,803 7,379 6,372
------------ ------------ ------------- ------------ ------------- ------------ ------------
Earnings available to cover
fixed charges $997,180 $720,673 $999,942 $746,023 $614,576 $360,188 $525,370
============ ============ ============= ============ ============= ============ ============
Fixed charges
Interest charges $528,017 $291,935 $424,341 $316,705 $281,573 $205,464 $219,898
Interest portion of rental
expense 3,914 2,703 10,055 7,420 6,803 7,379 6,372
------------ ------------ ------------- ------------ ------------- ------------ ------------
Total fixed charges $531,931 $294,638 $434,396 $324,125 $288,376 $212,843 $226,270
============ ============ ============= ============ ============= ============ ============
Ratio of earnings to fixed
charges 1.87 2.45 2.30 2.30 2.13 1.69 2.32
============ ============ ============= ============ ============= ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> Nov-30-1998
<CASH> 52,330
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 445,166
<DEPRECIATION> 163,069
<TOTAL-ASSETS> 16,202,843
<CURRENT-LIABILITIES> 0
<BONDS> 6,982,255
0
0
<COMMON> 5,598
<OTHER-SE> 2,414,378
<TOTAL-LIABILITY-AND-EQUITY> 16,202,843
<SALES> 0
<TOTAL-REVENUES> 1,446,619
<CGS> 0
<TOTAL-COSTS> 981,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 465,249
<INCOME-TAX> 181,447
<INCOME-CONTINUING> 283,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283,802
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.43
<FN>
</FN>
</TABLE>
