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 [FEE REQUIRED]
For the fiscal year ended February 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 NO FEE REQUIRED
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 1, 1998, there were 110,150,548 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
$5,124,908,000. For the purposes of the foregoing calculation only, all
directors and executive officers of the registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1998 Annual Meeting
PART I
ITEM 1. BUSINESS
A. General
Founded in 1969, Countrywide Credit Industries, Inc. (the "Company" or
"CCI") is a holding company which, through its principal subsidiary, Countrywide
Home Loans, Inc. ("CHL"), is engaged primarily in the mortgage banking business,
and as such originates, purchases, sells and services mortgage loans. The
Company's mortgage loans are principally prime credit quality first-lien
mortgage loans secured by single- (one-to-four) family residences ("prime credit
quality first mortgages"). The Company also offers home equity loans both in
conjunction with newly produced prime credit quality first mortgages and as a
separate product. In addition, the Company offers sub-prime credit quality
first-lien single-family mortgage loans ("sub-prime loans").
The Company, through its other wholly-owned subsidiaries, offers products
and services complementary to its mortgage banking business. See "Business-Other
Operations." Unless the context otherwise requires, references to the "Company"
herein shall be deemed to refer to the Company and its consolidated
subsidiaries.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Annual Report on Form 10-K
may contain forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause future results to differ materially from
historical results or those anticipated. The words "believe," "expect,"
"anticipate," "intend," "estimate," "should" and other expressions which
indicate future events and trends identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. The following factors, among
others, could cause future results to differ materially from historical results
or those anticipated: (1) the level of demand for mortgage credit, which is
affected by such external factors as the level of interest rates, the strength
of the various segments of the economy and demographics of the Company's lending
markets; (2) the direction of interest rates; (3) the relationship between
mortgage interest rates and the cost of funds; (4) federal and state regulation
of the Company's mortgage banking operations; and (5) competition within the
mortgage banking industry.
B. Mortgage Banking Operations
The principal sources of revenue from the Company's mortgage banking
business are: (i) loan origination fees; (ii) gains from the sale of loans, if
any; (iii) interest earned on mortgage loans during the period that they are
held by the Company pending sale, net of interest paid on funds borrowed to
finance such mortgage loans; (iv) loan servicing fees; and (v) interest benefit
derived from the custodial balances associated with the Company's servicing
portfolio.
Loan Production
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 which 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
$227,150 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
generally with original balances of up to $1 million.
The following table sets forth the number and dollar amount of the Company's
prime credit quality first mortgage, home equity and sub-prime loan production
for the periods indicated.
----------------------------- ----------- -----------------------------------------------------------------------
Summary of the Company's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------- -----------------------------------------------------------------------
----------------------------- ----
1998 1997 1996 1995 1994
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
Conventional Loans
Number of Loans 231,595 190,250 191,534 175,823 315,699
Volume of Loans $29,887.5 $22,676.2 $21,883.4 $20,958.7 $46,473.4
Percent of Total Volume 61.3% 60.0% 63.3% 75.2% 88.6%
FHA/VA Loans
Number of Loans 162,360 143,587 125,127 72,365 67,154
Volume of Loans $15,869.8 $13,657.1 $12,259.3 $6,808.3 $5,985.5
Percent of Total Volume 32.5% 36.1% 35.5% 24.4% 11.4%
Home Equity Loans
Number of Loans 45,052 20,053 7,986 2,147 -
Volume of Loans $1,462.5 $613.2 $220.8 $99.2 -
Percent of Total Volume 3.0% 1.6% 0.6% 0.4% -
Sub-prime Loans
Number of Loans 16,360 9,161 1,941 - -
Volume of Loans $1,551.9 $864.3 $220.2 - -
Percent of Total Volume 3.2% 2.3% 0.6% - -
Total Loans
Number of Loans 455,367 363,051 326,588 250,335 382,853
Volume of Loans $48,771.7 $37,810.8 $34,583.7 $27,866.2 $52,458.9
Average Loan Amount $107,000 $104,000 $106,000 $111,000 $137,000
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
The increase in the number and dollar amount of conventional loans produced
in the year ended February 28, 1998 ("Fiscal 1998") from those produced in the
years ended February 28 (29), 1997 ("Fiscal 1997") and 1996 ("Fiscal 1996") was
primarily due to generally lower interest rates that prevailed during most of
the year and the expansion of the Company's consumer markets and wholesale
branch networks. The increase in the number and dollar amount of FHA and VA
loans produced in the year ended February 28, 1998 from those produced in the
years ended February 28(29), 1997 and 1996 was attributable in part to increased
mortgage market activity. Production of the Company's home equity and sub-prime
products also increased from those produced in the years ended February 28 (29),
1997 and 1996. This increase was attributable primarily to the Company's efforts
to grow its production of these products due to the high returns they generate
and growth opportunities that exist in the market.
For the years ended February 28(29), 1998, 1997 and 1996, jumbo loans
represented 20%, 12% and 6%, respectively, of the Company's total volume of
mortgage loans produced. For the years ended February 28(29), 1998, 1997 and
1996, adjustable-rate mortgage loans ("ARMs") comprised approximately 23%, 26%
and 22%, respectively, of the Company's total volume of mortgage loans produced.
The decrease in the Company's percentage of ARM production from Fiscal 1997 to
Fiscal 1998 was primarily caused by the lower interest rate environment that
prevailed through most of Fiscal 1998 compared to Fiscal 1997. For the years
ended February 28(29), 1998, 1997 and 1996, refinancing activity represented
41%, 33% and 34%, respectively, of the Company's total volume of mortgage loans
produced. The increase in the percentage of refinance loans for the current year
is indicative of the lower interest rate environment experienced during Fiscal
1998.
The Company produces mortgage loans through three separate divisions of
Countrywide Home Loans and another subsidiary, Full Spectrum Lending, Inc. (the
"Divisions"). The Company maintains a staff of central office quality control
personnel that performs audits of the loan production of the Divisions on a
regular basis. In addition, the Divisions have implemented various procedures to
control the quality of loans produced, as described below. The Company believes
that its use of technology, benefits derived from economies of scale and a
noncommissioned sales force allow it to produce loans at a low cost relative to
its competition.
Consumer Markets Division
The Company's Consumer Markets Division (the "Consumer Markets Division")
originates prime credit quality first mortgage, home equity and sub-prime loans
using direct contact with consumers through its nationwide network of retail
branch offices, its telemarketing systems and its site on the World Wide Web. As
of February 28, 1998, the Company had 328 Consumer Markets Division branch
offices, two satellite offices and two processing support centers located in 44
states and the District of Columbia. The Consumer Markets Division's branch
offices are each staffed typically by five employees and connected to the
Company's central office by a computer network. In addition, the Company
operates three telemarketing centers which solicit potential borrowers and
receive telephone calls placed by potential borrowers primarily in response to
print or broadcast advertising. The loan counselors employed in the
telemarketing centers provide information and accept loan pre-applications,
which are then forwarded to either a branch office or a regional processing
support center for processing and funding. Business is also solicited through
advertising, participation of branch management in local real estate related
business functions and extensive use of direct mailings to borrowers, real
estate brokers and builders. Consumer Markets Division personnel are not paid a
commission on sales; however, they are paid a bonus based on various factors,
including branch profitability. The Company believes that this approach allows
it to originate high-quality loans at a comparatively low cost. The Consumer
Markets Division uses continuous quality control audits of loans originated
within each branch by branch management and quality control personnel to monitor
compliance with the Company's underwriting criteria.
The following table sets forth the number and dollar amount of the Consumer
Markets Division's prime credit quality first mortgage, home equity and
sub-prime loan production for the periods indicated.
----------------------------- ---------- ------------------------------------------------------------------------
Summary of the Consumer Markets Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
1998 1997 1996 1995 1994
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Conventional Loans
Number of Loans 67,850 43,261 47,260 48,772 73,249
Volume of Loans $8,377.7 $5,145.3 $5,271.8 $5,442.2 $9,264.8
Percent of Total Volume 62.8% 63.7% 70.7% 77.0% 80.2%
FHA/VA Loans
Number of Loans 43,238 27,746 22,829 19,060 26,418
Volume of Loans $4,114.0 $2,514.3 $2,025.4 $1,612.1 $2,282.3
Percent of Total Volume 30.8% 31.2% 27.1% 22.8% 19.8%
Home Equity Loans
Number of Loans 27,198 14,028 6,000 297 -
Volume of Loans $784.3 $384.7 $160.9 $11.4 -
Percent of Total Volume 5.9% 4.8% 2.2% 0.2% -
Sub-prime Loans
Number of Loans 737 303 - - -
Volume of Loans $62.5 $27.0 - - -
Percent of Total Volume 0.5% 0.3% - - -
Total Loans
Number of Loans 139,023 85,338 76,089 68,129 99,667
Volume of Loans $13,338.5 $8,071.3 $7,458.1 $7,065.7 $11,547.1
Average Loan Amount $96,000 $95,000 $98,000 $104,000 $116,000
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Wholesale Division
The Company's Wholesale Division (the "Wholesale Division"), produces prime
credit quality first mortgage, home equity and sub-prime loans through mortgage
loan brokers and other financial intermediaries. As of February 28, 1998, the
Wholesale Division operated 75 loan centers and 14 regional support centers in
various parts of the United States. Prime credit quality first mortgage loans
produced by the Wholesale Division comply with the Company's general
underwriting criteria for loans originated through the Consumer Markets
Division, and each such loan is approved by one of the Company's loan
underwriters. Sub-prime loans are underwritten centrally by a specialized
underwriting group and comply with the Company's underwriting criteria for such
loans. In addition, quality control personnel review loans for compliance with
the Company's underwriting criteria. Approximately 13,900 mortgage brokers
qualify to participate in the Wholesale Division's loan delivery program.
Mortgage loan brokers qualify to participate in the Wholesale Division's program
only after a review by the Company's management of their reputation and mortgage
lending expertise, including a review of their references and financial
statements.
The following table sets forth the number and dollar amount of the Wholesale
Division's prime credit quality first mortgage, home equity and sub-prime loan
production for the periods indicated.
----------------------------- ----------- --------------------------------------------------------------------
Summary of the Wholesale Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
1998 1997 1996 1995 1994
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Conventional Loans
Number of Loans 87,391 50,570 59,670 65,713 130,937
Volume of Loans $11,860.9 $6,187.8 $6,766.9 $7,790.0 $21,271.0
Percent of Total Volume 75.4% 73.4% 84.0% 91.6% 98.9%
FHA/VA Loans
Number of Loans 23,641 12,505 10,448 6,239 2,700
Volume of Loans $2,362.3 $1,190.0 $1,016.2 $626.3 $244.4
Percent of Total Volume 15.0% 14.1% 12.6% 7.4% 1.1%
Home Equity Loans
Number of Loans 11,073 6,017 1,937 1,836 -
Volume of Loans $419.4 $227.7 $57.5 $86.9 -
Percent of Total Volume 2.7% 2.7% 0.7% 1.0% -
Sub-prime Loans
Number of Loans 11,721 8,568 1,941 - -
Volume of Loans $1,088.1 $823.9 $220.2 - -
Percent of Total Volume 6.9% 9.8% 2.7% - -
Total Loans
Number of Loans 133,826 77,660 73,996 73,788 133,637
Volume of Loans $15,730.7 $8,429.4 $8,060.8 $8,503.2 $21,515.4
Average Loan Amount $118,000 $109,000 $109,000 $115,000 $161,000
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
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"). The Company's correspondent offices are located in Pasadena,
California; Dallas, Texas and Pittsburgh, Pennsylvania. Eleven hundred financial
intermediaries serving all 50 states and Guam are eligible to participate in
this program. Financial intermediaries qualify to participate in the
Correspondent Division's program after a review by the Company's management of
the reputation, financial strength and mortgage lending expertise of such
institutions, including a review of their references and financial statements.
In addition, all sellers are reaffirmed annually for continuation in the program
based upon a review of their current audited financial statements and their
historical production volumes and quality.
Loans purchased by the Company through the Correspondent Division comply
with the Company's general underwriting criteria for loans that it originates
through the Consumer Markets Division. The division has monitoring systems in
place to ensure that conventional loans of certain sellers and loans of certain
credit quality grades are reviewed by a Company underwriter prior to purchase.
Under this review process, approximately 39% of all conventional loans purchased
for the year ended February 28, 1998 were reviewed by Company underwriters. An
additional 11% of the conventional loans purchased was underwritten by contract
underwriters whose work is insured against loss or through underwriting systems
endorsed by Fannie Mae and Freddie Mac. To provide additional assurance against
losses, the purchase agreement signed by all its correspondents provides the
Company with recourse to the correspondent in the event of such occurrences as
fraud or misrepresentation in the origination process or a loan's failure to
meet eligibility requirements at the time the Company purchased the loan.
The following table sets forth the number and dollar amount of the
Correspondent Division's prime credit quality first mortgage, home equity and
sub-prime loan production for the periods indicated.
----------------------------- ------------------------------------------------------------------------------- --
Summary of the Correspondent Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
1998 1997 1996 1995 1994
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Conventional Loans
Number of Loans 76,354 96,419 84,604 61,338 111,513
Volume of Loans $9,648.9 $11,343.1 $9,844.7 $7,726.5 $15,937.6
Percent of Total Volume 49.3% 53.2% 51.7% 62.8% 82.2%
FHA/VA Loans
Number of Loans 95,481 103,336 91,850 47,066 38,036
Volume of Loans $9,393.5 $9,952.8 $9,217.7 $4,570.0 $3,458.8
Percent of Total Volume 48.0% 46.7% 48.3% 37.2% 17.8%
Home Equity Loans
Number of Loans 6,635 8 49 14 -
Volume of Loans $252.4 $0.8 $2.4 $0.8 -
Percent of Total Volume 1.3% 0.0% 0.0% 0.0% -
Sub-prime Loans
Number of Loans 2,457 290 - - -
Volume of Loans $267.5 $13.4 - - -
Percent of Total Volume 1.4% 0.1% - - -
Total Loans
Number of Loans 180,927 200,053 176,503 108,418 149,549
Volume of Loans $19,562.3 $21,310.1 $19,064.8 $12,297.3 $19,396.4
Average Loan Amount $108,000 $107,000 $108,000 $113,000 $130,000
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Full Spectrum Lending, Inc.
Full Spectrum Lending, Inc. ("FSLI"), a wholly owned subsidiary of the
Company, which commenced operations on September 1, 1997, originates sub-prime
and home equity loans. FSLI operates a nationwide network of 24 retail branch
offices located in 14 states in addition to two national sales centers. The
Company's branch offices are typically 2,500 square feet and have between five
and seven employees. Business is obtained primarily through direct mailings to
borrowers, outbound telemarketing and referrals from other Divisions of the
Company. FSLI personnel are not paid a commission on sales, but rather a bonus
based on various factors, including branch profitability. Each loan approved by
FSLI is reviewed by the Company's centralized underwriting unit to ensure that
standardized underwriting guidelines are met. In addition, the Company performs
quality control audits of the origination process on a continuous basis.
The following table sets forth the number and dollar amount of FSLI's home
equity and sub-prime loan production for the periods indicated.
----------------------------- ------------------------------------------------------------------------------- --
Summary of the Full Spectrum Lending's
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
1998 1997 1996 1995 1994
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Home Equity Loans
Number of Loans 146 - - - -
Volume of Loans $6.4 - - - -
Percent of Total Volume 4.6% - - - -
Sub-prime Loans
Number of Loans 1,445 - - - -
Volume of Loans $133.8 - - - -
Percent of Total Volume 95.4% - - - -
Total Loans
Number of Loans 1,591 - - - -
Volume of Loans $140.2 - - - -
Average Loan Amount $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- and moderate-income and
designated minority borrowers. These programs offer more flexible underwriting
guide lines (consistent with those guidelines adopted by Fannie Mae and Freddie
Mac) than historical industry standards, thereby enabling more people to qualify
for home loans than had qualified under such historical guidelines. Highlights
of these flexible guidelines include a lower down payment requirement, more
liberal guidelines in areas such as credit and employment history, less income
required to qualify and no cash reserve requirements at the date of funding.
House America(R) is the Company's affordable home loan program for low- and
moderate-income borrowers, offering loans that are eligible for purchase by
Fannie Mae and Freddie Mac. During the years ended February 28, 1998 and 1997,
the Company produced approximately $400 million and $600 million, respectively,
of mortgage loans under this program. The decline in House America production
from the year ended February 28, 1997 to the year ended February 28, 1998, was
the result of an improvement in the relative attractiveness of other loan
products as an alternative means of providing homeownership 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. 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 consumers obtain their goal of home
ownership. To assist a broad spectrum of consumers, counselors are bilingual and
work with consumers for up to one year, providing guidance on a regular basis
via phone and mail. The Company also organizes and participates in local home
buyer 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 home buyer education videos and workbooks.
The Company's affordable housing outreach also includes participation in 150
local mortgage revenue bond programs for first-time home buyers. Federal law
allows local government agencies to sell tax exempt bonds to purchase mortgages
securing loans made to first-time, low-income home buyers. These programs
thereby provide for mortgages with fixed interest rates that are lower than
then-current market rates. The Company also participates in over 350 Community
Seconds Programs for first time home buyers and low- and moderate-income
consumers. These programs are offered by city agencies and municipalities to
assist with downpayment and closing costs.
In addition, a selection of applications from certain designated minority
and other borrowers that are initially recommended for denial within the
Company's Consumer Markets Division is forwarded for an additional review by a
manager of the Company to insure that denial is appropriate.
The application of more flexible underwriting guidelines may carry a risk of
increased delinquencies. However, because the loans in the Company's portfolio
are generally serviced on a non-recourse basis, the exposure to credit loss
resulting from increased delinquency rates is substantially limited. Further,
related late charge income has historically been sufficient to offset
incremental servicing expenses resulting from an increased delinquency rate.
Loan Underwriting
The Company's guidelines for underwriting FHA-insured and VA-guaranteed
loans comply with the criteria established by such 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 private mortgage insurance (which may be paid by the borrower or the
lender).
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac, the Company has established affordable home loan programs for
low- and moderate-income borrowers offering more flexible underwriting
guidelines than historical industry standards. See "Business-Mortgage Banking
Operations - Fair Lending Programs".
The following describes the general underwriting criteria taken into
consideration by the Company in determining whether to approve a prime credit
quality first mortgage loan application. Borrowers who do not qualify for a
prime credit quality first mortgage may qualify for a sub-prime loan which
generally have more flexible underwriting criteria.
Employment and Income
Under most loan programs, applicants must exhibit the ability to generate
income on a regular basis in order to meet the housing payments relating to the
loan as well as any other debts they may have. The nature of the information
which a borrower is required to disclose and whether such information is
verified depends, in part, on the documentation program used in the origination
process. Evidence of employment and income is obtained through written
verification of employment with the current and prior employer(s) or by
obtaining a recent pay stub and W-2 forms. Self-employed applicants are
generally required to provide income tax returns, financial statements or other
documentation to verify income. Sources of income to be considered include
salary, bonus, overtime, commissions, retirement benefits, notes receivable,
interest, dividends, unemployment benefits and rental income. The underwriter
generally verifies the information contained in the application relating to
employment, income, assets or mortgages.
Debt-to-Income Ratios
Generally, an applicant's monthly housing expense (loan payment, real estate
taxes, hazard insurance and homeowner association dues, if applicable) should be
25% to 28% of monthly gross income. Total fixed monthly obligations (housing
expense plus other obligations such as car loans, credit card payments, etc.)
generally should be 33% to 36% of monthly gross income. Other areas of financial
strength, such as equity in the property, large cash reserves or a history of
meeting prior home mortgage or rental obligations are considered to be
compensating factors and may result in an adjustment of these ratio limitations.
Credit History
An applicant's credit history is examined for both favorable and unfavorable
occurrences. An applicant who has made payments on outstanding or previous
credit obligations according to the contractual terms may be considered
favorably. Unfavorable items such as slow payment records, legal actions,
judgments, bankruptcy, liens, foreclosure or garnishments are discussed with the
applicant in order to determine the reasons for the unfavorable rating. In some
instances, the applicant may explain the reasons for these ratings to indicate
there were isolated extenuating circumstances beyond the applicant's control,
which would mitigate the effect of such unfavorable items on the credit
decision.
Property
Under most loan programs, the property's market value and physical condition
as compared to the value of similar properties in the area is assessed to ensure
that the property provides adequate collateral for the loan. Generally,
properties are appraised by licensed real estate appraisers for loan
transactions involving purchases, rate-and-term refinances or cash-out
refinances. Automated or streamlined appraisal systems may also be used to
confirm property values on some loan programs.
Maximum Indebtedness to Appraised Value
Generally, the maximum amount the Company will lend is 95% of the appraised
value of the property and this percentage may be lower depending on certain
factors such as the principal balance of the loan. Loan amounts in excess of 80%
of the appraised value require private mortgage insurance to protect against
foreclosure loss.
Funds for Closing
Generally, applicants are required to have sufficient funds of their own to
meet the down payment requirement. Funds for closing costs may come from the
applicant or may be a gift from a family member. Certain loan programs require
the applicant to have sufficient funds for a portion of the down payment and the
remaining funds may be provided by a gift or an unsecured loan from a
municipality or a non-profit organization. Certain programs require the
applicant to have cash reserves after closing.
