UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13 - 2641992
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
4500 Park Granada, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 225-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.05 Par Value New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------------- -------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 17, 2000, there were 114,090,819 shares of Countrywide Credit
Industries, Inc. Common Stock, $.05 par value, outstanding. Based on the closing
price for shares of Common Stock on that date, the aggregate market value of
Common Stock held by non-affiliates of the registrant was approximately
$3,442,219,153. For the purposes of the foregoing calculation only, all
directors and executive officers of the registrant have been deemed affiliates.
25
PART I
ITEM 1. BUSINESS
A. General
Founded in 1969, Countrywide Credit Industries, Inc. (the "Company" or
"CCI") is a holding company which, through its principal subsidiary, Countrywide
Home Loans, Inc. ("CHL"), is engaged primarily in the mortgage banking business,
and as such originates, purchases, sells and services mortgage loans. The
Company's mortgage loans are principally prime credit quality first-lien
mortgage loans secured by single- (one-to-four) family residences ("prime credit
quality first mortgages"). The Company also offers home equity loans both in
conjunction with newly produced prime credit quality first mortgages and as a
separate product. In addition, the Company offers sub-prime credit quality
first-lien single-family mortgage loans ("sub-prime loans").
The Company, through its other wholly-owned subsidiaries, offers products
and services complementary to its mortgage banking business. See
"Business-Capital Markets Segment, Insurance Segment and Other Operations."
Unless the context otherwise requires, references to the "Company" herein shall
be deemed to refer to the Company and its consolidated subsidiaries.
This Annual Report on Form 10-K may contain forward-looking statements that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those identified below, which could cause future
results to differ materially from historical results or those anticipated. The
words "believe," "expect," "anticipate," "intend," "estimate," "should" and
other expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors, among others, could cause future
results to differ materially from historical results or those anticipated: (1)
the level of demand for mortgage credit, insurance and securities products,
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 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, closing services, capital markets
and insurance operations; and (5) competition within the mortgage banking
industry, capital markets and insurance industries.
B. Mortgage Banking Operations
The principal sources of revenue from the Company's mortgage banking
business are: (i) loan origination fees; (ii) gains from the sale of loans;
(iii) interest earned on mortgage loans during the period that they are held by
the Company pending sale, net of interest paid on funds borrowed to finance such
mortgage loans; (iv) loan servicing fees; and (v) interest earned from the
custodial balances associated with the Company's servicing portfolio.
Loan Production Segment
The Company originates and purchases conventional mortgage loans, mortgage
loans insured by the Federal Housing Administration ("FHA"), mortgage loans
partially guaranteed by the Department of Veterans Affairs ("VA"), home equity
loans and sub-prime loans. A majority of the conventional loans are conforming
loans that qualify for inclusion in guarantee programs sponsored by the Federal
National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). The remainder of the conventional loans are
non-conforming loans (i.e., jumbo loans with an original balance in excess of
$252,700 or other loans that do not meet Fannie Mae or Freddie Mac guidelines).
As part of its mortgage banking activities, the Company makes conventional loans
with original balances of up to $2 million.
The following table sets forth the number and dollar amount of the Company's
prime credit quality first mortgage, home equity and sub-prime loan production
for the periods indicated.
------------------------------- ----------- -----------------------------------------------------------------------
Summary of the Company's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 29(28),
----------- -----------------------------------------------------------------------
------------------------------- ----
2000 1999 1998 1997 1996
------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
Conventional Loans
Number of Loans 359,360 529,345 231,595 190,250 191,534
Volume of Loans $45,412.5 $69,026.1 $29,887.5 $22,676.2 $21,883.4
Percent of Total Volume 68.0% 74.3% 61.3% 60.0% 63.3%
FHA/VA Loans
Number of Loans 131,679 190,654 162,360 143,587 125,127
Volume of Loans $13,535.5 $19,137.5 $15,869.8 $13,657.1 $12,259.3
Percent of Total Volume 20.3% 20.6% 32.5% 36.1% 35.5%
Home Equity Loans
Number of Loans 93,812 65,607 45,052 20,053 7,986
Volume of Loans $3,635.6 $2,220.5 $1,462.5 $613.2 $220.8
Percent of Total Volume 5.5% 2.4% 3.0% 1.6% 0.6%
Sub-prime Loans
Number of Loans 43,392 25,433 16,360 9,161 1,941
Volume of Loans $4,156.1 $2,496.4 $1,551.9 $864.3 $220.2
Percent of Total Volume 6.2% 2.7% 3.2% 2.3% 0.6%
Total Loans
Number of Loans 628,243 811,039 455,367 363,051 326,588
Volume of Loans $66,739.7 $92,880.5 $48,771.7 $37,810.8 $34,583.7
Average Loan Amount $106,000 $115,000 $107,000 $104,000 $106,000
------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
The decrease in the number and dollar amount of loans produced in the year
ended February 29, 2000
("Fiscal 2000") was primarily due to a decrease in the overall mortgage market,
driven largely by a reduction in refinances caused by rising mortgage rates.
In an environment of increasing interest rates, adjustable-rate mortgage
loans ("ARMs") generally increase as a percentage of production while refinance
activity decreases. For Fiscal 2000, 1999 and 1998, ARMs represented 14%, 5% and
23%, respectively, of the Company's total volume of mortgage loans produced. In
addition, refinances comprised approximately 35%, 57% and 41%, respectively, of
the Company's total volume of mortgage loans produced. For Fiscal 2000, 1999 and
1998 jumbo loans represented 22%, 23% and 20%, respectively, of the Company's
total volume of mortgage loans produced.
The Company produces mortgage loans through three separate divisions of
Countrywide Home Loans and through Full Spectrum Lending, Inc. (the "Divisions).
Consumer Markets Division
The Company's consumer markets division (the "Consumer Markets Division")
originates primarily prime credit quality first mortgage and home equity loans
through referrals from real estate agents and direct contact with consumers
through its nationwide network of retail branch offices and its electronic
commerce-based group known as the Home Finance Network. For calendar 1999, the
Consumer Markets Division was ranked as the third largest retail lender, in
terms of volume, among residential mortgage lenders nationwide. During Fiscal
2000, the Consumer Markets Division added 31 retail branch offices, bringing the
total such offices to 446 located in 47 states and the District of Columbia.
Each of the Consumer Markets Division's branch offices is typically staffed by
four to five employees. They are connected to the Company's central office by a
computer network. The Company operates three Home Finance Network centers that
solicit potential borrowers and receive contacts from potential borrowers
through electronic media. Loan counselors employed in the Home Finance Network
centers provide information and process loan applications, which are then made
electronically available to branch offices for processing and funding. Business
from home construction companies is solicited through a nationwide network of
builder account managers. Additionally, business is solicited through
advertising, affinity relationships, participation by branch management in local
real estate related business functions, and extensive use of direct mailings to
borrowers and real estate brokers. The Company believes it offers a superior
alternative to its customers through low cost loans, a broad product line which
includes one-stop choice, direct access to the lender using the customer's
preferred channel (a local branch, telephonically or through the Internet), and
local underwriting authority. Consumer Markets Division Branch Managers are not
paid a commission on individual loan production; however, they are paid a bonus
based on various factors, including branch profitability and loan quality. The
Company believes that applying this basic approach allows it to originate
high-quality loans at a comparatively low cost. The Consumer Markets Division
uses continuous quality control audits of loans originated within to monitor
compliance with the Company's underwriting criteria. The audits are performed by
branch management and independent quality control personnel.
The following table sets forth the number and dollar amount of the Consumer
Markets Division's prime credit quality first mortgage, home equity and
sub-prime loan production for the periods indicated.
------------------------------- ---------- ------------------------------------------------------------------------
Summary of the Consumer Markets Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 29(28),
------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
2000 1999 1998 1997 1996
------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Conventional Loans
Number of Loans 102,665 151,845 67,850 43,261 47,260
Volume of Loans $13,156.0 $18,860.2 $8,377.7 $5,145.3 $5,271.8
Percent of Total Volume 65.9% 66.2% 62.8% 63.7% 70.7%
FHA/VA Loans
Number of Loans 49,247 87,290 43,238 27,746 22,829
Volume of Loans $4,998.2 $8,687.0 $4,114.0 $2,514.3 $2,025.4
Percent of Total Volume 25.0% 30.4% 30.8% 31.2% 27.1%
Home Equity Loans
Number of Loans 61,256 31,725 27,198 14,028 6,000
Volume of Loans $1,793.3 $947.8 $784.3 $384.7 $160.9
Percent of Total Volume 9.0% 3.3% 5.9% 4.8% 2.2%
Sub-prime Loans
Number of Loans 208 130 737 303 -
Volume of Loans $19.6 $13.1 $62.5 $27.0 -
Percent of Total Volume 0.1% 0.1% 0.5% 0.3% -
Total Loans
Number of Loans 213,376 270,990 139,023 85,338 76,089
Volume of Loans $19,967.1 $28,508.1 $13,338.5 $8,071.3 $7,458.1
Average Loan Amount $94,000 $105,000 $96,000 $95,000 $98,000
------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Wholesale Division
The Company's wholesale division (the "Wholesale Division") produces prime
credit quality first mortgage, home equity and sub-prime loans through mortgage
loan brokers and other financial intermediaries. As of February 29, 2000, the
Wholesale Division operated 58 loan centers, 10 regional support centers and
three sub-prime underwriting centers in various parts of the United States. Each
branch is typically staffed by 10-15 employees, comprised of sales and
operational personnel. Business is solicited through a broad sales force, the
Internet, advertising and participation of branch management and sales personnel
in trade associations. Additionally, the Wholesale Division has sales personnel
dedicated to serving large builders who have their own mortgage company.
Wholesale Division Branch Managers are not paid a commission on individual loan
production; however, they are paid a bonus on various factors, including branch
profitability and loan quality. Wholesale Division sales personnel are paid a
bonus or commission based on loan production. For calendar 1999, the Wholesale
Division was ranked as the top wholesale originator, in terms of volume, among
residential mortgage lenders nationwide. The Company attributes its success to
providing a high level of localized service to loan brokers, a competitive and
innovative product array and technology. The Wholesale Division's website,
"Countrywide Wholesale Business Channel" ("CWBC"), offers loan origination
capability coupled with automated underwriting that will allow a decision to be
made within minutes after an application is submitted through the website. Prime
credit quality first mortgage loans are approved on the local authority of the
Wholesale Division's loan underwriters staffed within each loan center.
Sub-prime loans are underwritten centrally by a specialized underwriting group
and comply with the Company's underwriting criteria for such loans. In addition,
quality control personnel review loans for compliance with the Company's
underwriting criteria. The Wholesale Division has approximately 15,000 approved
mortgage brokers and other third-party originators. All Wholesale Division
business partners are subject to ongoing quality control reviews.
The following table sets forth the number and dollar amount of the Wholesale
Division's prime credit quality first mortgage, home equity and sub-prime loan
production for the periods indicated.
------------------------------- ----------- --------------------------------------------------------------------
Summary of the Wholesale Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 29(28),
------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
2000 1999 1998 1997 1996
------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Conventional Loans
Number of Loans 111,935 187,852 87,391 50,570 59,670
Volume of Loans $14,504.6 $25,493.4 $11,860.9 $6,187.8 $6,766.9
Percent of Total Volume 75.9% 82.5% 75.4% 73.4% 84.0%
FHA/VA Loans
Number of Loans 21,029 33,282 23,641 12,505 10,448
Volume of Loans $2,206.9 $3,436.1 $2,362.3 $1,190.0 $1,016.2
Percent of Total Volume 11.5% 11.1% 15.0% 14.1% 12.6%
Home Equity Loans
Number of Loans 17,651 18,172 11,073 6,017 1,937
Volume of Loans $799.4 $687.2 $419.4 $227.7 $57.5
Percent of Total Volume 4.2% 2.2% 2.7% 2.7% 0.7%
Sub-prime Loans
Number of Loans 16,820 13,274 11,721 8,568 1,941
Volume of Loans $1,605.5 $1,300.5 $1,088.1 $823.9 $220.2
Percent of Total Volume 8.4% 4.2% 6.9% 9.8% 2.7%
Total Loans
Number of Loans 167,435 252,580 133,826 77,660 73,996
Volume of Loans $19,116.4 $30,917.2 $15,730.7 $8,429.4 $8,060.8
Average Loan Amount $114,000 $122,000 $118,000 $109,000 $109,000
------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Correspondent Division
Through its network of correspondent offices (the "Correspondent Division"),
the Company purchases loans from other mortgage bankers, commercial banks,
savings and loan associations, credit unions and other financial intermediaries
("correspondents"). For calendar 1999, the Correspondent Division was ranked as
the third largest correspondent lender, in terms of volume, among residential
mortgage lenders nationwide. The Company's correspondent offices are located in
Simi Valley, California; Dallas, Texas and Pittsburgh, Pennsylvania. The
Correspondent Division has approximately 1,500 approved financial intermediaries
serving all 50 states, District of Columbia and Guam. Financial intermediaries
are approved after a review of the reputation, financial strength and mortgage
lending expertise of such institutions, including a review of their references
and financial statements. In addition, all correspondents are reaffirmed
annually based upon a review of their current audited financial statements and
their historical production volumes and quality. The Company attributes its
success to providing superior service in the form of a broad product line and
advanced technological systems. The Correspondent Division's website, "Platinum
Lender Access" ("Platinum"), offers a reliable and efficient way for approved
correspondents to register loans, lock in best effort commitments and get
immediate approval for commitments through the Internet. In addition, the
website also offers a quick access to the Company's other ancillary services.
The Correspondent Division has in place extensive compliance monitoring
systems and procedures. These procedures include prior purchase underwriting
reviews, reviews performed by contract underwriters whose work CHL is
indemnified against, fraud detection, re-verification of employment, income and
deposits and other steps as deemed appropriate. In addition, quality control
personnel review loans for compliance with the Company's underwriting criteria.
To provide additional protection against losses, all correspondent contracts
provide the Company with recourse in the event of non-compliance, fraud or
misrepresentation in the origination process.
The following table sets forth the number and dollar amount of the
Correspondent Division's prime credit quality first mortgage, home equity and
sub-prime loan production for the periods indicated.
------------------------------- ------------------------------------------------------------------------------- --
Summary of the Correspondent Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 29(28),
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
2000 1999 1998 1997 1996
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Conventional Loans
Number of Loans 144,760 189,648 76,354 96,419 84,604
Volume of Loans $17,751.9 $24,672.5 $9,648.9 $11,343.1 $9,844.7
Percent of Total Volume 67.7% 75.3% 49.3% 53.2% 51.7%
FHA/VA Loans
Number of Loans 61,403 70,082 95,481 103,336 91,850
Volume of Loans $6,330.4 $7,014.4 $9,393.5 $9,952.8 $9,217.7
Percent of Total Volume 24.1% 21.4% 48.0% 46.7% 48.3%
Home Equity Loans
Number of Loans 14,709 15,597 6,635 8 49
Volume of Loans $1,035.8 $581.0 $252.4 $0.8 $2.4
Percent of Total Volume 3.9% 1.8% 1.3% 0.0% 0.0%
Sub-prime Loans
Number of Loans 11,418 4,229 2,457 290 -
Volume of Loans $1,121.5 $479.9 $267.5 $13.4 -
Percent of Total Volume 4.3% 1.5% 1.4% 0.1% -
Total Loans
Number of Loans 232,290 279,556 180,927 200,053 176,503
Volume of Loans $26,239.6 $32,747.8 $19,562.3 $21,310.1 $19,064.8
Average Loan Amount $113,000 $117,000 $108,000 $107,000 $108,000
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Full Spectrum Lending, Inc.
Full Spectrum Lending, Inc. ("FSLI"), a wholly-owned subsidiary of the
Company, which commenced operations on September 1, 1997, originates sub-prime
first mortgages and home equity loans. FSLI operates a nationwide network of 47
retail branch offices located in 27 states in addition to three national sales
centers. Each of FSLI's branch offices is typically staffed by five to seven
employees. Business is obtained primarily through direct mailings to borrowers,
outbound telemarketing, referrals from other Divisions of the Company and other
business partners. FSLI Branch Managers are not paid a commission on individual
loan production; however, they are paid a bonus based on various factors,
including overall branch loan production, loan agent productivity, branch
profitability and loan quality. FSLI sales personnel are paid a bonus based on
loan production. Each loan approved by FSLI is reviewed by its centralized
underwriting unit to ensure that standardized underwriting guidelines are met.
In addition, FSLI performs quality control audits of the origination process on
a continuous basis.
The following table sets forth the number and dollar amount of FSLI's
sub-prime home equity and first mortgage production for the periods indicated.
------------------------------- ------------------------------------------------------------------------------- --
Summary of the Full Spectrum Lending's
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
Except average loan amount) Year Ended February 29(28),
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
2000 1999 1998 1997 1996
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Home Equity Loans
Number of Loans 196 113 146 - -
Volume of Loans $7.1 $4.5 $6.4 - -
Percent of Total Volume 0.5% 0.6% 4.6% - -
Sub-prime Loans
Number of Loans 14,946 7,800 1,445 - -
Volume of Loans $1,409.5 $702.9 $133.8 - -
Percent of Total Volume 99.5% 99.4% 95.4% - -
Total Loans
Number of Loans 15,142 7,913 1,591 - -
Volume of Loans $1,416.6 $707.4 $140.2 - -
Average Loan Amount $94,000 $89,000 $88,000 - -
------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Fair Lending Programs
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac and promoted by various government agencies, including the
Department of Housing and Urban Development ("HUD"), the Company has established
affordable home loan and fair lending programs for low-income, moderate-income
and designated minority borrowers. These programs offer more flexible
underwriting guidelines (consistent with guidelines adopted by Fannie Mae and
Freddie Mac) than historical industry standards, thereby enabling more people to
qualify for home loans. These more flexible guidelines lower down payments,
income and cash reserve requirements and are more liberal in areas such as
credit and employment history.
House America(R) is the Company's affordable home loan program for low- and
moderate-income borrowers. It offers loans that are eligible for purchase by
Fannie Mae and Freddie Mac. During Fiscal 2000 and 1999, the Company produced
approximately $221 million and $312 million, respectively, of mortgage loans
under this program. The decline in House America production from Fiscal 1999 to
Fiscal 2000 was the result of an improvement in the relative attractiveness of
other loan products as an alternative means of providing home ownership to low-
and moderate-income borrowers. House America personnel work with all of the
Company's production Divisions to help properly implement the flexible
underwriting guidelines for House America loan programs. A selection of
applications from low-income, moderate-income and designated minority borrowers
that are initially recommended for denial within the Company's Consumer Markets
Division are reviewed at a second level to insure that denial is appropriate. In
addition, an integral part of the program is the House America Counseling
Center, a free educational service, which can provide consumers with a home
buyer's educational program, pre-qualify them for a loan or provide a customized
budget plan to help them obtain their goal of home ownership. Many of the credit
counselors are bilingual. They work with consumers providing counseling for up
to one year. The Company also organizes and participates in local homebuyer
fairs across the country. At these fairs, branch personnel and Counseling Center
counselors discuss various loan programs, provide free pre-qualifications and
distribute credit counseling and homebuyer education videos and workbooks.
The Company's affordable housing outreach also includes participation in 195
local mortgage revenue bond programs that are available for first-time
homebuyers. Federal law allows state and local government agencies to sell
tax-exempt bonds to purchase mortgages securing loans made to first-time,
low-income home buyers. These programs provide mortgages with below-market
rates. The Company is approved to participate in nearly 500 Community Seconds
Programs for first-time homebuyers and low- and moderate-income consumers. These
programs are offered by city agencies, municipalities and non-profits to assist
with downpayment and closing costs.
The use of more flexible underwriting guidelines may carry a risk of
increased loan defaults. However, because the loans in the Company's portfolio
originated under the House America program are serviced on a non-recourse basis,
the exposure to credit loss resulting from increased loan defaults is
substantially limited.
Loan Underwriting
The Company's guidelines for underwriting FHA-insured and VA-guaranteed
loans comply with the criteria established by those entities. The Company's
guidelines for underwriting conventional conforming loans comply with the
underwriting criteria employed by Fannie Mae and/or Freddie Mac. The Company's
underwriting guidelines and property standards for conventional non-conforming
loans are based on the underwriting standards employed by private investors for
such loans. In addition, conventional loans having a loan to value ratio greater
than 80% at origination, which are originated or purchased by the Company, are
covered by primary mortgage insurance. The insurance may be paid for by the
borrower or the lender.
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac, the Company has established affordable home loan programs for
low- and moderate-income borrowers. These programs may allow for more flexible
underwriting criteria than historical industry standards. See "Business -Fair
Lending Programs".
The Company determines loan approval by using the following general
underwriting criteria to determine if a conventional loan is a prime credit
quality first mortgage loan application. Borrowers who do not qualify for a
prime credit quality first mortgage may qualify for a sub-prime loan. See
Sub-prime Underwriting section below.
Employment and Income
Applicants must exhibit the ability to generate income, on a regular ongoing
basis, in an amount sufficient to pay the mortgage payment and any other debts
the applicant may have. The following sources of income may be included when
determining the applicant's ability: salary, wages, bonus, overtime,
commissions, retirement benefits, notes receivable, interest, dividends,
unemployment benefits, rental income and other verifiable sources of income.
The type and level of income verification and supporting documentation
required may vary based upon the type of loan program selected by the applicant.
For salaried applicants, evidence of employment and income is obtained through
written verification of employment with the current and prior employer(s) or by
obtaining a recent pay stub and W-2 forms. Self-employed applicants are
generally required to provide income tax returns, financial statements or other
documentation to verify income.
Debt-to-Income Ratios
Generally, an applicant's monthly housing expense (loan payment, real estate
taxes, hazard insurance and homeowner association dues, if applicable) should be
no greater than 25% to 28% of their monthly gross income. Total fixed monthly
obligations (housing expense plus other obligations such as car loans, credit
card payments, etc.) generally should be no greater than 33% to 36% of monthly
gross income. Other areas of financial strength, such as equity in the property,
large cash reserves or a history of meeting home mortgage or rental obligations
are considered to be compensating factors and may result in an adjustment of
these ratio limitations.
Credit History
An applicant's credit history is examined for both favorable and unfavorable
occurrences. An applicant who has made payments on outstanding or previous
credit obligations according to the contractual terms may be considered
favorably. Items such as slow payment records, legal actions, judgments,
bankruptcy, liens, foreclosure or garnishments are viewed unfavorably. In some
instances, extenuating circumstances beyond the applicant's control, may
mitigate the effect of such unfavorable items on the credit decision.
Property
The property's market value is assessed to ensure that the property provides
adequate collateral for the loan. Generally, properties are appraised by
licensed real estate appraisers. Automated or streamlined appraisal systems may
also be used to confirm property values on some loan programs.
Maximum Indebtedness to Appraised Value
Generally, the maximum amount the Company will lend is 95% of the property
value (appraised value or purchase price, which ever is less). However, under
certain loan programs this percentage may be exceeded. Loan amounts in excess of
80% of the appraised value generally require primary mortgage insurance to
protect against foreclosure loss.
Funds for Closing
Generally, applicants are required to have sufficient funds of their own to
meet the down payment requirement. A portion of the funds may come from a gift
or an unsecured loan from a municipality or a non-profit organization. Certain
programs may require the applicant to also have cash reserves after closing.
Sub-prime Underwriting
Generally, the same information is reviewed in the sub-prime underwriting
process as in the prime credit quality first mortgage loan underwriting process.
Borrowers who qualify generally have payment histories and debt-to-income ratios
which would not satisfy Freddie Mac and Fannie Mae underwriting guidelines and
may have a record of major derogatory credit items such as outstanding
judgements or prior bankruptcies. Countrywide's sub-prime mortgage loan
underwriting guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors, with more risk factors
resulting in lower loan-to-value ratios. On a case by case basis, the Company
may determine that, based upon compensating factors, a prospective borrower who
does not strictly qualify under the underwriting risk category guidelines
warrants an underwriting exception. Compensating factors may include low loan-to
value ratio, low debt-to-income ratios, stable employment and time in the same
residence.
Geographic Distribution
The following table sets forth the geographic distribution of the Company's
prime credit quality first mortgage, home equity and sub-prime loan production
for Fiscal 2000.
-------------------------------------------------------------------------------------------------------
Geographic Distribution of the Company's
Prime Mortgage, Home Equity and Sub-prime Loan Production
----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
Percentage of
Number Principal Total Dollar
(Dollar amounts in of Loans Amount Amount
millions)
----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
California 134,710 $14,428.6 21.6%
Michigan 38,429 3,700.9 5.5%
Texas 38,137 3,699.8 5.5%
Florida 36,348 3,219.9 4.8%
Colorado 24,557 3,048.8 4.6%
Illinois 24,619 2,694.8 4.0%
Arizona 22,423 2,370.6 3.6%
Washington 18,358 2,195.6 3.3%
Massachusetts 14,161 1,961.0 2.9%
Georgia 17,201 1,845.7 2.8%
Ohio 19,875 1,797.3 2.7%
New Jersey 13,673 1,623.9 2.4%
Pennsylvania 17,742 1,561.1 2.3%
New York 12,194 1,521.9 2.3%
Virginia 12,837 1,407.2 2.1%
Maryland 12,712 1,378.1 2.1%
Others (1) 170,267 18,284.5 27.5%
------------------ ----------------- -----------------
628,243 $66,739.7 100.0%
================== ================= =================
----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
(1) No other state constitutes more than 2.0% of the total dollar
amount of loan production.
California mortgage loan production as a percentage of total mortgage loan
production (measured by principal balance) for Fiscal 2000, 1999 and 1998 was
22%, 25% and 26%, respectively. Loan production within California is
geographically dispersed, which minimizes dependence on any individual local
economy. As of February 29, 2000, 83% of the Consumer Markets Division branch
offices, Wholesale Division loan centers and FSLI branches were located outside
of California.
The following table sets forth the distribution by county of the Company's
California loan production for Fiscal 2000.
-------------------------------------------------------------------------------------------------------
Distribution by County of the Company's California
Loan Production
----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
Percentage of
Number Principal Total Dollar
(Dollar amounts in Of Loans Amount Amount
millions)
----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
Los Angeles 27,173 $3,803.9 26.4%
Orange 11,261 1,619.3 11.2%
San Diego 9,202 1,287.1 8.9%
Riverside 7,111 776.6 5.4%
Santa Clara 4,878 771.1 5.3%
Others (1) 75,085 6,170.6 42.8%
------------------ ----------------- ------------------
134,710 $14,428.6 100.0%
================== ================= ==================
----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
(1) No other county in California constitutes more than 5.0% of the
total dollar amount of California loan production.
