CW Bofa Merger Plan Agreement
CW Bofa Merger Plan Agreement
CW Bofa Merger Plan Agreement
co
AGREEMENT & PLAN OF MERGER
d.
au
Table Of Contents:
Pg. 2. 2nd Supp. Note Deed Poll, Dated 11/072008, To The Note Deed Poll Dated 4/29/05
Fr
Pg. 10. Bank of America Corporation on 1st July 2008 – Effective date of merger
Pg. 15. Countrywide and Bank Of America Agreement And Plan Of Merger
re
Pg. 116. Bank of America Corporation on 7th November 2008 – Debt Assumption
Pg. 127. 6th Supp Trust Deed Dated 11/07/08, 11/07/08, Modifying The Prov. Of Trust Deed
5/01/98
su
Pg. 138 3rd Supp. Trust Deed 11/07/08, To The Trust Deed Dated 8/15/05
clo
Pg. 163. Countrywide Financial Corporation on 30th June 2008 – Consolidated Balance Sheet for
re
m
Exhibit 4.47
co
Second Supplemental Note Deed Poll
relating to the Note Deed Poll dated 29 April 2005 as amended and supplemented on 1 July 2008 (“Note
d.
Deed Poll”)
Countrywide Financial Corporation (formally known as Red Oak Merger Corporation) (“CFC”)
au
Countrywide Home Loans, Inc. (“Guarantor”)
Bank of America Corporation (“Corporation”)
FOR THE PURPOSES OF UNITED STATES FEDERAL INCOME TAX LAWS, THE REGISTERED
Fr
NOTES AND THE BEARER NOTES ARE BOTH “BEARER OBLIGATIONS”. ANY UNITED STATES
PERSON WHO HOLDS A NOTE WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES
FEDERAL INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j)
re
AND 1287(a) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES OF
AMERICA SECURITIES ACT OF 1933, AS AMENDED (“SECURITIES ACT”) OR ANY APPLICABLE
su
STATE SECURITIES OR “BLUE SKY” LAWS AND NEITHER THE NOTES NOR ANY INTEREST
THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF TO OR FOR
THE ACCOUNT OR BENEFIT OF A US PERSON (AS DEFINED IN REGULATION S UNDER THE
SECURITIES ACT) IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION UNDER THE
clo
SECURITIES ACT AND THE RULES AND REGULATIONS THEREUNDER OR ANY APPLICABLE
STATE SECURITIES LAW. THE ISSUER HAS NOT BEEN AND WILL NOT BE REGISTERED AS AN
INVESTMENT COMPANY UNDER THE UNITED STATES INVESTMENT COMPANY ACT OF 1940, AS
AMENDED.
re
FOR UNITED STATES FEDERAL INCOME TAX AND SECURITIES LAWS PURPOSES, EACH
TRANCHE OF REGISTERED NOTES AND, FOR THE PURPOSES OF THAT TRANCHE OF
REGISTERED NOTES ONLY, THE NOTE DEED POLL, CONSTITUTE A TEMPORARY GLOBAL NOTE
Fo
ISSUED IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT AND WILL
BECOME A PERMANENT GLOBAL NOTE ON OR AFTER THE EXCHANGE DATE UPON AND TO
THE EXTENT OF DELIVERY TO THE PAYING AGENT OF (A) A CERTIFICATE OR CERTIFICATES
FROM AUSTRACLEAR LIMITED (AS OPERATOR OF THE AUSTRACLEAR SYSTEM) BASED UPON A
op
m
F +61 3 9643 5999
DX 101 Melbourne
co
Contents Second Supplemental Note Deed Poll
d.
au
1 Assumption 2
Fr
Benefit and entitlement 3
Rights independent 3
Noteholders bound 3
re
Direction to hold this Second Supplemental Note Deed Poll 3
2 Miscellaneous su 3
Headings 5
Benefits of Second Supplemental Note Deed Poll 5
Counterparts 5
Fo
Governing law. 5
(i)
op
m
liability in the State of Delaware (“Corporation”)
co
In favour of: Each person who is from time to time a Noteholder (as defined in the Note Deed Poll).
Recitals:
A. CFC is the Issuer under the Note Deed Poll dated 29 April 2005 (as amended and
d.
supplemented on 1 July 2008, the “Note Deed Poll”), which provides for the constitution of
the notes issued by CFC under a A$3,500,000,000 Medium Term Note Programme (the
“Programme”).
au
B. There is outstanding under the terms of the Note Deed Poll one or more series of notes
(“Notes”).