Geographic Distribution
The following table sets forth the geographic distribution of the Company's
prime credit quality first mortgage, home equity and sub-prime loan production
for the year ended February 28, 1998.
-----------------------------------------------------------------------------------------------------
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 92,269 $12,566.4 25.8%
Michigan 23,779 2,424.3 5.0%
Texas 24,802 2,307.9 4.7%
Illinois 19,169 2,301.7 4.7%
Colorado 18,791 2,238.0 4.6%
Florida 25,427 2,137.6 4.4%
Washington 14,914 1,638.5 3.4%
Arizona 15,916 1,563.0 3.2%
Ohio 16,647 1,422.5 2.9%
Maryland 10,989 1,300.3 2.7%
Massachusetts 9,787 1,258.8 2.6%
Georgia 11,822 1,158.0 2.4%
Virginia 10,373 1,146.1 2.3%
Utah 9,655 1,069.0 2.2%
Others (1) 151,027 14,239.6 29.1%
------------------ ----------------- -----------------
455,367 $48,771.7 100.0%
================== ================= =================
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
(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 the years ended February 28(29),
1998, 1997 and 1996 was 26%, 25% and 31%, respectively. Loan production within
California is geographically dispersed, which minimizes dependence on any
individual local economy. The decline in the percentage of the Company's
mortgage loan production in California during the three year period ended
February 28, 1998 is the result of implementing the Company's strategy to expand
production capacity and market share outside of California. At February 28,
1998, 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 the year ended February 28, 1998.
-----------------------------------------------------------------------------------------------------
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 22,923 $ 3,322.3 26.4%
Orange 9,969 1,494.9 11.9%
San Diego 7,280 1,046.2 8.3%
Santa Clara 3,726 709.4 5.7%
Riverside 5,772 633.6 5.0%
Others (1) 42,599 5,360.0 42.7%
------------------ ----------------- ------------------
92,269 $12,566.4 100.0%
================== ================= ==================
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
(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 may be 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. Loans securitized through Fannie Mae or
Freddie Mac are sold on a non-recourse basis whereby foreclosure losses are
generally the responsibility of Fannie Mae and Freddie Mac, and not the Company.
The Company packages substantially all of its FHA-insured and VA-guaranteed
mortgage loans into pools of loans. It sells these pools in the form of modified
pass-through mortgage-backed securities ("MBS") guaranteed by the Government
National Mortgage Association ("Ginnie Mae") to national or regional
broker-dealers. With respect to loans securitized through Ginnie Mae programs,
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 the years ended February 28(29), 1998, 1997 and 1996, the aggregate
loss experience of the Company on VA loans in excess of the VA guaranty was
approximately $18.5 million, $9.3 million and $3.8 million, respectively. In the
opinion of management, the losses on VA loans increased from the year ended
February 28, 1997 to the year ended February 28, 1998 primarily due to the aging
of the VA loan servicing portfolio and declines in values of properties securing
VA loans, particularly in California. 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, the Company pays guarantee fees to
these agencies.
The Company consistently sells its non-conforming conventional loan
production to large buyers in the secondary market (which can include national
or regional broker-dealers) on a non-recourse basis. These loans can be sold
either on a whole-loan basis or in the form of pools backing securities which
are not guaranteed by any governmental instrumentality but 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
securitized. In connection with the securitization of its home equity and
sub-prime loans, the Company retains a subordinated residual interest in the
trust which acquires the loans. As a result of the retention of this residual
interest, the Company has exposure to credit losses on the loans. At February
28, 1998, the Company had investments in such subordinated residual interests
amounting to $251 million, which represents the maximum exposure to credit
losses on the securitized home equity and sub-prime loans.
In connection with the sales and exchange of loans, the Company makes
customary representations and warranties relating to, among other things,
compliance with laws and origination practices. The Company has potential
liability under these representations. In the event of a breach of the
representations and warranties, the Company may be required to repurchase a
mortgage loan. In such event, any subsequent loss on the mortgage loan may be
borne by the Company.
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of the Company's inventory of
conforming and government loans and the maximum portion of its Committed
Pipeline that the Company believes may close be hedged with forward contracts
for the delivery of MBS or options on MBS. The inventory is then used to form
the MBS that will fill the forward delivery contracts and exercised options. The
Company hedges its inventory and Committed Pipeline of jumbo mortgage loans by
using whole-loan sale commitments to ultimate buyers or by using temporary
"cross hedges" with sales of MBS since such loans are ultimately sold based on a
market spread to MBS. As such, the Company is not exposed to significant risk
nor will it derive any significant benefit from changes in interest rates on the
price of the inventory, net of gains or losses of associated hedge positions.
The correlation between the price performance of the inventory being hedged and
the hedge instruments is very high due to the similarity of the asset and the
related hedge instruments. The Company is exposed to the risk that the portion
of loans from the Committed Pipeline that actually closes at the committed price
is less than or more than the amount estimated to close in the event of a
decline or rise in interest rates during the commitment period. The amount of
loans estimated to close from the Committed Pipeline is influenced by many
factors, including the composition of the Committed Pipeline, the historical
portion of the Committed Pipeline that has closed given changes in interest
rates and the timing of such closings. See Note I to the Company's Consolidated
Financial Statements.
Loan Servicing
The Company services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases pursuant to servicing agreements
with investors in the loans. In addition, the Company purchases bulk servicing
contracts, also on a non-recourse basis, to service single-family residential
mortgage loans originated by other lenders. Servicing contracts acquired through
bulk purchases accounted for 15% of the Company's mortgage servicing portfolio
as of February 28, 1998. Servicing mortgage loans includes collecting and
remitting loan payments, answering customers' questions, 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 servicing fee is collected by the Company
out of monthly mortgage payments.
The Company's servicing portfolio is subject to reduction by scheduled
amortization or by prepayment or foreclosure of outstanding loans. In addition,
the Company has sold, and may sell in the future, a portion of its portfolio of
loan servicing rights to other mortgage servicers. In general, the decision to
sell servicing rights or newly originated loans on a servicing-released basis is
based upon management's assessment of the Company's cash requirements, the
Company's debt-to-equity ratio and other significant financial ratios, the
market value of servicing rights and the Company's current and future earnings
objectives. Generally, it is the Company's strategy to build and retain its
servicing portfolio.
Loans are serviced from two facilities located in Simi Valley, California
and Plano, Texas (see "Properties"). The Company has developed systems that
enable it to service mortgage loans efficiently and therefore enhance earnings
from its investments in servicing rights. Some of these systems are highlighted
in the following paragraphs.
All data elements pertaining to each individual loan are entered into the
applicable automated loan system at the point of origination or acquisition.
These data elements are captured and automatically transferred 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 customer's account, thus
eliminating the need to refer to paper files and shortening the average length
of a customer 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
data base. Having identified the customer, 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 customers wherein the
customer can obtain current account status, history, answers to frequently asked
questions and a dictionary to help the customer understand industry terminology.
During Fiscal 1998, the Company converted from a quarterly statement to a
monthly statement for 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.
The Company's high speed payment processing equipment enables the Company to
deposit virtually all cash on the same day it is received, thereby maximizing
cash availability.
The collection department utilizes its collection management system in
conjunction with its predictive dialing system to maximize and track 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 which 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 Company believes that its loan servicing earnings are counter cyclical
to its loan production earnings. In general, the value of the Company's
servicing portfolio and the income generated therefrom improve as interest rates
increase and decline when interest rates fall. Generally, in an environment of
increasing interest rates, the rate of current and projected future prepayments
decreases, resulting in a decreased rate of amortization and impairment of
mortgage servicing rights, and a decrease in gain from servicing portfolio
hedging activities. Amortization and impairment, net of servicing hedge gain, is
deducted from loan administration income. An increase in interest rates also
generally causes loan production (particularly refinancings) to decline.
Generally, in an environment of declining interest rates, the rate of current
and projected future prepayments increases, resulting in an increased rate of
amortization and impairment of mortgage servicing rights. However, the Company's
servicing portfolio hedging activities generally generate a gain during periods
of declining interest rates. At the same time, the decline in interest rates
generally contributes to high levels of loan production (particularly
refinancings).
The following table sets forth certain information regarding the Company'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 28(29),
---------------------------------- -- -------------------------------------------------------------------------
Composition of Servicing 1998 1997 1996 1995 1994
Portfolio
----------- -- ------------ -- ----------- -- ----------- -- ------------
at Period End:
FHA-Insured Mortgage Loans $ 37,241.3 $ 30,686.3 $ $ $ 9,793.7
23,206.5 17,587.5
VA-Guaranteed Mortgage Loans 14,878.7 13,446.4 10,686.2 7,454.3 3,916.0
Conventional Mortgage Loans 127,344.0 112,685.4 102,417.0 87,998.2 70,915.2
Home Equity Loans 1,656.5 689.9 204.5 31.3 -
Sub-prime Loans 1,744.2 1,048.9 289.1 - -
----------- ------------ ----------- ----------- ------------
Total Servicing Portfolio $182,864.7 $158,556.9 $136,803.3 $113,071.3 $84,624.9
=========== ============ =========== =========== ------------
Beginning Servicing Portfolio $158,556.9 $136,803.3 $113,071.3 $ 84,624.9 $54,417.8
Add: Loan Production 48,771.7 37,810.8 34,583.7 27,866.2 52,458.9
Bulk Servicing and
Subservicing 3,761.6 2,808.1 6,428.5 17,888.1 3,514.9
Acquired
Less: Servicing Transferred (1) (110.6) (70.8) (53.5) (6,287.4) (8.1)
Runoff (2) (28,114.9) (18,794.5) (17,226.7) (11,020.5) (25,758.6)
=========== ============ =========== =========== ------------
Ending Servicing Portfolio $182,864.7 $158,556.9 $136,803.3 $113,071.3 $84,624.9
=========== ============ =========== =========== ------------
Delinquent Mortgage Loans and Pending
Foreclosures at Period End (3):
30 days 2.68% 2.26% 2.13% 1.80% 1.82%
60 days 0.58% 0.52 0.48 0.29 0.28
90 days or more 0.65% 0.66 0.59 0.42 0.39
----------- ----------- ------------ ----------- ------------
Total Delinquencies 3.91% 3.44% 3.20% 2.51% 2.49%
=========== =========== ============ =========== ------------
Foreclosures Pending 0.45% 0.71% 0.49% 0.29% 0.29%
----------- ----------- ------------ ----------- ------------
---------------------------------- -- ----------- -- ----------- -- ------------ -- ----------- -- ------------
(1) When servicing rights are sold from the servicing portfolio the Company
generally subservices such loans from the sales contract date to the
transfer date.
(2) Runoff refers to scheduled principal repayments on loans and
unscheduled prepayments (partial prepayments or total prepayments due
to refinancing, modifications, sale, condemnation or foreclosure).
(3) As a percentage of the total number of loans serviced excluding
subserviced loans.
At February 28, 1998, the Company's servicing portfolio of single-family
mortgage loans was stratified by interest rate as follows.
-- -------------------------- -- --------------------------------------------------------------------------------
(Dollar amounts in Total Portfolio at February 28, 1998
millions)
-- -------------------------- -- --------------------------------------------------------------------------------
Weighted
Interest Principal Percent Average MSR
Rate Balance of Total Maturity (Years) Balance
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
7% and under $ 33,823.2 18.5% 23.5 $ 687.1
7.01-8% 92,950.3 50.8% 25.8 1,910.3
8.01-9% 47,026.3 25.7% 26.6 892.6
9.01-10% 6,866.3 3.8% 25.6 100.6
over 10% 2,198.6 1.2% 22.8 21.4
=============== ============== ===================== ===============
$182,864.7 100.0% 25.5 $3,612.0
=============== ============== ===================== ===============
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
The weighted average interest rate of the single-family mortgage loans in
the Company's servicing portfolio at both February 28, 1998 and 1997, was 7.8%.
At February 28, 1998, 83% of the loans in the servicing portfolio bore interest
at fixed rates and 17% bore interest at adjustable rates. The weighted average
net service fee of the loans in the portfolio was 0.413% at February 28, 1998
and the weighted average interest rate of the fixed-rate loans in the servicing
portfolio was 7.8%.
The following table sets forth the geographic distribution of the Company's
servicing portfolio of single-family mortgage loans, including loans and
securities held for sale and loans subserviced for others, as of February 28,
1998.
--------------------------------------------------------- -- ----------------------------- --------------------
Percentage of Principal
Balance Serviced
--------------------------------------------------------- -- ----------------------------- --------------------
California 34.8%
Florida 4.7%
Texas 4.6%
Washington 3.4%
Colorado 3.2%
Illinois 3.2%
New York 3.0%
Arizona 2.8%
Virginia 2.6%
Ohio 2.6%
Maryland 2.5%
Massachusetts 2.4%
Michigan 2.4%
Georgia 2.4%
New Jersey 2.4%
Other (1) 23.0%
==============
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 loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently utilizes commercial paper supported by CHL's revolving credit
facility, medium-term notes, mortgage repurchase agreements, subordinated notes,
pre-sale funding facilities, an optional cash purchase feature in the dividend
reinvestment plan, redeemable capital trust pass-through securities and cash
flow from operations. The Company estimates that it had available committed and
uncommitted credit facilities aggregating approximately $7.3 billion at February
28, 1998. In the past, the Company has utilized whole loan repurchase
agreements, servicing-secured bank facilities, private placements of unsecured
notes and other financings, direct borrowings from CHL's revolving credit
facility and public offerings of common and preferred stock. For further
information on the material terms of the borrowings utilized by the Company to
finance its inventory of mortgage loans and MBS and its investment in servicing
rights, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources." The Company continues to
investigate and pursue alternative and supplementary methods to finance its
operations through the public and private capital markets. These may include
such methods as mortgage loan sale transactions designed to expand the Company's
financial capacity and reduce its cost of capital and the securitization of
servicing income cash flows.
Seasonality
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
C. Information Technology
The Company employs technology wherever applicable 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 advanced messaging systems such as Lotus Notes, interactive voice
response and call management systems, as well as integrated client server
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
CLUES increases underwriters' productivity, reduces costs and provides greater
consistency to the underwriting process. Other systems currently in use by the
production Divisions are the EDGE (primarily used by the Consumer Markets and
Wholesale Lending Divisions) and GEMS (primarily used by the Correspondent
Lending Division) systems, which are loan origination and FSLI systems that are
designed to reduce the time and cost associated with the loan application and
funding process. These front-end systems were internally developed for the
Company's exclusive use and are integrated with the Company's loan servicing,
sales, accounting, treasury and other systems. The Company believes that both
the EDGE and GEMS systems improve the quality of its loan products and customer
service by: (i) reducing the risk of deficient loans; (ii) facilitating accurate
and customized pricing; (iii) promptly generating loan documents with the use of
laser printers; (iv) providing for electronic communication with credit bureaus,
financial institutions, HUD and other third parties; and (v) generally
minimizing manual data input.
Another system developed and implemented by the Company is the MORTGAGE LOAN
COUNSELOR. The MORTGAGE LOAN COUNSELOR is designed for telemarketing and
production branches and is currently being used by the telemarketing unit in
conjunction with its Customer Contact Management System ("CCMS"). (See
discussion in the following paragraph.) MORTGAGE LOAN COUNSELOR provides the
telemarketing unit the ability to: (i) pre-qualify a prospective applicant; (ii)
provide "what if" scenarios to help find the appropriate loan product; (iii)
obtain on-line price quotes; (iv) take applications; (v) request credit reports
electronically through LandSafe, Inc.; (vi) issue a LOCK 'N SHOP (R)
certificate; and (vii) transmit a loan pre-application to the production units
for processing.
CCMS is a telemarketing application designed to provide enterprise-wide
information on both current and prospective customers. CCMS helps the production
divisions identify prospective customers to solicit for specific products or
services and obtain the results of any solicitation as well as facilitate
customer contact management. Management believes that CCMS will provide the
Company the opportunity to (i) reduce the loss of customers who prepay their
loans and (ii) obtain new loans from other sources and generate additional
revenue by cross-selling other products and services.
The Company also participates on the Internet to enhance business partner
relationships and to provide loan origination services directly to the consumer.
The Company has a public site on the World Wide Web from which information as to
product offerings, as well as prequalification applications, can be obtained. In
addition, a similar 'private site' is available for business partners such as
correspondent lenders, realtors, brokers and builders to view pricing and
product information, as well as loan status. The Company believes that the
Internet provides a unique medium to deliver mortgage services at a cost
significantly lower than that incurred in conventional marketing methods.
D. Countrywide Asset Management Corporation
On July 1, 1997, the Company and INMC Mortgage Holdings, Inc. (formerly CWM
Mortgage Holdings, Inc.) ("INMC") concluded the restructuring of their business
relationship. In substance, INMC acquired the assets, operations and employees
of its former manager, Countrywide Asset Management Corporation ("CAMC"),
formerly a wholly-owned subsidiary of the Company. INMC will no longer pay
management fees to CAMC. In return, the Company received 3,440,800 newly issued
common shares of INMC. These shares were restricted at issuance for up to a
period of three years. The transaction was structured as a merger of CAMC with
and into INMC.
E. Other Operations
Through various other subsidiaries, the Company conducts business in a
number of areas related to the mortgage banking business. The activities of
select subsidiaries are described in the following paragraphs.
Countrywide Securities Corporation ("CSC") is a securities broker-dealer and
a member of the National Association of Securities Dealers, Inc. and the
Securities Investor Protection Corporation. CSC trades securities, including MBS
and other mortgage-related assets, with broker-dealers and institutional
investors.
Countrywide Agency, Inc. acts as an agent for the sale of insurance, including
homeowners, fire, flood, earthquake, auto, annuities, home warranty, life and
disability to CHL's mortgagors and others.
CTC Foreclosure Services Corporation serves as trustee under deeds of trust
in connection with foreclosures on loans in the Company's servicing portfolio in
California and certain other states.
Countrywide Servicing Exchange ("CSE") is a national servicing brokerage and
consulting firm. CSE acts as an agent facilitating transactions between buyers
and sellers of bulk servicing contracts.
LandSafe, Inc. and its subsidiaries act as a title insurance agent and a
provider of escrow services, appraisal and credit reporting services. Landsafe,
Inc. offers title insurance commitments and policies, settlement services and
property profiles to realtors, builders, consumers, mortgage brokers and other
financial institutions. Appraisal services are provided to consumers, mortgage
brokers and other financial institutions through a network of appraisers. Credit
reporting services are also provided to the Company and its subsidiaries.
Two of the Company's subsidiaries, Charter Reinsurance Corporation ("CRC")
and Second Charter Reinsurance Corporation ("SCRC"), partially reinsure loans
originated by the Company that are insured by mortgage insurance companies with
which CRC and SCRC have entered into a reinsurance agreement. CRC and SCRC share
in the premiums collected and losses incurred by the mortgage insurance company.
On October 1, 1997 CRC was merged into SCRC.
Countrywide Financial Services, Inc. ("CFSI") (formerly Leshner Financial
Services, Inc.) operates as a fund manager and service provider for unaffiliated
mutual funds, broker-dealers, investment advisors and fund managers. CFSI
currently has approximately $1.4 billion in funds under management and services
accounts aggregating over $10.9 billion for other fund management companies.
Countrywide Tax Services Corporation ("CTSC") provides tax services for CHL
mortgagors. CTSC monitors the payment of real estate taxes and pays property tax
bills from mortgagors' escrow accounts.
F. Industry Segments
Information regarding industry segments appears in the Notes to the
Consolidated Financial Statements, and is incorporated by this reference.
G. Regulation
The Company's mortgage banking business is subject to the rules and
regulations of, and examination by, HUD, FHA, VA, Fannie Mae, Freddie Mac,
Ginnie Mae and state regulatory authorities with respect to originating,
processing, selling and servicing mortgage loans. Those rules and regulations,
among other things, impose licensing obligations on the Company, establish
standards for originating and servicing mortgage loans, prohibit discrimination,
provide for inspections and appraisals of property, require credit reports on
prospective borrowers and, in some cases, fix maximum interest rates, fees and
other loan amounts. Moreover, FHA lenders such as the Company are required
annually to submit to the Federal Housing Commissioner audited financial
statements, and Ginnie Mae requires the maintenance of specified net worth
levels (which vary depending on the amount of Ginnie Mae securities issued by
the Company). The Company's affairs are also subject to examination by the
Federal Housing Commissioner at all times to assure compliance with the FHA
regulations, policies and procedures. In addition to other federal laws,
mortgage origination activities are subject to the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act, Home Mortgage Disclosure Act and the Real Estate
Settlement Procedures Act, and the regulations promulgated thereunder. These
laws prohibit discrimination, require the disclosure of certain basic
information to mortgagors concerning credit and settlement costs, limit payment
for settlement services to the reasonable value of the services rendered and
require the maintenance and disclosure of information regarding the disposition
of mortgage applications based on race, gender, geographical distribution and
income level.
Securities broker-dealer and mutual fund operations are subject to federal
and state securities laws, as well as the rules of both the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.
Insurance agency and title insurance operations are subject to insurance
laws of each of the states in which the Company conducts such operations.
H. Competition
The mortgage banking industry is highly competitive and fragmented. The
Company competes with other financial intermediaries (such as mortgage bankers,
commercial banks, savings and loan associations, credit unions and insurance
companies) and mortgage banking subsidiaries or divisions of diversified
companies. Generally, the Company competes by offering products with competitive
features, by emphasizing the quality of its service and by pricing its range of
products at competitive rates.