Sale of Loans
As a mortgage banker, the Company customarily sells substantially all loans
that it originates or purchases. Substantially all prime credit quality first
mortgage loans sold by the Company are sold without recourse, subject in the
case of VA loans to the limits of the VA guaranty described below. Conforming
conventional loans are generally pooled by the Company and exchanged for
securities guaranteed by Fannie Mae or Freddie Mac. These securities are then
sold to national or regional broker-dealers. Substantially all conventional
loans securitized through Fannie Mae or Freddie Mac are sold, subject to certain
representations and warranties on the part of the Company, on a non-recourse
basis, whereby foreclosure losses are generally a liability of Fannie Mae and
Freddie Mac and not the Company.
The Company securitizes substantially all of its FHA-insured and
VA-guaranteed mortgage loans through the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae, or Freddie Mac. The Company is insured
against foreclosure loss by the FHA or partially guaranteed against foreclosure
loss by the VA (at present, generally 25% to 50% of the loan, up to a maximum
amount of $50,750, depending upon the amount of the loan). For Fiscal 2000, 1999
and 1998, the aggregate loss experience of the Company on VA loans in excess of
the VA guaranty was approximately $8.5 million, $13.2 million and $18.5 million,
respectively. The reduction in losses in Fiscal 2000 was due mainly to improved
property values nationally. To guarantee timely and full payment of principal
and interest on Fannie Mae, Freddie Mac and Ginnie Mae securities and to
transfer the credit risk of the loans in the servicing portfolio sold to these
entities the Company pays guarantee fees to these agencies.
The Company sells its non-conforming conventional loan production on a
non-recourse basis. These loans can be sold either on a whole-loan basis or in
the form of "private-label" securities which generally have the benefit of some
form of credit enhancement, such as insurance, letters of credit, payment
guarantees or senior/subordinated structures.
Home equity and sub-prime loans may be sold on a whole-loan basis or in the
form of securities backed by pools of these loans. In connection with the
securitization of its home equity and sub-prime loans, the Company retains a
subordinated residual interest. The Company has exposure to credit losses on the
underlying loans to the extent of this residual interest. As of February 29,
2000, the Company had investments in such subordinated residual interests
amounting to $570.4 million.
In connection with the sale and securitization of mortgage loans, the
Company makes customary representations and warranties relating to, among other
things, compliance with laws and the underwriting rules of the buyer or
guarantor. In the event of a breach of such representations and warranties, the
Company may be required to repurchase a mortgage loan and any subsequent
foreclosure loss on the mortgage loan will be borne by the Company.
In order to mitigate the risk that a change in interest rates will result in
a decline in the value of the Company's current loan commitments the ("Committed
Pipeline") or closed loans and mortgage backed securities held in inventory (the
"Inventory"), the Company enters into hedging transactions. The Company's
Inventory is hedged with forward contracts for the sale of loans and net sales
of mortgage-backed securities ("MBS"), including options to sell MBS where the
Company can exercise the option on or prior to the anticipated settlement date
of the MBS. Due to the variability of closings in the Company's Committed
Pipeline, which is driven primarily by interest rates, the Company's hedging
policies require that substantially all of the Committed Pipeline be hedged with
a combination of options for the purchase and sale of MBS and treasury futures
and forward contracts for the sale of MBS. The correlation between the Inventory
and Committed Pipeline and the hedge instruments is very high due to their
similarity.
The Company is generally not exposed to significant losses nor will it
realize significant gains related to its Inventory and Committed Pipeline due to
changes in interest rates, net of gains or losses on associated hedge positions.
However, the Company is exposed to the risk that the actual closings in the
Committed Pipeline may deviate from the estimated closings for a given change in
interest rates. Although interest rates are the primary determinant, the actual
loan closings from the Committed Pipeline are influenced by many factors,
including the composition of the Committed Pipeline and remaining commitment
periods. The Company's estimated closings are based on historical data of loan
closings as influenced by recent developments.
Loan Servicing Segment
The Company services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases pursuant to servicing agreements
with Fannie Mae, Freddie Mac, Ginnie Mae and various private and public
investors. In addition, the Company periodically purchases bulk servicing
contracts, also on a non-recourse basis, to service single-family residential
mortgage loans and home equity lines of credit originated by other lenders.
Servicing contracts acquired through bulk purchases accounted for 8% of the
Company's mortgage servicing portfolio as of February 29, 2000. Servicing
mortgage loans includes collecting and remitting loan payments, responding to
borrower inquires, making advances when required, accounting for principal and
interest, holding custodial (impound) funds for payment of property taxes and
hazard insurance, making any physical inspections of the property, counseling
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering the loans. The Company
receives a fee for servicing mortgage loans ranging generally from 1/4% to 1/2%
annually on the declining principal balances of the loans.
The Company strives to balance its loan servicing and loan production
segments, which are counter-cyclical in nature. In general, earnings from the
loan servicing segment increase as interest rates increase and decline as
interest rates decline, which is normally the opposite of the loan origination
segment. Generally, in an environment of increasing interest rates, the rate of
current and projected future loan prepayments decreases, resulting in a
decreased rate of amortization of mortgage servicing rights ("MSRs").
Conversely, in an environment of declining interest rates, the rate of current
and projected future prepayments increases, resulting in an increased rate of
amortization and potential impairment of MSRs. To further mitigate the impact of
MSR impairment on earnings, the Company has devoted substantial management
expertise and resources to the development and maintenance of a financial hedge
(the "Servicing Hedge").
To maximize the value of its investment in MSRs, the Company has endeavored
to cross-sell various services and financial products to its portfolio of over
2.4 million borrowers. In particular, the Company has been able to cross-sell
homeowners, fire, flood, earthquake, auto, home warranty, life and disability
insurance, as well as annuities, through its insurance agency, Countrywide
Insurance Services ("CIS"). CIS is a national, full-service, multi-line
insurance agency, with over four hundred thousand policies currently in force
with both portfolio and non-portfolio customers. In addition, through
telemarketing and direct mail solicitations, the Company has offered home equity
lines of credit to its existing borrowers. As of February 29, 2000, the Company
had 109,235 home equity lines in place, up from 59,710 as of February 28, 1999.
The Company has vertically integrated several loan-servicing functions that
are commonly out-sourced by other loan servicers. These functions include
monitoring and processing property tax bills, tracking and ensuring adequate
insurance to protect the investor's interest in the property securing each loan,
trustee services, real estate owned ("REO") management and liquidation services,
and property field inspection services. The Company believes the integration of
these functions give it a competitive edge by lowering costs and enabling the
Company to provide an enhanced overall level of service.
Through a separate subsidiary, the Company earns a portion of the primary
mortgage insurance premiums associated with loans in the servicing portfolio by
providing a layer of non-catastrophic reinsurance coverage to the primary
mortgage insurance companies.
The Company's servicing portfolio is subject to reduction by scheduled
principal payments, prepayments and foreclosures. In addition, the Company has
elected in the past to sell a portion of its MSRs as well as newly originated
loans on a servicing-released basis, and may do so in the future. Nonetheless,
the Company's overall strategy is to build and retain its servicing portfolio.
Loans are serviced from facilities located in Simi Valley, California and
Plano, Texas (see "Properties"). The Company has developed systems and processes
that enable it to service mortgage loans efficiently and therefore enhance
earnings from its investment in MSRs. Some of these systems and processes are
highlighted in the following paragraphs.
All data elements pertaining to each individual loan are transferred from
the various loan origination systems to the loan servicing system without manual
intervention.
Customer service representatives in both servicing facilities have access to
on-line screens containing all pertinent data about a borrower's account, thus
eliminating the need to refer to paper files and shortening the average time per
call. The Company's telephone system controls the flow of calls to each
servicing site and has a "Smart Call Routing" filter. This filter is designed to
match the originating phone number to phone numbers in the Company's database.
Having identified the borrower, the Company can communicate topical loan
information electronically without requiring the caller to enter information.
The caller can get more detailed information through an Interactive Voice
Response application or can speak with a customer service representative. The
Company also features an Internet site for existing borrowers wherein the
borrower can obtain current account status, history, answers to frequently asked
questions and a dictionary to help the borrower understand industry terminology.
The Company issues monthly statements to its borrowers. This allows the
Company to provide personalized home loan information in a more timely manner
while simultaneously providing a vehicle for the Company to market other
products. Customers have the option of receiving a paper copy or an electronic
copy of their monthly statement. For those customers who elect to receive an
electronic statement, a notification is sent to the customer via e-mail when the
statement is available through the Company's Website, saving the Company the
cost of producing and mailing the statement while still marketing other products
to the customer and providing the customer with monthly information.
The Company's high speed payment processing equipment enables the Company
to deposit virtually all checks on the day of receipt, thereby maximizing cash
availability.
The collection department utilizes its collection management system in
conjunction with its predictive dialing system to track and maximize each
individual collector's performance as well as to track the success of each
collection campaign.
The Company tracks its foreclosure activity through its default processing
system ("DPS"). DPS is a client-server-based application that allows each
foreclosure to be assigned to a state/investor specific workflow template. The
foreclosure processor is automatically guided through each function required to
successfully complete a foreclosure in any state and for any investor.
The majority of the Company's insurance tracking and disbursements is
processed automatically through MortgageScan which makes use of Optical
Character Recognition for forms and interacts with the servicing system. Data is
extracted from insurance documents and converted to an electronic file that is
processed through a rules engine that automatically requests payments, prepares
correspondence and updates the host servicing system.
The following table sets forth certain information regarding CHL's servicing
portfolio of single-family mortgage loans, including loans and securities held
for sale and loans subserviced for others, for the periods indicated.
------------------------------------ -- -------------------------------------------------------------------------
(Dollar amounts in millions) Year Ended February 29(28),
------------------------------------ -- -------------------------------------------------------------------------
Composition of Servicing Portfolio 2000 1999 1998 1997 1996
----------- -- ------------ -- ----------- -- ----------- -- ------------
At Period End:
FHA-Insured Mortgage Loans $ 43,057.1 $ 38,707.0 $ 37,241.3 $ 30,686.3 $ 23,206.5
VA-Guaranteed Mortgage Loans 15,980.2 15,457.7 14,878.7 13,446.4 10,686.2
Conventional Mortgage Loans 178,754.6 155,999.4 127,344.0 112,685.4 102,417.0
Home Equity Loans 5,229.2 2,806.3 1,656.5 689.9 204.5
Sub-prime Loans 7,160.7 2,502.3 1,744.2 1,048.9 289.1
----------- ------------ ----------- ----------- ------------
Total Servicing Portfolio $250,181.8 $215,472.7 $182,864.7 $158,556.9 $136,803.3
=========== ============ =========== =========== ============
Beginning Servicing Portfolio $215,472.7 $182,864.7 $158,556.9 $136,803.3 $113,071.3
Add: Loan Production 66,739.7 92,880.5 48,771.7 37,810.8 34,583.7
Bulk Servicing and
Subservicing 2,658.1 6,644.6 3,761.6 2,808.1 6,428.5
Acquired
Less: Servicing Transferred (1) (255.2) (7,398.6) (110.6) (70.8) (53.5)
Runoff (2) (34,433.5) (59,518.5) (28,114.9) (18,794.5) (17,226.7)
----------- ------------ ----------- ----------- ------------
Ending Servicing Portfolio $250,181.8 $215,472.7 $182,864.7 $158,556.9 $136,803.3
=========== ============ =========== =========== ============
Delinquent Mortgage Loans and Pending
Foreclosures at Period End (3):
30 days 2.74% 2.52% 2.68% 2.26% 2.13%
60 days 0.67% 0.53% 0.58% 0.52% 0.48%
90 days or more 0.56% 0.50% 0.65% 0.66% 0.59%
----------- ----------- ------------ ----------- ------------
Total Delinquencies 3.97% 3.55% 3.91% 3.44% 3.20%
=========== =========== ============ =========== ============
Foreclosures Pending 0.39% 0.31% 0.45% 0.71% 0.49%
=========== =========== ============ =========== ============
------------------------------------ -- ----------- -- ----------- -- ------------ -- ----------- -- ------------
(1) When servicing rights are sold from the servicing portfolio, the
Company generally subservices such loans from the sales contract date
to the transfer date.
(2) Runoff refers to scheduled principal repayments on loans and
unscheduled prepayments (partial prepayments or total prepayments due
to refinancing, modifications, sale, condemnation or foreclosure).
(3) Expressed as a percentage of the total number of loans serviced
excluding subserviced loans.
At February 29, 2000, the CHL's servicing portfolio of single-family
mortgage loans was stratified by interest rate as follows.
---- -------------------------- -- --------------------------------------------------------------------------------
(Dollar amounts in Total Portfolio at February 29, 2000
millions)
---- -------------------------- -- --------------------------------------------------------------------------------
Weighted
Interest Principal Percent Average MSR
Rate Balance of Total Maturity (Years) Balance
---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
7% and under $ 84,670.4 33.8% 24.4 $1,781.3
7.01-8% 123,248.3 49.3% 25.9 2,735.1
8.01-9% 31,797.8 12.7% 26.3 689.7
9.01-10% 5,648.5 2.3% 25.2 154.4
over 10% 4,816.8 1.9% 23.8 36.0
--------------- -------------- --------------------- ---------------
$250,181.8 100.0% 25.4 $5,396.5
=============== ============== ===================== ===============
---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
The weighted average interest rate of the single-family mortgage loans in
the Company's servicing portfolio as of February 29(28), 2000 and 1999 was 7.5%.
As of February 29, 2000, 89.9% of the loans in the servicing portfolio bore
interest at fixed rates and 10.1% bore interest at adjustable rates. The
weighted average net service fee of the loans in the portfolio was .383% as of
February 29, 2000. The weighted average interest rate of the fixed-rate loans in
the servicing portfolio was 7.5%.
The following table sets forth the geographic distribution of the Company's
servicing portfolio of single-family mortgage loans, including loans and
securities held for sale and loans subserviced for others, as of February 29,
2000.
----------------------------------------------------------- -- ----------------------------- --------------------
Percentage of Principal
Balance Serviced
----------------------------------------------------------- -- ----------------------------- --------------------
California 27.9%
Texas 5.3%
Florida 4.9%
Michigan 4.0%
Illinois 3.8%
Colorado 3.7%
Washington 3.4%
Arizona 3.0%
Ohio 2.9%
New York 2.7%
Georgia 2.7%
Massachusetts 2.6%
Virginia 2.5%
New Jersey 2.4%
Maryland 2.3%
Pennsylvania 2.2%
Other (1) 23.7%
--------------
100.0%
==============
----------------------------------------------------------- ---------- -------------- ---------------------------
(1) No other state contains more than 2.0% of the properties securing loans in
the Company's servicing portfolio.
Financing of Mortgage Banking Operations
The Company's principal financing needs are the financing of its mortgage
loan inventory and its investment in MSRs. To meet these needs, the Company
currently utilizes commercial paper supported by revolving credit facilities,
medium-term notes, senior debt, MBS repurchase agreements, subordinated notes,
pre-sale funding facilities, redeemable capital trust pass-through securities,
securitization of servicing fee income and cash flow from operations. The
Company estimates that it had available committed and uncommitted credit
facilities aggregating approximately $9.6 billion as of February 29, 2000. 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. For further information on the
material terms of the borrowings utilized by the Company to finance its
inventory of mortgage loans and MBS and its investment in servicing rights, see
"Note F" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources." The Company continues to
investigate and pursue alternative and supplementary methods to finance its
operations through the public and private capital markets.
Seasonality
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
C. Information Technology
The Company employs both proprietary and nonproprietary technology
throughout the enterprise and continually searches for new and better ways of
both providing services to its customers and of maximizing the efficiency of its
operations. Technology is viewed as part of the Company's competitive advantage.
By implementing highly integrated systems into its lines of business, the
Company believes it has been successful in the rapid start-up of new business
enterprises. The Company views technology as a key driver to maintaining
world-class productivity levels in its operations. The deployment of Internet
technologies, integrated client server systems, as well as advanced messaging
systems such as Lotus Notes, interactive voice response and call management
systems all represent examples where management believes technology has played a
role in improving or maintaining productivity and efficiency.
Proprietary systems currently in use by the Company include CLUESTM, an
artificial intelligence system that is designed to expedite the review of
applications, credit reports and property appraisals. The Company believes that
CLUESTM increases underwriters' productivity, reduces costs and provides greater
consistency to the underwriting process which in turn provides improved
efficiencies in the Company's overall business processes and in the level of
customer service (improved pricing, approval and funding speed) the Company is
able to provide to its various constituencies. Other proprietary systems
currently in use by the production Divisions are the EDGE (primarily used by the
Consumer Markets and Wholesale Divisions and FLSI) and GEMS (primarily used by
the Correspondent Division) systems, which are loan processing systems that are
designed to reduce the time and cost associated with the loan application and
funding process. These front-end systems were internally developed for the
Company's exclusive use and are integrated with the Company's loan servicing,
sales, accounting, treasury and other systems. The Company believes that both
the EDGE and GEMS systems improve the quality of its loan products and customer
service by: (i) reducing the risk of deficient loans; (ii) facilitating accurate
and customized pricing; (iii) promptly generating loan documents with the use of
laser printers; (iv) providing for electronic communication with credit bureaus,
financial institutions, HUD and other third parties; and (v) generally
minimizing manual data input.
"AdvantEdge" is an application being developed by the Company. AdvantEdge
is an object oriented contact management and loan origination system, which can
be used separately or integrated with EDGE or websites. AdvantEdge was designed
primarily to assist the telemarketing unit and retail branch network in
generating more sales. AdvantEdge provides the telemarketing unit and the retail
branch network the ability to (i) manage customer contact efficiently and
effectively; (ii) pre-qualify a prospective applicant; (iii) provide "what if"
scenarios to help find the appropriate loan product; (iv) obtain on-line price
quotes; (v) take applications; (vi) request credit reports electronically
through LandSafe, Inc.; (vii) issue a LOCK 'N SHOP (R) certificate; and (viii)
transmit a loan pre-application to the appropriate production units for
processing. Additionally, the loan origination modules of AdvantEdge provide
disclosure document generation capability and access to CLUESTM. Once a loan is
ready to be funded, the loan information is seamlessly transferred to EDGE,
resulting in time saved and enhanced customer service. The Company believes that
AdvantEdge will allow the retail branch network to convert more leads, increase
business partner referrals and cross-sell additional products (e.g. mortgage
insurance, property insurance, etc.) throughout the loan process. By maintaining
a database of customer contact information, real estate agents, individual
customers, loan brokers, builders and other business partners, the Company
believes it will have the ability to maximize the customer relationship.
The Company is a dominant e-commerce home lender, generating 18% of total
production through electronic channels in Fiscal 2000 and Fiscal 1999.
Electronic originations include our Retail Home Finance Center, which consists
of retail internet and telemarketing fundings, as well as third party fundings
utilizing the Company's CWBC and Plantium internet sites. The Company believes
that the internet provides a unique medium to deliver mortgage services at costs
significantly less than the cost incurred in conventional marketing methods.
The Company's goal is to allow the customer (direct consumer or business
partner) to be able to utilize the Company's various websites in an integrated
fashion with its existing infrastructure to provide customers with competitive
pricing as well as convenient and efficient services. The Company's websites
will continue to evolve in depth and breadth as the Company develops online
partnerships. The Company also developed customized, interactive web pages for
each of its 400+ retail branches to leverage its local knowledge and expertise
to the consumer. The Company believes this strategy provides it with a distinct
advantage over other online competitors. A component of the Company's strategy
is to integrate services required in the loan process (title, appraisal, home
inspection and credit reporting) and offered through its LandSafe subsidiary.
This will provide a "one-stop" solution to the individual consumer and to the
Company's business partners.
The Company's websites links are: (1) "Home Financing - Mortgage and Equity
Lines" which provides potential customers with the ability to pre-qualify for a
loan, calculate maximum affordable home price, loan amount and monthly payments,
review loan products and current rates, submit loan applications on-line, check
application status on-line, determine if refinancing is advantageous and obtain
answers to frequently asked questions; (2) "Current Customer Benefits" which
provides current customers the ability to review their current loan status,
account history, insurance information, financial services and subscription
services online. This link also includes information on the "Mortgage Pay on the
Web" service, an internally developed product that allows the customer to make
mortgage payments online; (3) "Insurance Solutions " provides insurance
information concerning homeowners, automobile, home warranty, life, disability
insurance and annuities. This link provides calculators to help customers
determine coverage amounts and premiums including instant on-line quotes. In
addition, it provides customers the ability to contact our customer service
department to change existing coverage, review terms, conditions and status of
existing policies, file a claim, make a complaint, renew an existing policy,
make changes to method of billing and update or change personal information; (4)
"Corporate Information" which contains information about the Company background,
description of products and services offered, a president's letter, available
career opportunities, press releases, quarterly earnings and performance report,
annual reports and other investor information.
The Internet sites that enhance business partner relationships are within
the "Countrywide's Partners" site which include the "REALTOR(R) Advantage",
"Builders Advantage", CWBC and Platinum sites. The REALTOR (R) Advantage allows
realtors to register in the Company's online resource directory, obtain direct
access to local branches for up-front approvals, obtain a LOCK N' SHOP (R) and
LOCK N' SELL (R) to guarantee rates and offers real estate agents value-added
tools for their clients. Builders Advantage is a site that allows builders to
register with Countrywide, learn about the Company's builder advantage program
and builder services and links to builder industry web sites. CWBC site allows
registered brokers to (i) float or lock loans 24 hours, 7 days a week through
e-Pipeline; (ii) obtain up-to-the-minute pricing; (iii) customize Broker's rate
sheet using CHL's pricing; (iv) track status of all loans in the pipeline (CWBC
and branch generated loans); (v) download marketing materials and loan
submission forms; (vi) access the Company's ancillary services (appraisal,
credit reporting, flood and homeowners insurance); (vii) benefit from the
website-creation services offered by the Company through Mortgage.com; and (vii)
link to other industry-related sites. Platinum, a site similar to CWBC, offers
approved correspondent sellers (i) ability to register loans and lock in
commitments; (ii) access to CLUESTM and Freddie Mac Loan Prospector underwriting
decision services; (iii) access to the Company's ancillary services (appraisal,
credit reporting, flood and home warranty and homeowners insurance); (iv) access
to current pricing rate sheets; (v) up-to-the-minute reporting of loans in the
pipeline; and (vi) link to other industry-related sites.
D. Capital Markets Segment
The Company's Capital Markets Segment consists of Countrywide Capital
Markets ("CCM"), a wholly-owned subsidiary of the Company, and Countrywide
Warehouse Lending ("CWL"). CCM has three principal operating subsidiaries:
Countrywide Securities Corporation ("CSC"), Countrywide Servicing Exchange
("CSE") and Countrywide Asset Management Corporation ("CAMC"). CCM's principal
offices are located in Calabasas, California with sales offices in New York, New
York; Rochester, New York; and Ft. Lauderdale, Florida.
CSC is a registered broker-dealer and a member of both the National
Association of Securities Dealers, Inc. and the Securities Investor Protection
Corporation. CSC primarily trades mortgage-related securities, including pass
through certificates issued by Ginnie Mae, Fannie Mae and Freddie Mac, and
collateralized mortgage obligations. CSC also trades certificates of deposit
issued by banks, the deposits of which are insured by the Bank Insurance Fund (a
fund of Federal Depository Insurance Corporation) as well as callable agency
debt. CSC participates in the underwriting of securities for CHL and for
unrelated entities. CSC also arranges the purchase and sale of mortgage loans
for CHL and others. CSC trades with institutional investors, such as investment
managers, pension fund companies, insurance companies, depositories, and other
broker-dealers. CSC does not maintain retail accounts.
CSE is among the leading national mortgage servicing brokerage and
consulting firms. CSE, as an agent, facilitates the purchase and sale of bulk
servicing contracts and provides loan portfolio evaluation services for
prospective investors and servicers of mortgage loans.
CAMC purchases distressed loans and other credit sensitive residential
mortgage assets, including the related servicing asset from other lenders. The
Company services the loans with the intent to sell or securitize loans which
become current and liquidate those that do not become current. CAMC contracts
with CHL to provide loan servicing activities.
CWL provides warehouse lines of credit to mortgage originators to finance
their origination or acquisition of residential mortgage loans. Advances under
the lines of credit are secured by mortgage loans.
The principal financing needs of CCM consist of the financing of its
inventory of securities and mortgage loans. Its securities inventory is financed
primarily through MBS repurchase agreements. CCM also has access to a $200
million secured bank loan facility and a lending facility with CHL
The securities industry is highly competitive and fragmented. CCM competes
with large global investment banks and broker-dealers, as well as smaller
regional broker-dealers. CCM competes by specializing in mortgage related fixed
income securities and through its affiliation with CHL, which allow it to offer
information, products and services tailored to the unique needs of participants
in the mortgage related debt securities markets.
E. Insurance Segment
The Company's Insurance Group Segment consists of Countrywide Insurance
Group ("CIG"), a wholly owned subsidiary of the Company. Countrywide Insurance
Group has three operating subsidiaries, Countrywide Insurance Services ("CIS"),
Directnet Insurance Agency, Inc. ("Directnet") and Balboa Life & Casualty
("Balboa").
Countrywide Insurance Services
CIS is comprised of Countrywide Insurance Services of California;
Countrywide Insurance Services of Arizona; Countrywide General Agency of Texas;
Countrywide Insurance Agency of Massachusetts; Countrywide Agency of Ohio; and
Countrywide Insurance Agency of Ohio.
CIS is an independent insurance agency that provides homeowners insurance,
life insurance, disability insurance, automobile insurance, and various other
coverages. CIS has been servicing the insurance needs of homeowners, primarily
CHL's mortgage customers, since 1969.
CIS is headquartered in Simi Valley, California, with sales offices located
in Simi Valley, California; Phoenix, Arizona; Plano, Texas; Deerfield,
Massachusetts; Columbus, Ohio; and Winterpark, Florida.
Directnet Insurance Agency, Inc.
Directnet is comprised of Directnet Insurance Agency and Directnet Insurance
Agency of Arizona. Directnet provides financial institutions and mortgage
brokers with a private label insurance agency solution.
Balboa Life & Casualty
Balboa is comprised of Balboa Insurance, Balboa Life Insurance, Metriplan
Insurance and Newport Insurance companies. Balboa commenced operations in 1949,
and was acquired by Countrywide Insurance Group on November 30, 1999. The
Company is headquartered in Irvine, California, and has offices in Pasadena,
California; Rosemead, California; Seattle, Washington and Pittsburgh,
Pennsylvania.
"A" rated by A.M. Best Company, Balboa is the leading writer of
creditor-placed auto physical damage insurance and a leader in Guaranteed Auto
Protection ("GAP") insurance and creditor-placed property/hazard insurance.
Balboa is licensed to underwrite property and casualty and life and disability
insurance in 49 states. It distributes product and tracking services to 1,500
financial institutions, including 50 of the 100 largest U.S. financial services
companies, either directly or through independent agents. It tracks a combined
portfolio of over 4 million loans.