C. The Guarantor has provided a guarantee of CFC’s obligations under the Notes pursuant to a
Fr
Deed Poll Guarantee and Indemnity dated 29 April 2005 in relation to the Programme (as
amended and supplemented, the “Guarantee”).
D. The Corporation and CFC entered into a Stock Purchase Agreement dated 7 November 2008,
re
pursuant to which CFC will sell to the Corporation substantially all of CFC’s assets (the
“Stock Purchase”).
E. The Stock Purchase is expected to be consummated on 7 November 2008.
su
F. Condition 4.4 of the Note Deed Poll provides that in the case of a transfer of CFC’s property
and assets substantially as an entirety, the person which acquires by transfer the properties
and assets shall expressly assume by supplemental note deed poll all the obligations and
clo
covenants under the Notes and the Transaction Documents to be performed and observed by
CFC.
G. This Second Supplemental Note Deed Poll has been duly authorized by all necessary
corporate action on the part of CFC and the Corporation.
re
1
Fo
H. CFC and the Corporation are of the opinion that this Second Supplemental Note Deed Poll is
not materially prejudicial to the interests of the Noteholders.
op
I. CFC has delivered to the Programme Manager a certificate signed by two of its directors and
an opinion of counsel acceptable to the Programme Manager in accordance with Condition
4.4, stating that the Stock Purchase and this Second Supplemental Note Deed Poll comply
St
with the Conditions (as defined in the Note Deed Poll) and all conditions precedent provided
for in the Conditions (as defined in the Note Deed Poll) relating to the Stock Purchase have
been complied with (as defined in the Note Deed Poll).
w.
J. The Guarantor has delivered to the Programme Manager a certificate signed by two of its
directors and an opinion of counsel acceptable to the Programme Manager, stating that the
Guarantor’s obligations under the Guarantee remain in full force and effect after the transfer
of CFC’s properties and assets substantially as an entirety to the Corporation and the
ww
assumption by the Corporation of the due and punctual payment of the principal of (and
premium, if any) and any interest on the Notes and the due and punctual performance of all
the obligations, and the observance of every covenant, of CFC under the Note Deed Poll as
set out in this Second Supplemental Note Deed Poll.
K. All things necessary to make this Second Supplemental Note Deed Poll a valid note deed poll
and agreement according to its terms has been done.
m
Operative provisions:
1 Assumption
co
Assumption of the obligations and covenants under the Notes and the Transaction Documents
d.
1.1 The Corporation hereby represents and warrants that:
(a) it is a corporation organized and existing under the laws of the State of Delaware; and
au
(b) the execution, delivery and performance of this Second Supplemental Note Deed Poll
has been duly authorized by the board of directors of the Corporation.
1.2 The Corporation hereby expressly assumes the due and punctual payment of the principal of
(and premium, if any) and any interest on all the Notes and the due and punctual performance
Fr
of all the obligations, and the observance of every covenant of CFC under the Note Deed Poll
and each other Transaction Document and, in accordance with Condition 4.5 of the Note
Deed Poll, the Corporation succeeds to, and is substituted for, and may exercise every right
re
and power of, CFC under the Transaction Documents with the same effect as if the
Corporation had been named as the Issuer therein, and following such succession CFC is
relieved of all obligations and covenants under the Transaction Documents.
su
2
clo
Name
1.3 With effect from the Effective Time specified in clause 2.1 below, the name of the Issuer,
under the Note Deed Poll, shall be “Bank of America Corporation”.
re
Guarantee
1.4 The Guarantor acknowledges and agrees that the Guarantor’s obligations under the Guarantee
Fo
remain in full force and effect after the transfer of CFC’s properties and assets substantially
as an entirety to the Corporation and the assumption by the Corporation of the due and
punctual payment of the principal of (and premium, if any) and any interest on the Notes and
the due and punctual performance of all the obligations, and the observance of every
op
covenant, of CFC under the Note Deed Poll and each other Transaction Document as set out
in this Second Supplemental Note Deed Poll with each reference to the “Issuer” in the
Guarantee being read as a reference to the Corporation.
1.5 This Second Supplemental Note Deed Poll is executed as a deed poll. Accordingly, each
Noteholder has the benefit of, and is entitled to enforce, this deed poll against the Corporation
and the Guarantor even though it is not a party to, or is not in existence at the time of
w.
execution and delivery of, this Second Supplemental Note Deed Poll.
Rights independent
ww
1.6 Each Noteholder may enforce its rights under this Second Supplemental Note Deed Poll
independently from each other Noteholder.