In recent years, the aggregate share of the United States market for
residential mortgage loans that is served by mortgage bankers has risen,
principally due to the decline in the savings and loan industry. According to
industry statistics, mortgage bankers' aggregate share of this market increased
from approximately 19% during calendar year 1989 to approximately 52% during
calendar year 1997. The Company believes that it has benefited from this trend.
I. Employees
At February 28, 1998, the Company employed 7,983 persons, 3,751 of whom were
engaged in production activities, 1,833 were engaged in loan administration
activities and 2,399 were engaged in other activities. None of these employees
is represented by a collective bargaining agent.
J. Year 2000 Compliance
An issue affecting the Company and most other companies is whether computer
systems and applications will recognize and process the Year 2000 and beyond.
The nature of the Company's business and operations make it reliant on
computerized information. The inability of the Company or its business partners
to be Year 2000 compliant could have a material adverse impact on the Company
and its ability to process customer transactions or provide customer services.
The Company is currently in various stages of the assessment, remediation
and internal testing of the systems affected by this issue. Management believes
it is devoting the necessary resources to timely address all Year 2000 issues
over which it has control and all critical systems are scheduled to be Year 2000
compliant by February 28, 1999. The Company is also monitoring the adequacy of
the processes and progress of its business partners. However, there can be no
assurance that the Company's business partners, vendors and clients will timely
resolve their own Year 2000 compliance issues or that any failure would not have
a material adverse effect on the Company's operations and financial condition.
The Company has and will continue to make investments to ensure compliance
with issues associated with the change of the millennium. These costs are being
expensed by the Company during the period in which they are incurred. The
financial impact to the Company of implementing the systems changes necessary to
become Year 2000 compliant has not been and is not anticipated to be material to
its financial position or results of operations in any given year. However, the
Company's expectations about future costs associated with the Year 2000 are
subject to uncertainties that could cause the actual results to differ
materially from the Company's expectations. Factors that could influence the
amount and timing of future costs include the success of the Company in
identifying systems and programs that are not Year 2000 compliant, the nature
and amount of programming required to upgrade or replace each of the affected
programs, the availability, rate and magnitude of related labor and consulting
costs and the success of the Company's business partners, vendors and clients in
addressing the Year 2000 issue.
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company and its
subsidiaries are currently located at 4500 Park Granada, Calabasas, California,
consist of approximately 225,000 square feet and are situated on 20.1 acres of
land. This facility was acquired by the Company in 1996. The Company also leases
a 64,000 square foot facility in Calabasas, California, which primarily houses
part of the Company's data processing operations. For potential expansion
purposes, the Company has leased additional vacant land in Calabasas with an
option to purchase that land. The administrative offices of the Company's loan
production divisions are located in the Calabasas headquarters and in leased or
subleased space at 155 North Lake Avenue, 35 North Lake Avenue and 55 South Lake
Avenue in Pasadena, California, consisting of 290,000 square feet. The principal
leases covering such space expire in the year 2011. The Company also 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, and a 253,000 square
foot office building situated on 21.5 acres in Plano, Texas, which houses
additional loan servicing, loan production and data processing operations. The
Plano facility provides the Company with a business recovery site located
outside the State of California. Additional space located in Simi Valley,
California and Dallas, Texas is currently under lease for loan servicing, loan
production and data processing operations. These leases provide an additional
308,000 square feet on varying terms. In order to accommodate its expanding loan
servicing and related business operations, the Company purchased 17 acres of
vacant land adjacent to its Plano facility. The Company is currently in escrow
to purchase the 14 acre parcel adjacent to its Simi Valley facility and plans to
convert the existing structure on that parcel to a 200,000 square foot office
building.
ITEM 3. LEGAL PROCEEDINGS
On September 29, 1997, the United States District Court adopted the
recommendation of a magistrate denying class certification in a lawsuit which
was filed against CHL and a mortgage broker by Jeff and Kathy Briggs as a
purported class action. The effect of the ruling is that the lawsuit will not
proceed as a class action and will be limited to the Briggs' own claims. The
Briggs are seeking reconsideration of the Court's ruling. The suit, entitled
Briggs v. Countrywide, et. al. and filed in the Northern Division of the United
States District Court for the Middle District of Alabama, alleges that in
connection with residential mortgage loan closings, CHL made certain payments to
mortgage brokers in violation of the Real Estate Settlement Procedures Act and
induced mortgage brokers to breach their alleged fiduciary duties to their
customers. The plaintiffs seek unspecified compensatory and punitive damages
plus, as to certain claims, treble damages. In early 1998, two additional
purported class action lawsuits were filed making essentially the same
allegations about broker compensation as were made in the Briggs case. William
C. Elliott et. al v. Countrywide Home Loans, Inc. was filed on February 18, 1998
in the United States District Court for Northern District of Mississippi; and
Joseph W. Gann, Sr., et. al v. America's Wholesale Lender was filed on February
14, 1998 in the United States District Court for the Middle District of Alabama.
CHL's management believes that its compensation programs to mortgage brokers
comply with applicable laws and long standing industry practice, and that it has
meritorious defenses to these actions. CHL intends to defend vigorously against
these actions and believes that the ultimate resolution of such claims will not
have a material adverse effect on the Company's financial position or results of
operations.
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. Although
it is difficult to predict the ultimate outcome of these proceedings, management
believes, based on discussions with counsel, that any ultimate liability will
not materially affect the consolidated financial position or results of
operations of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange ("NYSE") and
the Pacific Stock Exchange (Symbol: CCR). The following table sets forth the
high and low sales prices (as reported by the NYSE) for the Company's common
stock and the amount of cash dividends declared for the fiscal years ended
February 28, 1998 and 1997.
----- --------------- ------------------------- --- ------------------------- --- --------------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1998 Fiscal 1997
----- --------------- ------------ ------------ --- ------------ ------------ --- --------------------------------
Quarter High Low High Low Cash Dividends Declared
----- --------------- ------------ ------------ --- ------------ ------------ --- --------------------------------
First $29.50 $24.38 $23.88 $19.75 $0.08 $0.08
Second 35.25 26.75 25.13 20.75 0.08 0.08
Third 41.88 31.50 30.25 23.25 0.08 0.08
Fourth 48.50 39.25 31.13 26.38 0.08 0.08
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- ---------------
The Company has declared and paid cash dividends on its common stock
quarterly since 1979, except that no cash dividend was declared in the fiscal
quarter ended February 28, 1982. For the fiscal years ended February 28, 1998
and 1997, the Company declared quarterly cash dividends aggregating $0.32 per
share. On March 18, 1998, the Company declared a quarterly cash dividend of
$0.08 per common share, paid April 30, 1998.
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 the
revolving credit facility). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
As of May 26, 1998, there were 2,466 shareholders of record of the Company's
common stock, with 110,608,494 common shares outstanding.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
----------------------------------------------- -----------------------------------------------------------------
Years ended February 28(29),
(Dollar amounts in thousands, except per 1998 1997 1996 1995 1994
share data)
----------------------------------------------- ------------ ------------ ------------ ------------- ------------
Selected Statement of Earnings Data (1):
Revenues:
Loan origination fees $301,389 $193,079 $199,724 $203,426 $379,533
Gain (loss) on sale of loans 417,427 247,450 92,341 (41,342) 88,212
------------ ------------ ------------ ------------- ------------
Loan production revenue 718,816 440,529 292,065 162,084 467,745
Interest earned 440,058 350,263 308,449 249,560 300,999
Interest charges (424,341) (316,705) (281,573) (205,464) (219,898)
------------ ------------ ------------ ------------- ------------
Net interest income 15,717 33,558 26,876 44,096 81,101
Loan servicing income 907,674 773,715 620,835 460,351 326,695
Amortization and impairment/recovery of
mortgage servicing rights (561,804) (101,380) (342,811) (95,768) (242,177)
Servicing hedge benefit (expense) 232,959 (125,306) 200,135 (40,030) 73,400
Less write-off of servicing hedge - - - (25,600) -
------------ ------------ ------------ ------------- ------------
Net loan administration income 578,829 547,029 478,159 298,953 157,918
138 91,346
Commissions, fees and other income 138,217 91,346 63,642 40,650 48,816
Gain on sale of subsidiary 57,381 - - - -
Gain on sale of servicing - - - 56,880 -
------------ ------------ ------------ ------------- ------------
Total revenues 1,508,960 1,112,462 860,742 602,663 755,580
------------ ------------ ------------ ------------- ------------
Expenses:
Salaries and related expenses 424,321 286,884 229,668 199,061 227,702
Occupancy and other office expenses 184,338 129,877 106,298 102,193 101,691
Guarantee fees 172,692 159,360 121,197 85,831 57,576
Marketing expenses 42,320 34,255 27,115 23,217 26,030
Other operating expenses 119,743 80,188 50,264 37,016 43,481
Branch and administrative office - - - 8,000 -
consolidation costs
------------ ------------ ------------ ------------- ------------
Total expenses 943,414 690,564 534,542 455,318 456,480
------------ ------------ ------------ ------------- ------------
421,898
Earnings before income taxes 565,546 421,898 326,200 147,345 299,100
Provision for income taxes 220,563 164,540 130,480 58,938 119,640
------------ ------------ ------------ ------------- ------------
============ ============ ============ ============= ------------
Net earnings $344,983 $257,358 $195,720 $88,407 $179,460
=============================================== ============ ============ ============ ============= ------------
----------------------------------------------- ============ ============ ============ ============= ------------
Per Share Data (2):
Basic $3.21 $2.50 $1.99 $0.97 $2.02
Diluted $3.09 $2.44 $1.95 $0.96 $1.97
Cash dividends per share $0.32 $0.32 $0.32 $0.32 $0.29
Weighted average shares outstanding:
Basic 107,491,000 103,112,000 98,352,000 91,240,000 88,792,000
Diluted 111,526,000 105,677,000 100,270,000 92,087,000 90,501,000
=============================================== ============ ============ ============ ============= ------------
----------------------------------------------- ============ ============ ============ ============= ------------
Selected Balance Sheet Data at End of Period
(1):
Total assets $12,219,181 $7,689,090 $8,321,652 $5,589,138 $5,602,884
Short-term debt $4,043,774 $2,567,420 $4,423,738 $2,664,006 $3,111,945
Long-term debt $4,195,732 $2,367,661 $1,911,800 $1,499,306 $1,197,096
Common shareholders' equity $2,087,943 $1,611,531 $1,319,755 $ 942,558 $ 880,137
=============================================== ============ ============ ============ ============= ------------
----------------------------------------------- ============ ============ ============ ============= ------------
Operating Data (dollar amounts in millions):
Loan servicing portfolio (3) $182,889 $158,585 $136,835 $113,111 $84,678
Volume of loans originated $48,772 $ 37,811 $ 34,584 $ 27,866 $52,459
=============================================== ============ ============ ============ ============= ------------
(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) 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 strategy is concentrated on three components of its business:
loan production, loan servicing and businesses ancillary to mortgage lending.
See "Business--Mortgage Banking Operations" and "Business--Other Operations."
The Company intends to continue its efforts to increase its market share of, and
realize increased income from, its loan production. In addition, the Company is
engaged in building its loan servicing portfolio because of the returns it can
earn from such investment. 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. Finally, the Company is involved in business
activities complementary to its mortgage banking business. These services
include acting as agent in the sale of insurance, including homeowners, fire,
flood, earthquake, life and disability, providing various title insurance agent
and escrow services, offering appraisal and credit reporting services, brokering
servicing contracts and trading mortgage-backed securities ("MBS") and other
mortgage-related assets.
The Company's results of operations historically have been primarily
influenced by: (i) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of the
various segments of the economy and the demographics of the Company's lending
markets; (ii) the direction of interest rates; and (iii) the relationship
between mortgage interest rates and the cost of funds.
The fiscal year ended February 29, 1996 ("Fiscal 1996") was a record year in
profits for the Company. Loan production increased to $34.6 billion from $27.9
billion in the fiscal year ended February 28, 1995 ("Fiscal 1995"). The Company
attributed the increase to: (i) a decline in mortgage interest rates during most
of the year; (ii) the implementation of a national advertising campaign aimed at
developing a brand identity for Countrywide and reaching the consumer directly;
and (iii) the opening of two telemarketing centers which, through the use of
proprietary systems, provide product information specific to the potential
borrower's needs and allow a telemarketer to take a pre-application and pass it
to a branch office for processing. For calendar 1995, the Company ranked second
in the amount of single-family mortgage originations nationwide. In Fiscal 1996,
the Company's market share increased to approximately 5% of the estimated $650
billion single-family mortgage origination market, up from approximately 4% of
the estimated $660 billion market in Fiscal 1995. The interest rate environment
that prevailed during Fiscal 1996 was favorable for fixed-rate mortgages.
Additionally, the percentage of loan production attributable to refinances
increased from 30% in Fiscal 1995 to 34% in Fiscal 1996, as borrowers took
advantage of declining interest rates. During Fiscal 1996, the Company's loan
servicing portfolio grew to $136.8 billion from $113.1 billion at February 28,
1995. This growth resulted from the Company's loan production during the year
and bulk servicing acquisitions amounting to $5.2 billion, partially offset by
prepayments, partial prepayments and scheduled amortization of $17.2 billion.
The prepayment rate in the servicing portfolio was 12%, up from the prior year
due to the decreasing mortgage interest rate environment in Fiscal 1996.
However, this rate was lower than the 35% prepayment rate in the fiscal year
ended February 28, 1994 ("Fiscal 1994") because a substantial number of loans in
the servicing portfolio were produced in Fiscal 1994 and bear interest at rates
lower than the lowest interest rate level reached during Fiscal 1996.
The fiscal year ended February 28, 1997 ("Fiscal 1997") was a period in
which interest rates were somewhat volatile, generally higher than during the
previous fiscal year but at levels that remained conducive to certain refinance
and home purchase activity. The Company's earnings increased 31% from Fiscal
1996. Loan production increased to $37.8 billion from $34.6 billion in the prior
year. The Company attributed the increase in production to: (i) the generally
strong economy and home purchase market; (ii) the continued implementation of a
national advertising campaign, which was started in Fiscal 1996, aimed at
developing a brand identity for Countrywide and reaching the consumer directly;
and (iii) the integration of home equity and sub-prime lending into the
Company's product offerings and production capacity. For calendar 1996, the
Company ranked second in the amount of single-family mortgage originations
nationwide. The Company's market share for both Fiscal 1997 and 1996 was
approximately 5% of the estimated $800 billion and $650 billion, respectively,
single-family mortgage origination market. During Fiscal 1997, the Company's
loan servicing portfolio grew to $158.6 billion from $136.8 billion at the end
of Fiscal 1996. This growth resulted from the Company's loan production during
the year and bulk servicing acquisitions amounting to $1.4 billion, partially
offset by prepayments, partial prepayments and scheduled amortization of $18.8
billion. The prepayment rate in the servicing portfolio was 11%, slightly down
from the prior year due to the higher mortgage interest rate environment in
Fiscal 1997.
The fiscal year ended February 28, 1998 ("Fiscal 1998") was a record year
from ongoing operations in revenues and net earnings for the Company. Loan
production increased to $48.8 billion 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, which was started in Fiscal
1996, aimed at developing a brand identity for Countrywide and reaching the
consumer directly; and (iv) increased 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. The Company's market share for both Fiscal 1998 and Fiscal 1997 was
approximately 5% of the estimated $850 billion and $800 billion, respectively,
single-family mortgage origination market. During Fiscal 1998, the Company's
loan servicing portfolio grew to $182.9 billion 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, partially
offset by prepayments, partial prepayments and scheduled amortization of $24.3
billion. The prepayment rate in the servicing portfolio was 15%, up from the
prior year due to the lower mortgage interest rate environment in Fiscal 1998.
On July 1, 1997, the Company and INMC Mortgage Holdings, Inc. (formerly CWM
Mortgage Holdings, Inc.) ("INMC") concluded the restructuring of their business
relationship. In substance, INMC acquired the assets, operations and employees
of its former manager CAMC, formerly a wholly-owned subsidiary of the Company.
INMC no longer pays management fees to CAMC. In return, the Company received
3,440,800 newly issued common shares of INMC. These shares were restricted at
issuance for up to a period of three years.
The transaction was structured as a merger of CAMC with and into INMC.
RESULTS OF OPERATIONS
Fiscal 1998 Compared with Fiscal 1997
Revenues from ongoing operations for Fiscal 1998 increased 30% to $1,451.6
million from $1,112.5 million for Fiscal 1997. Net earnings from ongoing
operations increased 20% to $ 310.0 million for Fiscal 1998 from $257.4 million
for Fiscal 1997. Both revenues and net earnings from ongoing operations for
Fiscal 1998 exclude a nonrecurring pre-tax gain of $57.4 million on the sale of
a subsidiary. The increase in revenues and net earnings from ongoing operations
for Fiscal 1998 compared to Fiscal 1997 was primarily attributable to a larger
gain on sale of loans resulting from greater sales of higher-margin home equity
loans and sub-prime loans in Fiscal 1998 at significantly higher margins than
prime credit quality first mortgages, improved pricing margins on prime credit
quality first mortgages, an increase in the size of the Company's servicing
portfolio, higher loan production volume and an increase in the income of the
non-mortgage banking subsidiaries. These positive factors were partially offset
by an increase in amortization of the servicing asset and an increase in
expenses in Fiscal 1998 over Fiscal 1997.
The total volume of loans produced increased 29% to $48.8 billion for Fiscal
1998 from $37.8 billion for Fiscal 1997. The increase in loan production was
primarily due to generally lower interest rates that prevailed during Fiscal
1998 compared to Fiscal 1997, as well as to the continuing expansion of the
Company's Consumer Markets and Wholesale Lending divisions, including the new
retail sub-prime branches. Refinancings totaled $19.8 billion, or 41% of total
fundings, for Fiscal 1998, as compared to $12.3 billion, or 33% of total
fundings, for Fiscal 1997. Fixed-rate mortgage loan production totaled $37.5
billion, or 77% of total fundings, for Fiscal 1998, as compared to $27.9
billion, or 74% of total fundings, for Fiscal 1997.
Total loan volume in the Company's production Divisions is summarized below.
- - -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Loan Production
- - -------------------------------------------- ------------------------------------ --------
Fiscal 1998 Fiscal 1997
------------- -------------
Consumer Markets Division $13,339 $ 8,071
Wholesale Lending Division 15,731 8,430
Correspondent Lending Division 19,562 21,310
Full Spectrum Lending, Inc. 140 -
============= =============
Total Loan Volume $48,772 $37,811
============= =============
- - -------------------------------------------- ------------- -------- ------------- --------
The factors which affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's product
offerings, the level of mortgage lending activity in each Division's market and
the success of each Division's sales and marketing efforts.
Included in the Company's total volume of loans produced is $1.5 billion of
home equity loans funded in Fiscal 1998 and $613 million funded in Fiscal 1997.
Sub-prime loan production, which is also included in the Company's total
production volume, was $1.6 billion in Fiscal 1998 and $864 million in Fiscal
1997.
At February 28, 1998 and 1997, the Company's pipeline of loans in process
was $12.6 billion and $4.7 billion, respectively. Historically, approximately
43% to 77% of the pipeline of loans in process has funded. In addition, at
February 28, 1998, the Company had committed to make loans in the amount of $1.4
billion, subject to property identification and approval of the loans (the "LOCK
'N SHOP (R) Pipeline"). At February 28, 1997, the LOCK 'N SHOP (R) Pipeline was
$1.8 billion. In Fiscal 1998 and Fiscal 1997, the Company received 714,668 and
499,861 new loan applications, respectively, at an average daily rate of $306
million and $206 million, respectively. The factors that affect the percentage
of applications received and funded during a given time period include the
movement and direction of interest rates, the average length of loan commitments
issued, the creditworthiness of applicants, the production Divisions' loan
processing efficiency and loan pricing decisions.
Loan origination fees increased in Fiscal 1998 as compared to Fiscal 1997
due to higher production. The percentage increase in loan origination fees was
more than the increase in production. This is primarily because production by
the Consumer Markets and Wholesale Lending Divisions (which, due to their higher
cost structure, charge higher origination fees per dollar loaned) comprised a
greater percentage of total production in Fiscal 1998 than in Fiscal 1997. Gain
on sale of loans improved in Fiscal 1998 as compared to Fiscal 1997 primarily
due to greater sales during Fiscal 1998 of higher-margin home equity and
sub-prime loans and improved pricing margins on prime credit quality first
mortgages. The sale of home equity loans contributed $62 million and $20 million
to gain on sale of loans in Fiscal 1998 and Fiscal 1997, respectively. Sub-prime
loans contributed $70 million to the gain on sale of loans in Fiscal 1998 and
$72 million in Fiscal 1997. In general, loan origination fees and gain (loss) on
sale of loans are affected by numerous factors including the volume and mix of
loans produced and sold, loan pricing decisions, interest rate volatility and
the general direction of interest rates.