Balboa is expanding its product line to include retail homeowners insurance
and additional credit life and disability insurance products, which are being
distributed by Countrywide Insurance Services and other entities.
The creditor-placed insurance market is dominated by a few providers,
competing on policy terms and conditions, service reputation, technological
innovation and broker compensation. The homeowners and life and disability
marketplace is dominated by large, brand name providers and is driven by price,
service reputation, commissions and the efficiency and effectiveness of
marketing and underwriting operations. CIG competes by providing high quality
service and pricing its products at competitive rates.
The primary cash needs for CIG are to meet short- and long-term obligations
to policyholders (payment of policy benefits), costs of acquiring new business
(principally commissions) and the purchases of new investments. To meet these
needs, CIG currently utilizes cash flow provided from operations as well as
maturities and sales of invested assets,
F. Other Operations
The Company provides various loan-closing services to its loan production
divisions and to others through its subsidiary, LandSafe, Inc. Through several
subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of
settlement, escrow, appraisal, credit reporting, flood zone determination and
home inspection services. In addition, LandSafe, Inc. provides property profiles
to realtors, builders, consumers, mortgage brokers and other financial
institutions.
G. Segments and Related Information
Information regarding the Company's segments appears in the Notes to the
Consolidated Financial Statements, and is incorporated herein by this reference.
H. Regulation
The Company's mortgage banking business is subject to the rules and
regulations of, and examination by, HUD, FHA, VA, Fannie Mae, Freddie Mac,
Ginnie Mae and state regulatory authorities with respect to originating,
processing, selling and servicing mortgage loans. Those rules and regulations,
among other things, impose licensing obligations on the Company, establish
standards for originating and servicing mortgage loans, prohibit discrimination,
provide for inspections and appraisals of property, require credit reports on
prospective borrowers and, in some cases, fix maximum interest rates, fees and
other loan amounts. Moreover, FHA lenders such as the Company are required
annually to submit to the Federal Housing Commissioner audited financial
statements, and Ginnie Mae requires the maintenance of specified net worth
levels (which vary depending on the amount of Ginnie Mae securities issued by
the Company). The Company's affairs are also subject to examination by the
Federal Housing Commissioner to assure compliance with the FHA regulations,
policies and procedures. In addition to other federal laws, mortgage origination
activities are subject to the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act, Home Mortgage Disclosure Act and the Real Estate
Settlement Procedures Act, and the regulations promulgated thereunder. These
laws prohibit discrimination, require the disclosure of certain basic
information to mortgagors concerning credit and settlement costs, limit payment
for settlement services to the reasonable value of the services rendered and
require the maintenance and disclosure of information regarding the disposition
of mortgage applications based on race, gender, geographical distribution and
income level.
Securities broker-dealer and mutual fund operations are subject to federal
and state securities laws, as well as the rules of both the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.
Insurance carrier, insurance agency and title insurance operations are
subject to insurance laws of each of the states in which the Company conducts
such operations.
I. Competition
The mortgage banking industry is highly competitive and fragmented. The
Company competes with other financial intermediaries (such as mortgage bankers,
commercial banks, savings and loan associations, credit unions and insurance
companies) and mortgage banking subsidiaries or divisions of diversified
companies. Generally, the Company competes by offering a wide selection of
products through multiple channels, by providing consistent, high quality
service and by pricing its products at competitive rates.
During the 1990's, the aggregate share of the United States market for
residential mortgage loans that is served by mortgage bankers has risen,
principally due to the decline in the savings and loan industry. According to
industry statistics, mortgage bankers' aggregate share of this market increased
from approximately 19% during calendar year 1989 to approximately 60% during
calendar year 1999. The Company believes that it has benefited from this trend.
J. Employees
At February 29, 2000, the Company had 10,572 employees, 5,024 of whom were
engaged in production activities, 2,108 were engaged in loan administration
activities 216 were engaged in Capital Markets activities, 854 were engaged in
insurance and 2,370 were engaged in other activities. None of these employees is
represented by a collective bargaining agent.
K. Year 2000 Compliance
A discussion of the Year 2000 issue is included in Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company and its
subsidiaries are located in Calabasas, California. The headquarters facility
consists of approximately 225,000 square feet and is situated on 20.1 acres of
land. In June 1999, the executive and administrative operations of the Company's
information technology division and wholesale lending division relocated to a
newly constructed 88,000 square foot office building in Calabasas, California
which the Company has leased with an option to purchase. In September 1998, the
Company entered into a 10-year sublease of a 215,000 square foot facility in
Rosemead, California, which houses loan production and certain subsidiary
operations. The Company owns an office facility of approximately 300,000 square
feet located on 43.5 acres in Simi Valley, California, which is used primarily
to house a portion of the Company's loan servicing and data processing
operations. In July 1998, the Company purchased the adjoining 14-acre parcel and
converted the existing structure on that parcel to a 206,000 square foot office
building for loan servicing operations and the executive and administrative
offices of its Correspondent Lending Division. In December 1998, the Company
purchased a 200,500 square foot building in Simi Valley, California, which
houses the Company's document custodian and collateral documents, as well as the
Company's document management operations. The Company also owns a 253,000 square
foot building situated on 21.5 acres in Plano, Texas, which houses additional
loan servicing, loan production, data processing and subsidiary operations. In
order to accommodate its expanding loan servicing and related business
operations, the Company constructed two office buildings totaling approximately
500,000 square feet on the 17-acre parcel of land adjacent to the existing Plano
facility. Additional space located in Pasadena, Irvine, Moorpark and Simi
Valley, California and Dallas, Texas is currently under lease for certain
subsidiaries, loan servicing, loan production and data processing operations.
These leases provide an additional 375,000 square feet on varying terms. In
addition, the Company leases space for its branch offices throughout the
country.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. Although
it is difficult to predict the ultimate outcome of these proceedings, management
believes, based on discussions with counsel, that any ultimate liability will
not materially affect the consolidated financial position or results of
operations of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange ("NYSE")
and the Pacific Stock Exchange (Symbol: CCR). The following table sets forth the
high and low sales prices (as reported by the NYSE) for the Company's common
stock and the amount of cash dividends declared for the fiscal years ended
February 29(28), 2000 and 1999.
------- --------------- ------------------------- --- ------------------------- --- --------------------------------
Fiscal 2000 Fiscal 1999 Fiscal 2000 Fiscal 1999
------- --------------- ------------ ------------ --- ------------ ------------ --- --------------------------------
Quarter High Low High Low Cash Dividends Declared
------- --------------- ------------ ------------ --- ------------ ------------ --- --------------------------------
First $48.00 $36.56 $54.50 $44.25 $0.10 $0.08
Second 45.25 31.63 56.25 37.00 0.10 0.08
Third 35.25 27.75 50.75 28.63 0.10 0.08
Fourth 29.25 23.00 51.44 36.75 0.10 0.08
------- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- ---------------
The Company has declared and paid cash dividends on its common stock
quarterly since 1982. For the fiscal years ended February 29(28), 2000 and 1999,
the Company declared quarterly cash dividends aggregating $0.40 and $0.32 per
share, respectively. On March 23, 2000, the Company declared a quarterly cash
dividend of $0.10 per common share, which was paid on April 28, 2000.
The ability of the Company to pay dividends in the future is limited by
various restrictive covenants in the debt agreements of the Company, the
earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under certain of its debt agreements,
including its guarantee of CHL's revolving credit facility, from paying
dividends on any capital stock (other than dividends payable in capital stock or
stock rights), except that so long as no event of default or potential event of
default under the agreements exists at the time, the Company may pay dividends
in an aggregate amount not to exceed the greater of: (i) the after-tax net
income of the Company, determined in accordance with generally accepted
accounting principles, for the fiscal year to the end of the quarter to which
the dividends relate and (ii) the aggregate amount of dividends paid on common
stock during the immediately preceding year. The primary source of funds for
payments to stockholders by the Company is dividends received from its
subsidiaries. Accordingly, such payments by the Company in the future also
depend on various restrictive covenants in the debt obligations of its
subsidiaries, the earnings, the cash position and the capital needs of its
subsidiaries, as well as laws and regulations applicable to its subsidiaries.
Unless the Company and CHL each maintain specified minimum levels of net worth
and certain other financial ratios, dividends cannot be paid by the Company and
CHL in compliance with certain of CHL's debt obligations (including its
revolving credit facility). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
As of May 17, 2000, there were 2,174 shareholders of record of the Company's
common stock, with 114,090,819 common shares outstanding.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
-------------------------------------- ------------------------------------------------------------------------------
Year ended February 29(28),
-------------------------------------- -------------------------- ------------ ------------ ------------ -------------
(Dollar amounts in thousands, except per share 2000 1999 1998 1997 1996
data)
------------------------------------------------- --------------- ------------ ------------ ------------ -------------
Statement of Earnings Data (1):
Revenues:
Loan origination fees $406,458 $623,531 $301,389 $193,079 $199,724
Gain on sale of loans 557,743 699,433 417,427 247,450 92,341
--------------- ------------ ------------ ------------ -------------
Loan production revenue 964,201 1,322,964 718,816 440,529 292,065
Interest earned 998,646 1,029,066 584,076 457,005 364,531
Interest charges (930,294) (983,829) (568,359) (423,447) (337,655)
--------------- ------------ ------------ ------------ -------------
Net interest income 68,352 45,237 15,717 33,558 26,876
Loan servicing income 1,192,789 1,023,700 907,674 773,715 620,835
Amortization and impairment/recovery of
mortgage servicing rights, net of (445,138) (600,766) (328,845) (226,686) (142,676)
servicing hedge
--------------- ------------ ------------ ------------ -------------
Net loan administration income 747,651 422,934 578,829 547,029 478,159
138 91,346
Commissions, fees and other income 234,047 187,867 138,217 91,346 63,642
Gain on sale of subsidiary 4,424 - 57,381 - -
--------------- ------------ ------------ ------------ -------------
Total revenues 2,018,675 1,979,002 1,508,960 1,112,462 860,742
--------------- ------------ ------------ ------------ -------------
Expenses:
Salaries and related expenses 689,768 669,686 424,321 286,884 229,668
Occupancy and other office expenses 276,802 270,483 182,335 129,877 106,298
Guarantee fees 195,928 181,117 172,692 159,360 121,197
Marketing expenses 72,930 64,510 42,320 34,255 27,115
Other operating expenses 152,049 161,401 121,746 80,188 50,264
--------------- ------------ ------------ ------------ -------------
Total expenses 1,387,477 1,347,197 943,414 690,564 534,542
--------------- ------------ ------------ ------------ -------------
421,898
Earnings before income taxes 631,198 631,805 565,546 421,898 326,200
Provision for income taxes 220,955 246,404 220,563 164,540 130,480
--------------- ------------ ------------ ------------ -------------
--------------- ------------ ------------ ------------ -------------
Net earnings $410,243 $385,401 $344,983 $257,358 $195,720
================================================= =============== ============ ============ ============ =============
================================================= =============== ============ ============ ============ =============
Per Share Data (2):
Basic (3) $3.63 $3.46 $3.21 $2.50 $1.99
Diluted (3) $3.52 $3.29 $3.09 $2.44 $1.95
Cash dividends per share $0.40 $0.32 $0.32 $0.32 $0.32
Weighted average shares outstanding:
Basic 113,083,000 111,414,000 107,491,000 103,112,000 98,352,000
Diluted 116,688,000 117,045,000 111,526,000 105,677,000 100,270,000
================================================= =============== ============ ============ ============ =============
================================================= =============== ============ ============ ============ =============
Selected Balance Sheet Data at End of Period
(1):
Total assets $15,822,328 $15,648,256 $12,183,211 $7,689,090 $8,321,652
Short-term debt 2,911,410 $5,065,934 $4,043,774 $2,567,420 $4,423,738
Long-term debt 7,253,323 $5,953,324 $4,195,732 $2,367,661 $1,911,800
Common shareholders' equity $2,887,879 $2,518,885 $2,087,943 $1,611,531 $1,319,755
================================================= =============== ============ ============ ============ =============
================================================= =============== ============ ============ ============ =============
Operating Data (dollar amounts in millions):
Loan servicing portfolio (4) $250,192 $215,489 $182,889 $158,585 $136,835
Volume of loans originated $66,740 $92,881 $48,772 $ 37,811 $ 34,584
================================================= =============== ============ ============ ============ =============
(1) Certain amounts in the Consolidated Financial Statements have been reclassified to conform to current year presentation.
(2) Adjusted to reflect subsequent stock dividends and splits.
(3) Earnings per share for Fiscal 1998 include a $57.4 million gain on sale of subsidiary. Excluding the non-recurring gain on
sale of subsidiary, basic and diluted earnings per share would have been
$2.88 and $2.78, respectively. (4) Includes warehoused loans and loans under
subservicing agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business strategy is primarily focused on five areas: loan
production, loan servicing, capital markets, insurance and other businesses
ancillary to mortgage lending. Loan production and loan servicing comprise the
Company's mortgage banking business. See "Business--Mortgage Banking
Operations", "Business--Capital Markets", "Business--Insurance Segment" and
"Business--Other Operations." The Company intends to continue its efforts to
expand its operations in each of these areas. A strong production capability and
a growing servicing portfolio are the primary means used by the Company to
reduce the sensitivity of its earnings to changes in interest rates because the
effect of interest rate changes on loan production income is counter cyclical to
their effect on servicing income. The operations of the capital markets segment
include trading mortgage-backed securities ("MBS") and other mortgage-related
assets as well as brokering service contracts and bulk purchases and sales of
whole loans. The operations of the insurance segment includes acting as an agent
and carrier in the sale of insurance, including homeowners, fire, flood,
earthquake, life and disability and creditor-placed auto and homeowner
insurance. Other complementary services offered include title insurance agent
and escrow services, appraisal and credit reporting services.
The Company's results of operations historically have been influenced
primarily by the level of demand for mortgage loans, which is affected by such
external factors as the level and direction of interest rates, and the strength
of the overall economy and the economy in each of the Company's lending markets.
The fiscal year ended February 28, 1998 ("Fiscal 1998") was a then record
year for the Company in terms of revenues and net earnings from its ongoing
operations. Loan production increased to $48.8 billion, up from $37.8 billion in
the prior year. The Company attributed the increase in production to: (i) lower
interest rates; (ii) the generally strong economy and home purchase market;
(iii) the continued implementation of a national advertising campaign aimed at
developing a brand identity for Countrywide and reaching the consumer directly;
and (iv) increased expansion of the Consumer Markets and Wholesale branch
networks, including the new retail sub-prime branches. For calendar 1997, the
Company ranked second in the amount of single-family mortgage originations
nationwide. For calendar 1997, the Company's market share increased to
approximately 5.1% of the estimated $850 billion single-family mortgage
origination market, up from approximately 4.8% of the estimated $800 billion
single-family mortgage origination market for 1996. During Fiscal 1998, the
Company's loan servicing portfolio grew to $182.9 billion, up from $158.6
billion at the end of Fiscal 1997. This growth resulted from the Company's loan
production during the year and bulk servicing acquisitions amounting to $1.0
billion. The increase in the loan servicing portfolio was partially offset by
prepayments, partial prepayments and scheduled amortization of $24.3 billion.
The prepayment rate in the servicing portfolio was 15%, up from the prior year
due to the lower mortgage interest rate environment in Fiscal 1998.
During Fiscal 1998, the Company sold the assets, operations and
employees of Countrywide Asset Management Corporation ("CAMC"), then a
wholly-owned subsidiary of the Company to IndyMac Mortgage Holdings, Inc.
(formerly INMC Mortgage Holdings, Inc.) ("INMC"). CAMC was formally the manager
of INMC. The Company received 3,440,800 newly issued common shares of INMC as
consideration.
The fiscal year ended February 28, 1999 ("Fiscal 1999") was another record
year for the Company in terms of revenues and net earnings. Loan production
increased to $92.9 billion, an all-time Company record, up from $48.8 billion in
the prior year. The Company attributed the increase in production to: (i) an
increase in the overall mortgage market driven largely by refinances; (ii) the
generally strong economy and home purchase market; and (iii) an increase in the
Company's market share, driven largely by the expansion of its Consumer Markets
Home Finance Network and Consumer Markets and Wholesale branch networks,
including the new retail sub-prime branches. For calendar 1998, the Company
ranked second in the amount of single-family mortgage originations nationwide.
During calendar 1998, the Company's market share increased to approximately
6.1%, up from approximately 5.1% in calendar 1997. During Fiscal 1999, the
Company's loan servicing portfolio grew to $215.5 billion, up from $182.9
billion at the end of Fiscal 1998. This growth resulted from the Company's loan
production during the year and bulk servicing acquisitions amounting to $4.6
billion. This growth in the loan servicing protfolio was partially offset by
prepayments, partial prepayments and scheduled amortization of $53.2 billion and
the transfer out of $6.5 billion of subservicing. The prepayment rate in the
servicing portfolio was 28%, up from the prior year due to increased refinance
activity driven by the lower mortgage interest rate environment in Fiscal 1999.
The fiscal year ended February 29, 2000 ("Fiscal 2000") was again a record
year for the Company in terms of revenues and net earnings. Loan production
decreased to $66.7 billion, down from $92.9 billion in the prior year. The
Company attributed the decrease in production primarily to a decrease in the
overall mortgage market driven largely by a decrease in refinance activity,
combined with a slight decrease in the Company's market share. For calendar 1999
the Company ranked third in the amount of single-family mortgage originations
nationwide. During calendar 1999 the Company's market share decreased to
approximately 5.9% down from approximately 6.1% in calendar 1998. During Fiscal
2000, the Company's loan servicing portfolio grew to $250.2 billion, up from
$215.5 billion at the end of Fiscal 1999. This growth resulted from the
Company's strong loan production during the year and bulk servicing acquisitions
amounting to $2 billion. This growth in the loan servicing protfolio was
partially offset by prepayments, partial prepayments and scheduled amortization
of $28.5 billion. The prepayment rate in the servicing portfolio was 13%, down
from 28% the prior year due to the higher mortgage interest rate environment in
Fiscal 2000.
RESULTS OF OPERATIONS
Fiscal 2000 Compared with Fiscal 1999
Revenues for Fiscal 2000 increased 2% to $2,018.7 million, up from $1,979.0
million for Fiscal 1999. Net earnings increased 6% to $410.2 million for Fiscal
2000, up from $385.4 million for Fiscal 1999. The slight increase in revenues
for Fiscal 2000 compared to Fiscal 1999 was primarily attributed to the loan
servicing, capital markets and insurance segments, together with increased
production of non traditional loan products (home equity and sub-prime loans).
This was largely offset by a decline in traditional prime loan originations,
attributable to the market-wide decline in loan refinancings. Included in net
earnings in Fiscal 2000 was a nonrecurring tax benefit of $25 million that
related primarily to a corporate reorganization.
The total volume of loans produced by the Company in Fiscal 2000 decreased
28% to $66.7 billion, down from $92.9 billion for Fiscal 1999. The decrease in
loan production was primarily due to a decrease in the mortgage origination
market, driven largely by a reduction in refinance activity, combined with a
slight decrease in the Company's market share.
Total loan production by purpose and by interest rate type is summarized
below.
(Dollar amounts in millions) Loan Production
- ------------------------------- --------------------------------------- --------
Fiscal Fiscal
2000 1999
------------- ----------------
Purchase $43,594 $39,681
Refinance 23,146 53,200
------------- ----------------
Total $66,740 $92,881
============= ================
------------- ----------------
Fixed Rate $57,178 $88,334
Adjustable Rate 9,562 4,547
------------- ----------------
Total $66,740 $92,881
============= ================
- -------------------------------------------------------------------------------
Total loan production by Division is summarized below.
- ----------------------------------------------------------------------- --------
(Dollar amounts in millions) Loan Production
- ----------------------------------------------------------------------- --------
Fiscal Fiscal
2000 1999
------------- ------------
Consumer Markets Division $19,967 $28,508
Wholesale Lending Division 19,116 30,917
Correspondent Lending Division 26,240 32,748
Full Spectrum Lending, Inc. 1,417 708
------------- ------------
Total $66,740 $92,881
============= ============
- --------------------------------------------------------------------------------
The factors which affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's various
product offerings, the level of mortgage lending activity in each Division's
market and the success of each Division's sales and marketing efforts.
Non traditional loan production (which is included in the Company's total
volume of loans produced) is summarized below.
- -------------------------------------------- -------------------------- --------
(Dollar amounts in millions) Non Traditional
Loan Production
- -------------------------------------------- -------------------------- --------
Fiscal Fiscal
2000 1999
------------- ------------
Sub-prime $ 4,156 $ 2,496
Home Equity Loans 3,636 2,221
------------- ------------
Total $7,792 $4,717
============= ============
- --------------------------------------------------------------------------------
During Fiscal 2000 and Fiscal 1999, the Company received 925,604 and
1,194,833 new loan applications, respectively, at an average daily rate of $383
million and $540 million, respectively. The factors that affect the percentage
of applications received and funded during a given time period include the
movement and direction of interest rates, the average length of loan commitments
issued, the creditworthiness of applicants, the production Divisions' loan
processing efficiency and loan pricing decisions.
Loan origination fees decreased in Fiscal 2000 as compared to Fiscal 1999
primarily due to lower production and a change in the divisional mix. The
Consumer Markets and Wholesale Lending Divisions (which, due to their higher
cost structure, charge higher origination fees per dollar loaned) comprised a
lower percentage of total production in Fiscal 2000 than in Fiscal 1999. Gain on
sale of loans also decreased in Fiscal 2000 as compared to Fiscal 1999 primarily
due to lower production volume and reduced margins on prime credit quality
mortgages. These declines were partially offset by increased sales during Fiscal
2000 of higher margin home equity and sub-prime loans (which, due in part to
their higher cost structure charge a higher price per dollar loaned). The sale
of home equity loans contributed $87 million and $65 million to gain on sale of
loans in Fiscal 2000 and Fiscal 1999, respectively. Sub-prime loans contributed
$186 million to the gain on sale of loans in Fiscal 2000 and $92 million in
Fiscal 1999. In general, loan origination fees and gain (loss) on sale of loans
are affected by numerous factors including the volume and mix of loans produced
and sold, loan pricing decisions, interest rate volatility and the general
direction of interest rates.
Net interest income (interest earned net of interest charges) increased to
$68.4 million for Fiscal 2000, up from $45.2 million for Fiscal 1999. Net
interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($149.5 million and $118.2 million
for Fiscal 2000 and Fiscal 1999, respectively); (ii) interest expense related to
the Company's investment in servicing rights ($324.2 million and $351.2 million
for Fiscal 2000 and Fiscal 1999, respectively) and (iii) interest income earned
from the custodial balances associated with the Company's servicing portfolio
($216.4 million and $270.4 million for Fiscal 2000 and Fiscal 1999,
respectively). The Company earns interest on, and incurs interest expense to
carry, mortgage loans held in its warehouse. The increase in net interest income
from the mortgage loan warehouse was primarily attributable to an increase in
inventory levels as a result of a longer warehouse period combined with a higher
net earnings rate during Fiscal 2000. The decrease in interest expense on the
investment in servicing rights resulted primarily from a decrease in the
payments of interest to certain investors pursuant to customary servicing
arrangements with regard to paid-off loans in excess of the interest earned on
these loans through their respective payoff dates ("Interest Costs Incurred on
Payoffs") as a result of lower prepayments. The decline in Interest Cost
Incurred on Payoffs was partially offset by additional interest expense from a
larger servicing portfolio. The decrease in net interest income earned from the
custodial balances was primarily related to a decrease in the average custodial
balances caused by decrease in the amount of prepayments.
During Fiscal 2000, loan servicing income before amortization increased
primarily due to growth of the loan servicing portfolio. As of February 29,
2000, the Company serviced $250.2 billion of loans (including $2.9 billion of
loans subserviced for others), compared to $215.5 billion (including $2.2
billion of loans subserviced for others) as of February 28, 1999, a 16%
increase. The growth in the Company's servicing portfolio during Fiscal 2000 was
the result of loan production volume and the acquisition of bulk servicing
rights, partially offset by prepayments, partial prepayments and scheduled
amortization of mortgage loans.
During Fiscal 2000, the annual prepayment rate of the Company's servicing
portfolio was 13%, compared to 28% for Fiscal 1999. The prepayment rate is
primarily affected by the level of refinance activity, which in turn is driven
by the relative level of mortgage interest rates, as well as activity in the
resale home market. The weighted average interest rate of the mortgage loans in
the Company's servicing portfolio as of February 29(28), 2000 and 1999 was 7.5%.
The Company recorded MSR amortization and net impairment recovery for Fiscal
2000 totaling $181.0 million (consisting of amortization amounting to $459.3
million and recovery of previous impairment of $278.3 million), compared to
$1,013.6 million of amortization and impairment (consisting of amortization
amounting to $556.4 million and impairment of $457.2 million) for Fiscal 1999.
The primary factors affecting the amount of amortization and impairment of the
MSRs recorded in an accounting period are the level of prepayments during the
period and the change, if any, in estimated future prepayments. To mitigate the
effect on earnings of MSR impairment that may result from increased current and
projected future prepayment activity, the Company acquires financial
instruments, including derivative contracts, that increase in aggregate value
when interest rates decline (the "Servicing Hedge").
In Fiscal 2000, the Company recognized a net expense of $264.1 million from
its Servicing Hedge. The net expense included unrealized net losses of $230.9
million and realized net losses of $33.2 million from the sale of various
financial instruments that comprise the Servicing Hedge net of premium
amortization. In Fiscal 1999, the Company recognized a net gain of $412.8
million from its Servicing Hedge. The net gain included unrealized net gains of
$26.1 million and realized net gains of $386.7 million from the sale of various
financial instruments that comprise the Servicing Hedge net of premium
amortization. The historical correlation of the Servicing Hedge and the MSRs has
been very high. However, given the complexity and uncertainty inherent in
hedging MSRs, there can be no assurance that future results will match the
historical performance of the Servicing Hedge.
The financial instruments that comprised the Servicing Hedge include
interest rate floors, principal only securities (P/O Securities"), options on
interest rate swaps ("Swaptions"), options on MBS, options on interest rate
futures, interest rate futures, interest rate swaps, interest rate swaps with
the Company's maximum payment capped ("Capped Swaps") and interest rate caps.
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 Company has entered into Swaps in which the rate received is fixed
and the rate paid is adjustable and is indexed to LIBOR ("Receiver Swap") as
well as Swaps in which the rate paid is fixed and the rate received is
adjustable and is indexed to LIBOR ("Payor Swap")
The Swaptions consist of options to enter into a receive-fixed, pay-floating
interest rate swap ("Receiver Swaption") and options to enter into a pay-fixed,
receive-floating interest rate swap ("Payor Swaption") at a future date or to
settle the transaction for cash.
An option on MBS gives the holder the right to call a mortgage-backed
security at a predetermined price.