Noteholders bound
1.7 Each Noteholder and any person claiming through or under a Noteholder is bound by this
m
Second Supplemental Note Deed Poll.
co
1.8 Each Noteholder is taken to have irrevocably nominated and authorised the Registrar to hold
this Second Supplemental Note Deed Poll in New South Wales (or such other place as the
Corporation and the Registrar agree) on its behalf. The Corporation and the Guarantor
acknowledge the right of every Noteholder to the production of this Second Supplemental
d.
Note Deed Poll.
2 Miscellaneous
au
Effect of this Second Supplemental Note Deed Poll
2.1 Upon the execution and delivery of this Second Supplemental Note Deed Poll by CFC, the
Fr
Guarantor and the Corporation (the
3
re
su
“Effective Time”) the Note Deed Poll shall be supplemented in accordance with this Second
Supplemental Note Deed Poll, and this Second Supplemental Note Deed Poll shall form a
part of the Note Deed Poll for all purposes, and every Noteholder shall be bound thereby.
clo
Note Deed Poll Remains in Full Force and Effect
2.2 Except as supplemented hereby, all provisions in the Note Deed Poll shall remain in full
force and effect.
re
Note Deed Poll and Supplemental Note Deed Polls Construed Together
2.3 This Second Supplemental Note Deed Poll is supplemental to the Note Deed Poll, and the
Fo
Note Deed Poll and this Second Supplemental Note Deed Poll shall be read and construed
together.
2.4 The Note Deed Poll as supplemented by this Second Supplemental Note Deed Poll is in all
other respects confirmed and preserved.
Severability
St
2.5 In case any provision in this Second Supplemental Note Deed Poll shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired by this Second Supplemental Note Deed Poll.
w.
m
postage prepaid first class mail addressed (until another address is notified by the Corporation
in accordance with the Conditions (as defined in the Note Deed Poll)) as follows:
Bank of America Corporation
co
Bank of America Corporate Center
100 North Tryon Street
NC1-007-07-13 Corporate Treasury Division
Charlotte, North Carolina 28255
d.
Telephone: (980) 387-3776 begin_of_the_skype_highlighting (980) 387-
3776 end_of_the_skype_highlighting
Facsimile: (980) 387-8794
au
Attention: B. Kenneth Burton, Jr.
Fr
re
together with a copy to:
Bank of America Corporation
Legal Department su
NC1-002-29-01
101 South Tryon Street
Charlotte, North Carolina 28255
Telephone: (704) 386-4238 begin_of_the_skype_highlighting (704) 386-
clo
4238 end_of_the_skype_highlighting
Facsimile: (704) 386-1670
Attention: Teresa M. Brenner, Esq.
Headings
re
2.8 The headings of this Second Supplemental Note Deed Poll have been inserted for
convenience of reference only, are not to be considered part of this Second Supplemental
Fo
Note Deed Poll and shall in no way modify or restrict any of the terms or provisions hereof.
give to any person, other than the parties to this Second Supplemental Note Deed Poll and
their successors and the Noteholders, any benefit of any legal or equitable right, remedy or
claim under the Note Deed Poll, this Second Supplemental Note Deed Poll or the Notes.
St
Counterparts
2.10 The parties may sign any number of copies of this Second Supplemental Note Deed Poll.
Each signed copy shall be an original, but all of them together represent the same instrument.
w.
Governing law.
2.11 This Second Supplemental Note Deed Poll is governed by the law in force in New South
ww
Wales.
2.12 Clauses 4.2, 4.3 and 4.4 of the Note Deed Poll apply to this Second Supplemental Note Deed
Poll in the same manner as they apply to the Note Deed Poll.
EXECUTED as a deed poll by each of CFC, the Guarantor and the Corporation
m
5
co
Execution page
d.
CFC
au
EXECUTED AS A DEED POLL by )
)
COUNTRYWIDE FINANCIAL )
Fr
CORPORATION acting under the authority of )
that company in the presence of: )
)
)
re
)
)
Signature of witness
su )
)
By executing this deed the authorised signatory
states that it has received no notice of revocation
of its signing authority
)
clo
Name of witness (block letters) )
Corporation
re
)
)
Signature of witness ) By executing this deed the authorised signatory
St
Guarantor
ww
m
of: )
)
)
co
)
)
Signature of witness ) By executing this deed the authorised signatory
) states that it has received no notice of revocation
d.
of its signing authority
)
au
Name of witness (block letters) )
Fr
re
su
clo
re
Fo
op
St
w.
ww
BANK OF AMERICA CORPORATION
m
As filed with the Securities and Exchange Commission on July 1, 2008
co
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
d.
FORM 8-K
au
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Fr
Date of Report (Date of earliest event reported):
July 1, 2008
re
BANK OF AMERICA CORPORATION su
(Exact name of registrant as specified in its charter)
Not Applicable
(Former name or former address, if changed since last report)
op
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing
obligation of the registrant under any of the following provisions:
St
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
w.