Net interest income (interest earned net of interest charges) decreased to
$15.7 million for Fiscal 1998 from $33.6 million for Fiscal 1997. Net interest
income is principally a function of: (i) net interest income earned from the
Company's mortgage loan warehouse ($74.5 million and $61.6 million for Fiscal
1998 and Fiscal 1997, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($219.7 million and $148.3 million for
Fiscal 1998 and Fiscal 1997, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($151.0
million and $116.9 million for Fiscal 1998 and Fiscal 1997, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its warehouse. The increase in net interest income from the mortgage
loan warehouse was primarily attributed to higher production levels partially
resulting from aggregating home equity and sub-prime loans (which generally bear
interest at higher rates than prime credit quality first mortgages) prior to
their sale or securitization. The increase in interest expense on the investment
in servicing rights resulted primarily from a larger servicing portfolio and an
increase in the payments of interest to certain investors pursuant to customary
servicing arrangements with regard to paid-off loans in excess of the interest
earned on these loans through their respective payoff dates ("Interest Costs
Incurred on Payoffs"). The increase in net interest income earned from the
custodial balances was related to an increase in the average custodial balances
(caused by growth of the servicing portfolio and an increase in the amount of
prepayments), combined with an increase in the earnings rate from Fiscal 1997 to
Fiscal 1998.
During Fiscal 1998, loan administration income was positively affected by
the continued growth of the loan servicing portfolio. At February 28, 1998, the
Company serviced $182.9 billion of loans (including $6.7 billion of loans
subserviced for others), compared to $158.6 billion (including $3.9 billion of
loans subserviced for others) at February 28, 1997, a 15% increase. The growth
in the Company's servicing portfolio during Fiscal 1998 was the result of loan
production volume and the acquisition of bulk servicing rights, partially offset
by prepayments, partial prepayments and scheduled amortization of mortgage
loans. The weighted average interest rate of the mortgage loans in the Company's
servicing portfolio at both February 28, 1998 and 1997 was 7.8%. It is the
Company's strategy to build and retain its servicing portfolio because of the
returns the Company can earn from such investment and because the Company
believes that servicing income is counter cyclical to loan production income.
See "Prospective Trends - Market Factors."
During Fiscal 1998, the prepayment rate of the Company's servicing portfolio
was 15%, compared to 11% for Fiscal 1997. In general, the prepayment rate is
affected by the level of refinance activity, which in turn is driven by the
relative level of mortgage interest rates, and activity in the home purchase
market. The increase in the prepayment rate from Fiscal 1997 to Fiscal 1998 was
primarily attributable to the increase in refinance activity caused by lower
interest rates during Fiscal 1998 than during Fiscal 1997.
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. In addition, to mitigate the effect on
earnings of impairment that may result from increased current and projected
future prepayment activity, the Company acquires financial instruments,
including derivative contracts, that increase in aggregate value when interest
rates decline (the "Servicing Hedge"). These financial instruments include
options on interest rate futures and MBS, interest rate futures, interest rate
floors, interest rate swaps (with the Company's maximum payment capped) ("Capped
Swaps"), options on interest rate swaps ("Swaptions"), interest rate caps,
principal-only ("P/O") swaps, certain tranches of collateralized mortgage
obligations ("CMOs") and options on callable pass-through certificates ("options
on CPC").
With the Capped Swaps, the Company receives and pays interest on a specified
notional amount. The rate received is fixed; the rate paid is adjustable, is
indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR")
and has a specified maximum or "cap".
With Swaps, the Company receives and pays interest on a specified notional
amount. The rate received is fixed; the rate paid is adjustable and is indexed
to LIBOR.
With the Swaptions, the Company has the option to enter into a
receive-fixed, pay-floating interest rate swap at a future date or to settle the
transaction for cash.
With P/O swaps, the value is determined by changes in the value of the
referenced P/O security. The payments received by the Company under the P/O
swaps relate to the cash flows of the referenced P/O security. The payments made
by the Company are based upon a notional amount tied to the remaining balance of
the referenced P/O security multiplied by a floating rate indexed to LIBOR.
The CMOs, which consist primarily of P/O securities, have been purchased at
deep discounts to their par values. As interest rates decrease, prepayments on
the collateral underlying the CMOs should increase. This should result in a
decline in the average lives of the P/O securities and a corresponding increase
in the present values of their cash flows. Conversely, as interest rates
increase, prepayments on the collateral underlying the CMOs should decrease.
These changes should result in an increase in the average lives of the P/O
securities and a decrease in the present values of their cash flows.
An option on CPC gives the holder the right to call a mortgage-backed
security at par and receive the remaining cash flows from the particular pool.
This option has a one year lockout, meaning it cannot be exercised until the end
of the first year. After the lockout period, the option can be exercised at
anytime.
The Servicing Hedge is designed to protect the value of the investment in
mortgage servicing rights ("MSRs") from the effects of increased prepayment
activity that generally results from declining interest rates. To the extent
that interest rates increase, the value of the MSRs increases while the value of
the hedge instruments declines. With respect to the floors, options, caps,
Swaptions, options on CPC and CMOs, the Company is not exposed to loss beyond
its initial outlay to acquire the hedge instruments. The Company's exposure to
loss on futures is related to changes in the Eurodollar rate over the life of
the contract. The Company estimates that its maximum exposure to loss over the
contractual term is $18.0 million. With respect to the Capped Swaps contracts
entered into by the Company as of February 28, 1998, the Company estimates that
its maximum exposure to loss over the contractual term is $24.5 million. With
respect to the Swap contracts entered into by the Company as of February 28,
1998, the Company estimates that its maximum exposure to loss over the
contractual term is $153.0 million. In Fiscal 1998, the Company recognized a net
benefit of $233.0 million from its Servicing Hedge. The net benefit included
unrealized net gains of $182.2 million and realized gains of $50.8 million from
the sale of various financial instruments that comprise the Servicing Hedge and
premium amortization. In Fiscal 1997, the Company recognized a net expense of
$125.3 million from its Servicing Hedge. The net expense included unrealized
losses of $56.9 million and net realized losses of $68.4 million from the sale
of various financial instruments that comprise the Servicing Hedge and premium
amortization. There can be no assurance that the Servicing Hedge will generate
gains in the future, or if gains are generated, that they will fully offset
impairment of the MSRs.
The Company recorded amortization and net impairment of its MSRs for Fiscal
1998 totaling $561.8 million (consisting of amortization amounting to $300.3
million and impairment of $261.5 million), compared to $101.4 million of
amortization and impairment (consisting of amortization amounting to $220.1
million and recovery of previous impairment of $118.7 million) for Fiscal 1997.
The factors affecting the amount of amortization and impairment or recovery of
the MSRs recorded in an accounting period include the level of prepayments
during the period, the change in estimated future prepayments and the amount of
Servicing Hedge gains or losses.
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 of the servicing portfolios acquired.
During Fiscal 1997, the Company acquired bulk servicing rights for loans with
principal balances aggregating $1.4 billion at a price of 1.60% of the aggregate
outstanding principal balances of the servicing portfolios acquired.
Salaries and related expenses are summarized below for Fiscal 1998 and Fiscal
1997.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1998
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $134,776 $44,911 $70,305 $24,512 $274,504
Incentive Bonus 76,854 1,196 16,570 10,361 104,981
Payroll Taxes and Benefits 22,956 8,476 10,581 2,823 44,836
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $234,586 $54,583 $97,456 $37,696 $424,321
============ ============= ============= ============= ------------
Average Number of 3,132 1,630 1,370 434 6,566
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1997
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 91,054 $41,806 $54,244 $12,852 $199,956
Incentive Bonus 34,501 763 14,820 6,799 56,883
Payroll Taxes and Benefits 15,105 7,747 5,389 1,804 30,045
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $140,660 $50,316 $74,453 $21,455 $286,884
============ ============= ============= ============= ------------
Average Number of 2,303 1,555 1,107 251 5,216
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 1998 reflecting the Company's
strategy of expanding and enhancing its Consumer Markets and Wholesale branch
networks, including new retail sub-prime branches. In addition, a larger
servicing portfolio and growth in the Company's non-mortgage banking
subsidiaries also contributed to the increase. Incentive bonuses earned during
Fiscal 1998 increased primarily due to higher production and a change in
production mix.
Occupancy and other office expenses for Fiscal 1998 increased to $184.3
million from $129.9 million for Fiscal 1997 primarily due to: (i) the continued
effort by the Company to expand its retail branch network, particularly outside
of California; (ii) higher loan production; (iii) a larger servicing portfolio;
and (iv) growth in the Company's non-mortgage banking activities.
Guarantee fees represent fees paid to guarantee timely and full payment of
principal and interest on MBS and whole loans sold to permanent investors and to
transfer the credit risk of the loans in the servicing portfolio. For Fiscal
1998, guarantee fees increased 8% to $172.7 million from $159.4 million for
Fiscal 1997. The increase resulted from an increase in the servicing portfolio,
changes in the mix of permanent investors and terms negotiated at the time of
loan sales.
Marketing expenses for Fiscal 1998 increased 24% to $42.3 million from $34.3
million for Fiscal 1997, reflecting the Company's continued implementation of a
marketing plan to increase consumer brand awareness of the Company in the
residential mortgage market.
Other operating expenses for Fiscal 1998 increased from Fiscal 1997 by $39.6
million, or 49%. This increase was due primarily to higher loan production, a
larger servicing portfolio, increased reserves for bad debt, increased systems
development and growth in the Company's non-mortgage banking subsidiaries in
Fiscal 1998 as compared to Fiscal 1997.
Profitability of Loan Production and Servicing Activities
In Fiscal 1998, the Company's pre-tax earnings from its loan production
activities (which include loan origination and purchases, warehousing and sales)
were $245.1 million. In Fiscal 1997, the Company's comparable pre-tax earnings
were $141.9 million. The increase of $103.2 million was primarily attributable
to increased production, greater sales of higher-margin home equity and
sub-prime loans at significantly higher margins than prime credit quality first
mortgages and improved pricing margins on prime credit quality first mortgages.
These positive results were partially offset by higher production costs. In
Fiscal 1998, the Company's pre-tax income from its loan servicing activities
(which include administering the loans in the servicing portfolio, selling
homeowners and other insurance, acting as tax payment agent, marketing
foreclosed properties and acting as reinsurer) was $215.5 million as compared to
$254.2 million in Fiscal 1997. The decrease of $38.7 million was primarily
attributed to the increased amortization of the servicing asset and Interest
Costs Incurred on Payoffs due to declining interest rates and increase in
prepayments from Fiscal 1997 to Fiscal 1998. These negative factors were
partially offset by the increase in servicing fees, miscellaneous income and
interest earned on escrow balances derived by the larger servicing portfolio.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title insurance and escrow services, home appraisals, securities
brokerage and servicing rights brokerage. For Fiscal 1998, these activities
contributed $47.5 million to the Company's pre-tax income compared to $25.8
million for Fiscal 1997. This increase in pre-tax income primarily results from
improved performance of the title insurance, escrow and capital markets
businesses.
During Fiscal 1998, Countrywide Asset Management Corporation, a subsidiary
of the Company, was sold to INMC Mortgage Holdings, Inc., (INMC) a publicly
traded real estate investment trust for 3,440,800 newly issued common shares of
INMC stock. These shares were restricted at issuance for up to a period of three
years. The impact of this sale on earnings was a $57.4 million pre-tax gain.
Fiscal 1997 Compared with Fiscal 1996
Revenues for Fiscal 1997 increased 29% to $1,112.5 million from $860.7
million for Fiscal 1996. Net earnings increased 31% to $257.4 million in Fiscal
1997 from $195.7 million in Fiscal 1996. The increase in revenues and net
earnings in Fiscal 1997 compared to Fiscal 1996 was primarily attributable to a
larger gain on sale of loans resulting from greater sales of higher-margin home
equity loans and sales of sub-prime loans in Fiscal 1997 at significantly higher
margins than prime credit quality first mortgages, improved pricing margins on
prime credit quality first mortgages, an increase in the size of the Company's
servicing portfolio and higher loan production volume. These positive factors
were partially offset by increased expenses in Fiscal 1997 over Fiscal 1996.
The total volume of loans produced increased 9% to $37.8 billion for Fiscal
1997 from $34.6 billion for Fiscal 1996. Refinancings totaled $12.3 billion, or
33% of total fundings, for Fiscal 1997, as compared to $11.7 billion, or 34% of
total fundings, for Fiscal 1996. Fixed-rate mortgage loan production totaled
$27.9 billion, or 74% of total fundings, for Fiscal 1997, as compared to $26.9
billion, or 78% of total fundings, for Fiscal 1996.
Total loan volume in the Company's production Divisions is summarized below.
- - -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Loan Production
- - -------------------------------------------- ------------------------------------ --------
Fiscal 1997 Fiscal 1996
------------- -------------
Consumer Markets Division $ 8,071 $ 7,458
Wholesale Lending Division 8,430 8,061
Correspondent Lending Division 21,310 19,065
============= =============
Total Loan Volume $37,811 $34,584
============= =============
- - -------------------------------------------- ------------- -------- ------------- --------
The factors which affect the relative volume of production among the
Company's three divisions include the price competitiveness of each division's
product offerings, the level of mortgage lending activity in each division's
market and the success of each division's sales and marketing efforts.
Included in the Company's total volume of loans produced are $613 million of
home equity loans funded in Fiscal 1997 and $221 million funded in Fiscal 1996.
Sub-prime credit quality loan production, which is also included in the
Company's total production volume, was $864 million in Fiscal 1997 and $220
million in Fiscal 1996.
At February 28(29), 1997 and 1996, the Company's pipeline of loans in
process was $4.7 billion and $5.6 billion, respectively. Historically,
approximately 43% to 77% of the pipeline of loans in process has funded. In
addition, at February 28, 1997, the Company had $1.8 billion of the loans in the
LOCK 'N SHOP (R) Pipeline. At February 29, 1996, the LOCK 'N SHOP (R) Pipeline
was $1.3 billion. In Fiscal 1997 and Fiscal 1996, the Company received 499,861
and 460,486 new loan applications, respectively, at an average daily rate of
$206 million and $194 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 1997 as compared to Fiscal 1996
primarily because production by the Correspondent Division (which, due to its
lower cost structures, charges lower origination fees per dollar loaned)
comprised a greater percentage of total production in Fiscal 1997 than in Fiscal
1996. Gain on sale of loans improved in Fiscal 1997 as compared to Fiscal 1996
primarily due to the sale during Fiscal 1997 of higher-margin home equity and
sub-prime loans and improved pricing margins on prime credit quality first
mortgages. The sale of home equity loans contributed $20 million and $4 million
to gain on sale of loans in Fiscal 1997 and Fiscal 1996, respectively. Sub-prime
loans contributed $72 million to the gain on sale of loans in Fiscal 1997. There
were no sub-prime loan sales in Fiscal 1996. 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
$33.6 million for Fiscal 1997 from $26.9 million for Fiscal 1996. Net interest
income is principally a function of: (i) net interest income earned from the
Company's mortgage loan warehouse ($61.6 million and $35.0 million for Fiscal
1997 and Fiscal 1996, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($148.3 million and $112.4 million for
Fiscal 1997 and Fiscal 1996, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($116.9
million and $102.3 million for Fiscal 1997 and Fiscal 1996, 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 attributed to a higher net earnings rate partially
resulting from aggregating home equity and sub-prime loans (which generally bear
interest at higher rates than prime credit quality first mortgages) prior to
their sale or securitization. The increase in interest expense on the investment
in servicing rights resulted primarily from a larger servicing portfolio,
partially offset by a decrease 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), offset
somewhat by a decrease in the earnings rate from Fiscal 1996 to Fiscal 1997.
During Fiscal 1997, loan administration income was positively affected by
the continued growth of the loan servicing portfolio. At February 28, 1997, the
Company serviced $158.6 billion of loans (including $3.9 billion of loans
subserviced for others), compared to $136.8 billion (including $1.9 billion of
loans subserviced for others) at February 29, 1996, a 16% increase. The growth
in the Company's servicing portfolio during Fiscal 1997 was the result of loan
production volume and the acquisition of bulk servicing rights, partially offset
by prepayments, partial prepayments and scheduled amortization of mortgage
loans. The weighted average interest rate of the mortgage loans in the Company's
servicing portfolio at both February 28(29), 1997 and 1996 was 7.8%. It is the
Company's strategy to build and retain its servicing portfolio because of the
returns the Company can earn from such investment and because the Company
believes that servicing income is counter cyclical to loan production income.
See "Prospective Trends - Market Factors."
During Fiscal 1997, the prepayment rate of the Company's servicing portfolio
was 11%, compared to 12% for Fiscal 1996.
In Fiscal 1997, the Company recognized a net expense of $125.3 million from
its Servicing Hedge. The net expense included unrealized losses of $56.9 million
and realized losses of $68.4 million from the sale of various financial
instruments that comprise the Servicing Hedge and premium amortization. In
Fiscal 1996, the Company recognized a net benefit of $200.1 million from its
Servicing Hedge. The net benefit included unrealized gains of $108.8 million and
net realized gains of $91.3 million from the sale of various financial
instruments that comprise the Servicing Hedge. There can be no assurance that
the Company's Servicing Hedge will generate gains in the future, or if gains are
generated, that they will fully offset impairment of the MSRs. See Note I to the
Company's Consolidated Financial Statements.
The Company recorded amortization and net impairment of its MSRs for Fiscal
1997 totaling $101.4 million (consisting of amortization amounting to $220.1
million and recovery of previous impairment of $118.7 million), compared to
$342.8 million of amortization and impairment (consisting of amortization
amounting to $168.0 million and net impairment of $174.8 million) for Fiscal
1996. The factors affecting the amount of amortization and impairment or
recovery of the MSRs recorded in an accounting period include the level of
prepayments during the period, the change in estimated future prepayments and
the amount of Servicing Hedge gains or losses.
During Fiscal 1997, the Company acquired bulk servicing rights for loans
with principal balances aggregating $1.4 billion at a price of 1.60% of the
aggregate outstanding principal balances of the servicing portfolios acquired.
During Fiscal 1996, the Company acquired bulk servicing rights for loans with
principal balances aggregating $5.2 billion at a price of 1.30% of the aggregate
outstanding principal balances of the servicing portfolios acquired.
Salaries and related expenses are summarized below for Fiscal 1997 and Fiscal
1996.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1997
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 91,054 $41,806 $54,244 $12,852 $199,956
Incentive Bonus 34,501 763 14,820 6,799 56,883
Payroll Taxes and Benefits 15,105 7,747 5,389 1,804 30,045
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $140,660 $50,316 $74,453 $21,455 $286,884
============ ============= ============= ============= ------------
Average Number of 2,303 1,555 1,107 251 5,216
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1996
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 68,502 $32,080 $46,504 $ 9,711 $156,797
Incentive Bonus 33,022 445 9,711 4,546 47,724
Payroll Taxes and Benefits 11,472 5,571 6,824 1,280 25,147
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $112,996 $38,096 $63,039 $15,537 $229,668
============ ============= ============= ============= ------------
Average Number of 1,743 1,160 887 192 3,982
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 1997 primarily due to an
increase in the number of employees resulting from higher loan production and
diversification of loan products, a larger servicing portfolio and growth in the
Company's non-mortgage banking activities.
Occupancy and other office expenses for Fiscal 1997 increased to $129.9
million from $106.3 million for Fiscal 1996 primarily due to: (i) the continued
effort by the Company to expand its retail branch network, particularly outside
of California, (ii) the purchase of an office facility to house the Company's
primary executive and administrative offices and some of its non-mortgage
banking subsidiaries, (iii) higher loan production, (iv) a larger servicing
portfolio and (v) growth in the Company's non-mortgage banking activities.
Guarantee fees represent fees paid to guarantee timely and full payment of
principal and interest on MBS and whole loans sold to permanent investors and to
transfer the credit risk of the loans in the servicing portfolio. For Fiscal
1997, guarantee fees increased 31% to $159.4 million from $121.2 million for
Fiscal 1996. The increase resulted from an increase in the servicing portfolio,
changes in the mix of permanent investors and terms negotiated at the time of
loan sales.
Marketing expenses for Fiscal 1997 increased 26% to $34.3 million from $27.1
million for Fiscal 1996, reflecting the Company's continued implementation of a
marketing plan to increase consumer brand awareness.
Other operating expenses for Fiscal 1997 increased from Fiscal 1996 by $29.9
million, or 60%. This increase was due primarily to higher loan production, a
larger servicing portfolio, increased reserves for bad debts and increased
systems development and operation costs in Fiscal 1997 than in Fiscal 1996.
Profitability of Loan Production and Servicing Activities
In Fiscal 1997, the Company's pre-tax earnings from its loan production
activities (which include loan origination and purchases, warehousing and sales)
were $141.9 million. In Fiscal 1996, the Company's comparable pre-tax earnings
were $61.2 million. The increase of $80.7 million was primarily attributable to
a greater sale of higher-margin home equity loans and sales of sub-prime loans
at significantly higher margins than prime credit quality first mortgages and
improved pricing margins on prime credit quality first mortgages. There were no
sub-prime loan sales in Fiscal 1996. These positive results were partially
offset by higher production costs and a change in the internal method of
allocating overhead between the Company's production and servicing activities.