The P/O securities consist of certain tranches of collateralized mortgage
securities ("CMOs"), mortgage trust principal-only securities and treasury
principal-only strips. These securities have been purchased at deep discounts to
their par values. As interest rates decrease, prepayments on the collateral
underlying the CMOs and mortgage trust principal-only securities should
increase. This results in a decline in the average lives of the P/O securities
and a corresponding increase in the present values of their cash flows.
Conversely, as interest rates increase, prepayments on the collateral underlying
the CMOs and mortgage trust principal-only securities should decrease. This
would result in an increase in the average lives of the P/O Securities and a
decrease in the present values of their cashflows. The prices of the treasury
principal-only strips are determined by the discount rate used to determine
their present value, as interest rates decline the discount rate applied to the
maturity principal payment declines, resulting in an increase in the price.
The Servicing Hedge is designed to protect the value of the MSRs from the
effects of increased prepayment activity that generally results from declining
interest rates. To the extent that interest rates increase, the value of the
MSRs increases while the value of the hedge instruments declines. With respect
to the floors, options on interest rate futures and MBS, caps, Swaptions and P/O
securities, the Company is not exposed to loss beyond its initial outlay to
acquire the hedge instruments plus any unrealized gains recognized to date. The
Company's exposure to loss on futures is related to changes in the LIBOR rate
over the life of the contract. The Company was not a party to any futures
contract at February 29, 2000. With respect to the Interest Rate Swaps contracts
entered into by the Company as of February 29, 2000, the Company estimates that
its maximum exposure to loss over the contractual terms is $1 million. With
respect to the Capped Swaps contracts entered into by the Company as of February
29, 2000, the Company estimates that its maximum exposure to loss over the
contractual terms is $4 million.
Salaries and related expenses are summarized below for Fiscal 2000 and
Fiscal 1999.
---- -------------------------------- -- ------ ------ ---------------------------------------------------------- ----- ---
(Dollar amounts in thousands) Fiscal 2000
------ ------ ---------------------------------------------------------- ----- ---
---- ------------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- ------------------------------- -- ------------- -- ---------------- --- ---------------- -- ---------- -- -----------
Base Salaries $232,408 $55,219 $103,088 $66,044 $456,759
Incentive Bonus 97,619 509 20,794 27,029 145,951
Payroll Taxes and Benefits 45,785 11,247 20,174 9,852 87,058
------------- ---------------- ---------------- ---------- -----------
Total Salaries and Related
Expenses $375,812 $66,975 $144,056 $102,925 $689,768
============= ================ ================ ========== ===========
Average Number of Employees 5,695 1,985 2,128 1,127 10,935
---- ------------------------------- -- ------------- -- ---------------- --- ---------------- -- ---------- -- -----------
---- ------------------------------- -- -- ------------------------------------------------- ------ - ---- ---------------
(Dollar amounts in thousands) Fiscal 1999
-- ------------------------------------------------- ------ - ---- ---------------
---- ------------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- ------------------------------- -- -------------- -- ---------------- -- ---------------- -- ---------- -- ----------
Base Salaries $212,591 $45,412 $90,953 $45,383 $394,339
Incentive Bonus 147,695 601 20,706 20,357 189,359
Payroll Taxes and Benefits 52,821 10,429 15,170 7,568 85,988
-------------- ---------------- ---------------- ---------- ----------
Total Salaries and Related
Expenses $413,107 $56,442 $126,829 $73,308 $669,686
============== ================ ================ ========== ==========
Average Number of Employees 5,512 1,740 1,823 872 9,947
---- ------------------------------- -- ------------ -- ------------- -- ---------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 2000 reflecting growth in the
non-mortgage banking subsidiaries, the continued expansion of the consumer
branch network, including the retail sub-prime branches and a larger servicing
portfolio. These increases were partially offset by a reduction in the
processing work force in the production divisions as production declined. The
number of production employees declined from 6,365 at February 28, 1999 to 5,039
at February 29, 2000. Incentive bonuses earned during Fiscal 2000 decreased
primarily due to the reduction in loan production.
Occupancy and other office expenses for Fiscal 2000 increased to $276.8
million from $270.5 million for Fiscal 1999. This was primarily due to: (i) the
continued expansion of the consumer branch network; (ii) a larger servicing
portfolio; and (iii) growth in the Company's non-mortgage banking activities,
partially offset by a reduction in temporary personnel expense as a result of
decreased production.
Guarantee fees represent fees paid to Fannie Mae and Ginnie Mae ("GSEs") to
guarantee timely and full payment of principal and interest on MBS and to
transfer the credit risk of the loans in the servicing portfolio sold to these
entities. For Fiscal 2000, guarantee fees increased 8% to $195.9 million, up
from $181.1 million for Fiscal 1999. The increase resulted from an increase in
the servicing portfolio, changes in the mix of the portfolio sold to the GSEs
and terms negotiated at the time of loan sales.
Marketing expenses for Fiscal 2000 increased 13% to $72.9 million, up from
$64.5 million for Fiscal 1999. This increase primarily related to the company's
growing non-traditional loan products.
Other operating expenses for Fiscal 2000 decreased from Fiscal 1999 by 6%.
This decrease was due primarily to a reduction in reserves for bad debts due
mainly to improved property values nationally.
In Fiscal 2000, the Company initiated a corporate reorganization related to
its servicing operations. As a result of the reorganization, future state income
tax liabilities are expected to be less than the amounts that were previously
recorded as deferred income tax expense and liability in the Company's financial
statements. The expected reduction in tax liabilities was reflected as a
reduction in deferred state income tax expense in Fiscal 2000.
The Company's pre-tax earnings by segment are summarized below.
- -------------------------------------------- -----------------------------------
(Dollar amounts in thousands) Pre-Tax Earnings
- -------------------------------------------- -----------------------------------
Fiscal Fiscal
2000 1999
------------- ------------
Loan Production $259,869 $556,213
Loan Servicing 312,182 20,130
Capital Markets 32,124 26,529
Insurance 13,485 3,325
Other Activities 13,538 25,608
------------- ------------
Pre-tax Earnings $631,198 $631,805
============= ============
- --------------------------------------------------------------------------------
Profitability of Loan Production Segment
Loan production segment activities include loan origination and purchases,
warehousing and sales. The decrease in pre-tax earnings of $296.3 million in
Fiscal 2000 as compared to Fiscal 1999 was primarily attributable to lower
production and reduced margins on prime credit quality first mortgages driven by
a significant reduction in refinances. These factors were partially offset by
increased production and sales of higher margin home equity and sub-prime loans.
Profitability of Servicing Segment
Loan servicing segment activities include administering the loans in the
servicing portfolio, acting as tax payment agent, marketing foreclosed
properties and acting as reinsurer. The increase in pre-tax earnings of $292.1
million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to an
increase in servicing revenues resulting from servicing portfolio growth
combined with a reduction in the MSR amortization and recovery of previous MSR
impairment attributable to the decline in refinance activity. These positive
factors were partially offset by higher servicing costs driven by the increase
in the servicing portfolio.
Profitability of Capital Markets Segment
Capital Markets segment activities include primarily the operations of CSC,
a registered broker dealer specializing in the secondary mortgage market. The
increase in pre-tax earnings of $5.6 million in Fiscal 2000 as compared to
Fiscal 1999 was primarily due to increased trading volumes.
Profitability of Insurance Segment
Insurance segment activities include the operations of an insurance agency,
Countrywide Insurance Services ("CIS"), that provides homeowners, life,
disability, automobile as well as other forms of insurance. In addition, this
segment includes the activities of Balboa Life and Casualty ("Balboa"), an
insurance carrier that specializes in creditor-placed automobile and homeowner
insurance. The increase in pre-tax earnings of $10.2 million in Fiscal 2000 as
compared to Fiscal 1999 was primarily due to the acquisition of Balboa on
November 30, 1999.
Profitability of Other Activities
In addition to loan production, loan servicing, capital markets and
insurance, the Company offers other ancillary products and services related to
its mortgage banking activities, primarily through its subsidiary, LandSafe,
Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance
agent and a provider of settlement, escrow, appraisal and credit reporting, and
home inspection and flood zone determination services. In addition, through its
subsidiaries, LandSafe, Inc. provides property profiles to realtors, builders,
consumers, mortgage brokers and other financial institutions. For Fiscal 2000,
Landsafe Inc. contributed $13.2 million to the Company's pre-tax income compared
to $25.2 million for Fiscal 1999. The decrease in the profitability of LandSafe
Inc. resulted primarily from decreased title business attributable to the
decline in refinance activity.
During Fiscal 2000, the Company sold Countrywide Financial Services, Inc.
which resulted in a $4.4 million pre-tax gain.
Fiscal 1999 Compared with Fiscal 1998
Revenues from ongoing operations for Fiscal 1999 increased 36% to $1,979.0
million, up from $1,451.6 million for Fiscal 1998. Net earnings from ongoing
operations increased 24% to $385.4 million for Fiscal 1999, up from $310.0
million for Fiscal 1998. Revenues and net earnings from ongoing operations for
Fiscal 1998 exclude a nonrecurring pre-tax gain of $57.4 million on the sale of
CAMC. The increase in revenues and net earnings from ongoing operations for
Fiscal 1999 compared to Fiscal 1998 was primarily attributed to higher loan
production volume, an increase in the size of the Company's servicing portfolio
as well as continued growth in the Company's non-mortgage banking subsidiaries.
These positive factors were partially offset by an increase in amortization of
the servicing asset and an increase in expenses in Fiscal 1999 over Fiscal 1998.
The total volume of loans produced by the Company in Fiscal 1999 increased
90% to $92.9 billion, up from $48.8 billion for Fiscal 1998. The increase in
loan production was primarily due to an increase in the Company's market share,
driven largely by the expansion of the Company's Consumer Markets Home Finance
Network and Consumer Markets and Wholesale branch networks, including the retail
sub-prime branches, combined with an increase in the overall mortgage market
driven largely by refinances. Total loan production by purpose and by interest
rate type is summarized below.
- -------------------------------------------- -------------------------- --------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- -------------------------- --------
Fiscal Fiscal
1999 1998
------------- ------------
Purchase $ 39,681 $ 28,990
Refinance 53,200 19,782
------------- ------------
Total $92,881 $48,772
============= ============
------------- ------------
Fixed Rate $ 88,334 $ 37,486
Adjustable Rate 4,547 11,286
------------- -----------
Total $92,881 $48,772
============= ============
- --------------------------------------------------------------------------------
Total loan production by Division is summarized below.
- -------------------------------------------- -----------------------------------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- -----------------------------------
Fiscal Fiscal
1999 1998
------------- ------------
Consumer Markets Division $28,508 $13,339
Wholesale Lending Division 30,917 15,731
Correspondent Lending Division 32,748 19,562
Full Spectrum Lending, Inc. 708 140
------------- ------------
Total $92,881 $48,772
============= ============
- --------------------------------------------------------------------------------
The factors which affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's product
offerings, the level of mortgage lending activity in each Division's market and
the success of each Division's sales and marketing efforts.
Non-traditional loan production (which is included in the Company's total
volume of loans produced) is summarized below.
- -------------------------------------------- -----------------------------------
(Dollar amounts in millions) Non-Traditional
Loan Production
- -------------------------------------------- -----------------------------------
Fiscal Fiscal
1999 1998
------------- ------------
Sub-prime $ 2,496 $ 1,552
Home Equity Loans 2,221 1,463
------------- ------------
Total $4,717 $3,015
============= ============
- --------------------------------------------------------------------------------
During Fiscal 1999 and Fiscal 1998, the Company received 1,194,833 and
714,668 new loan applications, respectively, at an average daily rate of $540
million and $306 million, respectively. The factors that affect the percentage
of applications received and funded during a given time period include the
movement and direction of interest rates, the average length of loan commitments
issued, the creditworthiness of applicants, the production Divisions' loan
processing efficiency and loan pricing decisions.
Loan origination fees increased in Fiscal 1999 as compared to Fiscal 1998
primarily due to higher production. In addition, the Consumer Markets and
Wholesale Lending Divisions (which, due to their higher cost structure, charge
higher origination fees per dollar loaned) comprised a greater percentage of
total production in Fiscal 1999 than in Fiscal 1998. Gain on sale of loans also
increased in Fiscal 1999 as compared to Fiscal 1998 primarily due to higher
production volume. This positive factor was partially offset by reduced margins
on home equity and sub-prime loans. The sale of home equity loans contributed
$65 million and $62 million to gain on sale of loans in Fiscal 1999 and Fiscal
1998, respectively. Sub-prime loans contributed $92 million to the gain on sale
of loans in Fiscal 1999 and $70 million in Fiscal 1998. In general, loan
origination fees and gain (loss) on sale of loans are affected by numerous
factors including the volume and mix of loans produced and sold, loan pricing
decisions, interest rate volatility and the general direction of interest rates.
Net interest income (interest earned net of interest charges) increased to
$45.2 million for Fiscal 1999, up from $15.7 million for Fiscal 1998. Net
interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($118.2 million and $74.5 million for
Fiscal 1999 and Fiscal 1998, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($351.2 million and $219.4 million for
Fiscal 1999 and Fiscal 1998, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($270.4
million and $151.0 million for Fiscal 1999 and Fiscal 1998, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its warehouse. The increase in net interest income from the mortgage
loan warehouse was primarily attributable to higher production levels. The
increase in interest expense on the investment in servicing rights resulted
primarily from a larger servicing portfolio and an increase in Interest Costs
Incurred on Payoffs. The increase in net interest income earned from the
custodial balances was related to an increase in the average custodial balances
caused by growth of the servicing portfolio and an increase in the amount of
prepayments.
During Fiscal 1999, loan servicing income before amortization increased
primarily due to growth of the loan servicing portfolio. As of February 28,
1999, the Company serviced $215.5 billion of loans (including $2.2 billion of
loans subserviced for others), compared to $182.9 billion (including $6.7
billion of loans subserviced for others) as of February 28, 1998, an 18%
increase. The growth in the Company's servicing portfolio during Fiscal 1999 was
the result of increased loan production volume and the acquisition of bulk
servicing rights. This was partially offset by prepayments, partial prepayments,
scheduled amortization of mortgage loans and the transfer back to INMC of $6.5
billion of subservicing.
During Fiscal 1999, the annual prepayment rate of the Company's servicing
portfolio was 28%, compared to 15% for Fiscal 1998. The prepayment rate is
primarily affected by the level of refinance activity, which in turn is driven
by the relative level of mortgage interest rates, as well as activity in the
resale home market. The weighted average interest rate of the mortgage loans in
the Company's servicing portfolio as of February 28, 1999 was 7.5% compared to
7.8% as of February 28, 1998.
The Company recorded amortization and net impairment of its MSRs for Fiscal
1999 totaling $1,013.6 million (consisting of amortization amounting to $556.4
million and impairment of $457.2 million), compared to $561.8 million of
amortization and impairment (consisting of amortization amounting to $300.3
million and impairment of $261.5 million) for Fiscal 1998. The factors affecting
the amount of amortization and impairment of the MSRs recorded in an accounting
period include the level of prepayments during the period, the change in
estimated future prepayments and the amount of Servicing Hedge gains or losses.
In Fiscal 1999, the Company recognized a net gain of $412.8 million from its
Servicing Hedge. The net gain included unrealized net gains of $26.1 million and
realized net gains of $386.7 million from the sale of various financial
instruments that comprise the Servicing Hedge net of premium amortization. In
Fiscal 1998, the Company recognized a net gain of $233.0 million from its
Servicing Hedge. The net gain included unrealized gains of $182.2 million and
net realized gains of $50.8 million from the sale of various financial
instruments that comprise the Servicing Hedge net of premium amortization. The
historical correlation of the Servicing Hedge and the MSRs has been very high.
However, given the complexity and uncertainty inherent in hedging MSRs, there
can be no assurance that future results will match the historical performance of
the Servicing Hedge.
During Fiscal 1999, the Company acquired bulk servicing rights for loans
with principal balances aggregating $4.6 billion at a price of 1.21% of the
aggregate outstanding principal balances. During Fiscal 1998, the Company
acquired bulk servicing rights for loans with principal balances aggregating
$1.0 billion at a price of 1.13% of the aggregate outstanding principal
balances.
Salaries and related expenses are summarized below for Fiscal 1999 and
Fiscal 1998.
---- ------------------------------- -- -- ------------------------------------------------- ------ - ---- ---------------
(Dollar amounts in thousands) Fiscal 1999
-- ------------------------------------------------- ------ - ---- ---------------
---- ------------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- ------------------------------- -- -------------- -- ---------------- -- ---------------- -- ---------- -- ----------
Base Salaries $212,591 $45,412 $90,953 $45,383 $394,339
Incentive Bonus 147,695 601 20,706 20,357 189,359
Payroll Taxes and Benefits 52,821 10,429 15,170 7,568 85,988
-------------- ---------------- ---------------- ---------- ----------
Total Salaries and Related
Expenses $413,107 $56,442 $126,829 $73,308 $669,686
============== ================ ================ ========== ==========
Average Number of Employees 5,512 1,740 1,823 872 9,947
---- ------------------------------- -- ------------ -- ------------- -- ---------------- -- ------------- -- ------------
---- ------------------------------ -- ------------- -- -------------- ------------------ -- -- ---------- -- -----------
(Dollar amounts in thousands) Fiscal 1998
---- ------------------------------ -- ------------- -- -------------- ------------------ -- -- ---------- -- -----------
---- ------------------------------ --
Production Loan Corporate Other
Activities Administration Administration Activities Total
---- ------------------------------ -- ------------- -- ---------------- -- ---------------- -- ---------- -- -----------
Base Salaries $134,776 $39,987 $70,305 $29,436 $274,504
Incentive Bonus 76,854 251 16,570 11,306 104,981
Payroll Taxes and Benefits 22,956 7,518 10,581 3,781 44,836
------------- ---------------- ---------------- ---------- -----------
Total Salaries and Related
Expenses $234,586 $47,756 $97,456 $44,523 $424,321
============= ================ ================ ========== ===========
Average Number of Employees 3,329 1,518 1,404 682 6,933
---- ------------------------------ -- ------------- -- ---------------- -- ---------------- -- ---------- -- -----------
The amount of salaries increased during Fiscal 1999 reflecting the Company's
strategy of expanding and enhancing its Consumer Markets and Wholesale branch
networks, including new retail sub-prime branches. In addition, a larger
servicing portfolio and growth in the Company's non-mortgage banking
subsidiaries also contributed to the increase. Incentive bonuses earned during
Fiscal 1999 increased primarily due to higher production and a change in
divisional production mix.
Occupancy and other office expenses for Fiscal 1999 increased to $270.5
million from $182.3 million for Fiscal 1998. This was primarily due to: (i) the
continued effort by the Company to expand its Consumer Markets and Wholesale
branch networks, including new retail sub-prime branches; (ii) higher loan
production; (iii) a larger servicing portfolio; and (iv) growth in the Company's
non-mortgage banking activities.
Guarantee fees represent fees paid to Fannie Mae and Ginnie Mae in order for
these Government Sponsored Entities ("GSEs") to agree to guarantee timely and
full payment of principal and interest on MBS and to transfer the credit risk of
the loans in the servicing portfolio sold to these entities. For Fiscal 1999,
guarantee fees increased 5% to $181.1 million, up from $172.7 million for Fiscal
1998. The increase resulted from an increase in the servicing portfolio, changes
in the mix of the portfolio sold to the GSEs and terms negotiated at the time of
loan sales.
Marketing expenses for Fiscal 1999 increased 52% to $64.5 million, up from
$42.3 million for Fiscal 1998, reflecting the increased mortgage market and the
Company's continued implementation of a marketing plan to increase its consumer
brand awareness.
Other operating expenses for Fiscal 1999 increased from Fiscal 1998 by $39.7
million, or 33%. This increase was due primarily to higher loan production, a
larger servicing portfolio, increased systems development and growth in the
Company's non-mortgage banking subsidiaries.
The Company's pre-tax earnings by segment are summarized below.
- ------------------------------------------- -----------------------------------
(Dollar amounts in thousands) Pre-Tax Earnings
- ------------------------------------------- ------------------------------------
Fiscal Fiscal
1999 1998
-------------- -----------
Loan Production $556,213 $245,121
Loan Servicing 20,130 207,487
Capital Markets 26,529 19,287
Insurance 3,325 7,522
Sale of Subsidiary - 57,381
Other Activities 25,608 28,748
-------------- ------------
Total $631,805 $565,546
============== ============
- --------------------------------------------------------------------------------
Profitability of Loan Production Segment
Loan production segment activities include loan origination and purchases,
warehousing and sales. The increase in pre-tax earnings of $311.1 million in
Fiscal 1999 as compared to Fiscal 1998 was primarily attributable to increased
production volume and margins and a shift in production towards the Consumer
Markets and Wholesale Divisions. These positive results were partially offset by
higher production costs.
Profitability of Servicing Segment
Loan servicing segment activities include administering the loans in the
servicing portfolio, acting as tax payment agent, marketing foreclosed
properties and acting as reinsurer. The decrease in pre-tax earnings of $187.4
million in Fiscal 1999 as compared to Fiscal 1998 was primarily attributed to
increased amortization of MSRs, increased Interest Costs Incurred on Payoffs and
a reduction in the performance of residuals and other interests retained in
securitization. These negative factors were partially offset by the increase in
servicing fees, miscellaneous income and interest earned on escrow balances
derived by the larger servicing portfolio.
Profitability of Capital Markets Segment
Capital Markets segment activities include primarily the operations of CSC,
a registered broker dealer specializing in the secondary mortgage market. The
increase in pre-tax earnings of $7.2 million in Fiscal 1999 as compare to Fiscal
1998 was primarily due to increased trading volumes driven largely by CHL's
increased loan originations and sales.
Profitability of Insurance Segment
Insurance segment activities include the operations of CIS, an insurance
agency that provides homeowners, life, disability, automobile insurance and
various other coverage. The decrease in pre-tax earnings of $4.2 million
occurred despite an increase in policies sold and was primarily due to an
increase in advertising and salaries reflecting as aggressive expansion efforts.
Profitability of Other Activities
In addition to loan production, loan servicing, capital markets and
insurance segment, the Company offers ancillary products and services related to
its mortgage banking activities, primarily through its subsidiary, LandSafe,
Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance
agent and a provider of settlement, escrow, appraisal and credit reporting and
home inspection services. During Fiscal 1999, LandSafe, Inc., through a
subsidiary, began providing flood zone determination services. In addition,
LandSafe, Inc. provides property profiles to realtors, builders, consumers,
mortgage brokers and other financial institutions. For Fiscal 1999, LandSafe
Inc. contributed $25.2 million to the Company's pre-tax income compared to $10.1
million for Fiscal 1998. The increase in the profitability of LandSafe Inc.
resulted primarily from expanded services and the Company's increased loan
production.
The Company's other activities also include the operations of its holding
company, Countrywide Credit Industries, Inc. ("CCI") and Countrywide Financial
Services, Inc.. The operations of other activities, excluding LandSafe Inc.,
incurred pre-tax income of $0.4 million during Fiscal 1999 compared to pre-tax
income of $18.6 million during Fiscal 1998. This decrease in pre-tax income
primarily resulted from: (i) a decrease in CCI net interest income related to a
receivable from CHL that was eliminated by a capital contribution during Fiscal
1999 and (ii) the discontinuance of management fees received prior to the sale
of Countrywide Asset Management Corporation ("CAMC").
During Fiscal 1998, CAMC, a subsidiary of the Company, was sold to INMC
Mortgage Holdings, Inc., (INMC) a publicly traded real estate investment trust
for 3,440,800 newly issued common shares of INMC stock. These shares are subject
to resale restrictions which apply to the shares from the date of issuance
through July 2000. The sale resulted in a $57.4 million pre-tax gain.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are counter
cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its committed pipeline, mortgage loan inventory and MBS
held for sale, MSRs, mortgage-backed securities retained in securitizations,
trading securities and debt securities. The overall objective of the Company's
interest rate risk management policies is to offset changes in the values of
these items resulting from changes in interest rates. The Company does not
speculate on the direction of interest rates in its management of interest rate
risk.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that quantify the net financial impact of changes
in interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses incorporate scenarios including selected
hypothetical (instantaneous) parallel shifts in the yield curve. Various
modeling techniques are employed to value the financial instruments. For
mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread
("OAS") model is used. The primary assumptions used in this model are the
implied market volatility of interest rates and prepayment speeds. For options
and interest rate floors, an option-pricing model is used. The primary
assumption used in this model is implied market volatility of interest rates.
MSRs and residual interests are valued using discounted cash flow models. The
primary assumptions used in these models are prepayment rates, discount rates
and credit losses.
Utilizing the sensitivity analyses described above, as of February 29, 2000,
the Company estimates that a permanent 0.50% reduction in interest rates, all
else being constant, would result in a $1.4 million after-tax loss related to
its trading securities and there would be no loss related to its other financial
instruments. As of February 29, 2000, the Company estimates that this combined
after-tax loss of $1.4 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, are subject to the accuracy of various assumptions used including
prepayment forecasts, and do not incorporate other factors that would impact the
Company's overall financial performance in such a scenario. Consequently, the
preceding estimates should not be viewed as a forecast.
An additional, albeit less significant, market risk facing the Company is
foreign currency risk. The Company has issued foreign currency denominated
medium-term notes (See Note F). The Company manages the foreign currency risk
associated with such medium-term notes by entering into currency swaps. The
terms of the currency swaps effectively translate the foreign currency
denominated medium-term notes into U.S. dollars, thereby eliminating the
associated foreign currency risk (subject to the performance of the various
counterparties to the currency swaps). As a result, hypothetical changes in the
exchange rates of foreign currencies denominating such medium-term notes would
not have a net financial impact on future earnings, fair values or cash flows.
INFLATION
Inflation affects the Company most significantly in the areas of loan
production and servicing. Interest rates normally increase during periods of
high inflation and decrease during periods of low inflation. Historically, as
interest rates increase, loan production decreases, particularly from loan
refinancings. Although in an environment of gradual interest rate increases,
purchase activity may actually be stimulated by an improving economy or the
anticipation of increasing real estate values. In such periods of reduced loan
production, production margins may decline due to increased competition
resulting from overcapacity in the market. In a higher interest rate
environment, servicing-related earnings are enhanced because prepayment rates
tend to slow down thereby extending the average life of the Company's servicing
portfolio and reducing amortization and impairment of the MSRs, as well as
Interest Costs Incurred on Payoffs, and because the rate of interest earned from
the custodial balances tends to increase. Conversely, as interest rates decline,
loan production, particularly from loan refinancings, increases. However, during
such periods, prepayment rates tend to accelerate (principally on the portion of
the portfolio having a note rate higher than the then-current interest rates),
thereby decreasing the average life of the Company's servicing portfolio and
adversely impacting its servicing-related earnings primarily due to increased
amortization and impairment of the MSRs, a decreased rate of interest earned
from the custodial balances and increased Interest Costs Incurred on Payoffs.