In Fiscal 1997, the Company's pre-tax income from its loan servicing activities
(which include administering the loans in the servicing portfolio, selling
homeowners and other insurance, acting as tax payment agent, marketing
foreclosed properties and acting as reinsurer) was $254.2 million as compared to
$251.2 million in Fiscal 1996. The increase of $3.0 million was due to an
increase in the size of the servicing portfolio and in the rate of servicing and
miscellaneous fees earned. Largely offsetting these positive factors was an
increase in the net expense resulting from amortization and impairment of MSRs
and from the Servicing Hedge from Fiscal 1996 to Fiscal 1997. The increase in
such net expense is due primarily to increased amortization resulting from a
higher cost basis in the MSRs. This higher basis is attributable to adoption of
a new accounting standard effective March 1, 1995 that required recognition of
originated mortgage servicing rights.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title insurance and escrow services, home appraisals, credit
cards, management of a publicly traded real estate investment trust ("REIT"),
securities brokerage and servicing rights brokerage. For Fiscal 1997, these
activities contributed $25.8 million to the Company's pre-tax income compared to
$13.8 million for Fiscal 1996. This increase to pre-tax income primarily results
from improved performance of the title insurance, escrow and REIT management
services.
QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are counter
cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its committed pipeline, mortgage loan inventory and MBS
held for sale, MSRs, mortgage-backed securities retained in securitizations and
debt securities. The overall objective of the Company's interest rate risk
management policies is to offset changes in the values of these items resulting
from changes in interest rates. The Company does not speculate on the direction
of interest rates in its management of interest rate risk.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that quantify the net financial impact of changes
in interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses incorporate scenarios including selected
hypothetical (instantaneous) parallel shifts in the yield curve. Various
modeling techniques are employed to value the financial instruments. For
mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread
("OAS") model is used. The primary assumptions used in this model are the
implied market volatility of interest rates and prepayment speeds. For options
and interest rate floors, an option-pricing model is used. The primary
assumption used in this model is implied market volatility of interest rates.
MSRs and residual interests are valued using discounted cash flow models. The
primary assumptions used in these models are prepayment rates, discount rates
and credit losses.
Utilizing the sensitivity analyses described above, as of February 28, 1998,
the Company estimates that a permanent 0.50% reduction in interest rates, all
else being constant, would result in a $15 million after-tax loss related to its
trading securities and a $14 million after-tax loss related to its other
financial instruments, for the fiscal year ended February 28, 1999. The Company
estimates that this combined after-tax loss of $29 million is the largest such
loss that would occur within the range of reasonably possible interest rate
changes. These sensitivity analyses are limited by the fact that they are
performed at a particular point in time and do not incorporate other factors
that would impact the Company's financial performance in such a scenario.
Consequently, the preceding estimates should not be viewed as a forecast.
INFLATION
Inflation affects the Company in the areas of loan production and servicing.
Interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. Historically, as interest rates increase, loan
production, particularly from loan refinancings, decreases, although in an
environment of gradual interest rate increases, purchase activity may actually
be stimulated by an improving economy or the anticipation of increasing real
estate values. In such periods of reduced loan production, production margins
may decline due to increased competition resulting from overcapacity in the
market. In a higher interest rate environment, servicing-related earnings are
enhanced because prepayment rates tend to slow down thereby extending the
average life of the Company's servicing portfolio and reducing amortization and
impairment of the MSRs, decreasing Interest Costs Incurred on Payoffs and
because the rate of interest earned from the custodial balances tends to
increase. Conversely, as interest rates decline, loan production, particularly
from loan refinancings, increases. However, during such periods, prepayment
rates tend to accelerate (principally on the portion of the portfolio having a
note rate higher than the then-current interest rates), thereby decreasing the
average life of the Company's servicing portfolio and adversely impacting its
servicing-related earnings primarily due to increased amortization and
impairment of the MSRs, a decreased rate of interest earned from the custodial
balances and increased Interest Costs Incurred on Payoffs. The impacts of
changing interest rates on servicing-related earnings are reduced by performance
of the Servicing Hedge, which is designed to mitigate the impact on earnings of
higher amortization and impairment that may result from declining interest
rates.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently utilizes commercial paper supported by the revolving credit
facility, medium-term notes, MBS repurchase agreements, subordinated notes,
pre-sale funding facilities, an optional cash purchase feature in the dividend
reinvestment plan, redeemable capital trust pass-through securities and cash
flow from operations. In addition, in the past the Company has utilized whole
loan repurchase agreements, servicing-secured bank facilities, private
placements of unsecured notes and other financings, direct borrowings from the
revolving credit facility and public offerings of common and preferred stock.
Certain of the debt obligations of the Company and Countrywide Home Loans,
Inc. ("CHL") contain various provisions that may affect the ability of the
Company and CHL to pay dividends and remain in compliance with such obligations.
These provisions include requirements concerning net worth, current ratio and
other financial covenants. These provisions have not had, and are not expected
to have, an adverse impact on the ability of the Company and CHL to pay
dividends.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its 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
December 1996, Countrywide Capital I, a subsidiary of the Company, issued $300
million of 8% Capital Trust Pass-through Securities, and on June 4, 1997,
Countrywide Capital III, a subsidiary of the Company, issued $200 million of
8.05% Subordinated Capital Income Securities, the proceeds of which were used to
purchase subordinated debt securities from the Company. The Company used the net
proceeds from the sale of the subordinated debt securities for general corporate
purposes, principally to reduce short-term debt.
In connection with its derivative contracts, the Company may be required to
deposit cash or certain government securities or obtain letters of credit to
meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and liquidity.
Cash Flows
Operating Activities In Fiscal 1998, the Company's operating activities used
cash of approximately $2.5 billion on a short-term basis primarily to support
the increase in its mortgage loans and MBS held for sale. Mortgage loans and MBS
held for sale are generally financed with short-term borrowings. In Fiscal 1997,
operating activities provided approximately $2.0 billion on a short-term basis
primarily from the decrease in its mortgage loans and MBS held for sale. In
Fiscal 1996, the Company's operating activities used cash of approximately $1.5
billion.
Investing Activities The primary investing activity for which cash was used
by the Company was the investment in servicing. Net cash used by investing
activities was $1.1 billion for Fiscal 1998 and $0.9 billion for Fiscal 1997 and
Fiscal 1996.
Financing Activities Net cash provided by financing activities amounted to
$3.6 billion for Fiscal 1998. Net cash used by financing activities amounted to
$1.0 billion for Fiscal 1997. Net cash provided by financing activities amounted
to $2.4 billion for Fiscal 1996. The increase or decrease in cash flow from
financing activities was primarily the result of net short-term and long-term
debt issuance or repayment by the Company.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During Fiscal 1998, the Company received new loan applications at an average
daily rate of $306 million and at February 28, 1998, the Company's pipeline of
loans in process was $12.6 billion. This compares to a daily application rate in
Fiscal 1997 of $206 million and a pipeline of loans in process at February 28,
1997 of $4.7 billion. The size of the pipeline is generally an indication of the
level of future fundings, as historically 43% to 77% of the pipeline of loans in
process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline at
February 28, 1998 was $1.4 billion and at February 28, 1997 was $1.8 billion.
For the month ended March 31, 1998, the average daily rate of applications
received was $497 million, and at March 31, 1998, the pipeline of loans in
process was $13.9 billion and the LOCK `N SHOP Pipeline was $1.6 billion. Future
application levels and loan fundings are dependent on numerous factors,
including the level of demand for mortgage credit, the extent of price
competition in the market, the direction of interest rates, seasonal factors and
general economic conditions.
Market Factors
Loan production increased 29% from Fiscal 1997 to Fiscal 1998. This increase
was primarily due to several factors. First, mortgage interest rates generally
decreased in Fiscal 1998. Second, sub-prime and home equity loan fundings, which
are generally less sensitive to interest rate fluctuations than prime credit
quality first mortgages, increased from Fiscal 1997 to Fiscal 1998.
Further, home purchase market activity was stronger during Fiscal 1998 than in
Fiscal 1997.
The prepayment rate in the servicing portfolio increased from Fiscal 1997 to
Fiscal 1998 because interest rates were lower in Fiscal 1998 than in Fiscal
1997.
The Company's primary competitors are commercial banks, savings and loans,
mortgage banking subsidiaries of diversified companies, as well as other
mortgage bankers. Over the past three years, certain commercial banks have
expanded their mortgage banking operations through acquisition of formerly
independent mortgage banking companies or through internal growth. The Company
believes that these transactions and activities have not had a material impact
on the Company or on the degree of competitive pricing in the market.
The Company's California mortgage loan production (measured by principal
balance) constituted 26% of its total production during Fiscal 1998 and 25%
during Fiscal 1997. The Company is continuing its efforts to expand its
production capacity outside of California. Some regions in which the Company
operates have experienced slower economic growth, and real estate financing
activity in these regions has been negatively impacted. As a result, home
lending activity for single- (one-to-four) family residences in these regions
may also have experienced slower growth. To the extent that any geographic
region's mortgage loan production constitutes a significant portion of the
Company's production, there can be no assurance that the Company's operations
will not be adversely affected if that region experiences slow or negative
economic growth resulting in decreased residential real estate lending activity,
or market factors further impact the Company's competitive position in that
region.
The delinquency rate in the Company-owned servicing portfolio increased to
3.91% at February 28, 1998 from 3.44% at February 28, 1997. The Company believes
that this increase was primarily the result of changes in portfolio mix and
aging. The proportion of government and high loan-to-value conventional loans,
which tend to experience higher delinquency rates than low loan-to-value
conventional loans, was 48% of the portfolio at February 28, 1998 and February
28, 1997. In addition, the weighted average age of the portfolio is 31 months at
February 28, 1998, up from 27 months at February 28, 1997. 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. Further, related late
charge income has historically been sufficient to offset incremental servicing
expenses resulting from an increased delinquency rate.
The percentage of loans in the Company's owned servicing portfolio that are
in foreclosure decreased to 0.45% at February 28, 1998 from 0.71% at February
28, 1997. The Company sold $644 million of defaulted mortgage loans on February
27, 1998. See "Notes to the Consolidated Financial Statements, Note A,
Investment in Non-Consolidated Subsidiaries". Generally, the Company is not
exposed to credit risk. Because the Company services substantially all
conventional loans on a non-recourse basis, foreclosure losses are generally the
responsibility of the investor or insurer and not the Company. The Company
retains credit risk on the home equity and sub-prime loans it sells in the form
of pools backing securities. As such, through retention of a subordinated
interest in the trust, the Company bears primary responsibility for credit
losses on the loans. At February 28, 1998, the Company had investments in such
subordinated interests amounting to $251 million, which represents the maximum
exposure to credit losses on the securitized home equity and sub-prime loans.
While the Company generally does not retain credit risk with respect to the
prime credit quality first mortgage loans it sells, it does have potential
liability under representations and warranties made to purchasers and insurers
of the loans. In the event of a breach of the representations and warranties,
the Company may be required to repurchase a mortgage loan and any subsequent
loss on the mortgage loan may be borne by the Company. Similarly, government
loans serviced by the Company (29% of the Company's servicing portfolio at
February 28, 1998) 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.
Servicing Hedge
As previously discussed, the Company's Servicing Hedge is designed to
protect the value of its investment in servicing rights from the effects of
increased prepayment activity that generally results from declining interest
rates. In periods of increasing interest rates, the value of the Servicing Hedge
generally declines and the value of MSRs generally increases. There can be no
assurance that, in periods of increasing interest rates, the increase in value
of the MSRs will offset the amount of Servicing Hedge expense; or in periods of
declining interest rates, that the Company's Servicing Hedge will generate
gains, or if gains are generated, that they will fully offset impairment of the
MSRs.
Implementation of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of general-purpose financial statements. This Statement
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and show the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The impact of the adoption of this statement
is disclosure related and therefore Management believes that the adoption will
not have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131"). SFAS No. 131 establishes standards for the manner in which public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Statement also establishes standards for related disclosure about products
and services, geographic areas, and major customers. This Statement is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application comparative information for earlier years is to be restated. This
Statement need not be applied to interim financial statements in the initial
year of its application. The impact of the adoption of this statement is
disclosure related and therefore Management believes that the adoption will not
have a material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, Employers' Disclosure about Pensions and Other Postretirement Benefits
("SFAS No. 132"), an amendment of FASB Statements No. 87, 88, and 106. SFAS No.
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
This Statement is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required. The impact of the adoption of this statement is disclosure related
and therefore Management believes that the adoption will not have a material
impact on the Company.
Year 2000 Compliance
The Company has and will continue to make investments to ensure compliance
with issues associated with the change of the millennium. These costs are being
expensed by the Company during the period in which they are incurred. The
financial impact to the Company of implementing the systems changes necessary to
become Year 2000 compliant has not been and is not anticipated to be material to
its financial position or results of operations in any given year. However, the
Company's expectations about future costs associated with the Year 2000 are
subject to uncertainties that could cause the actual results to differ
materially from the Company's expectations. Factors that could influence the
amount and timing of future costs include the success of the Company in
identifying systems and programs that are not Year 2000 compliant, the nature
and amount of programming required to upgrade or replace each of the affected
programs, the availability, rate and magnitude of related labor and consulting
costs and the success of the Company's business partners, vendors and clients in
addressing the Year 2000 issue.
Item 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In response to this Item, the information set forth on page 30 and F-10 in
the Annual Report 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.
Exhibit
No. Description
----------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc.,
Countrywide Asset Management Corporation and Countrywide Credit
Industries, Inc.
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.
3.3.2 Amendment to Bylaws of Countrywide Credit Industries, Inc. dated
February 3, 1998.
4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide
Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Form 8-A
filed pursuant to Section 12 of the Securities Exchange Act of 1934 on
February 12, 1988).
4.1.1* Amendment No. 1 to Rights Agreement dated as 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 on Form S-3 of the Company and CHL (File Nos. 33-59559 and
33-59559-01) filed with the SEC on June 16, 1995).
4.12*Form of Medium-Term Notes, Series D (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
4.13*Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
333-3835 and 333-3835-01) filed with the SEC on August 2, 1996).
4.14*Form of Medium-Term Notes, Series E (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment
No. 1 to the registration statement on Form S-3 of the Company and CHL
(File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2,
1996).
+ 10.1*Indemnity Agreements with Directors and Officers of Countrywide
Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 8-K dated February 6, 1987).
+ 10.2*Restated Employment Agreement for David S. Loeb dated March 26, 1996
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26,
1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.3.1 Amendment Number One to Restated Employment Agreement for Angelo R.
Mozilo.
+ 10.3.2 Amendment Number Two to Restated Employment Agreement for Angelo R.
Mozilo.
+ 10.4 Employment Agreement for Stanford L. Kurland dated May 7, 1996
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-Q dated August 31, 1996).
+ 10.5*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).
+ 10.6*Countrywide Credit Industries, Inc. Deferred Compensation Plan for
Key Management Employees dated April 15, 1992 (incorporated by reference to
Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28,
1993).
+ 10.7 Countrywide Credit Industries, Inc. Deferred Compensation Plan
Amended and Restated Effective January 1, 1998.
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 August 31, 1997)
+ 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989
(incorporated by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K dated February 28, 1989).
+ 10.11.1* First Amendment to the 1987 Stock Option Plan as Amended and
Restated.(incorporated by reference to Exhibit 10.11.1 to the Company's
Quarterly Report on Form 10-Q dated November 30, 1997)
+ 10.11.2*Second Amendment to the 1987 Stock Option Plan as Amended and
Restated. (incorporated by reference to Exhibit 10.11.2 to the Company's
Quarterly Report on Form 10-K 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)
+ 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by
reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
+ 10.16* Amended and Restated Stock Option Financing Plan (incorporated by
reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
10.17* 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset
Management Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1995).
10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February 28, 1990).
10.19* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1995).
+ 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K dated February 29, 1992).
+ 10.20.1* First Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.2* Second Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.3* Third Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated
February 28, 1995).
+ 10.20.6* Sixth Amendment to the 1991 Stock Option Plan. (incorporated
by reference to Exhibit 10.20.6 to the Company's Quarterly 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 Quarterly Report on Form 10-Q
dated November 30, 1997)
+ 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* First 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)
+ 10.22* 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 Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.22.2* Second Amendment to the Amendment 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 Amendment and Restated 1993 Stock Option Plan.
+ 10.23* Supplemental Executive Retirement Plan effective March 1, 1994
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1994).
+ 10.23.1 Amended and Restated Supplemental Retirement Plan.
+ 10.24* Split-Dollar Life Insurance Agreement (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31,
1994).
+ 10.25* 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
11.1 Statement Regarding Computation of Earnings Per Share.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
22.1 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/ DAVID S. LOEB
-------------------------------------
David S. Loeb, Chairman and President
Dated: May 28, 1998
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/ DAVID S. LOEB President, Chairman of the Board of May 28, 1998
----------------------- Directors and Director (Principal
----------------------- Executive Officer)
David S. Loeb
/s/ ANGELO R. MOZILO Chief Executive Officer and Director May 28, 1998
- - -------------------------
- - -------------------------
Angelo R. Mozilo
/s/ STANFORD L. KURLAND Senior Managing Director and Chief May 28, 1998
- - ------------------------- Operating Officer
- - -------------------------
Stanford L. Kurland
/s/ CARLOS M. GARCIA Managing Director; Chief Financial May 28, 1998
----------------------- Officer and Chief Accounting Officer
Carlos M. Garcia (Principal Financial Officer and
Principal Accounting Officer)
/s/ ROBERT J. DONATO Director May 28, 1998
- - -------------------------
Robert J. Donato
/s/ BEN M. ENIS Director May 28, 1998
- - -------------------------
- - -------------------------
Ben M. Enis
/s/ EDWIN HELLER Director May 28, 1998
- - -------------------------
Edwin Heller
/s/ HARLEY W. SNYDER Director May 28, 1998
- - -------------------------
Harley W. Snyder
/s/ JEFFREY M. CUNNINGHAM Director May 28, 1998
- - --------------------------
Jeffrey M. Cunningham
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 28, 1998
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 28, 1998
Page
----------------
Report of Independent Certified Public Accountants.................. F-3
Financial Statement
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
Notes to Consolidated Financial Statements...................... F-8
Schedules
Schedule I - Condensed Financial Information of Registrant...... F-34
Schedule II - Valuation and Qualifying Accounts................. F-37
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Credit Industries, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 28, 1998 and 1997, and
the related consolidated statements of earnings, common shareholders' equity,
and cash flows for each of the years in the three year period ended February 28,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide Credit
Industries, Inc. and Subsidiaries as of February 28, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three year period ended February 28, 1998, in
conformity with generally accepted accounting principles.
We have also audited Schedules I and II for each of the years in the three year
period ended
February 28, 1998. 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
May 4, 1998
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28,
(Dollar amounts in thousands, except per share data)
A S S E T S
1998 1997
------------------ -------------------
Cash $ 10,707 $ 18,269
Mortgage loans and mortgage-backed securities held for sale 5,292,191 2,579,972
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 226,330 190,104
Mortgage servicing rights, net 3,612,010 3,023,826
Other assets 3,077,943 1,876,919
------------------ -------------------
Total assets $12,219,181 $7,689,090
================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $3,945,606 $1,695,523
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $7,475,221 $4,713,324
Drafts payable issued in connection with mortgage loan closings 764,285 221,757
Accounts payable, accrued liabilities and other 518,648 206,835
Deferred income taxes 873,084 635,643
------------------ -------------------
Total liabilities 9,631,238 5,777,559
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities
of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 300,000
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $0.05 par
value; issued and outstanding, 109,205,579 shares in 1998 and
106,095,558 shares in 1997 5,460 5,305
Additional paid-in capital 1,049,365 917,942
Unrealized gain (loss) on available for sale securities 3,697 (30,545)
Retained earnings 1,029,421 718,829
------------------ -------------------
Total shareholders' equity 2,087,943 1,611,531
------------------ -------------------
Total liabilities and shareholders' equity $12,219,181 $7,689,090
================== ===================
Borrower and investor custodial accounts $3,945,606 $1,695,523
================== ===================
The accompanying notes are an integral part
of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 28(29),
(Dollar amounts in thousands, except per share data)
1998 1997 1996
---------------- -------------- --------------
Revenues
Loan origination fees $ 301,389 $ 193,079 $199,724
Gain on sale of loans, net of commitment fees 417,427 247,450 92,341
---------------- -------------- --------------
Loan production revenue 718,816 440,529 292,065
Interest earned 440,058 350,263 308,449
Interest charges (424,341) (316,705) (281,573)
---------------- -------------- --------------
Net interest income 15,717 33,558 26,876
Loan servicing income 907,674 773,715 620,835
Amortization and impairment/recovery of
mortgage servicing rights (561,804) (101,380) (342,811)
Servicing hedge benefit (expense) 232,959 (125,306) 200,135
---------------- -------------- --------------
Net loan administration income 578,829 547,029 478,159
Commissions, fees and other income 138,217 91,346 63,642
Gain on sale of subsidiary 57,381 - -
---------------- -------------- --------------
Total revenues 1,508,960 1,112,462 860,742
Expenses
Salaries and related expenses 424,321 286,884 229,668
Occupancy and other office expenses 184,338 129,877 106,298
Guarantee fees 172,692 159,360 121,197
Marketing expenses 42,320 34,255 27,115
Other operating expenses 119,743 80,188 50,264
---------------- -------------- --------------
Total expenses 943,414 690,564 534,542
---------------- -------------- --------------
Earnings before income taxes 565,546 421,898 326,200
Provision for income taxes 220,563 164,540 130,480
---------------- -------------- --------------
NET EARNINGS $ 344,983 $ 257,358 $195,720
================ ============== ==============
Earnings per share
Basic $3.21 $2.50 $1.99
Diluted $3.09 $2.44 $1.95
The accompanying notes are an integral part
of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Three years ended February 28, 1998
(Dollar amounts in thousands)
Unrealized
Gain (Loss)
Additional on
Number Common Paid-in- Available-for-SalRetained
of Shares Stock Capital Securities Earnings Total
-------------- -------------------------- -------------- ------------- ---------------
Balance at February 28, 1995 91,370,364 $4,568 $608,289 $ - $329,701 $942,558
Issuance of common stock 10,000,000 500 200,775 - - 201,275
Cash dividends paid - common - - - - (30,961) (30,961)
Stock options exercised 752,380 38 6,686 - - 6,724
Tax benefit of stock options exercised - - 1,963 - - 1,963
Dividend reinvestment plan 33,345 2 697 - - 699
401(k) Plan contribution 86,240 4 1,773 - - 1,777
Net earnings for the year - - - - 195,720 195,720
- - ------------------------------------------------------------------------------------------------------------------------------
Balance at February 29, 1996 102,242,329 5,112 820,183 - 494,460 1,319,755
Cash dividends paid - common - - - - (32,989) (32,989)
Stock options exercised 1,000,798 50 15,337 - - 15,387
Tax benefit of stock options exercised - - 3,656 - - 3,656
Dividend reinvestment plan 2,198,563 110 60,040 - - 60,150
401(k) Plan contribution 79,878 4 2,038 - - 2,042
Issuance of common stock in business -
acquisition 573,990 29 16,688 - - 16,717
Unrealized loss on available-for-sale
securities - - - (30,545) - (30,545)
Net earnings for the year - - - - 257,358 257,358
-- ---
- - -------------------------------------------------------------------------------- ---------------------------------------------
Balance at February 28, 1997 106,095,558 5,305 917,942 (30,545) 718,829 1,611,531
Cash dividends paid - common - - - - (34,391) (34,391)
Stock options exercised 839,479 42 14,645 - - 14,687
Tax benefit of stock options exercised - - 5,378 - - 5,378
Dividend reinvestment plan 2,179,939 109 108,511 - - 108,620
401(k) Plan contribution 90,603 4 2,889 - - 2,893
Unrealized gain on available-for-sale
securities - - - 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
==============================================================================================================================
The accompanying notes are an integral part
of this statement.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Year ended February 28(29),
(Dollar amounts in thousands)
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from operating activities:
Net earnings $344,983 $ 257,358 $ 195,720
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Gain on sale of subsidiary (57,381) - -
Gain on sale of available-for-sale securities (16,749) - -
Amortization and impairment/recovery of mortgage
servicing rights 561,804 101,380 342,811
Depreciation and other amortization 44,930 40,378 30,545
Deferred income taxes 220,563 164,540 130,480
Origination and purchase of loans held for sale (48,771,673) (37,810,761) (34,583,653)
Principal repayments and sale of loans 46,059,454 39,970,876 32,742,391
---------------- ---------------- ----------------
Decrease (increase) in mortgage loans and mortgage-
backed securities held for sale (2,712,219) 2,160,115 (1,841,262)
Increase in other receivables and other assets (1,144,103) (833,837) (592,164)
Increase in accounts payable and accrued liabilities 302,404 96,712 269,531
---------------- ---------------- ----------------
Net cash provided (used) by operating activities (2,455,768) 1,986,646 (1,464,339)
---------------- ---------------- ----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (1,149,988) (858,912) (869,579)
Purchase of property, equipment and leasehold
improvements - net (70,896) (77,294) (19,003)
Proceeds from sale of available-for-sale securities 72,747 - -
---------------- ---------------- ----------------
Net cash used by investing activities (1,148,137) (936,206) (888,582)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net (decrease) increase in warehouse debt and other
short-term borrowings 1,513,974 (1,924,308) 1,742,290
Issuance of long-term debt 1,973,198 637,624 526,500
Repayment of long-term debt (182,747) (113,773) (96,563)
Issuance of Company - obligated mandatorily redeemable
capital trust pass-through securities of subsidiary trust
holding solely a Company guaranteed related
subordinated debt 200,000 300,000 -
Issuance of common stock 126,309 84,831 210,475
Cash dividends paid (34,391) (32,989) (30,961)
---------------- ---------------- ----------------
Net cash (used) provided by financing activities 3,596,343 (1,048,615) 2,351,741
---------------- ---------------- ----------------
Net increase (decrease) in cash (7,562) 1,825 (1,180)
Cash at beginning of period 18,269 16,444 17,624
================ ================ ================
Cash at end of period $ 10,707 $ 18,269 $ 16,444
================ ================ ================
Supplemental cash flow information:
Cash used to pay interest $ 422,969 $ 309,575 $ 317,156
Cash used to pay (refund from) income taxes $ (1,645) $ 15 $ 54
Noncash financing activities:
Issuance of common stock in business acquisition $ - $ 16,717 $ -
Unrealized gain (loss) on available-for-sale securities,
net of tax $ 34,242 $( $ -
30,545)
The accompanying notes are an integral part
of this statement.
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 required to be consolidated under generally
accepted accounting principles. All material intercompany accounts and
transactions have been eliminated.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans and the carrying value of
mortgage-backed securities ("MBS") held for sale in the near-term are adjusted
by gains and losses generated from corresponding closed hedging transactions
entered into to protect the inventory value from increases in interest rates.
Hedge positions are also used to protect the pipeline of loan applications in
process from changes in interest rates. Gains and losses resulting from changes
in the market value of the inventory, pipeline and open hedge positions are
netted. Any net gain that results is deferred; any net loss that results is
recognized when incurred. Hedging gains and losses realized during the
commitment and warehousing period related to the pipeline and mortgage loans
held for sale are deferred. Hedging losses are recognized currently if deferring
such losses would result in mortgage loans held for sale and the pipeline being
valued in excess of their estimated net realizable value.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives using the straight-line method. Leasehold improvements
are amortized over the lesser of the life of the lease or service lives of the
improvements using the straight-line method.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
F-14
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Servicing Rights, Amortization and Impairment
The Company recognizes as separate assets the rights to service mortgage
loans for others, whether the servicing rights are acquired through a separate
purchase or through loan origination by allocating total costs incurred between
the loan and the servicing rights retained based on their relative fair values.
Amortization of mortgage servicing rights ("MSRs") is based on the ratio of net
servicing income received in the current period to total net servicing income
projected to be realized from the MSRs. Projected net servicing income is in
turn determined on the basis of 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,
interest rate stratification and recent prepayment experience. MSRs are
periodically assessed for impairment, which is recognized in the statement of
income during the period in which impairment occurs as an adjustment to the
corresponding valuation allowance. For purposes of performing its impairment
evaluation, the Company stratifies its portfolio on the basis of certain risk
characteristics including loan type (fixed or adjustable) and note rate.
The Company acquires financial instruments, including derivative contracts,
that change in aggregate value inversely to the movement of interest rates (the
"Servicing Hedge"). These financial instruments include interest rate floors,
options on interest rate futures and MBS, interest rate futures, interest rate
swaps with the Company's maximum payment capped ("Capped Swaps"), interest rate
swaps, interest rate caps, options on interest rate swaps ("Swaptions"), options
on callable pass-through certificates ("options on CPC"), principal-only ("P/O")
swaps and certain tranches of collateralized mortgage obligations ("CMOs"). 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. The value of the interest rate floors, options on interest rate futures,
Capped Swaps, interest rate caps, Swaptions, options on CPC and P/O swaps is
derived from an underlying instrument or index; however, the notional or
contractual amount is not recognized in the balance sheet. The cost of these
instruments is charged to expense (and deducted from net loan administration
income) over the life of the contract. Unamortized costs are included in Other
Assets in 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. For the year ended February 28, 1998, the net benefit of
$233.0 million from the Servicing Hedge included a net unrealized gain of $182.2
million and a net realized gain of $50.8 million from the sale of various
derivative financial instruments and premium amortization. For the year ended
February 28, 1997, the Servicing Hedge expense included an unrealized loss of
$56.9 million and a realized loss of $68.4 million from premium amortization and
sale of various derivative financial instruments.
Prior to January 1, 1997, amortization of capitalized servicing fees
receivable was based on the decline during the period in the present value of
the projected excess servicing fees using the same discount rate as that implied
by the price that investors were willing to pay for the excess servicing fees at
the time of the loan sale.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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 effective in reducing the market risk of an existing
asset, liability or pipeline of applications in process. The effectiveness of
the derivative contracts is evaluated on an initial and ongoing basis using
quantitative measures of correlation. If a derivative contract is no longer
effective, it no longer qualifies as a hedge and any gains and losses
attributable to such ineffectiveness, as well as any subsequent changes in fair
value, are recognized currently in earnings.
If a derivative contract is sold, matures or is terminated, any resulting
intrinsic gain or loss is deferred and amortized as part of the basis of the
asset being hedged, provided that the effectiveness criteria is met. Unamortized
premiums associated with the time value of such contracts are recognized in
income. If an underlying designated item is no longer held, any previously
unrecognized gain or loss on the related derivative is recognized in earnings
and the derivative contract is subsequently accounted for at fair value.
Trading Securities
The Company's MBS held for sale in the near term are classified as trading
securities and included with mortgage loans on the consolidated balance sheet.
Trading securities are recorded at fair value, with the change in fair value
during the period included in earnings. The fair value of MBS held for sale in
the near term is based on quoted market prices.
Included in Other Assets are mortgage-backed securities retained in the
Company's securtizations and classified as trading securities. These securities
primarily consist of interest-only and P/O certificates on prime credit quality
first mortgage loans and sub-prime and home equity residuals ("Residuals"). 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.
At February 28, 1998, the Company used discount rates for sub-prime and home
equity mortgage-backed residuals of 20% and 15%, respectively; annual prepayment
estimates of 20% to 48% and 30%, respectively; and lifetime credit loss
estimates of 0.5% to 4.6% and 1.3% of the original principal balances of the
underlying loans, respectively. The change in fair value during the period is
included in earnings.
Financial instruments held by the Company's broker-dealer subsidiary are
included in Other Assets. These financial instruments, including derivative
contracts, are recorded at fair value on a trade date basis, and gains and
losses, both realized and unrealized, are included in Gain on Sale of Loans.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Available for Sale Securities
The Company has designated its investments in certain tranches of CMOs and
certain other equity securities as available for sale securities which are
measured at fair value and are included in Other Assets. 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 included in loan origination
fees when the loan is sold.
Deferred Commitment Fees
Deferred commitment fees, included in Other Assets, primarily consist of
fees paid to permanent investors to ensure the ultimate sale of loans and net
put and call option fees paid for the option of selling or buying MBS. Fees paid
to permanent investors are recognized as an adjustment to the sales price when
the loans are shipped and 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
On February 27, 1998, the Company capitalized 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 Government National Mortgage Association
mortgage-backed securities serviced by the Company. This subsidiary qualifies as
a special-purpose entity and meets the requirements for non-consolidation under
generally accepted accounting principles. At February 28, 1998, CWHL Funding
Inc. had a residual interest equal to the initial capitalization of $40 million
and an advance from the Company of $16 million held in reserve for the
beneficial interest holders of the assets in trust.
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.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Servicing Income
Loan servicing income represents fees earned for servicing residential
mortgage loans for investors and related ancillary income, including late
charges. Servicing income is recognized as earned, unless collection is
doubtful.
Interest Rate Swap Agreements
The amount to be received or paid under the interest rate swap agreements
associated with the Company's debt and custodial accounts is accrued and is
recognized as an adjustment to net interest income. The related amount payable
to or receivable from counterparties is included in accounts payable and accrued
liabilities.
Advertising Costs
The Company generally charges to expense the production costs of advertising
the first time the advertising takes place, except for direct-response
advertising, which is capitalized and amortized over the expected period of
future benefits. Advertising expense was $32.6 million and $26.6 million for the
years ended February 28, 1998 and 1997, respectively.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company recognizes compensation cost related to its stock option
plans only to the extent that the fair value of the shares at the grant date
exceeds the exercise price.
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
On February 28, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share, ("SFAS No. 128") which supersedes
Accounting Principles Board Opinion No. 15, of the same name. SFAS No. 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards. SFAS No. 128 was effective for financial
statements issued for periods ending after December 15, 1997, with earlier
application not permitted. Upon adoption, all prior EPS data was restated.
Basic EPS is determined using net income divided by the weighted average
shares outstanding during the period. Diluted EPS is computed by dividing net
income by the weighted average shares outstanding, assuming all dilutive
potential common shares were issued.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table presents basic and diluted EPS for the years ended February
28(29), 1998, 1997 and 1996, computed under the provisions of SFAS No. 128.
- - ------------------------ --------- --------- --------- -- - ----------------------------- -- -- ------- ---------- -----
Years ended February 28(29),
--------- --------- --------- -- - ----------------------------- -- -- ------- ---------- -----
1998 1997 1996
--------- --------- --------- ---------- --------- --------- --------- --------- ---------
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 $344,983 $257,358 $195,720
========= ========== =========
Basic EPS
Net earnings available
to common shareholders $344,983 107,491 $3.21 $257,358 103,112 $2.50 $195,720 98,352 $1.99
Effect of Dilutive -
Stock Options 4,035 - 2,565 1,918
--------- --------- ---------- --------- --------- ---------
Diluted EPS
Net earnings available
to common shareholders $344,983 111,526 $3.09 $257,358 105,677 $2.44 $195,720 100,270 $1.95
========= ========= ========= ========== ========= ========= ========= ========= ---------
- - ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- --------- ---------
Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the years
ended February 28(29), 1997 and 1996 have been reclassified to conform to the
presentation for the year ended February 28, 1998.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
------------------------------------------- --------------------------------------------------------------------
February 28,
----------------- -- -------------- -----
(Dollar amounts in thousands) 1998 1997
------------------------------------------------------------------- -- ----------------- -- -------------- -----
Buildings $ 84,526 $ 69,786
Office equipment 223,792 176,957
Leasehold improvements 28,136 26,853
----------------- --------------
336,454 273,596
Less: accumulated depreciation and amortization (133,353) (102,259)
----------------- --------------
203,101 171,337
Land 23,229 18,767
================= ==============
$226,330 $190,104
================= ==============
------------------------------------------------------------------- -- ----------------- -- -------------- -----
Depreciation expense and amortization amounted to $31.8 million, $29.0 million
and $21.1 million for the years ended February 28(29), 1998, 1997 and 1996,
respectively.
NOTE C - MORTGAGE SERVICING RIGHTS
The activity in mortgage servicing rights for the years ended February 28(29),
1998, 1997 and 1996 was as follows.
--------------------------------------------- -- -------------------------------------------------------------
February 28(29),
---------------- --- ---------------- --- ---------------- --
(Dollar amounts in thousands) 1998 1997 1996
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
Mortgage Servicing Rights
Balance at beginning of period $3,026,494 $2,385,299 $1,796,897
Additions 1,149,988 858,912 869,579
Scheduled amortization (300,312) (220,099) (168,017)
Hedge losses (gains) applied (222,852) 59,753 (113,160)
Reclassification of rights in excess of
minimum contractually specified
servicing fees - (57,371) -
---------------- ---------------- ----------------
Balance before valuation reserve
at end of period 3,653,318 3,026,494 2,385,299
---------------- ---------------- ----------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (2,668) (61,634) -
Reductions (additions) (38,640) 58,966 (61,634)
---------------- ---------------- ----------------
Balance at end of period (41,308) ( 2,668) (61,634)
================ ================ ================
Mortgage Servicing Rights, net $3,612,010 $3,023,826 $2,323,665
================ ================ ================
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
The estimated fair value of recognized mortgage servicing rights was $3.7
billion and $3.1 billion at February 28, 1998 and 1997, respectively. The fair
value was determined by discounting estimated net future cash flows from
mortgage servicing activities using discount and prepayment rates that
approximate current market rates.
NOTE D - OTHER ASSETS
Other assets at February 28, 1998 and 1997 included the following.
---------------------------------------------------------- -----------------------------------------------------
February 28,
----------------- --- ---------------- ---
(Dollar amounts in thousands) 1998 1997
------------------------------------------------------------------ -- ----------------- --- ---------------- ---
Servicing hedge instruments $ 801,335 $ 372,029
Mortgage-backed securities retained in securitization 466,259 293,030
Rewarehoused FHA and VA loans 426,407 556,571
Trading securities 255,216 130,915
Servicing related advances 231,437 159,107
Loans held for investment 115,713 66,780
Equity securities 96,152 8,400
Accrued interest 84,601 18,954
Receivables related to broker-dealer activities 148,976 51,574
Other 451,847 219,559
----------------- ----------------
$3,077,943 $ 1,876,919
================= ================
------------------------------------------------------------------ -- ----------------- --- ---------------- ---
NOTE E - AVAILABLE FOR SALE SECURITIES
Amortized cost and fair value of available for sale securities as of February
28, 1998 and 1997 were as follows.
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 28, 1998
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
CMOs $204,234 $ - ($12,411) $191,823
Equity Securities 7,315 18,471 - 25,786
================ ================= ================ ================
$211,549 $18,471 ($12,411) $217,609
================ ================= ================ ================
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 28, 1997
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
CMOs $217,004 $ - ($50,074) $166,930
================ ================= ================ ================
$217,004 - ($50,074) $166,930
================ ================= ================ ================
- - ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE F - NOTES PAYABLE
Notes payable consisted of the following.
---------------------------------------------------------- -----------------------------------------------------
February 28,
----------------- --- ---------------- ---
(Dollar amounts in thousands) 1998 1997
------------------------------------------------------------------ -- ----------------- --- ---------------- ---
Commercial paper $2,119,330 $1,943,368
Medium-term notes, Series A, B, C, D, E and F 4,137,185 2,346,800
Repurchase agreements 181,121 220,637
Subordinated notes 200,000 200,000
Unsecured notes payable 835,000 -
Other notes payable 2,585 2,519
================= ================
$7,475,221 $4,713,324
================= ================
------------------------------------------------------------------ -- ----------------- --- ---------------- ---
Revolving Credit Facility and Commercial Paper
As of February 28, 1998, CHL, the Company's mortgage banking subsidiary, had
an unsecured credit agreement (revolving credit facility) with forty-five
commercial banks permitting CHL to borrow an aggregate maximum amount of $4.0
billion. The purpose of the revolving credit facility is to provide liquidity
back-up for CHL's $4.0 billion commercial paper program. The facility contains
various financial covenants and restrictions, certain of which limit the amount
of dividends that can be paid by the Company or CHL. As consideration for the
facility, CHL pays annual commitment fees of $3.8 million. The interest rate on
direct borrowings is based on a variety of sources, including the prime rate and
the London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This
interest rate varies, depending on CHL's credit ratings. No amount was
outstanding under the revolving credit facility at February 28, 1998. The
revolving credit facility consists of a five year facility of $3.0 billion which
expires on September 24, 2002 and a one year facility of $1.0 billion which
expires on September 24, 1998. The weighted average borrowing rate on commercial
paper borrowings
NOTE F - NOTES PAYABLE (Continued)
for the year ended February 28, 1998 was 5.61%. The weighted average borrowing
rate on commercial paper outstanding as of February 28, 1998 was 5.63%.
Medium-Term Notes
As of February 28, 1998, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission
were as follows.
- - -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
---------------------- ----------------------------
-------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- ------------- --------------
Series A $ $ 230,500 $ 230,500 6.86% 8.79% Mar. 1998 Mar. 2002
-
Series B - 396,000 396,000 6.02% 6.98% Mar. 1998 Aug. 2005
Series C 208,000 197,000 405,000 5.27% 8.43% Apr. 1999 Mar. 2004
Series D 115,000 402,000 517,000 5.88% 6.88% Aug. 1998 Sep. 2005
Series E 310,000 673,000 983,000 5.75% 7.45% Feb. 2000 Oct. 2008
Series F 591,000 1,014,685 1,605,685 5.59% 6.84% Oct. 1999 Feb. 2005
-------------------------------------------
Total $1,224,000 $2,913,185 $4,137,185
===========================================
- - --------------------------------------------------------------------------------
As of February 28, 1998, all of the outstanding fixed-rate notes had been
effectively converted through interest rate swap agreements to floating-rate
notes. The weighted average borrowing rate on medium-term note borrowings for
the year ended February 28, 1998, including the effect of the interest rate swap
agreements, was 6.20%.
Repurchase Agreements
As of February 28, 1998, the Company had entered into short-term financing
arrangements to sell MBS under agreements to repurchase. The weighted average
borrowing rate for the year ended February 28, 1998 was 5.61%. The weighted
average borrowing rate on repurchase agreements outstanding as of February 28,
1998 was 5.58%. The repurchase agreements were collateralized by MBS. All MBS
underlying repurchase agreements are held in safekeeping by broker-dealers, and
all agreements are to repurchase the same or substantially identical MBS.
Subordinated Notes
The 8.25% subordinated notes are due July 15, 2002. Interest is payable
semi-annually on each January 15 and July 15. The subordinated notes are not
redeemable prior to maturity and are not subject to any sinking fund
requirements.