The Servicing Hedge is designed to mitigate the impact of changing interest
rates on servicing-related earnings.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of its mortgage
loan inventory, investment in MSRs and the trading securities of its
broker-dealer subsidiary. To meet these needs, the Company currently utilizes
commercial paper supported by the revolving credit facility, medium-term notes,
senior debt, MBS repurchase agreements, subordinated notes, pre-sale funding
facilities, redeemable capital trust pass-through securities, securitization of
servicing fee income 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. The Company strives to maintain sufficient liquidity in the
form of unused, committed lines of credit, to meet anticipated short-term cash
requirements as well as to provide for potential sudden increases in business
activity driven by changes in the market environment.
Certain of the debt obligations of the Company and Countrywide Home Loans,
Inc. ("CHL") contain various provisions that may affect the ability of the
Company and CHL to pay dividends and remain in compliance with such obligations.
These provisions include requirements concerning net worth and other financial
covenants. These provisions have not had, and are not expected to have, an
adverse impact on the ability of the Company and CHL to pay dividends.
The principal financing needs of CCM consist of the financing of its
inventory of securities and mortgage loans. Its securities inventory is financed
primarily through MBS repurchase agreements. CCM also has access to a $200
million secured bank loan facility and a lending facility with CHL
The securities industry is highly competitive and fragmented. CCM competes
with large global investment banks and broker-dealers, as well as smaller
regional broker-dealers. CCM competes by specializing in mortgage related fixed
income securities and through its affiliation with CHL, which allow it to offer
information, products and services tailored to the unique needs of participants
in the mortgage related debt securities markets.
The primary cash needs for CIG are to meet short-term and long-term
obligations to policyholders (payment of policy benefits), costs of acquiring
new business (principally commissions) and the purchases of new investments. To
meet these needs, CIG currently utilizes cash flow provided from operations as
well as maturities and sales of invested assets.
The lender-placed collateral protection insurance market is dominated by a
few providers competing on overall financial strength of the insurer, premium
rates, policy terms and conditions, services offered, reputation and broker
compensation. The voluntary property and casualty and life and disability
marketplace is dominated by large, brand name providers and is driven mostly by
price and name recognition. GIC competes by providing high quality service and
pricing its products at competitive rates.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
In connection with its derivative contracts, the Company may be required to
deposit cash or certain government securities or obtain letters of credit to
meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells the mortgage loans it originates and purchases to investors but generally
retains the right to service the loans, thereby increasing the Company's
investment in MSRs. The Company views the sale of loans on a servicing-retained
basis in part as an investment vehicle. Significant unanticipated prepayments in
the Company's servicing portfolio could have a material adverse effect on the
Company's future operating results and liquidity.
Cash Flows
Operating Activities In Fiscal 2000, the Company's operating activities
provided cash of approximately $2.4 billion on a short-term basis primarily as a
result of a decrease in its mortgage loans and MBS held for sale. In Fiscal
1999, operating activities used approximately $1.0 billion on a short-term basis
primarily to support the increase in its mortgage loans and MBS held for sale.
In Fiscal 1998, the Company's operating activities used cash of approximately
$2.5 billion.
Investing Activities The primary investing activities for which cash was
used by the Company was the investment in MSRs and the acquisition of Balboa.
Net cash used by investing activities was $1.6 billion for Fiscal 2000, $1.8
billion for Fiscal 1999 and $1.1 billion for Fiscal 1998.
Financing Activities Net cash used by financing activities amounted to $0.9
billion for Fiscal 2000. Net cash provided by financing activities amounted to
$2.8 billion for Fiscal 1999. Net cash used by financing activities amounted to
$3.6 billion for Fiscal 1998. The increase or decrease in cash flow from
financing activities was primarily the result of the change in the Company's
mortgage loan inventory and investment in MSRs.
Prospective Trends
Applications and Pipeline of Loans in Process
For the month ended March 31, 2000, the Company received new loan
applications at an average daily rate of $353 million. As of March 31, 2000, the
Company's pipeline of loans in process was $9.0 billion. This compares to a
daily application rate for the month ended in March 31, 1999 of $537 million and
a pipeline of loans in process as of March 31, 1999 of $14.2 billion. The size
of the pipeline is generally an indication of the level of future fundings, as
historically 37% to 77% of the pipeline of loans in process has funded. In
addition, the Company's LOCK `N SHOP(R) Pipeline as of March 31, 2000 was $3.1
billion and as of March 31, 1999 was $2.5 billion. Future application levels and
loan fundings are dependent on numerous factors, including the level of demand
for mortgage loans, the level of competition in the market, the direction of
interest rates, seasonal factors and general economic conditions.
Market Factors
Loan production decreased 28% from Fiscal 1999 to Fiscal 2000. This decrease
was primarily due to a smaller mortgage origination market, driven by reduced
refinances, combined with a slight decrease in the Company's market share. Home
purchase related loan production increased during the same period.
The prepayment rate in the servicing portfolio decreased from 28% in Fiscal
1999 to 13% in Fiscal 2000. This was due primarily to a smaller mortgage
origination refinance market.
The Company's California mortgage loan production (as measured by principal
balance) constituted 22% of its total production during Fiscal 2000 and 25%
during Fiscal 1999. The Company is continuing its efforts to expand its
production capacity outside of California. Some regions in which the Company
operates have experienced slower economic growth, and real estate financing
activity in these regions has been impacted negatively. The Company has striven
to diversify its mortgage banking activities geographically to mitigate such
effects.
The delinquency rate in the Company's servicing portfolio, excluding
sub-servicing, increased to 3.97% at February 29, 2000 from 3.55% as of February
28, 1999. The Company believes that this increase was primarily the result of
changes in portfolio mix and aging. Sub-prime loans (which tend to experience
higher delinquency rates than prime loans) represented approximately 3% of the
total portfolio as of February 29, 2000, up from 1% as of February 28, 1999. In
addition, the weighted average age of the prime credit quality loans in the
portfolio increased to 29 months at February 29, 2000 from 26 months in February
28, 1999. Delinquency rates tend to increase as loans age, reaching a peak at
three to five years of age. However, because the loans in the portfolio are
generally serviced on a non-recourse basis, the Company's exposure to credit
loss resulting from increased delinquency rates is substantially limited.
Furthermore, related late charge income has historically been sufficient to
offset incremental servicing expenses resulting from an increased delinquency
rate.
The percentage of loans in the Company's servicing portfolio, excluding
sub-servicing, that are in foreclosure increased to 0.39% as of February 29,
2000 from 0.31% as of February 28, 1999. Because the Company services
substantially all conventional loans on a non-recourse basis, foreclosure losses
are generally the responsibility of the investor or insurer and not the Company.
While the Company does not generally retain credit risk with respect to the
conventional prime credit quality first mortgage loans it sells, it does have
potential liability under representations and warranties made to purchasers and
insurers of the loans. In the event of a breach of these representations and
warranties, the Company may be required to repurchase a mortgage loan and any
subsequent loss on the mortgage loan may be borne by the Company. Similarly,
government loans serviced by the Company (24% of the Company's servicing
portfolio as of February 29, 2000) are insured by the Federal Housing
Administration or partially guaranteed against loss by the Department of
Veterans Administration. The Company is exposed to credit losses to the extent
that the partial guarantee provided by the Department of Veterans Administration
is inadequate to cover the total credit losses incurred. The Company retains
credit risk on the home equity and sub-prime loans it securitizes, through
retention of a subordinated interest. As of February 29, 2000, the Company had
investments in such subordinated interests amounting to $570.4 million. The
Company incurred bad debt expenses totaling $15.4 million and $23.6 million in
Fiscal 2000 and Fiscal 1999, respectively, related to the credit risk described
above.
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. The historical correlation
of the Servicing Hedge and the MSRs has been very high. However, given the
complexity and uncertainty inherent in hedging MSRs, there can be no assurance
that future results will match the historical performance of the Servicing
Hedge.
Implementation of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize the
fair value of all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. This statement will become effective in the fiscal year
ended February 28, 2002. The Company has not yet determined the impact upon
adoption of this standard on the Consolidated Financial Statements.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interests
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998 and, accordingly, reclassified
mortgage-backed securities retained in securitization as available for sale
securities.
Year 2000 Update
Reflecting the work completed on the Company's Year 2000 program, the
Company's computer systems and business processes successfully handled the date
change from December 31, 1999 to January 1, 2000. The Company is not aware of
any significant year 2000 problems encountered internally or with third parties
with which it does business, including customers, counterparties and others, the
global financial market infrastructure, and the utility infrastructure on which
all corporations rely.
Based on operations since January 1, 2000, the Company does not expect any
significant impact to its ongoing operations as a result of the year 2000 issue.
However, although remote, it is possible that the full impact of year 2000
issues has not been fully recognized and no assurances can be given that year
2000 problems will not emerge. To the extent any Year 2000 issues arise, that
could expose the Company to certain risks, such as the nonperformance by third
parties of obligations to the Company.
The pre-tax cost associated with the required systems modifications and
conversions totaled approximately $32.3 million of which all had been incurred
through February 29, 2000. The Company had previously estimated the cost at
approximately $36 million. Management believes a significant amount of the work
incurred in connection with the year 2000 issue will have ongoing utility by way
of improved software coding and systems documentation.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In response to this Item, the information set forth on page 34 and Note A of
this Form 10-K is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is hereby incorporated by
reference from the Company's Financial Statements and Auditors' Report beginning
at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The information required by this Item 11 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The information required by this Item 12 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) - Financial Statement Schedules.
The information called for by this section of Item 14 is set forth in the
Financial Statements and Auditors' Report beginning at page F-1 of this Form
10-K. The index to Financial Statements and Schedules is set forth at page F-2
of this Form 10-K.
(3) - Exhibits
Exhibit
No. Description
2.1* Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc., Countrywide
Asset Management Corporation and Countrywide Credit Industries, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form
10-K dated February 28, 1997). 3.1* Certificate of Amendment of Restated
Certificate of Incorporation of Countrywide Credit Industries, Inc.
(incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on
Form 10-Q dated August 31, 1987). 3.2* Restated Certificate of Incorporation of
Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.2 to
the Company's Quarterly Report on Form 10-Q dated August 31, 1987). 3.3* Bylaws
of Countrywide Credit Industries, Inc., as amended and restated (incorporated by
reference to Exhibit 3 to the Company's Current Report on Form 8-K dated
February 10, 1988). 3.3.1* Amendment to Bylaws of Countrywide Credit Industries,
Inc. dated January 28, 1998 (incorporated by reference to Exhibit 3.3.1 to the
Company's Annual Report on Form 10-K dated February 28, 1998). 3.3.2* Amendment
to Bylaws of Countrywide Credit Industries, Inc. dated February 3, 1998
(incorporated by reference to Exhibit 3.3.1 to the Company's Annual Report on
Form 10-K dated February 28, 1998). 3.3.3 Amendment to Bylaws of Countrywide
Credit Industries, Inc. dated March 24, 2000.
4.1* Rights Agreement, dated as of February 10, 1988,
between Countrywide Credit Industries, Inc. and
Bank of America NT & SA, as Rights Agent
(incorporated by reference to Exhibit 4 to the
Company's Form 8-A filed pursuant to Section 12 of
the Securities Exchange Act of 1934 on February 12,
1988).
4.1.1* Amendment No. 1 to Rights Agreement dated as of
March 24, 1992 (incorporated by reference to
Exhibit 1 to the Company's Form 8
filed with the SEC on March 27, 1992).
4.2* Specimen Certificate of the Company's Common Stock
(incorporated by reference to Exhibit 4.2 to the
Current Company's Report on Form 8-K dated February
6, 1987).
4.3* Specimen Debenture Certificate(incorporated by
reference to Exhibit 4.3 to the Company's Current
Report on Form 8-K dated February 6, 1987).
4.4* Form of Medium-Term Notes, Series A (fixed-rate) of
Countrywide Funding Corporation (now known as
Countrywide Home Loans, Inc.) ("CHL") (incorporated
by reference to Exhibit 4.2 to the Company's
registration statement on Form S-3 (File Nos.
33-44194 and 33-44194-1) filed with the SEC on
November 27, 1991).
4.5* Form of Medium-Term Notes, Series A
(floating-rate) of CHL (incorporated by
reference to Exhibit 4.3 to the Company's
registration statement on Form S-3 (File Nos.
33-44194 and 33-44194-1) filed with the SEC on
November 27, 1991).
4.6* Form of Medium-Term Notes, Series B(fixed-rate)
of CHL (incorporated by reference to Exhibit 4.2
to the Company's registration statement on Form
S-3(File No. 33-51816) filed with the SEC on
September 9, 1992).
4.7* Form of Medium-Term Notes, Series B(floating-rate)
of CHL (incorporated by reference to Exhibit 4.3
to the Company's registration statement on Form
S-3(File No. 33-51816) filed with the SEC on
September 9, 1992).
4.8* Form of Medium-Term Notes, Series C (fixed-rate)
of CHL (incorporated by reference to Exhibit 4.2
to the registration statement on Form S-3 of CHL
and the Company (File Nos.33-50661 and 33-50661-01)
filed with the SEC on October 19, 1993).
4.9* Form of Medium-Term Notes, Series C floating-rate)
of CHL (incorporated by reference to Exhibit 4.3
to the registration statement on Form S-3 of CHL
and the Company (File Nos.33-50661 and 33-50661-01)
filed with the SEC on October 19, 1993).
4.10* Indenture dated as of January 1, 1992 among CHL,
the Company and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.1 to the
registration statement on Form S-3 of CHL and the
Company (File Nos. 33-50661 and 33-50661-01) filed
with the SEC on October 19, 1993).
4.10.1* Form of Supplemental Indenture No. 1 dated as of
June 15, 1995, to the Indenture dated as of
January 1, 1992, among CHL, the Company, and The
Bank of New York, as trustee (incorporated by
reference to Exhibit 4.9 to Amendment No. 2 to the
registration statement on Form S-3 of the Company
and CHL (File Nos. 33-59559 and 33-59559-01) filed
with the SEC on June 16, 1995).
4.11* Form of Medium-Term Notes, Series D (fixed-rate)
of CHL (incorporated by reference to Exhibit
4.10 to Amendment No. 2 to the registration
statement onForm S-3 of the Company and CHL
(File Nos. 33-59559 and 33-59559-01) filed with
the SEC on June 16, 1995).
4.12* Form of Medium-Term Notes, Series D(floating-rate)
of CHL (incorporated by reference to Exhibit 4.11
to Amendment No. 2 to the registration statement
on Form S-3 of the Company and CHL
(File Nos.33-59559 and 33-59559-01) filed with
the SEC on June 16, 1995).
4.13* Form of Medium-Term Notes, Series E (fixed-rate)
of CHL (incorporated by reference to Exhibit 4.3
to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the
Company and CHL (File Nos. 333-3835 and
333-3835-01) filed with the SEC on August 2, 1996).
4.14* Form of Medium-Term Notes, Series E (floating rate)
of CHL (incorporated by reference to Exhibit 4.4 to
Post-Effective Amendment No. 1 to the registration
statement on Form S-3 of the Company and CHL (File
Nos. 333-3835 and 333-3835-01) filed with the SEC
on August 2, 1996).
4.15* Trust Deed dated 1st May, 1998 among CHL, the
Company and Bankers Trustee Company Limited, as
Trustee for Euro Medium Notes of CHL (incorporated
by reference to Exhibit 4.15 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1998).
4.16* First Supplemental Trust Deed dated 16th
December, 1998, modifying the provisions of a
Trust Deed dated 1st May, 1998 among CHL, the
Company and Bankers Trustee Company Limited, as
Trustee for Euro Medium Notes of CHL
(incorporated by reference to Exhibit 4.16 to the
Company's Annual Report on Form 10-K dated
February 28, 1999).
4.16.1* Form of Medium-Term Notes, Series F (fixed-rate) of
CHL (incorporated by reference to Exhibit 4.3 to
the registration statement on Form S-3 of the
Company and CHL (File Nos. 333-31529 and
333-31529-01) filed with the SEC on July 29, 1997).
4.16.2* Form of Medium-Term Notes, Series F (floating-rate)
of CHL (incorporated by reference to Exhibit 4.4 to
the registration statement on Form S-3 of the
Company and CHL (File Nos. 333-31529 and
333-31529-01) filed with the SEC on July 29, 1997).
4.17* Form of Medium-Term Notes,Series G (fixed-rate)
of CHL (incorporated by reference to Exhibit
4.10 to the registration statement on Form S-3
of the Company and CHL (File Nos. 333-58125 and
333-58125-01) filed with the SEC on
June 30, 1998).
4.18* Form of Medium-Term Notes,Series G (floating-rate)
of CHL (incorporated by reference to Exhibit
4.11 to the registration statement on Form S-3
of the Company and CHL (File Nos. 333-58125 and
333-58125-01)filed with the SEC on June 30, 1998).
4.19* Form of Medium-Term Notes, Series H(fixed-rate)
of CHL (incorporated by reference to Exhibit4.3
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).
4.21* Form of 6.85% Note due 2004 of CHL (incorporated
by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated June 21, 1999.
+ 10.2.2 Part-Time Employment Agreement between named
executive officer and the Company dated as of
February 28, 2000.
+ 10.2.3 Letter Agreement between David S. Loeb and the
Company dated February 28, 2000.
+ 10.3* Restated Employment Agreement for Angelo R
Mozilo dated March 26, 1996 (incorporated by
reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q dated August 31,
1996).
+ 10.3.1* Amendment Number One to Restated Employment
Agreement for Angelo R. Mozilo (incorporated by
reference to Exhibit 10.3.1 to the Company's
Annual Report on Form 10-K dated February 28, 1998)
+ 10.3.2* Amendment Number Two to Restated Employment
Agreement for Angelo R. Mozilo (incorporated by
reference to Exhibit 10.3.2 to the Company's
Annual Report on Form 10-K dated February 28, 1998)
+ 10.3.3 Third Restated Employment Agreement by and
between the Company and Angelo R. Mozilo in effect
as of March 1, 2000.
+ 10.4.1* Employment Agreement by and between the
Company and Stanford L. Kurland, dated as of March
1, 1999 (incorporated by reference to Exhibit
10.4.1 to the Company's Annual Report on Form 10-K
dated February 28, 1999.
+ 10.5* Countrywide Credit Industries, Inc. Deferred
Compensation Agreement for Non-Employee
Directors (incorporated by reference to
Exhibit 5.2 to the Company's Quarterly Report on
Form 10-Q dated August 31, 1987).
+ 10.5.1* Supplemental Form of Countrywide Credit
Industries, Inc. Deferred Compensation Agreement
for Non-Employee Directors (incorporated by
reference to Exhibit 10.5.1 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1998).
+ 10.7* Countrywide Credit Industries, Inc. Deferred
Compensation Plan Amended and Restated Effective
January 1, 1998 (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form
10-K dated February 28, 1998).
+ 10.7.1* First Amendment to Countrywide Credit Industries,
Inc. Deferred Compensation Plan
Amended and Restated effective January 1, 1999.
+ 10.7.2* Second Amendment, effective as of June 30,
1999, to the Company's Deferred Compensation Plan
Amended and Restated (incorporated by reference to
Exhibit 10.7.2 to the Company's Quarterly Report on
Form 10-Q dated August 31, 1999).
10.8* Revolving Credit Agreement dated as of the 24th
day of September, 1997, by and among Countrywide
Home Loans, Inc., Bankers Trust Company,The First
National Bank of Chicago, The Bank of New York,
Chase Securities Inc., The Chase Manhattan Bank
and the Lenders Party thereto. (incorporated by
reference to
Exhibit 10.8 to the Company's Quarterly report
on Form 10-Q dated August 31, 1997).
10.8.3* Amendment to Revolving Credit Agreement dated as of
the 25th day of November, 1998 by and among CHL,
the Lenders under (as that term is defined in) the
Revolving Credit Agreement dated as of September
24, 1997, and Bankers Trust Company as Credit Agent
(incorporated by reference to Exhibit 10.8.3 to the
Company's Quarterly Report on Form 10-Q dated
November 30, 1998).
10.8.6* Short Term Facility Extension Amendment dated as of
the 22nd day of September 1999 by and among CHL,
the Short Term Lenders under the Revolving Credit
Agreement dated as of September 24, 1997, and
Bankers Trust Company, as Credit Agent
(incorporated by reference to Exhibit 10.8.6 to the
Company's Quarterly Report on Form 10-Q dated
August 31, 1999).
10.8.7 Credit Agreement as of the 12th day of April, 2000,
by and among CHL, Royal Bank of Canada, ABN AMRO
Bank, N.V., Credit Lyonnais New York Branch,
Commerzbank AG, New York branch, and the Lenders
Party thereto.
+ 10.9* Severance Plan (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1988).
+ 10.11* 1987 Stock Option Plan, as Amended and Restated on
May 15, 1989 (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on
Form 10-K dated February 28, 1989).
+ 10.11.1* First Amendment to the 1987 Stock Option
Plan as Amended and Restated.(incorporated by
reference to Exhibit 10.11.1 to the Company's
Quarterly Report on Form 10-Q dated
November 30, 1997).
+ 10.11.2* Second Amendment to the 1987 Stock Option Plan
as Amended and Restated.(incorporated by
reference to Exhibit 10.11.2 to the Company's
Quarterly Report on Form 10-Q dated November 30,
1997).
+ 10.11.3* Third Amendment to the 1987 Stock Option
Plan as Amended and Restated (incorporated by
reference to Exhibit 10.11.3 to the Company's
Quarterly Report on Form 10-Q dated November 30,
1997).
+ 10.11.4* Fourth Amendment to the 1987 Stock Option
Plan as Amended and Restated (incorporated by
reference to Exhibit 10.11.4 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1998).
+ 10.13* 1985 Non-Qualified Stock Option Plan as amended
(incorporated by reference to Exhibit 10.9 to
Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No.
33-9231) filed with the SEC on December 20,
1988).
+ 10.15* 1982 Incentive Stock Option Plan as amended
(incorporated by reference to Exhibits 10.2
- 10.5 to Post-Effective Amendment No. 2 to
the Company's registration statement on Form S-8
(File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.16* Amended and Restated Stock Option Financing Plan
(incorporated by reference to Exhibit 10.12 to
Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No.
33-9231) filed with the SEC on December 20,
1988).
+ 10.20* 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K dated February 29, 1992)
+ 10.20.1* First Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.1
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.2* Second Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.2
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.3* Third Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.3
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.4* Fourth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.4
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.5* Fifth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.19.5
to the Company's Annual Report on Form 10-K dated
February 28, 1995).
+ 10.20.6* Sixth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.20.6
to the Company's Annual Report on Form 10-Q dated
November 30, 1997).
+ 10.20.7* Seventh Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.20.7
to the Company's Annual Report on Form 10-Q dated
November 30, 1997).
+ 10.20.8* Eighth Amendment to the 1991 Stock Option
Plan (incorporated by reference to Exhibit 10.20.8
to the Company's Quarterly Report on Form 10-Q
dated May 31, 1998).
+ 10.21* 1992 Stock Option Plan dated as of December 22,1992
(incorporated by reference to Exhibit 10.19.5 to
the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.21.1* First Amendment to the 1992 Stock Option
Plan (incorporated by reference to Exhibit 10.21.1
to the Company's Quarterly Report on Form 10-Q
dated November 30, 1997).
+ 10.21.2* Second Amendment to the 1992 Stock Option
Plan (incorporated by reference to Exhibit 10.21.2
to the Company's Quarterly Report on Form 10-Q
dated November 30, 1997).
+ 10.21.3* Third Amendment to the 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.21.3 to
the Company's Quarterly Report on Form 10-Q
dated May 31, 1998).
+ 10.22* Amended and Restated 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q
dated August 31, 1996).
+ 10.22.1* First Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.5.1 to the Company's
Quarterly Report on Form 10-Q dated August 31,
1996).
+ 10.22.2* Second Amendment to the Amended and Restated
1993 Stock Option Plan. (incorporated by
reference to Exhibit 10.22.2 to the Company's
Quarterly Report on Form 10-Q dated
November 30,1997).
+ 10.22.3* Third Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.22.3 to the Company's
Annual Report on Form 10-K dated February 28,
1998).
+ 10.22.4* Fourth Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.22.4 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1998).
+ 10.22.5* Fifth Amendment to the Amended and
Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.22.5 to the Company's
Quarterly Report on Form 10-Q dated August 31,
1998).
+ 10.23.1* Amended and Restated Supplemental
Executive Retirement Plan (incorporated by
reference to Exhibit 10.23.1 to the Company's
Annual Report on Form 10-K dated February 28,
1998).
+ 10.23.2* First Amendment, effective January 1,
1999, to the Company's Supplemental Executive
Retirement Plan 1998 Amendment and Restatement
(incorporated by reference to Exhibit 10.23.2 to
the Company's Annual Report on Form 10-K dated
February 28, 1999).
+ 10.23.3* Second Amendment, effective as of June 30,
1999, to the Company's Supplemental Executive
Retirement Plan (incorporated by reference to
Exhibit 10.23.3 to the Company's Quarterly Report
on Form 10-Q dated August 31, 1999).
+ 10.24.1* Amended and Restated Split-Dollar Life
Insurance Agreement (incorporated by reference to
Exhibit 10.24.1 to the Company's Quarterly Report
on Form 10-Q dated November 30, 1998).
+ 10.25* Split-Dollar Collateral Assignment (incorporated
by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1994).
+ 10.26* Annual Incentive Plan (incorporated by reference
to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q dated August 31, 1996).
+ 10.27* Change in Control Severance Plan.
+ 10.27.1* First Amendment to Change in Control
Severance Plan (incorporated by reference to
Exhibit 10.27.1 to the Company's Quarterly Report
on Form 10-Q dated November 30, 1998).
11.1 Statement Regarding Computation of Earnings Per
Share.
12.1 Computation of the Ratio of Earnings to Fixed
Charges.
21 List of subsidiaries.
23 Consent of Grant Thornton LLP.
27 Financial Data Schedules (included only with the
electronic filing with the SEC).