NOTE F - NOTES PAYABLE (Continued)
Pre-Sale Funding Facilities
As of February 28, 1998, CHL had uncommitted revolving credit facilities
with the Federal National Mortgage Association ("Fannie Mae") and the Federal
Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are
secured by conforming mortgage loans which are in the process of being pooled
into MBS. Interest rates are based on LIBOR, federal funds and/or the prevailing
rates for MBS repurchase agreements. The weighted average borrowing rate for all
such facilities for the year ended February 28, 1998 was 5.73%. As of February
28, 1998, the Company had no outstanding borrowings under any of these
facilities.
Maturities of notes payable are as follows.
---------------- ------------------------------------------- ----------------------------------------------
Year ending February 28(29), (Dollar amounts in thousands)
---------------- ------------------------------------------- ----------------------------------------------
1999 $3,279,489
2000 673,477
2001 507,070
2002 722,000
2003 658,500
Thereafter 1,634,685
=================
$7,475,221
=================
---------------- ------------------------------------------- -------- ------------------- -----------------
NOTE G - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
On December 11, 1996, Countrywide Capital I (the "Subsidiary Trust I"), a
subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through
Securities (the "8% Capital Securities"). In connection with the Subsidiary
Trust I issuance of the 8% Capital Securities, CHL issued to the Subsidiary
Trust I, $309 million of its 8% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debt Securities I"). The Subordinated Debt
Securities I are due on December 15, 2026 with interest payable semi-annually on
June 15 and December 15 of each year. The Company has the right to redeem at
par, plus accrued interest, the 8% Capital Securities any time on or after
December 15, 2006. The sole assets of the Subsidiary Trust I are and will be the
Subordinated Debt Securities I.
On June 4, 1997, Countrywide Capital III (the "Subsidiary Trust III"), a
subsidiary of the Company, issued $200 million of 8.05% Subordinated Capital
Income Securities, Series A (the "8.05% Capital Securities"). In connection with
the Subsidiary Trust III issuance of 8.05% Capital Securities, CHL issued to the
Subsidiary Trust III, $206 million of its 8.05% Junior Subordinated Deferrable
Interest Debentures (the "Subordinated Debt Securities III"). The Subordinated
Debt Securities III are due on June 15, 2027 with interest payable semi-annually
on June 15 and December 15 of each year. The sole assets of the Subsidiary Trust
III are and will be the Subordinated Debt Securities III.
On December 24, 1997, Subsidiary Trust III completed an exchange offer
pursuant to which newly issued capital securities (the "New 8.05% Capital
Securities") were exchanged for all of the outstanding 8.05% Capital Securities.
The New 8.05% Capital Securities are identical in all material respects to the
8.05% Capital Securities, except that the New 8.05% Capital Securities have been
registered under the Securities Act of 1933, as amended.
In relation to Subsidiary Trusts I and III, CHL has the right to defer
payment of interest by extending the interest payment period, from time to time,
for up to 10 consecutive semi-annual periods. If interest payments on the
Debentures are so deferred, the Company and CHL may not declare or pay dividends
on, or make a distribution with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any of its capital stock.
NOTE H - INCOME TAXES
Components of the provision for income taxes were as follows.
-- ------------------------------ ------------------------------------------------------------ --------
Year ended February 28(29),
---------------- -- ------------- -- ------------- ---
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- ---
---------------- -- ------------- -- ------------- ---
(Dollar amounts in thousands) 1998 1997 1996
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- ---
Federal expense - deferred $181,228 $135,991 $106,789
State expense - deferred 39,335 28,549 23,691
================ ============= =============
$220,563 $164,540 $130,480
================ ============= =============
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- ---
The following is a reconciliation of the statutory federal income tax rate
to the effective income tax rate as reflected in the consolidated statements of
earnings.
-- ------------------------------ ------------------------------------------------------------ --------
Year ended February 28(29),
--------------- -- -------------- --- ------------ ---
1998 1997 1996
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
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 5.0
=============== ============== ============
Effective income tax rate 39.0% 39.0% 40.0%
=============== ============== ============
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
The tax effects of temporary differences that gave rise to deferred income tax
assets and liabilities are presented below.
--- ------------------------------------------- -------------------------------------------------- ---
Year Ended February 28(29),
--------------------------------------------------
(Dollar amounts in thousands) 1998 1997 1996
-------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Net operating losses $ 152,279 $131,253 $101,303
State income and franchise taxes 49,649 39,487 30,276
Reserves, accrued expenses and other 28,033 40,067 16,902
----------------- --------------- -------------
Total deferred income tax assets 229,961 210,807 148,481
----------------- --------------- -------------
Deferred income tax liabilities:
Mortgage servicing rights 1,079,364 846,450 645,693
Gain on sale of subsidiary 23,681 - -
----------------- --------------- -------------
Total deferred income tax liabilities 1,103,045 846,450 645,693
----------------- --------------- -------------
Deferred income taxes $ 873,084 $635,643 $497,212
================= =============== =============
-------------------------------------------------------------------------------------------------------
At February 28, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of $12.3 million expiring in 2003, $19.7 million
expiring in 2004, $3.2 million expiring in 2006, $5.1 million expiring in 2008,
$131.4 million expiring in 2009, $74.0 million expiring in 2010, $41.0 million
expiring in 2011, $84.1 million expiring in 2012 and $64.0 million expiring in
2013.
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 and
treasury securities, options on CPC, interest rate caps, Capped Swaps,
Swaptions, interest rate futures, interest rate swaps, and P/O swaps. These
instruments involve, to varying degrees, elements of interest-rate and credit
risk. All of the Company's derivative financial instruments are held or issued
for purposes other than trading.
While the Company does not anticipate nonperformance by any counterparty,
the Company is exposed 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 entering into agreements with well established, financially
strong entities having a long-term credit rating of single A or better. 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 or the Mortgage-Backed Securities Clearing Corporation
(the "MBSCC"), an independent clearing agent. The amounts of credit risk as of
February 28, 1998, if the counterparties failed completely and if the margins,
if any, retained by the Company or the MBSCC were to become unavailable, and net
of margin accounts follows:
- - --------------------------------------------------------------- ------------------------------------------
(Dollar amounts in millions) As of February 28, 1998
- - --------------------------------------------------------------- ------------------------------------------
Interest rate floors $374.0
MBS mandatory delivery and purchase commitments 18.4
Interest rate caps 41.3
Swaptions 27.2
Interest rate swaps 155.2
------------------
Total 616.1
Less: Margin accounts held (214.9)
==================
Net Credit Risk $401.2
==================
- - ---------------------------------------------------------------------- ------------------ ----------------
Hedge of Committed Pipeline and Mortgage Loan Inventory
As of February 28, 1998, the Company had short-term rate and point
commitments amounting to approximately $7.0 billion (including $6.6 billion
fixed-rate and $.4 billion adjustable-rate) to fund mortgage loan applications
in process subject to approval of the loans (the "Committed Pipeline") and an
additional $1.4 billion of mortgage loans subject to property identification and
borrower qualification. 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).
NOTE I - FINANCIAL INSTRUMENTS (Continued)
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current Inventory or its loan
commitments, the Company enters into hedging transactions. The Company's hedging
policies generally require that substantially all of its Inventory and the
maximum portion of its Committed Pipeline that may close be hedged with forward
contracts for the sale of MBS or options on MBS. The MBS that are to be
delivered under these contracts and options are fixed or adjustable-rate,
corresponding with the composition of the Company's Inventory and Committed
Pipeline. At February 28, 1998, the notional amount of forward contracts and
options to purchase MBS aggregated $6.7 billion and $4.8 billion, respectively.
The forward contracts and options extend through October 1998. The Company is
not exposed to significant risk nor will it derive any significant benefit from
changes in interest rates on the price of the Inventory net of gains or losses
of associated hedge positions. The correlation between the price performance of
the Inventory being hedged and the hedge instruments is very high due to the
similarity of the asset and the related hedge instrument. The Company is exposed
to the risk that the portion of loans from the Committed Pipeline that actually
closes at the committed price is less than or more than the estimated amount of
closing in the event of a decline or rise in rates during the commitment period.
The estimated amount of loans closing from the Committed Pipeline is influenced
by many factors, including the composition of the Company's Committed Pipeline,
the historical and expected portion of the Committed Pipeline likely to close
and the timing of such closings. At February 28, 1998, the Company had open
commitments amounting to approximately $16.6 billion to sell MBS with varying
settlement dates generally not extending beyond August 1998, and options to sell
MBS through December 1998 with a total notional amount of $6.2 billion.
Servicing Hedge
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. To further mitigate the effect on earnings of
higher amortization and impairment of MSRs resulting from increased prepayment
activity that generally occurs when interest rates decline, the Company utilizes
its Servicing Hedge, consisting of financial instruments, including derivative
contracts, that increase in aggregate value when interest rates decline. These
financial instruments include options on interest rate futures and MBS, interest
rate floors, interest rate swaps, interest rate caps, Capped Swaps, Swaptions,
options on CPC, P/O swaps and certain tranches of CMOs.
The CMOs, which consist primarily of P/O securities, have been purchased at
deep discounts to their par values. As interest rates decline, prepayments on
the collateral underlying the CMOs should increase which should result in a
decline in the average lives of the P/O securities and an increase in the
present values of their cash flows. At February 28, 1998, the carrying value of
CMOs included in the Servicing Hedge was approximately $191.8 million.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
- - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
(Dollar amounts in millions) Balance, Dispositions/ Balance,
February 28, 1997 Additions Expirations February 28,
1998
- - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
Interest Rate Floors $26,250 13,500 ( 6,750) $33,000
Long Call Options on
Interest Rate Futures $4,200 99,600 (24,400) $79,400
Long Put Options on
Interest Rate Futures - 11,775 ( 1,975) $9,800
Interest Rate Futures - 5,000 - $5,000
Capped Swaps $1,000 - - $1,000
Interest Rate Swaps - 3,900 - $3,900
Principal - Only Swaps $ 268 - ( 268) -
Interest Rate Cap $1,000 4,000 ( 500) $4,500
Swaptions $1,750 1,000 ( 900) $1,850
Options on Callable Pass-through
Certificates $ - 2,561 - $2,561
- - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
The Servicing Hedge instruments utilized by the Company are intended to
protect the value of the investment in 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 hedge instruments declines. With respect to the options, Swaptions,
floors, caps and CMOs, the Company is not exposed to loss beyond its initial
outlay to acquire the hedge instruments. With respect to the Capped Swaps
contracts entered into by the Company as of February 28, 1998, the Company
estimates that its maximum exposure to loss over the contractual term is $24.5
million. With respect to the Swap contracts entered into by the Company as of
February 28, 1998, the Company estimates that its maximum exposure to loss over
the contractual term is $153.0 million. The Company's exposure to loss on
futures is related to changes in the Eurodollar rate over the life of the
contract. The Company estimates that its maximum exposure to loss over the
contractual term is $18.0 million.
There can be no assurance that the Servicing Hedge will generate gains in
the future, or if gains are generated, that they will fully offset impairment of
the MSRs.
Interest Rate Swaps
As of February 28, 1998, CHL had interest rate swap agreements, in addition
to those included in the Servicing Hedge, with certain financial institutions
having notional principal amounts totaling $4.1 billion. The effect of these
agreements is to enable CHL to convert its fixed-rate long term debt borrowings
to LIBOR-based floating-rate cost borrowings (notional amount $3.4 billion), to
convert a portion of its commercial paper and medium-term note borrowings from
one floating-rate index to another (notional amount $0.1 billion) and to convert
the earnings rate on the custodial accounts held by CHL from floating to fixed
(notional amount $0.6 billion). Payments are due periodically through the
termination date of each agreement. The agreements expire between March 1998 and
June 2027.
The interest rate swap agreements related to debt had an average fixed rate
(receive rate) of 6.22% and an average floating rate indexed to 3-month LIBOR
(pay rate) of 5.72% at February 28, 1998. The interest rate swap agreements
related to custodial accounts had an average fixed rate (receive rate) of 6.89%
and an average floating rate indexed to 1 to 3-month LIBOR (pay rate) of 5.72%
at February 28, 1998.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of February 28, 1998 and 1997 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.
-- ---------------------------------------------- ------------------------------- --- ----------------------------
February 28, 1998 February 28, 1997
------------------------------- --- ----------------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) amount fair value amount fair value
-- ---------------------------------------------- ------------ -- ------------- -- ------------- --- -------------
Assets:
Mortgage loans and mortgage-backed securities
held for sale $5,292,191 $5,292,191 $2,579,972 $2,579,972
Items included in other assets:
Trading securities 255,216 255,216 130,915 130,915
Reverse repurchase agreements 53,560 53,560 - -
CMOs purchased 191,823 191,823 165,452 165,452
Mortgage-backed securities retained in
securitizations 466,259 466,259 293,030 293,030
Equity Securities - restricted and unrestricted 96,152 96,152 8,400 25,900
Rewarehoused FHA and VA loans 426,407 426,407 556,571 556,571
Liabilities:
Notes payable 7,475,221 7,589,593 4,713,324 4,738,763
Repurchase agreements 7,190 7,456 24,083 24,891
Securities sold not yet purchased 165,316 165,316 - -
Derivatives:
Interest rate floors 378,023 373,964 167,204 137,047
Contracts on MBS - ( 5,719) - (38,119)
Options on MBS 33,290 24,125 43,058 29,240
Options on interest rate futures 32,093 13,546 6,431 1,625
Options on callable pass-through certificates 34,451 44,278 - -
Interest rate caps 83,512 41,319 30,912 29,127
Capped Swaps 5,405 ( 1,795) (11,609) (11,609)
Swaptions 27,213 27,213 19,701 19,482
Interest rate futures ( 3,359) ( 3,359) - -
Interest rate swaps 44,717 155,229 5,340 (4,951)
Principal-only swaps - - (19,446) (19,446)
Short-term commitments to extend credit - 38,525 - 40,439
-- ---------------------------------------------- ------------ -- ------------- -- ------------- --- -------------
The fair value estimates as of February 28, 1998 and 1997 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
NOTE I - FINANCIAL INSTRUMENTS (Continued)
The following describes the methods and assumptions used by the Company in
estimating fair values.
Mortgage Loans and Mortgage-Backed Securities Held for Sale
Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
Collateralized Mortgage Obligations
Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and market
consensus prepayment rates.
Mortgage-backed securities retained in securitization
Fair value is estimated by discounting future cash flows using discount
rates that approximate current market rates and market consensus prepayment
rates.
Derivatives
Fair value is defined as the amount that the Company would receive or pay to
terminate the contracts at the reporting date. Market or dealer quotes are
available for many derivatives; otherwise, pricing or valuation models are
applied to 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
On September 29, 1997, the United States District Court adopted the
recommendation of a magistrate denying class certification in a lawsuit which
was filed against CHL and a mortgage broker by Jeff and Kathy Briggs as a
purported class action. The effect of the ruling is that the lawsuit will not
proceed as a class action and will be limited to the Briggs' own claims. The
Briggs are seeking reconsideration of the Court's ruling. The suit entitled
Briggs v. Countywide, et. al and filed in the Northern Division of the United
States District Court for the Middle District of Alabama, alleges that in
connection with residential mortgage loan closings, CHL made certain payments to
mortgage brokers in violation of the Real Estate Settlement Procedures Act and
induced mortgage brokers to breach their alleged fiduciary duties to their
customers. The plaintiffs seek unspecified compensatory and punitive damages
plus, as to certain claims, treble damages. In early 1998, two additional
purported class action lawsuits were filed making essentially the same
allegations about broker compensation as were made in Briggs. William C. Elliott
et. al v. Countrywide Home Loans, Inc. was filed on February 18, 1998 in the
United States District Court for Northern District of Mississippi and Joseph W.
Gann, Sr., et. al v. America's Wholesale Lender was filed on February 14, 1998
in the United States District Court for the Middle District of Alabama. CHL's
management believes that its compensation programs to mortgage brokers comply
with applicable laws and long standing industry practice, and that it has
meritorious defenses to these actions. CHL intends to defend vigorously against
these actions and believes that the ultimate resolution of such claims will not
have a material adverse effect on the Company's financial position or results of
operations.
NOTE J - COMMITMENTS AND CONTINGENCIES (Continued)
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. Although
it is difficult to predict the ultimate outcome of these proceedings, management
believes, based on discussions with counsel, that any ultimate liability will
not materially affect the consolidated financial position or results of
operations of the Company and its subsidiaries.
Commitments to Buy or Sell Mortgage-Backed Securities and Other Derivatives
Contracts
In connection with its open commitments to buy or sell MBS and other
derivative contracts, the Company may be required to maintain margin deposits.
With respect to the MBS commitments, these requirements are generally greatest
during periods of rapidly declining interest rates. With respect to other
derivative contracts, margin requirements are generally greatest during periods
of increasing interest rates.
Lease Commitments
The Company leases office facilities under lease agreements extending
through September, 2011. Future minimum annual rental commitments under these
non-cancelable operating leases with initial or remaining terms of one year or
more are as follows.
--- ------------------------------------------ ------------------------------------
Year ending February 28(29), (Dollar amounts in thousands)
--- ------------------------------- -------------------- -------------- -----------
1999 $ 22,557
2000 17,867
2001 13,360
2002 10,703
2003 7,997
Thereafter 53,323
==============
$125,807
==============
--- ------------------------------- -------------------- -------------- -----------
Rent expense was $30.2 million, $22.3 million and $20.4 million for the
years ended February 28(29), 1998, 1997 and 1996, 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 facility as of February 28, 1998, the Company is required to
maintain $1.3 billion in consolidated net worth and CHL is required to maintain
$1.2 billion of net worth, as defined in the credit agreement.
Loan Servicing
As of February 28(29), 1998, 1997 and 1996, the Company serviced loans
totaling approximately $182.9 billion, $158.6 billion and $136.8 billion,
respectively. Included in the loans serviced at February 28(29), 1998, 1997 and
1996 were loans being serviced under subservicing agreements with total
principal balances of $6.7 billion, $3.9 billion and $1.9 billion, respectively.
The loans are serviced under a variety of servicing contracts. In general, these
contracts include guidelines and procedures for servicing the loans, remittance
requirements and reporting requirements, among other provisions.
NOTE J - COMMITMENTS AND CONTINGENCIES (Continued)
Conforming conventional loans serviced by the Company (56% of the servicing
portfolio at February 28, 1998) are securitized through the Fannie Mae or
Freddie Mac programs. Such servicing is done on a non-recourse basis, whereby
foreclosure losses are generally the responsibility of Fannie Mae or Freddie Mac
and not of the Company. The government loans serviced by the Company are
securitized through Government National Mortgage Association programs. The
government loans are either insured against loss by the Federal Housing
Administration (20% of the servicing portfolio at February 28, 1998) or
partially guaranteed against loss by the Department of Veterans Affairs (8% of
the servicing portfolio at February 28, 1998). In addition, jumbo mortgage loans
(16% of the servicing portfolio at February 28, 1998) are also serviced for
various investors on a
non-recourse basis.
Properties securing the mortgage loans in the Company's servicing portfolio
are geographically dispersed throughout the United States. As of February 28,
1998, approximately 35% of the mortgage loans (measured by unpaid principal
balance) in the Company's servicing portfolio are secured by properties located
in California. No other state contains more than 5% of the properties securing
mortgage loans.
Generally, the Company is not exposed to credit risk. Because the Company
services substantially all conventional loans on a non-recourse basis,
foreclosure losses are generally the responsibility of the investor or insurer
and not the Company. The Company retains credit risk on the home equity and
sub-prime loans it sells in the form of pools backing securities. As such,
through retention of a subordinated interest in the trust, the Company bears
primary responsibility for credit losses on the loans. At February 28, 1998, the
Company had investments in such subordinated interests amounting to $251
million, which represents the maximum exposure to credit losses on the
securitized home equity and sub-prime loans. While the Company generally does
not retain credit risk with respect to the prime credit quality first mortgage
loans it sells, it does have potential liability under representations and
warranties made to purchasers and insurers of the loans. In the event of a
breach of the representations and warranties, the Company may be required to
repurchase a mortgage loan and any subsequent loss on the mortgage loan may be
borne by the Company. Similarly, government loans serviced by the Company (29%
of the Company's servicing portfolio at February 28, 1998) are insured by the
Federal Housing Administration or partially guaranteed against loss by the
Department of Veterans Affairs. The Company is exposed to credit losses to the
extent that the partial guarantee provided by the Department of Veterans Affairs
is inadequate to cover the total credit losses incurred.
NOTE K - EMPLOYEE BENEFITS
Stock Option Plans
The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and directors.
Options are generally granted at the average market price of the Company's
common stock on the date of grant and are exercisable beginning one year from
the date of grant and expire up to eleven years from the date of grant.
NOTE K - EMPLOYEE BENEFITS (Continued)
Stock options transactions under the Plans were as follows.
- - -----------------------------------------------------------------------------------------------------------------
Year ended February 28(29),
-------------------------------------------------------
1998 1997 1996
- - ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- ---
Number of Shares:
Outstanding options at beginning of year 10,241,862 6,911,180 6,683,414
Options granted 1,836,169 4,516,237 1,110,205
Options exercised (839,479) (1,000,798) (752,380)
Options expired or cancelled (86,753) (184,757) (130,059)
============== ============== ==============
Outstanding options at end of year 11,151,799 10,241,862 6,911,180
============== ============== ==============
Weighted Average Exercise Price:
Outstanding options at beginning of year $19.03 $15.67
$14.75
Options granted 27.09 23.14 18.56
Options exercised 16.07 14.26 11.60
Options expired or canceled 21.17 19.38 16.25
============== ============== ==============
Outstanding options at end of year $20.57 $19.03 $15.67
============== ============== ==============
Options exercisable at end of year 5,407,177 3,862,565 3,437,985
Options available for future grant 1,920,487 3,078,591 1,410,485
- - ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- ---
Status of the outstanding stock options under the Plans at February 28, 1998
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
------------------- --------------- -------------- ------------- ------------- --------------
$2.39 - $15.58 4.4 years 1,750,953 $12.02 1,567,026 $11.60
$16.19 - $16.81 5.7 1,191,567 $16.55 974,908 $16.49
$17.38 - $22.81 6.8 2,862,792 $20.08 1,827,499 $19.68
$23.06 - $26.63 8.4 3,564,918 $23.23 1,037,369 $23.32
$27.06 - $44.00 9.3 1,781,569 $27.12 375 $28.56
=================== =============== ============== ============= ============= --------------
$2.39 - $44.00 7.2 years 11,151,799 $20.57 5,407,177 $17.46
=================== =============== ============== ============= ============= --------------
- - ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- --------------
NOTE K - EMPLOYEE BENEFITS (Continued)
Had the estimated fair value of the options granted during the period been
included in compensation expense, the Company's net earnings and earnings per
share would have been as follows:
- - ------------------------------------------- ----------------------------------------------------
(Dollar amounts in thousands, Year ended February 28,
----------------------------------------------------
except per share data) 1998 1997 1996
- - ------------------------------------------- ----------------- ---------------- -----------------
Net Earnings
As reported $344,983 $257,358 $195,720
Pro forma $335,043 $241,115 $191,652
Basic Earnings Per Share
As reported $3.21 $2.50 $1.99
Pro forma $3.12 $2.34 $1.95
Diluted Earnings Per Share
As reported $3.09 $2.44 $1.95
Pro forma $3.00 $2.28 $1.91
- - ------------------------------------------- ----------------- ---------------- -----------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model modified to consider cash dividends to be
paid. The following weighted-average assumptions were used for grants in fiscal
1998, 1997 and 1996, respectively: dividend yield of 1.18%, 1.38% and 1.72%;
expected volatility of 28%, 26% and 32%; risk-free interest rates of 6.5%, 6.6%
and 5.9% and expected lives of five years for options granted in all three
years. The average fair value of options granted during fiscal 1998, 1997 and
1996 was $8.89, $7.15 and $6.11, respectively.
Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the minimum
funding standards of ERISA.
NOTE K - EMPLOYEE BENEFITS (Continued)
The following table sets forth the Plan's funded status and amounts recognized
in the Company's financial statements.
-- ----------------------------------------- ---- ------------------------------------------------------ ---
Year ended February 28,
---
-- ------------- --- ------------
(Dollar amounts in thousands) 1998 1997
-- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Actuarial present value of benefit obligations:
Vested $10,849 $8,640
Non-vested 4,378 3,425
------------- ------------
Total accumulated benefit obligation 15,227 12,065
Additional benefits based on estimated future salary levels 8,706 6,439
------------
-------------
Projected benefit obligations for service rendered to date 23,933 18,504
Less: Plan assets at fair value, primarily mortgage-backed securities (18,152) (13,677)
------------- ------------
Projected benefit obligation in excess of Plan assets 5,781 4,827
Unrecognized net (loss) gain from past experience different from that
assumed and
effects of changes in assumptions (809) (903)
Prior service cost not yet recognized in net periodic pension cost (1,123) (1,223)
Unrecognized net asset at February 28, 1987 being recognized over 15 years 283 354
------------- ------------
Accrued pension cost $4,132 $3,055
============= ============
Net pension cost included the following components:
Service cost - benefits earned during the period $3,241 $2,331
Interest cost on projected benefit obligations 1,273 1,153
Actual return on Plan assets (2,525) 598
Net amortization and deferral 1,372 (1,614)
============= ============
Net periodic pension cost $3,361 $2,468
============= ============
-- ------------------------------------------------------------------- -- ------------- --- ------------ ---
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for February 28, 1998 and 1997 was
7.25% and 7.50%, respectively. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 4.0% for both years ended February 28, 1998 and 1997. The
expected long-term rate of return on assets used was 8.0% for both years ended
February 28, 1998 and 1997. Pension expense for the years ended February 28(29),
1998, 1997 and 1996 was $3.4 million, $2.5 million and $2.0 million,
respectively. The Company makes contributions to the Plan in amounts that are
deductible in accordance with federal income tax regulations.
NOTE L - SHAREHOLDERS' EQUITY
In February 1988, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock. As a result of stock splits and
stock dividends, 0.399 of a Right is presently associated with each outstanding
share of the Company's common stock issued prior to the Distribution Date (as
defined below). Each Right, when exercisable, entitles the holder to purchase
from the Company one one-hundredth of a share of Series A Participating
Preferred Stock, par value $0.05 per share, of the Company (the "Series A
Preferred Stock"), at a price of $145, subject to adjustments in certain cases
to prevent dilution.
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
On July 1, 1997, the Company sold the assets, operations and employees of
Countrywide Asset Management Corporation ("CAMC"), a then wholly-owned
subsidiary of the Company, to INMC Mortgage Holdings, Inc. (formerly CWM
Mortgage Holdings, Inc.) ("INMC"). CAMC was formally the manager of INMC. As
consideration, the Company received 3,440,800 newly issued common shares of
INMC. These shares have resale restrictions for up to a period of three years.
The transaction was structured as a merger of CAMC with and into INMC.
Prior to the sale, CAMC received certain management fees and incentive
compensation. During the fiscal years ended February 28(29), 1998, 1997 and
1996, CAMC earned $0.6 million, $1.6 million and $2.0 million, respectively, in
base management fees from INMC and its subsidiaries. In addition, during the
fiscal years ended February 28(29), 1998, 1997 and 1996, CAMC received $3.1
million, $8.6 million and $6.6 million, respectively, in incentive compensation.
Prior to the sale, CAMC incurred many of the expenses related to the
operations of INMC and its subsidiaries, including personnel and related
expenses, subject to reimbursement by INMC. During the fiscal years ended
February 28(29), 1998, 1997 and 1996, the amount of expenses incurred by CHL
which were allocated to CAMC and reimbursed by INMC totaled $16.0 million, $29.2
million and $17.1 million, respectively.
INMC held an option to purchase conventional loans from CHL at the
prevailing market price. During the years ended February 28(29), 1998, 1997 and
1996, INMC purchased $2.9 million, $51.5 million and $14.3 million,
respectively, of conventional non-conforming mortgage loans from CHL pursuant to
this option.
CHL services mortgage loans issued by subsidiaries of INMC with outstanding
balances of approximately $4.4 billion at February 28, 1998. CHL received $1.9
million, $0.6 million and $0.1 million in subservicing fees for the years ended
February 28 (29), 1998, 1997 and 1996, respectively.
NOTE N - SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in the mortgage banking
industry. Operations in mortgage banking involve CHL's origination and purchase
of mortgage loans, sale of mortgage loans in the secondary mortgage market,
servicing of mortgage loans and the purchase and sale of rights to service
mortgage loans.
Segment information for the year ended February 28, 1998 was as follows.
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Unaffiliated revenue $ 1,260,306 $ 248,654 $ - $ 1,508,960
Intersegment revenue 351 - (351) -
------------ ----------- ------------ -------------
------------ ----------- ------------ -------------
Total revenue $ 1,260,657 $ 248,654 $ (351) $ 1,508,960
============ =========== ============ -------------
Earnings before income taxes $ 421,748 $ 143,798 $ - $ 565,546
============ =========== ============ =============
Identifiable assets as
of February 28, 1998 $11,508,573 $ 3,137,247 ($2,426,639) $12,219,181
============ =========== ============ -------------
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Segment information for the year ended February 28, 1997 was as follows.
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Unaffiliated revenue $1,006,146 $ 106,316 $ - $ 1,112,462
Intersegment revenue 392 - (392) -
------------ ----------- ------------ -------------
Total revenue $1,006,538 $ 106,316 $ (392) $ 1,112,462
============ =========== ============ =============
Earnings before income taxes $ 369,020 $ 52,878 $ - $ 421,898
============ =========== ============ =============
Identifiable assets as
of February 28, 1997 $7,415,050 $ 2,158,835 ($1,884,795) $7,689,090
============ =========== ============ =============
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
NOTE N - SEGMENT INFORMATION (Continued)
Segment information for the year ended February 29, 1996 was as follows.
----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- -------------
Unaffiliated revenue $ 806,813 $ 53,959 $ - $ 860,742
Intersegment revenue 1,776 - (1,776) -
------------ ----------- -------------- -------------
Total revenue $ 808,589 $ 53,929 ($ 1,776) $ 860,742
============ =========== ============== =============
Earnings before income taxes $ 308,596 $ 17,604 $ - $ 326,200
============ =========== ============== ==============
Identifiable assets as
of February 29, 1996 $ 8,181,765 $ 1,454,609 ($1,299,388) ($$8,336,986)
============ =========== ============== ==============
----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- -------------
NOTE O - SUBSEQUENT EVENTS
On March 18, 1998, the Company declared a cash dividend of $0.08 per common
share payable April 30, 1998 to shareholders of record on April 14, 1998.
On April 15, 1998 CHL entered into a one year Revolving Credit Agreement
with 16 banks for total commitments of $1.3 billion. The facility contains terms
consistent with the existing $4.0 billion revolving credit facility. The
facility will serve as additional liquidity backup to CHL's commercial paper
program.
On or about May 28, 1998 CHL entered into a commitment to sell to qualified
purchasers a total of $400 million Floating Rate Notes due 2003 listed on the
Luxembourg Stock Exchange (the "Euro Notes"). The Euro Notes are fully and
unconditionally guaranteed by the Company and will be issued under the Euro
Medium Term Notes program established by CHL. The maximum aggregate principal
amount outstanding at any one time under the program will not exceed $2.0
billion. The Euro Notes will not be registered under the Securities Act of 1933,
as amended (the "Securities Act") and as such, they may not be offered or sold
within the United States or to, or for the account or benefit of, U.S. persons
except in accordance with an exemption from the registration requirements of the
Securities Act.
NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data was as follows.
-- ----------------------------------------- ---- ------------------------------------------------- ---------
Three months ended
(Dollar amounts in thousands, except per share May 31 August 31 November 30 February 28
data)
-------------- --------------- -------------- -----------------
--------------------------------------------- -------------- --------------- -------------- -----------------
Year ended February 28, 1998
Revenue $318,645 $405,156 $375,141 $410,018
Expenses 203,942 225,272 243,693 270,507
Provision for income taxes 44,734 70,155 51,265 54,409
Net earnings $ 69,969 $109,729 $ 80,183 $ 85,102
Earnings per share(1)
Basic $0.66 $1.02 $0.75 $0.78
Diluted $0.64 $0.99 $0.71 $0.74
Year ended February 28, 1997
Revenue $263,282 $270,815 $281,530 $296,835
Expenses 163,898 168,361 173,440 184,865
Provision for income taxes 38,760 39,957 42,155 43,668
Net earnings $ 60,624 $ 62,497 $ 65,935 $ 68,302
Earnings per share(1)
Basic $0.59 $0.61 $0.64 $0.65
Diluted $0.58 $0.60 $0.62 $0.63
--------------------------------------------- -------------- --------------- -------------- -----------------
(1) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share
amounts may not equal the annual amount. This is caused by rounding
and the averaging effect of the number of share equivalents utilized
throughout the year, which changes with the market price of the common
stock.
NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for Countrywide Home Loans, Inc. was as
follows.
-- ----------------------------------------- ---- ------------------------------------------------- ---------
February 28,
-------------- ----------- -------------- ---------
(Dollar amounts in thousands) 1998 1997
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $ 5,292,191 $2,579,972
Other assets 6,216,382 4,835,078
============== ==============
Total assets $11,508,573 $7,415,050
============== ==============
Short- and long-term debt $ 8,747,794 $5,220,277
Other liabilities 1,027,884 742,435
Equity 1,732,895 1,452,338
============== ==============
Total liabilities and equity $11,508,573 $7,415,050
============== ==============
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
NOTE Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (Continued)
--- ----------------------------------------- --- --------------------------------------------------- --------
Year ended February 28,
--------------- ---------- --------------- ---------
(Dollar amounts in thousands) 1998 1997
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings:
Revenues $1,260,657 $1,006,538
Expenses 838,909 637,518
Provision for income taxes 164,166 143,918
=============== ===============
Net earnings $ 257,582 $ 225,102
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE R - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of general-purpose financial statements. This Statement
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and show the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The impact of the adoption of this statement
is disclosure related and therefore Management believes that the adoption will
not have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131"). SFAS No. 131 establishes standards for the manner in which public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Statement also establishes standards for related disclosure about products
and services, geographic areas, and major customers. This Statement is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application comparative information for earlier years is to be restated. This
Statement need not be applied to interim financial statements in the initial
year of its application. The impact of the adoption of this statement is
disclosure related and therefore Management believes that the adoption will not
have a material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, Employers' Disclosure about Pensions and Other Postretirement Benefits
("SFAS No. 132"), an amendment of FASB Statements No. 87, 88, and 106. SFAS No.
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
This Statement is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required. The impact of the adoption of this statement is disclosure related
and therefore Management believes that the adoption will not have a material
impact on the Company.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COUNTRYWIDE CREDIT INDUSTRIES, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
February 28,
-------------- -- --------------
1998 1997
-------------- --------------
Assets
Cash $ - $ -
Intercompany receivable 278,966 120,126
Investment in subsidiaries at equity in net assets 1,846,298 1,560,341
Equipment and leasehold improvements 88 108
Other assets 207,005 36,934
-------------- --------------
Total assets $2,332,357 $1,717,509
============== ==============
Liabilities and Shareholders' Equity
Intercompany payable $ 133,240 $ 44,023
Accounts payable and accrued liabilities 47,566 16,971
Deferred income taxes 56,039 14,439
--------------
--------------
Total liabilities 236,845 75,433
Common shareholders' equity
Common stock 5,460 5,305
Additional paid-in capital 1,049,364 917,942
Unrealized gain on available-for-sale securities 11,267 -
Retained earnings 1,029,421 718,829
-------------- --------------
Total shareholders' equity 2,095,512 1,642,076
-------------- --------------
Total liabilities and shareholders' equity $2,332,357 $1,717,509
============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
Year ended February 28(29),
-------------- -- -------------- -- --------------
1998 1997 1996
-------------- -------------- --------------
Revenue
Interest earned $ 6,421 $ 1,148 $ 31
Interest charges - - (1,952)
-------------- -------------- --------------
Net interest income 6,421 1,148 (1,921)
Gain on sale of subsidiary 57,381 - -
Dividend income 10,350 1,550 2,332
-------------- -------------- --------------
74,152 2,698 411
Expenses (3,414) (3,398) (3,761)
-------------- -------------- --------------
Earnings (loss) before income tax provision/benefit and
equity in net earnings of subsidiaries 70,738 (700) (3,350)
Income tax (provision) benefit (27,588) 273 1,340
-------------- -------------- --------------
Earnings (loss) before equity in net earnings of subsidiaries 43,150 (427) (2,010)
Equity in net earnings of subsidiaries 301,833 257,785 197,730
-------------- -------------- --------------
NET EARNINGS $344,983 $257,358 $195,720
============== ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(Dollar amounts in thousands)
Year ended February 28(29),
-------------- -- -------------- -- --------------
1998 1997 1996
-------------- -------------- --------------
Cash flows from operating activities:
Net earnings $344,983 $257,358 $195,720
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Earnings of subsidiaries (301,833) (257,785) (197,730)
Depreciation and amortization 26 24 18
Increase in other receivables and other assets (85,647) (1,644) (8,241)
Increase in accounts payable and accrued liabilities 44,039 5,534 2,488
Gain on sale of subsidiary (57,381) - -
Gain on sale of available-for-sale securities (2,593) - -
-------------- -------------- --------------
Net cash provided (used) by operating activities (58,406) 3,487 (7,745)
-------------- -------------- --------------
Cash flows from investing activities:
Net change in intercompany receivables and payables (53,066) (44,901) 76,236
Investment in subsidiaries 15,876 (6,832) (239,368)
Proceeds from available-for-sale securities 3,678 - -
-------------- -------------- --------------
Net cash (used) provided by investing activities (33,512) (51,733) (163,132)
-------------- -------------- --------------
Cash flows from financing activities:
Repayment of long-term debt - - (10,600)
Issuance of common stock 126,309 81,235 212,438
Cash dividends paid (34,391) (32,989) (30,961)
-------------- -------------- --------------
Net cash provided (used) by financing activities 91,918 48,246 170,877
-------------- -------------- --------------
Net change in cash - - -
Cash at beginning of year - - -
-------------- -------------- --------------
Cash at end of year $ - $ - $ -
============== ============== ==============
Supplemental cash flow information:
Cash used to pay interest - - $ 2,744
Cash used to pay income taxes $ 186 - -
Noncash financing activities - issuance of common stock
to acquire subsidiary - $ 16,717 -
Unrealized gain (loss) on available-for-sale securities,
net of tax $ 11,267 - -
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS Three years ended February
28(29), 1998
(Dollar amounts in thousands)
Column A Column B Column C Column D Column E
- - ---------------------------------- -------------- -------------------------------- ----------------- --------------
Additions
--------------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
of period expenses accounts Deductions (1) of period
- - ---------------------------------- -------------- -------------- ---------------- ------------------ -------------
Year ended February 28, 1998
Allowance for losses $24,749 $31,456 $ 296 $21,823 $34,678
Year ended February 28, 1997
Allowance for losses $15,635 $21,064 $ 242 $12,192 $24,749
Year ended February 29, 1996
Allowance for losses $11,183 $8,831 $ 800 $ 5,179 $15,635
- - ----------------------------------
(1) Actual losses charged against reserve, net of recoveries and
reclassification.
Exhibit List
Exhibit
No. Description
- - ----------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc.,
Countrywide Asset Management Corporation and Countrywide Credit
Industries, Inc.
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.
3.3.2 Amendment to Bylaws of Countrywide Credit Industries, Inc. dated
February 3, 1998.
4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide
Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Form 8-A
filed pursuant to Section 12 of the Securities Exchange Act of 1934 on
February 12, 1988).
4.1.1* Amendment No. 1 to Rights Agreement dated as 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 on Form S-3 of the Company and CHL (File Nos. 33-59559 and
33-59559-01) filed with the SEC on June 16, 1995).
4.12*Form of Medium-Term Notes, Series D (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
4.13*Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
333-3835 and 333-3835-01) filed with the SEC on August 2, 1996).
4.14*Form of Medium-Term Notes, Series E (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment
No. 1 to the registration statement on Form S-3 of the Company and CHL
(File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2,
1996).
+ 10.1*Indemnity Agreements with Directors and Officers of Countrywide
Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 8-K dated February 6, 1987).
+ 10.2*Restated Employment Agreement for David S. Loeb dated March 26, 1996
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26,
1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.3.1 Amendment Number One to Restated Employment Agreement for Angelo R.
Mozilo.
+ 10.3.2 Amendment Number Two to Restated Employment Agreement for Angelo R.
Mozilo.
+ 10.4 Employment Agreement for Stanford L. Kurland dated May 7, 1996
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-Q dated August 31, 1996).
+ 10.5*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).
+ 10.6*Countrywide Credit Industries, Inc. Deferred Compensation Plan for
Key Management Employees dated April 15, 1992 (incorporated by reference to
Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28,
1993).
+ 10.7 Countrywide Credit Industries, Inc. Deferred Compensation Plan
Amended and Restated Effective January 1, 1998.
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 August 31, 1997)
+ 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989
(incorporated by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K dated February 28, 1989).
+ 10.11.1* First Amendment to the 1987 Stock Option Plan as Amended and
Restated.(incorporated by reference to Exhibit 10.11.1 to the Company's
Quarterly Report on Form 10-Q dated November 30, 1997)
+ 10.11.2*Second Amendment to the 1987 Stock Option Plan as Amended and
Restated. (incorporated by reference to Exhibit 10.11.2 to the Company's
Quarterly Report on Form 10-K 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)
+ 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by
reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
+ 10.16* Amended and Restated Stock Option Financing Plan (incorporated by
reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
10.17* 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset
Management Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1995).
10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February 28, 1990).
10.19* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1995).
+ 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K dated February 29, 1992).
+ 10.20.1* First Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.2* Second Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.3* Third Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated
February 28, 1995).
+ 10.20.6* Sixth Amendment to the 1991 Stock Option Plan. (incorporated
by reference to Exhibit 10.20.6 to the Company's Quarterly 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 Quarterly Report on Form 10-Q
dated November 30, 1997)
+ 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* First 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)
+ 10.22* 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 Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.22.2 Second Amendment to the Amendment and Restated 1993 Stock Option Plan.
+ 10.22.3 Third Amendment to the Amendment and Restated 1993 Stock Option Plan.
+ 10.23* Supplemental Executive Retirement Plan effective March 1, 1994
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1994).
+ 10.24* Split-Dollar Life Insurance Agreement (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31,
1994).
+ 10.25* 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
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.