* Incorporated by reference
+Constitutes a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By: /s/ Angelo R. Mozilo
------------------------------------------------
Angelo R. Mozilo, Chief Executive Officer,
President and Chairman of the Board of Directors
(Principal Executive Officer)
Dated: May 10, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signatures Title Date
s/Angelo R. MoziloChief Executive Officer, President and May 10, 2000
---------------------------------------
---------------------------------------
Angelo R. Mozilo Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Stanford L. Kurland Senior Managing Director, Chief May 10, 2000
---------------------------------------
---------------------------------------
Stanford L. Kurland Operating Officer and Director
/s/ Carlos M. Garcia Managing Director; Chief Financial May 10, 2000
---------------------------------------
Carlos M. Garcia Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Jeffrey M. Cunningham Director May 10, 2000
---------------------------------------
Jeffrey M. Cunningham
/s/ Robert J. Donato Director May 10, 2000
---------------------------------------
Robert J. Donato
/s/ Michael E. Dougherty Director May 10, 2000
---------------------------------------
---------------------------------------
Michael E. Dougherty
/s/ Ben M. Enis Director May 10, 2000
---------------------------------------
Ben M. Enis
/s/ Edwin Heller Director May 10, 2000
---------------------------------------
Edwin Heller
/s/ Harley W. Snyder Director May 10, 2000
---------------------------------------
Harley W. Snyder
/s/ Oscar P. Robertson Director May 10, 2000
---------------------------------------
Oscar P. Robertson
F-1
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
February 29, 2000
F-9
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 29, 2000
Page
---------------
Report of Independent Certified Public Accountants...................... F-3
Financial Statements
Consolidated Balance Sheets........................................ F-4
Consolidated Statements of Earnings................................ F-5
Consolidated Statement of Common Shareholders' Equity.............. F-6
Consolidated Statements of Cash Flows.............................. F-7
Consolidated Statements of Comprehensive Income.................... F-8
Notes to Consolidated Financial Statements......................... F-9
Schedules
Schedule I - Condensed Financial Information of Registrant......... F-35
Schedule II - Valuation and Qualifying Accounts.................... F-39
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Credit Industries, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 29, 2000 and February
28, 1999, and the related consolidated statements of earnings, common
shareholders' equity, cash flows and comprehensive income for each of the three
years in the period ended February 29, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide Credit
Industries, Inc. and Subsidiaries as of February 29, 2000 and February 28, 1999,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended February 29, 2000, in
conformity with accounting principles generally accepted in the United States.
In October 1998, the Company adopted Financial Accounting Standards Board
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This change is discussed in Note S of the Notes to Consolidated
Financial Statements.
We have also audited Schedules I and II for each of the three years in the
period ended February 29, 2000. In our opinion, such schedules present fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
April 28, 2000
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 29(28),
(Dollar amounts in thousands, except per share data)
A S S E T S
2000 1999
------------------- -------------------
Cash $ 59,890 $ 58,748
Mortgage loans and mortgage-backed securities held for sale 2,653,183 6,231,220
Trading securities, at market value 1,984,031 1,460,446
Mortgage servicing rights, net 5,396,477 4,496,439
Investments in other financial instruments 3,562,458 1,628,153
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 410,899 311,741
Other assets 1,755,390 1,461,509
------------------- -------------------
Total assets $15,822,328 $15,648,256
=================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $2,852,738 $4,020,998
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 9,782,625 $ 9,935,759
Drafts payable issued in connection with mortgage loan closings 382,108 1,083,499
Accounts payable, accrued liabilities and other 997,405 517,937
Deferred income taxes 1,272,311 1,092,176
------------------- -------------------
Total liabilities 12,434,449 12,629,371
Commitments and contingencies
- -
Company-obligated mandatorily redeemable capital trust pass- through securities
of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 500,000
Shareholders' equity
Preferred stock - authorized, 2,500,000 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, 113,463,424 shares in 2000 and
112,619,313 shares in 1999 5,673 5,631
Additional paid-in capital 1,171,238 1,153,673
Accumulated other comprehensive loss (33,234)
(19,593)
Retained earnings 1,744,202 1,379,174
------------------- -------------------
Total shareholders' equity 2,887,879 2,518,885
------------------- -------------------
Total liabilities and shareholders' equity $15,822,328 $15,648,256
=================== ===================
Borrower and investor custodial accounts $2,852,738 $4,020,998
=================== ===================
The accompanying notes are an integral part
of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 29(28),
(Dollar amounts in thousands, except per share data)
2000 1999 1998
--------------- -------------- --------------
Revenues
Loan origination fees $406,458 $ 623,531 $ 301,389
Gain on sale of loans, net of commitment fees 557,743 699,433 417,427
--------------- -------------- --------------
Loan production revenue 964,201 1,322,964 718,816
Interest earned 998,646 1,029,066 584,076
Interest charges (930,294) (983,829) (568,359)
--------------- -------------- --------------
Net interest income 68,352 45,237 15,717
Loan servicing income 1,192,789 1,023,700 907,674
Amortization and impairment/recovery of
mortgage servicing rights, net of servicing hedge (445,138) (600,766) (328,845)
--------------- -------------- --------------
Net loan administration income 747,651 422,934 578,829
Commissions, fees and other income 234,047 187,867 138,217
Gain on sale of subsidiary 4,424 - 57,381
--------------- -------------- --------------
Total revenues 2,018,675 1,979,002 1,508,960
Expenses
Salaries and related expenses 689,768 669,686 424,321
Occupancy and other office expenses 276,802 270,483 182,335
Guarantee fees 195,928 181,117 172,692
Marketing expenses 72,930 64,510 42,320
Other operating expenses 152,049 161,401 121,746
--------------- -------------- --------------
Total expenses 1,387,477 1,347,197 943,414
--------------- -------------- --------------
Earnings before income taxes 631,198 631,805 565,546
Provision for income taxes 220,955 246,404 220,563
--------------- -------------- --------------
NET EARNINGS $410,243 $385,401 $ 344,983
=============== ============== ==============
Earnings per share
Basic $3.63 $3.46 $3.21
Diluted $3.52 $3.29 $3.09
The accompanying notes are an integral part
of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Three years ended February 29(28),
(Dollar amounts in thousands)
Accumulated
Additional Other
Number Common Paid-in- Comprehensive Retained
of Shares Stock Capital Income (Loss) Earnings Total
-------------- ----------- -----------------------------------------------------------
Balance at February 28, 1997 106,095,558 $5,305 $917,942 ($30,545) $718,829 $1,611,531
Cash dividends paid - common - - - - (34,391) (34,391)
Stock options exercised 839,479 42 14,645 - - 14,687
Tax benefit of stock options exercised - - 5,378 - - 5,378
Dividend reinvestment plan 2,179,939 109 108,511 - - 108,620
401(k) Plan contribution 90,603 4 2,889 - - 2,893
Other comprehensive income, net of tax - - - 34,242 - 34,242
Net earnings for the year - - - - 344,983 344,983
--- --
- ------------------------------------------------------------------- -----------------------------------------------------------
Balance at February 28, 1998 109,205,579 5,460 1,049,365 3,697 1,029,421 2,087,943
Cash dividends paid - common - - - - (35,648) (35,648)
Stock options exercised 1,239,662 62 20,047 - - 20,109
Tax benefit of stock options exercised - - 11,456 - - 11,456
Dividend reinvestment plan 2,048,062 103 66,669 - - 66,772
401(k) Plan contribution 126,010 6 6,136 - - 6,142
Other comprehensive loss, net of tax - - - (23,290) - (23,290)
Net earnings for the year - - - - 385,401 385,401
- -------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1999 112,619,313 5,631 1,153,673 (19,593) 1,379,174 2,518,885
Cash dividends paid - common - - - - (45,215) (45,215)
Stock options exercised 602,021 31 6,709 - - 6,740
Tax benefit of stock options exercised - - 1,883 - - 1,883
Dividend reinvestment plan 61,869 2 1,986 - - 1,988
401(k) Plan contribution 180,221 9 6,987 - - 6,996
Other comprehensive loss, net of tax - - - (13,641) - (13,641)
Net earnings for the year - - - - 410,243 410,243
- -------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------- -----------------------------------------------------------
Balance at February 29, 2000 113,463,424 $5,673 $1,171,238 ($33,234) $1,744,202 $2,887,879
===============================================================================================================================
The accompanying notes are an integral part
of this statement.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Year ended February 29(28),
(Dollar amounts in thousands)
2000 1999 1998
---------------- ----------------- ----------------
Cash flows from operating activities:
Net earnings $410,243 $385,401 $344,983
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sale of available-for-sale securities (12,332) (56,801) (16,749)
Gain on sale of subsidiary (4,424) - (57,381)
Gain on sale of securitized service fees (2,650) - -
Amortization and impairment/recovery of mortgage
servicing rights 181,101 1,013,578 561,804
Depreciation and other amortization 65,947 49,210 44,930
Deferred income taxes 220,955 246,404 220,563
Origination and purchase of loans held for sale (66,739,744) (92,880,538) (48,771,673)
Principal repayments and sale of loans 70,317,781 91,941,509 46,059,454
---------------- ----------------- ----------------
Decrease (increase) in mortgage loans and mortgage-
backed securities held for sale 3,578,037 (939,029) (2,712,219)
Increase in other financial instruments (1,393,493) (423,807) (685,119)
Increase in trading securities (523,585) (1,216,499) (113,032)
Increase in other assets (81,052) (97,181) (345,952)
Increase in accounts payable and accrued liabilities 6,263 35,259 302,404
---------------- ----------------- ----------------
Net cash provided (used) by operating activities 2,445,010 (1,003,465) (2,455,768)
---------------- ----------------- ----------------
Cash flows from investing activities:
Additions to mortgage servicing rights, net (1,299,909) (1,898,007) (1,149,988)
Proceeds from sale of securitized service fees 197,616 - -
Acquisition of insurance company (425,000) - -
Purchase of property, equipment and leasehold
improvements, net (150,537) (119,507) (70,896)
Proceeds from sale of available-for-sale securities 96,200 231,555 72,747
Proceeds from sale of subsidiary 21,053 - -
---------------- ----------------- ----------------
Net cash used by investing activities (1,560,577) (1,785,959) (1,148,137)
---------------- ----------------- ----------------
Cash flows from financing activities:
Net (decrease) increase in warehouse debt and other
short-term borrowings (790,117) (1,122,273) 1,513,974
Issuance of long-term debt 2,224,354 4,044,121 1,973,198
Repayment of long-term debt (2,288,762) (142,096) (182,747)
Issuance of Company - obligated mandatorily redeemable
capital trust pass-through securities of subsidiary trust holding
solely a Company guaranteed related subordinated debt - - 200,000
Issuance of common stock 16,449 93,361 126,309
Cash dividends paid (45,215) (35,648) (34,391)
---------------- ----------------- ----------------
Net cash (used) provided by financing activities (883,291) 2,837,465 3,596,343
---------------- ----------------- ----------------
Net increase (decrease) in cash 1,142 48,041 (7,562)
Cash at beginning of period 58,748 10,707 18,269
---------------- ----------------- ----------------
Cash at end of period $ 59,890 $ 58,748 $ 10,707
================ ================= ================
Supplemental cash flow information:
Cash used to pay interest $ 902,491 $ 876,236 $ 422,969
Cash used to pay (refund from) income taxes $ 7,084 $ 1,407 $ (1,645)
Noncash financing activities:
Unrealized gain (loss) on available-for-sale securities,
net of tax $ (13,641) $ (23,290) $ 34,242
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended February 29(28),
(Dollar amounts in thousands)
2000 1999 1998
--------------- ----------------- ---------------
NET EARNINGS $410,243 $385,401 $344,983
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period, before tax (9,356) 18,556 72,883
Income tax benefit (expense) 3,331 (7,237) (28,424)
--------------- ----------------- ---------------
Unrealized holding gains (losses) arising
during the period, net of tax (6,025) 11,319 44,459
Less: reclassification adjustment for gains
included in net earnings, (12,332) (56,801) (16,749)
before tax
Income tax expense 4,716 22,192 6,532
--------------- ----------------- ---------------
Reclassification adjustment for gains included
in net earnings, net of tax (7,616) (34,609) (10,217)
--------------- ----------------- ---------------
Other comprehensive (loss) income (13,641) (23,290) 34,242
--------------- ----------------- ---------------
COMPREHENSIVE INCOME $396,602 $362,111 $379,225
=============== === ===============
The accompanying notes are an integral
part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Countrywide Credit Industries, Inc. (the "Company") is a holding company,
which through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL"), is
engaged primarily in the mortgage banking business and as such originates,
purchases, sells and services mortgage loans throughout the United States. In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent and
all wholly-owned subsidiaries that are required to be consolidated under
generally accepted accounting principles. All material intercompany accounts and
transactions have been eliminated.
Mortgage Loans and Mortgage-Backed Securities Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans and the carrying value of
mortgage-backed securities ("MBS") held for sale in the near term are adjusted
by gains and losses generated from corresponding hedging transactions entered
into to protect the value of the mortgage loans and MBS held for sale from
increases in interest rates. Hedging transactions also are entered into to
protect the value of the Company's short-term rate and point commitments to fund
mortgage loan applications in process (the "Committed Pipeline") from increases
in interest rates. Gains and losses generated from such hedging transactions are
deferred. Hedging losses are recognized currently if deferring such losses would
result in mortgage loans and MBS held for sale and the Committed Pipeline being
effectively valued in excess of their estimated net realizable value.
The Company's MBS held for sale in the near term are classified as trading.
Trading securities are recorded at fair value, with the change in fair value
during the period included in earnings. The fair value of MBS held for sale in
the near term is based on quoted market prices.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives using the straight-line method. Leasehold improvements
are amortized over the lesser of the life of the lease or service lives of the
improvements using the straight-line method.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
35
F-
Mortgage Servicing Rights, Amortization and Impairment
The Company recognizes as separate assets the rights to service mortgage
loans for others, whether the servicing rights are acquired through a separate
purchase or through loan origination by allocating total costs incurred between
the loan, the servicing rights retained and other assets retained based on their
relative fair values. Amortization of mortgage servicing rights ("MSRs") is
based on the ratio of net servicing income received in the current period to
total net servicing income projected to be realized from the MSRs. Projected net
servicing income is in turn determined by the estimated future balance of the
underlying mortgage loan portfolio, which declines over time from prepayments
and scheduled loan amortization. The Company estimates future prepayment rates
based on current interest rate levels, other economic conditions and market
forecasts, as well as relevant characteristics of the servicing portfolio, such
as loan types, note rate stratification and recent prepayment experience.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
MSRs are periodically evaluated for impairment, which is recognized in the
statement of earnings during the applicable period through additions to an
impairment reserve. For purposes of performing its impairment evaluation, the
Company stratifies its servicing portfolio on the basis of certain risk
characteristics including loan type (fixed or adjustable) and note rate.
Servicing Hedge
To mitigate the effect on earnings of MSR impairment that may result from
increased current and projected prepayment activity that generally occurs when
interest rates decline, the Company acquires financial instruments, including
derivatives, that increase in aggregate value when interest rates decline (the
"Servicing Hedge"). These financial instruments include interest rate floors,
principle-only securities ("P/O Securities"), options on interest rate Swaps
("Swaptions"), options on MBS, options on interest rate futures, interest rate
futures, interest rate swaps with the Company's maximum payment capped ("Capped
Swaps"), interest rate swaps and interest rate caps. The value of the interest
rate floors, options on interest rate futures and MBS, Capped Swaps, interest
rate caps and Swaptions, is derived from an underlying instrument or index;
however, the notional or contractual amount is not recognized on the balance
sheet. The cost of these instruments is charged to expense (and deducted from
net loan administration income) over the life of the contract. Unamortized costs
are included in Investments in Other Financial Instruments on the balance sheet.
The basis of the MSRs is adjusted for realized and unrealized gains and losses
in the derivative financial instruments that qualify for hedge accounting.
Qualitative Disclosures About Market Risk
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are
counter-cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its Committed Pipeline, mortgage loan inventory and MBS
held for sale, MSRs, mortgage-backed securities retained in securitizations,
trading securities and debt securities. The overall objective of the Company's
interest rate risk management policies is to offset changes in the values of
these items resulting from changes in interest rates. The Company does not
speculate on the direction of interest rates in its management of interest rate
risk.
To qualify for hedge accounting, the derivative contract positions must be
designated as a hedge and be effective in reducing the market risk of an
existing asset, liability or the Committed Pipeline. The effectiveness of the
derivative contracts is evaluated on an initial and ongoing basis using
quantitative measures of correlation. If a derivative contract no longer
qualifies as a hedge, any subsequent changes in fair value are recognized
currently in earnings.
If a derivative contract that qualifies as a hedge is sold, matures or is
terminated, any resulting intrinsic gain or loss adjusts the basis of the
underlying item. Unamortized premiums associated with the time value of such
contracts are recognized in income. If a designated underlying item is no longer
held, any previously unrecognized gain or loss on the related derivative is
recognized in earnings and the derivative contract is subsequently accounted for
at fair value.
Trading Securities
Trading securities consists of financial instruments held by the Company's
broker-dealer subsidiary. These financial instruments, including derivative
contracts, are recorded at fair value on a trade date basis, and gains and
losses, both realized and unrealized, are included in Gain on Sale of Loans.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Available-for-Sale-Securities
The Company has designated its investments in P/O Securities, certain other
equity securities, mortgage-backed securities retained in the Company's
securitizations and insurance company investment portfolio as available for sale
securities, which are included in Investments in Other Financial Instruments.
Mortgage-backed securities retained in the Company's securtizations consist of
sub-prime and home equity residual interests ("Residuals") and interest-only and
principal-only certificates related to the Company's non-conforming private
label mortgage-backed securities. The timing and amount of cash flows on these
securities are significantly influenced by prepayments on the underlying loans
and estimated foreclosure losses to the extent the Company has retained the risk
of such losses. The fair value of these securities is determined by discounting
future cash flows using discount rates that approximate current market rates.
As of February 29, 2000, the Company used discount rates for sub-prime and
home equity mortgage-backed residuals of 20% and 15%, respectively; annual
prepayment estimates of 19% to 37% and 25%, respectively; and lifetime credit
loss estimates of 1.0% to 9.0% and 2.3% of the original principal balances of
the underlying loans, respectively.
The insurance company investment portfolio, includes primarily fixed income
securities, as well as stocks and other short-term securities.
The available for sale securities are measured at fair value. Unrealized
gains or losses, net of deferred income taxes, are excluded from earnings and
reported as a separate component of shareholders' equity until realized.
Realized gains and losses on sales of securities are computed by the specific
identification method at the time of disposition and are recorded in earnings.
Unrealized losses that are other than temporary are recognized in earnings.
Loan Origination Fees
Loan fees, discount points and certain direct origination costs are recorded
as an adjustment of the cost of the loan and are recorded in earnings when the
loan is sold.
Option Fees
Option fees, included in Other Assets, primarily consist of unamortized put
and call option fees on MBS. Option fees are amortized over the life of the
option to reflect the decline in its time value. Any unamortized option fees are
charged to income when the related option is exercised.
Investment In Non-Consolidated Subsidiaries
The Company has an investment in CWHL Funding, Inc., a bankruptcy remote,
wholly-owned subsidiary. This subsidiary was established to facilitate the sale
of certain defaulted mortgage loans repurchased in the ordinary course of
business from Ginnie Mae MBS serviced by the Company. The Company's investment
in CWHL Funding, Inc. was $63.0 million and $73.7 million as of February 29,
2000 and February 28, 1999, respectively.
Interest Income Recognition
Interest income is accrued as earned. Loans are placed on non-accrual status
when any portion of principal or interest is ninety days past due or earlier
when concern exists as to the ultimate collectibility of principal or interest.
Loans return to accrual status when principal and interest become current and
are anticipated to be fully collectible.
Loan Servicing Income
Loan servicing income represents fees earned for servicing residential
mortgage loans for investors and related ancillary income, including late
charges. Servicing income is recognized as earned, unless collection is
doubtful.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest Rate Swap Agreements
The amount to be received or paid under the interest rate swap agreements
associated with the Company's debt and custodial accounts is accrued and is
recognized as an adjustment to net interest income. The related amount payable
to or receivable from counterparties is included in accounts payable and accrued
liabilities.
Advertising Costs
The Company generally charges to expense the production costs of advertising
the first time the advertising takes place, except for direct-response
advertising, which is capitalized and amortized over the expected period of
future benefits. Advertising expense was $53.5 million, $46.0 million and $32.6
million for the years ended February 29(28), 2000, 1999 and 1998, respectively.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company recognizes compensation cost related to its stock option
plans only to the extent that the fair value of the shares at the grant date
exceeds the exercise price.
Income Taxes
The Company utilizes an asset and liability approach in its accounting for
income taxes. This approach requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences
between the financial statement and tax basis carrying amounts of assets and
liabilities.
Earnings Per Share
Basic earnings per share ("EPS") is determined using net income divided by
the weighted average shares outstanding during the period. Diluted EPS is
computed by dividing net income by the weighted average shares outstanding,
assuming all dilutive potential common shares were issued.
The following table presents basic and diluted EPS for the years ended
February 29(28), 2000, 1999 and 1998.
- ------------------------ --------- --------- --------- -- - ----------------------------- -- -- ------- ---------- -----
Year ended February 29(28),
--------- --------- --------- -- - ----------------------------- -- -- ------- ---------- -----
2000 1999 1998
--------- --------- --------- ---------- --------- --------- --------- --------- ---------
Per-Share Per-Share Per-Share
(Amounts in thousands, Net Amount Net Amount Net Amount
except per share data) Earnings Shares Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- --------- --------- ---------
--------- ---------- ---------
Net earnings $410,243 $385,401 $344,983
========= ========== =========
Basic EPS
Net earnings available
to common shareholders $410,243 113,083 $3.63 $385,401 111,414 $3.46 $344,983 107,491 $3.21
Effect of Dilutive
Stock Options 3,605 - 5,631 - 4,035
--------- --------- ---------- --------- --------- ---------
Diluted EPS
Net earnings available
to common shareholders $410,243 116,688 $3.52 $385,401 117,045 $3.29 $344,983 111,526 $3.09
========= ========= ========== ========= ========= =========
- ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- --------- ---------
During the years ended February 29 (28), 2000 and 1999, options to purchase
3.2 million shares and 1.2 million shares, respectively, were outstanding but
not included in the computation of EPS because they were antidilutive.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 28, 1999 and 1998 have been reclassified to conform to the
presentation for the year ended February 29, 2000.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
--------------------------------------------- --------------------------------------------------------------------
February 29(28),
----------------- -- -------------- -----
(Dollar amounts in thousands) 2000 1999
--------------------------------------------------------------------- -- ----------------- -- -------------- -----
Buildings $183,134 $ 97,339
Office equipment 362,346 305,092
Leasehold improvements 55,281 42,578
----------------- --------------
600,761 445,009
Less: accumulated depreciation and amortization (218,828) (167,449)
----------------- --------------
381,933 277,560
Land 28,966 34,181
----------------- --------------
$410,899 $311,741
================= ==============
--------------------------------------------------------------------- -- ----------------- -- -------------- -----
Depreciation and amortization expense amounted to $48.8 million, $40.3
million and $31.8 million for the years ended February 29(28), 2000, 1999 and
1998, respectively.
NOTE C - MORTGAGE SERVICING RIGHTS
Entries to mortgage servicing rights for the years ended February 29(28),
2000, 1999 and 1998 were as follows.
----------------------------------------------- -- -------------------------------------------------------------
February 29(28),
---------------- --- ---------------- --- ---------------- --
(Dollar amounts in thousands) 2000 1999 1998
----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
Mortgage Servicing Rights
Balance at beginning of period $4,591,191 $3,653,318 $3,026,494
Additions, net 1,299,909 1,898,007 1,149,988
Securitization of service fees (218,770) - -
Scheduled amortization (459,308) (556,373) (300,312)
Hedge losses (gains) applied 207,217 (403,761) (222,852)
---------------- ---------------- ----------------
Balance before valuation reserve
at end of period 5,420,239 4,591,191 3,653,318
---------------- ---------------- ----------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (94,752) (41,308) (2,668)
Reductions (additions) 70,990 (53,444) (38,640)
---------------- ---------------- ----------------
Balance at end of period (23,762) (94,752) (41,308)
---------------- ---------------- ----------------
Mortgage Servicing Rights, net $5,396,477 $4,496,439 $3,612,010
================ ================ ================
----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
The estimated fair value of mortgage servicing rights was $5.7 billion and
$4.7 billion as of February 29(28), 2000 and 1999, respectively. The fair value
was determined by discounting estimated net future cash flows from mortgage
servicing activities using discount and prepayment rates that approximate
current market rates.
NOTE D - INVESTMENTS IN OTHER FINANCIAL INSTRUMENTS
Investments in other financial instruments as of February 29(28), 2000 and
1999 included the following.
------------------------------------------------------------ -----------------------------------------------------
February 29(28),
----------------- --- ---------------- ---
(Dollar amounts in thousands) 2000 1999
------------------------------------------------------------------- --- ----------------- --- ---------------- ---
Servicing hedge instruments $1,784,315 $ 991,401
Mortgage-backed securities retained in securitization 775,867 500,631
Insurance company investment portfolio 520,490 -
Securities purchased under agreements to resell 435,593 76,246
Equity securities, restricted and unrestricted 46,193 59,875
----------------- ----------------
$3,562,458 $1,628,153
================= ================
------------------------------------------------------------------- --- ----------------- --- ---------------- ---
NOTE E - AVAILABLE FOR SALE SECURITIES
Amortized cost and fair value of available for sale securities as of
February 29(28), 2000 and 1999 were as follows. (In October 1998,
mortgage-backed securities retained in securitization were reclassified as
available for sale securities; see note S.)
---------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 29, 2000
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
securities retained in
securitization $760,619 $39,411 ($24,163) $775,867
Principal only securities 1,002,496 2,372 (52,028) 952,840
Insurance company
investment portfolio 523,012 483 520,490
(3,005)
Equity securities 63,136 3,193 (20,136) 46,193
---------------- ----------------- ---------------- ----------------
$2,349,263 $45,459 ($99,332) $2,295,390
================ ================= ================ ================
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE E - AVAILABLE FOR SALE SECURITIES (Continued)
---------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 28, 1999
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
securities retained in
securitization $519,321 - ($18,690) $500,631
Principal only securities 32,514 312 - 32,826
Equity securities 42,498 3,098 (16,904) 28,692
---------------- ----------------- ---------------- ----------------
$594,333 $3,410 ($35,594) $562,149
================ ================= ================ ================
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE F - NOTES PAYABLE
Notes payable consisted of the following.
------------------------------------------------------------ -----------------------------------------------------
February 29(28),
----------------- --- ---------------- ---
(Dollar amounts in thousands) 2000 1999
-------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Commercial paper $ 103,829 $ 176,559
Medium-term notes, Series A, B, C, D, E, F, G, H
and Euro Notes 7,975,324 8,039,824
Repurchase agreements 1,501,409 1,517,405
Subordinated notes 200,000 200,000
Other notes payable 2,063 1,971
----------------- ----------------
$9,782,625 $9,935,759
================= ================
-------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Commercial Paper and Backup Credit Facilities
As of February 29, 2000, CHL, the Company's mortgage banking subsidiary, had
unsecured credit agreements (revolving credit facilities) with consortiums of
commercial banks permitting CHL to borrow an aggregate maximum amount of $5.0
billion. The facilities included a $4.0 billion revolving credit facility with
forty-four commercial banks consisting of: (i) a five-year facility of $3.0
billion, which expires on September 24, 2002, and (ii) a one-year facility of
$1.0 billion which expires on September 20, 2000. As consideration for the
facility, CHL pays annual commitment fees of $3.8 million. There is an
additional one-year facility, which expired April 12, 2000, with eleven of the
forty-four banks referenced above for total commitments of $1.0 billion. As
consideration for the facility, CHL pays annual commitment fees of $0.8 million.
CHL renewed this facility. (See Note O - "Subsequent Events".) The purpose of
these credit facilities is to provide liquidity backup for CHL's commercial
paper program. No amount was outstanding under these revolving credit facilities
at February 29, 2000. The weighted average borrowing rate on commercial paper
borrowings for the year ended February 29, 2000 was 5.31%. The weighted average
borrowing rate on commercial paper outstanding as of February 29, 2000 was
5.92%. In addition, CHL has entered into a $1.1 billion asset-backed commercial
paper conduit facility with four commercial banks. This facility has a maturity
date of November 21, 2000. As consideration for this facility, CHL pays annual
commitment fees of $1.4 million. Loans made under this facility are secured by
conforming and non-conforming mortgage loans. All of the facilities contain
various financial covenants and restrictions, certain of which limit the amount
of dividends that can be paid by the Company or CHL.
NOTE F - NOTES PAYABLE (Continued)
Medium-Term Notes
As of February 29, 2000, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission or
issued by CHL pursuant to its Euro medium-term note program were as follows.
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
---------------------- ----------------------------
-------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- -------------- -------------
Series A - $ 143,500 $143,500 7.29% 8.79% Aug. 2000 Mar. 2002
Series B - 301,000 301,000 6.53% 6.98% Apr. 2000 Aug. 2005
Series C 130,000 127,000 257,000 5.74% 7.75% Mar. 2000 Mar. 2004
Series D 75,000 385,000 460,000 6.05% 6.88% Aug. 2000 Sep. 2005
Series E 210,000 690,000 900,000 6.31% 7.45% Aug. 2000 Oct. 2008
Series F 311,000 1,344,000 1,655,000 6.13% 7.00% Oct. 2000 May 2013
Series G 5,000 581,000 586,000 5.35% 7.00% Oct. 2000 Nov. 2018
Series H - 1,889,000 1,889,000 6.25% 8.25% Jun. 2004 Oct. 2019
Euro Notes 659,600 1,124,224 1,783,824 6.10% 7.42% Jul. 2000 Jan. 2009
-------------------------------------------
Total $1,390,600 $6,584,724 $7,975,324
===========================================
- ---------------------------------------------------------------------------------------------------------------------------
As of February 29, 2000 substantially all of the outstanding fixed-rate
notes had been effectively converted through interest rate swap agreements to
floating-rate notes. The weighted average rate on medium-term notes for the year
ended February 29, 2000, including the effect of the interest rate swap
agreements, was 5.88%. As of February 29, 2000 $1,074 million foreign
currency-denominated medium-term notes were outstanding. Such notes are
denominated in Deutsche Marks, French Francs, Portuguese Escudos and Euros. The
Company manages the associated foreign currency risk by entering into currency
swaps. The terms of the currency swaps effectively translate the foreign
currency denominated medium-term notes into U.S. dollars.
Repurchase Agreements
The Company routinely enters into short-term financing arrangements to
sell MBS under agreements to repurchase. The weighted average borrowing rate for
the year ended February 29, 2000 was 5.16%. The weighted average borrowing rate
on repurchase agreements outstanding as of February 29, 2000 was 5.86%. The
repurchase agreements were collateralized by MBS. All MBS underlying repurchase
agreements are held in safekeeping by broker-dealers or banks. All agreements
are to repurchase the same or substantially identical MBS.
NOTE F - NOTES PAYABLE (Continued)
Pre-Sale Funding Facilities
As of February 29, 2000, CHL had uncommitted revolving credit facilities
with the Federal National Mortgage Association ("Fannie Mae") and the Federal
Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are
secured by conforming mortgage loans which are in the process of being pooled
into MBS. As of February 29, 2000, the Company had no outstanding borrowings
under any of these facilities.
Maturities of notes payable are as follows.
------------------ ------------------------------------------- ----------------------------------------------
Year ending February 29(28), (Dollar amounts in thousands)
------------------ ------------------------------------------- ----------------------------------------------
2001 $2,529,302
2002 727,000
2003 1,146,500
2004 863,000
2005 1,528,685
Thereafter 2,988,138
-----------------
$9,782,625
=================
------------------ ------------------------------------------- -------- ------------------- -----------------
NOTE G - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
In December 1996, Countrywide Capital I (the "Subsidiary Trust I"), a
subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through
Securities (the "8% Capital Securities"). In connection with the Subsidiary
Trust I issuance of the 8% Capital Securities, CHL issued to the Subsidiary
Trust I, $309 million of its 8% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debt Securities I"). The Subordinated Debt
Securities I are due on December 15, 2026 with interest payable semi-annually on
June 15 and December 15 of each year. The Company has the right to redeem at
par, plus accrued interest, the 8% Capital Securities any time on or after
December 15, 2006. The sole assets of the Subsidiary Trust I are, and will be,
the Subordinated Debt Securities I.
In June 1997, Countrywide Capital III (the "Subsidiary Trust III"), a
subsidiary of the Company, issued $200 million of 8.05% Subordinated Capital
Income Securities, Series A (the "8.05% Capital Securities"). In connection with
the Subsidiary Trust III issuance of 8.05% Capital Securities, CHL issued to the
Subsidiary Trust III, $206 million of its 8.05% Junior Subordinated Deferrable
Interest Debentures (the "Subordinated Debt Securities III"). The Subordinated
Debt Securities III are due on June 15, 2027 with interest payable semi-annually
on June 15 and December 15 of each year. The sole assets of the Subsidiary Trust
III are, and will be, the Subordinated Debt Securities III.
In December 1997, Subsidiary Trust III completed an exchange offer pursuant
to which newly issued capital securities (the "New 8.05% Capital Securities")
were exchanged for all of the outstanding 8.05% Capital Securities. The New
8.05% Capital Securities are identical in all material respects to the 8.05%
Capital Securities, except that the New 8.05% Capital Securities have been
registered under the Securities Act of 1933, as amended.
In relation to Subsidiary Trusts I and III, CHL has the right to defer
payment of interest by extending the interest payment period, from time to time,
for up to 10 consecutive semi-annual periods. If interest payments on the
Debentures are so deferred, the Company and CHL may not declare or pay dividends
on, or make a distribution with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any of its capital stock.
NOTE H - INCOME TAXES
Components of the provision for income taxes were as follows.
---- ------------------------------ ------------------------------------------------------------ --------
Year ended February29(28),
---------------- -- ------------- -- ------------- ---
(Dollar amounts in thousands) 2000 1999 1998
---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- ---
Federal expense - deferred $220,955 $204,186 $181,228
State expense - deferred - 42,218 39,335
---------------- ------------- -------------
$220,955 $246,404 $220,563
================ ============= =============
---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- ---
The following is a reconciliation of the statutory federal income tax rate
to the effective income tax rate as reflected in the consolidated statements of
earnings.
---- ------------------------------ ------------------------------------------------------------ --------
Year ended February 29(28),
--------------- -- -------------- --- ------------ ---
2000 1999 1998
---- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income and franchise taxes, net
of federal tax effect 4.0 4.0 4.0
Change in expected state tax rate (4.0) - -
--------------- -------------- ------------
Effective income tax rate 35.0% 39.0% 39.0%
=============== ============== ============
---- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
In Fiscal 2000, the Company initiated a corporate reorganization related to
its servicing operations. As a result of the reorganization, future state income
tax liabilities are expected to be less than the amounts that were previously
recorded as deferred income tax expense and liability in the Company's financial
statements. The expected reduction in tax liabilities was reflected as a
reduction in deferred state income tax expense in Fiscal 2000.
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below.
----- ------------------------------------------- -------------------------------------------------- -----
February 29(28),
-------------------------------------------------- -----
(Dollar amounts in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Net operating losses $ 157,606 $ 198,204
State income and franchise taxes 53,625 59,752
Reserves, accrued expenses and other 38,366 41,898
--------------- ---------------
Total deferred income tax assets 249,597 299,854
--------------- ---------------
Deferred income tax liabilities:
Mortgage servicing rights 1,500,495 1,368,349
Gain on sale of subsidiary 21,413 23,681
--------------- ---------------
Total deferred income tax liabilities 1,521,908 1,392,030
--------------- ---------------
Deferred income taxes $1,272,311 $1,092,176
=============== ===============
----------------------------------------------------------------------------------------------------------
As of February 29, 2000, the Company had net operating loss carryforwards
for federal income tax purposes totaling $443.3 million that expire as follows:
$74.3 million in 2009, $74.3 million in 2010, $41.3 million in 2011, $84.7
million in 2012, and $72.8 million in 2013, and $95.9 million in 2019.
NOTE I - FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company utilizes a variety of derivative financial instruments to manage
interest-rate risk. These instruments include interest rate floors, MBS
mandatory forward sale and purchase commitments, options to sell or buy MBS,
treasury futures and interest rate futures, interest rate caps, Capped Swaps,
Swaptions, interest rate futures and interest rate swaps. These instruments
involve, to varying degrees, elements of interest-rate and credit risk. In
addition, the Company manages foreign currency exchange rate risk with foreign
currency swaps.
The Company has potential exposure to credit loss in the event of
nonperformance by the counterparties to the various over-the-counter
instruments. The Company manages this credit risk by selecting only well
established, financially strong counterparties, spreading the credit risk
amongst many such counterparties, and by placing contractual limits on the
amount of unsecured credit risk from any one counterparty. The Company's
exposure to credit risk in the event of default by a counterparty is the current
cost of replacing the contracts net of any available margins retained by the
Company, a custodian or the Mortgage-Backed Securities Clearing Corporation (the
"MBSCC"), which is an independent clearing agent.
The total amount of counterparty credit exposure as of February 29, 2000,
before and after applicable margin accounts held, was as follows:
- --------------------------------------------------------------- ------------------------------------------
(Dollar amounts in millions) As of February 29, 2000
- --------------------------------------------------------------- ------------------------------------------
Total credit exposure before margin accounts held $218.7
Less: Margin accounts held (89.5)
------------------
Net unsecured credit exposure $129.2
==================
- ---------------------------------------------------------------------- ------------------ ----------------
Hedge of Committed Pipeline and Mortgage Loan Inventory
As of February 29, 2000, the Company had $2.7 billion of closed mortgage
loans and MBS held in inventory, including $2.1 billion fixed-rate and $0.6
billion adjustable-rate (the "Inventory"). In addition, as of February 29, 2000,
the Company had short-term rate and point commitments amounting to approximately
$4.2 billion (including $2.8 billion fixed-rate and $1.4 billion
adjustable-rate) to fund mortgage loan applications in process and an additional
$3.1 billion (including $2.8 billion fixed-rate and $0.3 billion
adjustable-rate) like commitments subject to property identification and
borrower qualification (together the "Committed Pipeline"). Substantially all of
these commitments are for periods of 60 days or less. (After funding and sale of
the mortgage loans, the Company's exposure to credit loss in the event of
nonperformance by the mortgagor is limited as described in Note J).
In order to mitigate the risk that a change in interest rates will result
in a decline in the value of the Company's Committed Pipeline or Inventory, the
Company enters into hedging transactions. The Inventory is hedged with forward
contracts for the sale of loans and net sales of MBS, including options to sell
MBS where the Company can exercise the option on or prior to the anticipated
settlement date of the MBS.
Due to the variability of closings in the Company's Committed Pipeline,
which is driven primarily by interest rates, the Company's hedging policies
require that substantially all of the Committed Pipeline be hedged with a
combination of options for the purchase and sale of MBS and treasury futures in
addition to forward contracts for the sale of MBS. As of February 29, 2000, the
notional amount of options to purchase and sell MBS aggregated $3.1 billion and
$1.3 billion, respectively. There were no treasury futures options in place at
February 29, 2000. The Company had net forward contracts to sell MBS that
amounted to $4.8 billion (including forward contracts to sell MBS of $9.1
billion and to purchase MBS of $4.3 billion). The MBS that are to be delivered
under these contracts and options are either fixed or adjustable-rate, and
generally correspond with the composition of the Company's Inventory and
Committed Pipeline.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
The Company is generally not exposed to significant losses nor will it
realize significant gains related to its Inventory or Committed Pipeline due to
changes in interest rates, net of gains or losses on associated hedge positions.
The correlation between the Inventory, the Committed Pipeline and the associated
hedge instruments is very high due to their similarity. However, the Company is
exposed to the risk that the actual closings in the Committed Pipeline may
deviate from the estimated closings for a given change in interest rates.
Although interest rates are the primary determinant, the actual loan closings
from the Committed Pipeline are influenced by many factors, including the
composition of the Committed Pipeline and remaining commitment periods. The
Company's estimated closings are based on historical data of loan closings as
influenced by recent developments.
Servicing Hedge
The Company manages its exposure to interest rate risk primarily through
balancing its loan production and loan servicing operations which are counter
cyclical in nature. In order to further mitigate the effect on earnings of MSR
impairment that may result from increased current and projected prepayment
activity that generally occur when interest rates decline, the Company maintains
a portfolio of financial instruments, including derivative contracts, that
increase in aggregate value when interest rates decline (the "Servicing Hedge").
The financial instruments that form the Servicing Hedge include interest rate
floors, options on interest rate futures, Capped Swaps, interest rate swaps,
interest rate caps, Capped Swaps, Swaptions, options on MBS, interest rate
futures and P/O securities.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
The following table summarizes the notional amounts of derivative contracts
included in the Servicing Hedge.
- -------------------------------------- -------------------- -------------------- ------------------ ---------------------
(Dollar amounts in millions) Balance, Dispositions/ Balance,
February 28, 1999 Additions Expirations February 29,
2000
- -------------------------------------- -------------------- -------------------- ------------------ ---------------------
Interest Rate Floors $33,000 18,000 (500) $50,500
Long Call Options on
Interest Rate Futures $32,000 18,750 (35,750) $15,000
Long Put Options on
Interest Rate Futures $54,600 5,250 (58,100) $1,750
Short Call Options on
Interest Rate Futures $22,000 2,000 (24,000) -
Short Put Options on
Interest Rate Futures $720 - (720) -
Long Call Options on MBS $4,561 4,000 - $8,561
Interest Rate Futures $22,500 - (22,500) -
Capped Swaps $1,000 - - $1,000
Interest Rate Swaps $15,150 1,050 (14,700) $1,500
Interest Rate Cap $4,500 - (2,000) $2,500
Swaptions $32,550 20,500 (16,800) $36,250
- -------------------------------------- -------------------- -------------------- ------------------ ---------------------
The Servicing Hedge is intended to protect the value of the investment in
MSRs from the effects of increased prepayment activity that generally results
from declining interest rates. Should interest rates increase, the value of the
MSRs generally will increase while the value of the Servicing Hedge will
decline. With respect to the options on interest rate futures and MBS,
Swaptions, floors, caps and P/O Securities included in the Servicing Hedge, the
Company is not exposed to loss beyond its initial outlay to acquire the
instruments plus any unrealized gains recognized to date. With respect to the
Capped Swaps contracts entered into by the Company as of February 29, 2000, the
Company estimates that its maximum exposure to loss over the contractual term is
$4 million. With respect to the Swap contracts entered into by the Company as of
February 29, 2000, the Company estimates that its maximum exposure to loss over
the contractual term is $1 million.
Interest Rate Swaps
As of February 29, 2000, CHL had interest rate swap contracts, in addition
to those included in the Servicing Hedge, with certain financial institutions
having notional principal amounts totaling $6.8 billion. The effect of these
contracts is to enable CHL to convert its fixed-rate long term debt borrowings
to LIBOR-based floating-rate cost borrowings (notional amount $5.6 billion), to
convert its foreign currency denominated fixed rate medium-term notes to U.S.
dollar LIBOR-based floating-rate cost borrowings (notional amount $1.1 billion)
and to convert a portion of its medium-term note borrowings from one
floating-rate index to another (notional amount $0.1 billion). Payments are due
periodically through the termination date of each contract. The agreements
expire between April 2000 and June 2027.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
The interest rate swap agreements related to debt had an average fixed rate
(receive rate) of 6.23% and an average floating rate indexed to 3-month LIBOR
(pay rate) of 6.30% on February 29, 2000.
Broker-Dealer Financial Instruments
Countrywide Securities Corporation ("CSC") utilizes a variety of financial
instruments for trading purposes and to manage interest-rate risk. These
instruments include MBS mandatory forward sale and purchase commitments as well
as short sales of cash market U.S. Treasury securities. At February 29, 2000,
CSC had forward contracts to sell MBS that amounted to $3.1 billion and forward
contracts to purchase MBS that amounted to $1.3 billion. During the year ended
February 29, 2000, the average fair value of the forward contracts to sell MBS
amounted to a loss on $4.3 million and the average fair value of forward
contracts to purchase MBS amounted to a loss of $2.8 million.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of February 29(28), 2000 and 1999 is made by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
---- ------------------------------------------------ ---------------------------------- --- ----------------------------
February 29, 2000 February 28, 1999
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) Amount fair value amount fair value
Assets:
Mortgage loans and mortgage-backed securities
held for sale $2,653,183 $2,653,183 $6,231,220 $6,231,220
Trading securities 1,984,031 1,984,031 1,460,446 1,460,446
Items included in investments in other financial instruments:
Principal only securities purchased 952,840 952,840 32,826 32,826
Mortgage-backed securities retained in
securitizations 775,867 775,867 500,631 500,631
Insurance Company investment
portfolio 520,490 520,490 - -
Securities purchased with agreements 435,593 435,593 76,246 76,246
resell
Equity Securities - restricte46,193 46,193 59,875 46,971
and
unrestricted
Items included in other assets:
Rewarehoused FHA and VA loans 336,273 336,273 216,598 216,598
Loans held for investment 177,330 177,330 125,236 125,236
Receivables related to broker-dealer activities22,612 22,612 401,232 401,232
Liabilities:
Notes payable 9,782,625 9,459,011 9,935,759 9,883,859
Securities sold not yet purchased 181,903 181,903 84,775 84,775
Derivatives:
Interest rate floors 411,278 180,360 426,838 402,061
Forward contracts on MBS (11,080) (13,511) 12,775 120,709
Options on MBS 75,950 32,415 90,476 98,935
Options on interest rate futures 8,921 6,032 18,261 15,729
Interest rate caps 47,348 39,088 77,508 40,437
Capped Swaps (5,619) (8,040) 8,470 3,092
Swaptions 341,039 76,254 337,703 271,073
Interest rate futures - - 57,280 57,280
Interest rate swaps (23,228) (457,051) 43,570 93,205
Short-term commitments to extend credit - 52,500 - 26,400
---- ------------------------------------------------ --------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of February 29(28), 2000 and 1999 are based on
pertinent information that was available to management as of the respective
dates. Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair values.
Mortgage Loans and Mortgage-Backed Securities Held for Sale
Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Trading Securities
Fair value is estimated using quoted market prices.
Principal Only Securities
Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and market
consensus prepayment rates.
Mortgage-backed securities retained in securitization
Fair value is estimated by discounting future cash flows using discount
rates that approximate current market rates, market consensus and internally
developed prepayment rates.
Insurance Company investment portfolio
Fair value is estimated using quoted market prices.
Derivatives
Fair value is defined as the amount that the Company would receive or pay to
terminate the contracts at the report date. Market or dealer quotes are
available for many derivatives; otherwise, pricing or valuation models are
applied to utilizing current market information to estimate fair value.
Notes Payable
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
NOTE J - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. Although
it is difficult to predict the ultimate outcome of these proceedings, management
believes, based on discussions with counsel, that any ultimate liability will
not materially affect the consolidated financial position or results of
operations of the Company and its subsidiaries.
Commitments to Buy or Sell Mortgage-Backed Securities and Other Derivatives
Contracts
In connection with its open commitments to buy or sell MBS and other
derivative contracts, the Company may be required to maintain margin deposits.
With respect to the MBS commitments, these requirements are generally greatest
during periods of rapidly declining interest rates. With respect to other
derivative contracts, margin requirements are generally greatest during periods
of increasing interest rates.
NOTE J - COMMITMENTS AND CONTINGENCIES (Continued)
Lease Commitments
The Company leases office facilities under lease agreements extending
through December 2011. Future minimum annual rental commitments under these
non-cancelable operating leases with initial or remaining terms of one year or
more are as follows.
----- ------------------------------------------ -----------------------------------
Year ending February 29(28), (Dollar amounts in thousands)
----- ------------------------------- -------------------- -------------- ----------
2001 $ 38,355
2002 33,336
2003 27,747
2004 19,033
2005 9,347
Thereafter 42,045
--------------
$169,863
==============
----- ------------------------------- -------------------- -------------- ----------
Rent expense was $57.2 million, $44.7 million and $30.2 million for the
years ended February 29(28), 2000, 1999 and 1998, respectively.
Restrictions on Transfers of Funds
The Company and certain of its subsidiaries are subject to regulatory and/or
credit agreement restrictions which limit their ability to transfer funds to the
Company through intercompany loans, advances or dividends. Pursuant to the
revolving credit facilities as of February 29, 2000, the Company is required to
maintain $1.3 billion in consolidated net worth and CHL is required to maintain
$1.2 billion of net worth, as defined in the credit agreement.
Loan Servicing
As of February 29(28), 2000, 1999 and 1998, the Company serviced loans
totaling approximately $250.2 billion, $215.5 billion and $182.9 billion,
respectively. Included in the loans serviced as of February 29(28), 2000, 1999
and 1998 were loans being serviced under subservicing agreements with total
principal balances of $2.9 billion, $2.2 billion and $6.7 billion, respectively.
The loans are serviced under a variety of servicing contracts. In general, these
contracts include guidelines and procedures for servicing the loans, remittance
requirements and reporting requirements, among other provisions.
Conforming conventional loans serviced by the Company (56% of the servicing
portfolio as of February 29, 2000) are primarily included in either Fannie Mae
MBS or Freddie Mac participation certificates ("PCs"). Such servicing is done on
a non-recourse basis, whereby credit losses are generally borne by Fannie Mae or
Freddie Mac and not the Company. The government loans serviced by the Company
are included in either Ginnie Mae MBS, Fannie Mae MBS, or Freddie Mac PCs. The
government loans are either insured against loss by the Federal Housing
Administration (17% of the servicing portfolio as of February 29, 2000) or
partially guaranteed against loss by the Department of Veterans Affairs (7% of
the servicing portfolio as of February 29, 2000). In addition, non-conforming
mortgage loans (20% of the servicing portfolio as of February 29, 2000) are
primarily included in "private label" MBS and serviced on a non-recourse basis.
Properties securing the mortgage loans in the Company's servicing portfolio
are geographically dispersed throughout the United States. As of February 29,
2000, approximately 28% and 5% of the mortgage loans (measured by unpaid
principal balance) in the Company's servicing portfolio are secured by
properties located in California and Texas, respectively. No other state
contains more than 5% of the properties securing mortgage loans.
NOTE J - COMMITMENTS AND CONTINGENCIES (Continued)
Generally, the Company is not exposed to credit risk. Because the Company
services substantially all conventional loans on a non-recourse basis, credit
losses are normally borne by the investor or insurer and not the Company. The
Company retains primary credit risk on the home equity and sub-prime loans it
securitizes through retention of a subordinated interest. As of February 29,
2000, the Company had investments in such subordinated interests that amounted
to $570.4 million. While the Company generally does not retain credit risk with
respect to the conventional prime credit quality first mortgage loans it sells,
it does have potential liability under representations and warranties made to
purchasers and insurers of the loans. In the event of a breach of the
representations and warranties, the Company may be required to repurchase a
mortgage loan and any subsequent loss on the mortgage loan may be borne by the
Company. Similarly, government loans serviced by the Company (24% of the
Company's servicing portfolio as of February 29, 2000) are insured by the
Federal Housing Administration or partially guaranteed against loss by the
Department of Veterans Affairs. The Company is exposed to credit losses to the
extent that the partial guarantee provided by the Department of Veterans Affairs
is inadequate to cover the total credit losses incurred.
NOTE K - EMPLOYEE BENEFITS
Stock Option Plans
The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and directors.
Options are generally granted at the average market price of the Company's
common stock on the date of grant and are exercisable beginning one year from
the date of grant and expire up to ten years from the date of grant.
Stock options transactions under the Plans were as follows.
- ----------------------------------------------------------------------------------------------------------------
Year ended February 29(28),
------------------------------------------------------
2000 1999 1998
- ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- --
Number of Shares:
Outstanding options at beginning of year 11,497,044 11,151,799 10,241,862
Options granted 3,643,111 1,648,647 1,836,169
Options exercised (602,021) (1,239,662) (839,479)
Options expired or cancelled (478,619) (63,740) (86,753)
-------------- -------------- --------------
Outstanding options at end of year 14,059,515 11,497,044 11,151,799
============== ============== ==============
Weighted Average Exercise Price:
Outstanding options at beginning of year $24.81 $20.57 $19.03
Options granted 35.27 46.71 27.09
Options exercised 13.45 15.90 16.07
Options expired or canceled 37.64 25.11 21.17
-------------- --------------
--------------
Outstanding options at end of year $27.44 $24.81 $20.57
Options exercisable at end of year 8,299,892 6,514,039 5,407,177
Options available for future grant 2,673,480 5,840,713 1,920,487
- ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- --
NOTE K - EMPLOYEE BENEFITS (Continued)
Status of the outstanding stock options under the Plans as of February 29,
2000 was as follows:
- ----------------------------------------------------------------------------------------------------------------
Outstanding Options Exercisable Options
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Life Number Price Number Price
------------------- --------------- -------------- ------------- ------------- -------------
$2.80 - $15.90 2.8 years 878,123 $14.29 878,123 $14.29
$15.91 - $21.20 4.2 2,172,720 17.51 2,172,720 17.51
$21.21 - $26.50 5.7 5,889,217 23.43 4,056,366 22.94
$26.51 - $31.80 7.1 1,513,094 27.07 751,018 27.06
$31.81 - $42.40 4.5 2,126,681 40.98 8,751 39.46
$42.41 - $53.00 8.1 1,479,680 46.73 432,914 46.73
------------------- --------------- -------------- ------------- ------------- -------------
$2.80 - $53.00 5.5 years 14,059,515 $27.44 8,299,892 $22.23
=================== =============== ============== ============= ============= =============
- ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- -------------
Had the estimated fair value of the options granted during the period been
included in compensation expense, the Company's net earnings and earnings per
share would have been as follows:
- ------------------------------------------- ----------------------------------------------------
(Dollar amounts in thousands, Year ended February 29(28),
----------------------------------------------------
except per share data) 2000 1999 1998
- ------------------------------------------- ----------------- ---------------- -----------------
Net Earnings
As reported $410,243 $385,401 $344,983
Pro forma $379,632 $366,118 $335,043
Basic Earnings Per Share
As reported $3.63 $3.46 $3.21
Pro forma $3.36 $3.29 $3.12
Diluted Earnings Per Share
As reported $3.52 $3.29 $3.09
Pro forma $3.25 $3.13 $3.00
- ------------------------------------------- ----------------- ---------------- -----------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model that has been modified to consider cash
dividends to be paid. The following weighted-average assumptions were used for
grants in Fiscal 2000, 1999 and 1998, respectively: dividend yield of 1.29%,
0.72% and 1.18%; expected volatility of 34%, 40% and 28%; risk-free interest
rates of 6.0%, 5.5% and 6.5% and expected lives of five years for options
granted in all three years. The average fair value of options granted during
Fiscal 2000, 1999 and 1998 was $13.66, $19.20 and $8.89, respectively.
Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the minimum
funding standards of ERISA.
NOTE K - EMPLOYEE BENEFITS (Continued)
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
---- ----------------------------------------- ---- ------------------------------------------------------ ---
Year ended February 29(28),
---- ----------------------------------------- ---- ------------------------------------------------------ ---
-- ------------- --- ------------
(Dollar amounts in thousands) 2000 1999
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Change in benefit obligation
Benefit obligation at beginning of year $29,777 $23,933
Service cost 5,535 4,715
Interest cost 2,204 1,772
Transfer of plan assets (453) -
Actuarial loss (gain) (41) 549
Benefits paid (401) (364)
Change in discount rate (4,028) (828)
------------- ------------
Benefit obligation at end of year $32,593 $29,777
============= ============
Change in plan assets
Fair value of plan assets at beginning of year $22,775 $18,152
Actual return on plan assets 3,110 1,948
Employer contribution 5,846 3,039
Transfer of plan assets (453) -
Benefits paid (401) (364)
------------- ------------
Fair value of plan assets at end of year $30,877 $22,775
============= ============
Funded status at end of year ($1,716) ($ 7,002)
Unrecognized net actuarial (gain) loss (4,977) 151
Unrecognized prior service cost 924 1,024
Unrecognized transaction asset (142) (212)
------------- ------------
Net amount recognized ($5,911) ($ 6,039)
============= ============
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
The following table sets forth the components of net periodic benefit cost
for 2000 and 1999.
--------------------------------------------------------------------------------------------------------------
Year ended February 29(28),
--------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2000 1999
--- ------------------------------------------------- -- -------------- -- --------------- -- ------------- --
Service cost $5,535 $4,715
Interest cost 2,204 1,772
Expected return on plan assets (2,051) (1,569)
Amortization of prior service cost 99 99
Amortization of unrecognized transition asset (70) (70)
--------------- -------------
Net periodic benefit cost $5,717 $4,947
=============== =============
--- ------------------------------------------------- -- -------------- -- --------------- -- ------------- --
The weighted-average assumptions used in calculating the amounts above were:
---- ----------------------------------------- ---- ------------------------------------------------------ ---
Year ended February 29(28),
---- ----------------------------------------- ---- ------------------------------------------------------ ---
-- ------------- --- ------------
2000 1999
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Discount rate 8.00% 7.40%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.00% 4.00%
---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
NOTE K - EMPLOYEE BENEFITS (Continued)
Pension expense for the years ended February 29(28), 2000, 1999 and 1998 was
$5.7 million, $4.9 million and $3.4 million, respectively. The Company makes
contributions to the Plan in amounts that are deductible in accordance with
federal income tax regulations.
Defined Contribution Plan
The Company has a defined contribution plan covering all full-time employees
of the Company who have at least one year of service and are age 21 or older.
Participants may contribute up to 16 percent of pretax annual compensation, as
defined in the plan agreement. Participants may also contribute, at the
discretion of the plan administrator, amounts representing distributions from
other qualified defined benefit or contribution plans. The Company makes a
discretionary matching contribution equal to 50 percent of the participant
contributions up to a maximum of 6 percent of the participants' base
compensation, as defined in the plan agreement. The defined contribution plan is
subject to the provisions of ERISA.
NOTE L - SHAREHOLDERS' EQUITY
In January, 2000, the Company entered into a three year equity put option
agreement with National Indemnity Company ("National Indemnity"), a property
casualty insurance company which is a subsidiary of Berkshire Hathaway, Inc. The
purpose of the agreement is to provide up to $100 million of additional capital
and surplus in the event that property and casualty insurance companies of
Balboa Life and Casualty ("Balboa") incur a certain level of catastrophic
property and casualty losses.
Upon the occurrence of one or more catastrophic events and two trigger
events, the Company will have the option to require National Indemnity to
purchase up to one million shares of non voting Series B Cumulative Preferred
Stock, par value $0.05 per share, of the Company (the "Series B Preferred
Stock"), at a price of $100 per share, with a dividend rate to be determined in
accordance with the agreement, resetting annually. The Series B Preferred Stock
is convertible into shares of common stock of the Company at a price which is
20% above the average price of the common stock in the 30 day period prior to
the issuance of the Series B Preferred Stock. Upon issuance of the Series B
Preferred Stock and for so long as National Indemnity owns at least 50% of the
outstanding Series B Preferred Stock, the Company will not be able to increase
quarterly dividends on its common stock. If issued, the Series B Preferred Stock
will pay an annual dividend rate determined at the time of issuance, and such
rate would increase by 50 basis points each year if the Series B Preferred Stock
remained outstanding for more than three years. The Series B Preferred Stock is
redeemable by the Company at the purchase price plus any then unpaid dividend
yield.
A catastrophic event that would trigger the option is one which results in
Balboa sustaining losses in excess of $97 million, net of reinsurance
recoverable, or the occurrence in any calendar year of multiple catastrophic
events which results Balboa sustaining losses in excess of $194 million, net of
reinsurance recoverable. In addition, for the option to be triggered the
consolidated net loss ratio of the Balboa property and casualty operations must
exceed 60% for the applicable calendar year and Balboa property and casualty
operations must have a net loss for such year.
In the event of a default in the payment of dividends on Series B Preferred
Stock, National Indemnity has the right to purchase shares of the Company's
common stock having a market value of $1 million at a price per share of 10%
below the closing price of the Company's common stock on the business day prior
to such purchase. This purchase option may be exercised quarterly until all
unpaid dividends and interest are paid.
In February 1988, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock. As a result of stock splits and
stock dividends, 0.399 of a Right is presently associated with each outstanding
share of the Company's common stock issued prior to the Distribution Date (as
defined below). Each Right, when exercisable, entitles the holder to purchase
from the Company one one-hundredth of a share of Series A Participating
Preferred Stock, par value $0.05 per share, of the Company (the "Series A
Preferred Stock"), at a price of $145, subject to adjustments in certain cases
to prevent dilution.
NOTE L - SHAREHOLDERS' EQUITY (Continued)
The Rights are evidenced by the common stock certificates and are not
exercisable or transferable, apart from the common stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
common stock ("Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of common
stock, or the equivalent thereof, of the Company which, at the time of such
transaction, would have a market value of two times the exercise price of the
Right. The Board of Directors of the Company may delay the exercisability of the
Rights during the period in which they are exercisable only for Series A
Preferred Stock (and not common stock).
In the event that, after a person has become an Acquiring Person, the
Company is acquired in a merger or other business combination, as defined for
the purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise price
of the Right, that number of shares of common stock, or the equivalent thereof,
of the other party (or publicly-traded parent thereof) to such merger or
business combination which at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on the
earlier of February 28, 2002, consummation of certain merger transactions or
optional redemption by the Company prior to any person becoming an Acquiring
Person.
NOTE M - RELATED PARTY TRANSACTIONS
In July 1997, the Company sold the assets, operations and employees of
Countrywide Asset Management Corporation ("CAMC"), a then wholly-owned
subsidiary of the Company, to IndyMac Mortgage Holdings, Inc. (formerly INMC
Mortgage Holdings, Inc.) ("INMC"). CAMC was formerly the manager of INMC. As
consideration, the Company received 3,440,800 newly issued common shares of
INMC. These shares are subject to resale restrictions which apply to the shares
from the date of issuance through July 2000.
Prior to the sale, CAMC received certain management fees and incentive
compensation. During the year ended February 28, 1998, CAMC earned $0.6 million
in base management fees from INMC and its subsidiaries. In addition, during the
year ended February 28, 1998, CAMC received $3.1 million in incentive
compensation. In addition, CAMC incurred many of the expenses related to the
operations of INMC and its subsidiaries, including personnel and related
expenses, subject to reimbursement by INMC. During the year ended February 28,
1998, the amount of expenses incurred by CHL which were allocated to CAMC and
reimbursed by INMC totaled $16.0 million.
Subsequent to the sale, the Company entered into an agreement with INMC
whereby the Company and certain affiliates agreed to provide certain services to
INMC during a transition period. During the years ended February 29(28), 2000
and 1999, CHL received $3.9 million and $2.6 million, respectively, from INMC
related to services provided in accordance with the agreement. Additionally,
during the years ended February 29(28), 2000 and 1999 the Company received $4.1
million and $3.0 million, respectively, of net sublease income from INMC.
INMC held an option to purchase conventional loans from CHL at the
prevailing market price. This option was not utilized in the year ended February
29, 2000. During the years ended February 28, 1999 and 1998, INMC purchased
$460.2 million and $2.9 million, respectively, of conventional non-conforming
mortgage loans from CHL pursuant to this option.
During the year ended February 28, 1999, CHL entered into an agreement
pursuant to which CHL assumed certain INMC recourse obligations with respect to
certain mortgage loans that INMC had previously sold to Freddie Mac. In
consideration of CHL's assumption of these recourse obligations, CHL received
$6.0 million, which Management believes will exceed the actual loss experience.
A portion of the $6.0 million is subject to reimbursement to INMC based upon
actual loss experience on the loans.
NOTE M - RELATED PARTY TRANSACTIONS (Continued)
During the year ended February 28, 1999, CHL purchased servicing rights from
INMC for $35.5 million, related to a $2.7 billion portfolio of loans.
During the year ended February 29, 2000, the Company sold 780,000 shares of
INMC common stock, which resulted in a pre-tax gain of $0.4 million.
Prior to August 1998, CHL sub-serviced mortgage loans issued by subsidiaries
of INMC, for which CHL received $1.7 million and $1.9 million in subservicing
fees for the years ended February 28, 1999 and 1998, respectively.
During the year ended February 29, 2000, the Company's broker-dealer
subsidiary purchased $872.6 million of MBS from INMC and sold $100.0 million MBS
to INMC.
In January 2000, CHL sold their entire investment in IndyMac, Inc., which
consisted of all of the outstanding common stock and 1% of the
economic interest in IndyMac, Inc., to INMC for $1.8 million.
NOTE N - SEGMENTS AND RELATED INFORMATION
The Company has four major segments: Loan Production, Loan Servicing,
Capital Markets and Insurance. The Production segment is comprised of the
Consumer Markets, Wholesale and Correspondent Divisions and Full Spectrum
Lending, Inc. ("the Divisions"). The Loan Production segment originates and
purchases conventional mortgage loans, mortgage loans insured by the FHA and VA,
home equity and sub-prime loans and sells those loans to permanent investors.
The Loan Servicing segment services on a primarily non-recourse basis
substantially all of the mortgage loans originated and purchased by the Loan
Production segment. In addition, the Loan Servicing segment purchases bulk
servicing contracts, also on a non-recourse basis, to service single-family
residential mortgage loans originated by other lenders. The Capital Markets
segment trades securities, primarily mortgage-related securities, with
broker-dealers and institutional investors and, as an agent, facilitates the
purchase and sale of bulk servicing contracts. The Insurance segment is an agent
and carrier that provides homeowners insurance, life insurance, disability
insurance, automobile insurance, credit-related insurance and various other
coverages. Included in the tables below labeled "Other" are the operating
segments that provide other complimentary services and certain reclassifications
to conform management reporting to the consolidated financial statements. In
addition, for Fiscal Year 1998, "Other" includes a $57.4 million pre-tax gain on
the sale of a CAMC.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (See Note A).
- ----------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000
- ------------------------------- ------------ -- ----------- -- ----------- -- ----------- -- ------------ -- ------------ --
(Dollars in thousands) Loan Loan Capital Consolidated
Production Servicing Markets Insurance Other Total
- ------------------------------- ------------ -- ----------- -- ----------- -- ----------- -- ------------ -- ------------ --
Non-interest revenues $904,634 $847,934 $64,090 $45,249 $88,416 $1,950,323
Interest earned 667,933 234,482 106,898 10,800 (21,467) 998,646
Interest charges (518,458) (342,250) (84,021) (4,988) 19,423 (930,294)
------------ ----------- ----------- ----------- ------------ ------------
Net interest income (expense)149,475 (107,768) 22,877 5,812 (2,044) 68,352
------------ ----------- ----------- ----------- ------------ ------------
Total revenue $1,054,109 $740,166 $86,967 $51,061 $86,372 $2,018,675
============ =========== =========== =========== ============ ============
Segment earnings (pre-tax) $259,869 $312,182 $32,124 $13,485 $13,538 $631,198
Segment assets $3,795,339 $8,963,785 $2,409,714 $568,314 $85,176 $15,822,328
- ------------------------------- ------------ -- ----------- -- ----------- -- ----------- -- ------------ -- ------------ --
NOTE N - SEGMENT AND RELATED INFORMATION (Continued)
- ----------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999
- ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
(Dollars in thousands) Loan Loan Capital Consolidated
Production Servicing Markets Insurance Other Total
- ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
Non-interest revenues $1,271,934 $483,933 $54,594 $22,711 $100,593 $1,933,765
Interest earned 721,289 270,355 40,051 492 (3,121) 1,029,066
Interest charges (603,093) (351,199) (30,689) (419) 1,571 (983,829)
------------ ----------- ------------ ------------ -------------
------------ ----------- ------------ ------------ ------------ -------------
Net interest income (expense118,196 (80,844) 9,362 73 (1,550) 45,237
------------ ----------- ------------ ------------ ------------ -------------
------------ ----------- ------------ ------------ -------------
Total revenue $1,390,130 $403,089 $63,956 $22,784 $99,043 $1,979,002
============ =========== ============ ============ ============ =============
============ =========== ============ ============ =============
Segment earnings (pre-tax) $556,213 $20,130 $26,529 $3,325 $25,608 $631,805
Segment assets $7,093,817 $6,626,097 $1,858,357 $6,503 $63,482 $15,648,256
- ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
- ----------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998
- ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
(Dollars in thousands) Loan Loan Capital Consolidated
Production Servicing Markets Insurance Other Total
- ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
Non-interest revenues $685,160 $620,964 $39,581 $20,752 $126,786 $1,493,243
Interest earned 421,714 150,997 3,909 344 7,112 584,076
Interest charges (347,240) (219,359) (608) (99) (1,053) (568,359)
------------ ----------- ------------ ------------ -------------
------------ ----------- ------------ ------------ ------------ -------------
Net interest income (expense)74,474 (68,362) 3,301 245 6,059 15,717
------------ ----------- ------------ ------------ ------------ -------------
------------ ----------- ------------ ------------ -------------
Total revenue $759,634 $552,602 $42,882 $20,997 $132,845 $1,508,960
============ =========== ============ ============ ============ =============
============ =========== ============ ============ =============
Segment earnings (pre-tax) $245,121 $207,487 $19,287 $7,522 $86,129 $565,546
Segment assets $5,969,661 $5,588,454 $532,927 $5,718 $86,451 $12,183,211
- ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
NOTE O - SUBSEQUENT EVENTS
On March 23, 2000, the Company declared a cash dividend of $.10 per common
share payable April 28, 2000 to shareholders of record on April 11, 2000.
On April 12, 2000, CHL renewed its one-year revolving credit facility with a
revised limit of $1.0 billion. The new facility expires on April 13, 2001.
NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data was as follows.
---- ----------------------------------------- ---- ------------------------------------------------- --------
Three months ended
(Dollar amounts in thousands, except per share dataMay 31 August 31 November 30 February 29(28)
-------------- --------------- -------------- ----------------
----------------------------------------------- -------------- --------------- -------------- ----------------
Year ended February 29, 2000
Revenue $537,003 $537,015 $491,779 $452,878
Expenses 367,529 362,420 327,039 330,489
Provision for income taxes 66,095 68,092 64,176 22,592
Net earnings 103,379 106,503 100,564 99,797
Earnings per share(1)
Basic $0.92 $0.94 $0.89 $0.88
Diluted $0.88 $0.91 $0.87 $0.87
Year ended February 28, 1999
Revenue $450,265 $482,157 $514,197 $532,383
Expenses 301,488 326,293 353,589 365,827
Provision for income taxes 58,023 60,787 62,637 64,957
Net earnings 90,754 95,077 97,971 101,599
Earnings per share(1)
Basic $0.82 $0.86 $0.88 $0.90
Diluted $0.78 $0.81 $0.84 $0.86
----------------------------------------------- -------------- --------------- -------------- ----------------
(1) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share amounts
may not equal the annual amount. This is caused by rounding and the
averaging effect of the number of share equivalents utilized throughout the
year, which changes with the market price of the common stock.
NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for Countrywide Home Loans, Inc. was as follows.
---- ----------------------------------------- ---- ------------------------------------------------- ---------
February 29(28),
-------------- ----------- -------------- ---------
(Dollar amounts in thousands) 2000 1999
---- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $ 2,653,183 $ 6,231,220
Mortgage servicing rights, net 5,396,477 4,496,439
Other assets 5,240,247 3,149,382
-------------- --------------
Total assets $13,289,907 $13,877,041
============== ==============
Short- and long-term debt $ 9,224,956 $ 9,910,966
Other liabilities 1,632,106 1,434,727
Equity 2,432,845 2,531,348
-------------- --------------
Total liabilities and equity $13,289,907 $13,877,041
============== ==============
---- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
----- ----------------------------------------- --- --------------------------------------------------- --------
Year ended February 29(28),
--------------- ---------- --------------- ---------
(Dollar amounts in thousands) 2000 1999
----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings:
Revenues $1,597,691 $1,668,627
Expenses 1,111,278 1,149,886
Provision for income taxes 168,729 202,308
--------------- ---------------
Net earnings $ 317,684 $ 316,433
=============== ===============
----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE R - Business Acquisitions
On November 30, 1999, the Company acquired all of the outstanding common
stock of Balboa Life & Casualty, Inc. ("Balboa") for a cash price of $435
million. The purchase price is subject to adjustment based upon completion of a
post-closing audit.
Balboa is a leading writer of credit-related insurance, specializing in
creditor-placed auto and homeowner insurance. Balboa is licensed to underwrite
in all 50 states.
The acquisition of Balboa was accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was allocated to assets
acquired and liabilities assumed based on their estimated fair market value at
the date of acquisition. The fair value of identifiable assets acquired and
liabilities assumed was $898 million and $473 million, respectively. Goodwill of
$10 million will be amortized over a period of 25 years.
NOTE R - Business Acquisitions (Continued)
The unaudited results of operations for Balboa are included in the Company's
consolidated results of operations from December 1, 1999. The following table
sets forth certain consolidated earnings data for the years ended February 29,
2000, and February 28, 1999, as if the acquisition of Balboa had been
consummated March 1, 1998.
----- ----------------------------------------- --- --------------------------------------------------- --------
Year ended February 29(28),
--------------- ---------- --------------- ---------
(Dollar amounts in millions) 2000 1999
----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings: (Unaudited)
Revenues $2,193,550 $2,245,253
Net Earnings $ 422,309 $ 404,717
Per Share
Basic $3.73 $3.63
Diluted $3.62 $3.46
----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
In management's opinion, these unaudited pro forma amounts are not
necessarily indicative of what the actual consolidated results of operations
might have been if the acquisition had been effective at March 1, 1998.
NOTE S - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement will be
effective for the Company in fiscal year ending February 28, 2002. The Company
has not yet determined the impact upon adoption of this standard on the
Consolidated Financial Statements.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interests
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998, accordingly, and reclassified
mortgage-backed securities retained in securitization as available for sale
securities.
F-40
-
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COUNTRYWIDE CREDIT INDUSTRIES, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
February 29(28),
-------------- -- --------------
2000 1999
-------------- --------------
Assets
Cash $ 0 $
852
Intercompany receivable 428,298 225,333
Investment in subsidiaries at equity in net assets 3,120,766 2,504,443
Equipment and leasehold improvements 55 79
Other assets 168,651 190,178
-------------- --------------
Total assets $3,717,770 $2,920,885
============== ==============
Liabilities and Shareholders' Equity
Intercompany payable $ 766,697 $ 347,416
Accounts payable and accrued liabilities 39,513 30,903
Deferred income taxes 23,681 23,681
--------------
--------------
Total liabilities 829,891 402,000
Common shareholders' equity
Common stock 5,673 5,631
Additional paid-in capital 1,171,238 1,153,673
Accumulated other comprehensive loss (33,234) (19,593)
Retained earnings 1,744,202 1,379,174
-------------- --------------
Total shareholders' equity 2,887,879 2,518,885
-------------- --------------
Total liabilities and shareholders' equity $3,717,770 $2,920,885
============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
Year ended February 29(28),
-------------- -- -------------- -- --------------
2000 1999 1998
-------------- -------------- --------------
Revenue
Interest earned $ 1,281 $ 1,261 $ 6,421
Interest charges (8,680) (4,151) -
-------------- -------------- --------------
Net interest income (7,399) (2,890) 6,421
Gain on sale of subsidiary 4,424 - 57,381
Dividend and other income 4,420 8,287 10,350
-------------- -------------- --------------
1,445 5,397 74,152
Expenses (3,614) (3,772) (3,414)
-------------- -------------- --------------
Earnings (loss) before income tax (provision) benefit and
equity in net earnings of subsidiaries (2,169) 1,625 70,738
Income tax (provision) benefit 127 (634) (27,588)
-------------- -------------- --------------
Earnings (loss) before equity in net earnings of subsidiaries (2,042) 991 43,150
Equity in net earnings of subsidiaries 412,285 384,410 301,833
-------------- -------------- --------------
NET EARNINGS $410,243 $385,401 $344,983
============== ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(Dollar amounts in thousands)
Year ended February 29(28),
-------------- -- -------------- -- --------------
2000 1999 1998
-------------- -------------- --------------
Cash flows from operating activities:
Net earnings $410,243 $385,401 $344,983
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Earnings of subsidiaries (412,285) (384,410) (301,833)
Depreciation and amortization 5 28 26
Decrease (increase) in other receivables and other assets (18,110) (1,801) (93,217)
(Decrease) increase in accounts payable and accrued liabilities 8,610 (50,154) 44,039
Gain on sale of subsidiary - (57,381)
(4,424)
Gain on sale of available-for-sale securities (433) - (2,593)
-------------- -------------- --------------
Net cash provided (used) by operating activities (16,394) (50,936) (65,976)
-------------- -------------- --------------
Cash flows from investing activities:
Net change in intercompany receivables and payables 216,316 267,809 (53,066)
Investment in subsidiaries (204,038) (273,735) 23,446
Proceeds from sales of subsidiary 21,053 - -
Proceeds from available-for-sale securities 10,977 - 3,678
-------------- -------------- --------------
Net cash (used) provided by investing activities 44,308 (5,926) (25,942)
-------------- -------------- --------------
Cash flows from financing activities:
Issuance of common stock 16,449 93,362 126,309
Cash dividends paid (45,215) (35,648) (34,391)
-------------- -------------- --------------
Net cash provided (used) by financing activities (28,766) 57,714 91,918
-------------- -------------- --------------
Net change in cash (852) 852 -
Cash at beginning of year 852 - -
-------------- -------------- --------------
Cash at end of year $ - $ 852 $ -
============== ============== ==============
Supplemental cash flow information:
Cash used to pay interest $ 5,015 $ 97 -
Unrealized gain (loss) on available-for-sale securities,
net of tax $ (13,641) $ (23,290) $ 34,242
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF COMPREHENSIVE INCOME
Year Ended February 29(28),
(Dollar amounts in thousands)
2000 1999 1998
--------------- ----------------- ---------------
NET EARNINGS $410,243 $385,401 $344,983
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period, before tax (9,356) 18,556 72,883
Income tax benefit (expense) 3,331 (7,237) (28,424)
--------------- ----------------- ---------------
Unrealized holding gains (losses) arising
during the period, net of tax (6,025) 11,319 44,459
Less: reclassification adjustment for gains
included in net earnings, (12,332) (56,801) (16,749)
before tax
Income tax expense 4,716 22,192 6,532
--------------- ----------------- ---------------
Reclassification adjustment for gains included
in net earnings, net of tax (7,616) (34,609) (10,217)
--------------- ----------------- ---------------
Other comprehensive (loss) income (13,641) (23,290) 34,242
--------------- ----------------- ---------------
COMPREHENSIVE INCOME $396,602 $362,111 $379,225
=============== ================= ===============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended February 29(28),
(Dollar amounts in thousands)
Column A Column B Column C Column D Column E
- ----------------------------------- -------------- --------------------------------- ----------------- --------------
Additions
---------------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
of period expenses accounts (2) Deductions (1) of period
- ----------------------------------- -------------- --------------- ---------------- ------------------ -------------
Year ended February 29, 2000
Allowance for losses $49,366 $17,143 $ - $18,137 $48,372
Year ended February 28, 1999
Allowance for losses $41,094 $30,556 $2,997 $25,281 $49,366
Year ended February 28, 1998
Allowance for losses $24,749 $31,456 $6,711 $21,822 $41,094
- -----------------------------------
(1) Actual losses charged against reserve, net of recoveries and reclassification.
(2) Primarily represents loss indemnification proceeds received.
Exhibit List
Exhibit
No. Description
---------- ------------------------------------------------------------
3.3.3 Amendment to Bylaws of Countrywide Credit Industries, Inc.
dated March 24, 2000.
+ 10.2.2 Part-Time Employment Agreement between named
executive officer and the Company dated as of February 28,
2000.
+ 10.2.3 Letter Agreement between David S. Loeb and the Company
dated February 28, 2000.
+ 10.3.3 Third Restated Employment Agreement by and between the
Company and Angelo R.Mozilo in effect as of March 1, 2000.
10.8.7 Credit Agreement as of the 12th day of April, 2000, by and
among CHL, Royal Bank of Canada, ABN AMRO Bank, N.V., Credit
Lyonnais New York Branch, Commerzbank AG, New York Branch,
and the Lenders Party thereto.
11.1 Statement Regarding Computation of Earnings Per Share.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
21 List of subsidiaries
23 Consent of Grant Thornton LLP.
27 Financial Data Schedules (included only with the electronic
filing with the SEC).
+Constitutes a management contract or compensatory plan or arrangement.