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
ww
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
ww
w.
St
op
Fo
re
clo
su
re
Fr
au
d.
co
m
m
ITEM 8.01. OTHER EVENTS.
co
As previously reported, Bank of America Corporation (the “Registrant”) and Countrywide Financial
Corporation (“Countrywide”) announced that they had signed an Agreement and Plan of Merger pursuant
to which Countrywide will merge with and into a wholly owned subsidiary of the Registrant (the
d.
“Merger”).
On July 1, 2008, the Registrant issued a press release announcing that the Merger had been completed
effective as of July 1, 2008. A copy of the press release announcing the closing of the Merger is filed as
au
Exhibit 99.1 to this Current Report on Form 8-K.
Fr
(d) Exhibits.
The following exhibits are filed herewith:
re
EXHIBIT NO. DESCRIPTION OF EXHIBIT
co
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto duly authorized.
BANK OF AMERICA
d.
CORPORATION
au
Teresa M. Brenner
Dated: July 1, 2008 Associate General Counsel
Fr
re
su
clo
re
Fo
op
St
w.
ww
m
co
INDEX TO EXHIBITS
d.
99.1 Press release dated July 1, 2008
au
Fr
re
su
clo
re
Fo
op
St
w.
ww
EX-2.1 2 exhibit21.htm AGREEMENT AND PLAN OF MERGER
m
Exhibit 2.1
co
by and among
d.
COUNTRYWIDE FINANCIAL CORPORATION,
au
and
Fr
RED OAK MERGER CORPORATION
_____________________
re
DATED AS OF JANUARY 11, 2008
su
TABLE OF CONTENTS
clo
Page
m
3.2 Capitalization 10
3.3 Authority; No Violation 12
3.4 Consents and Approvals 13
co
3.5 Reports; Regulatory Matters 13
3.6 Financial Statements 15
3.7 Broker’s Fees 16
d.
3.8 Absence of Certain Changes or Events 16
3.9 Legal Proceedings 17
au
3.10 Taxes and Tax Returns 18
3.11 Employee Matters 19
3.12 Compliance with Applicable Law 24
Fr
3.13 Certain Contracts 24
3.14 Risk Management Instruments 25
re
3.15 Investment Securities and Commodities 26
3.16 Warehouse Loan Portfolio 26
3.17 Property su 26
3.18 Intellectual Property 27
3.19 Environmental Liability 31
3.20 Mortgage Banking Business 31
clo
3.21 Securitization Matters 39
3.22 Insurance Matters 43
3.23 State Takeover Laws 46
re
TABLE OF CONTENTS
(continued)
Page
St
3.27 Opinion 47
3.28 Company Information 47
ww
m
4.3 Authority; No Violation 49
4.4 Consents and Approvals 49
4.5 Reports; Regulatory Matters 50
co
4.6 Financial Statements 51
4.7 Broker’s Fees 52
4.8 Absence of Certain Changes or Events 52
d.
4.9 Legal Proceedings 53
4.10 Taxes and Tax Returns 53
au
4.11 Compliance with Applicable Law 53
4.12 Reorganization; Approvals 53
4.13 Parent Information 53
Fr
Article V COVENANTS RELATING TO CONDUCT OF BUSINESS 54
re
5.1 Conduct of Businesses Prior to the Effective Time 54
5.2 Company Forbearances 54
5.3 Parent Forbearances su 57
6.11 No Solicitation 63
6.12 Restructuring Efforts 66
6.13 Dividends 66
St
-ii-
TABLE OF CONTENTS
m
(continued)
Page
co
7.2 Conditions to Obligations of Parent 67
7.3 Conditions to Obligations of Company 68
d.
Article VIII TERMINATION AND AMENDMENT 68
au
8.1 Termination 68
8.2 Effect of Termination 69
8.3 Fees and Expenses 70
Fr
8.4 Termination Fee 70
8.5 Amendment 71
re
8.6 Extension; Waiver 71
-iii-
St
Section
ww
m
Agreement Preamble
AJCA 3.11(k)
Alternative Proposal 6.11(a)
co
Alternative Transaction 6.11(a)
Applicable Requirements 3.20(a)
Bankruptcy and Equity Exception 3.3(a)
d.
BHC Act 3.4
BHCA Application 3.4
au
Certificate 1.4(d)
Certificate Insurer 3.20(a)
Certificate of Merger 1.2
Fr
Change of Recommendation 6.11(d)
Change of Recommendation Notice 6.11(d)(iv)
re
Claim 6.7(a)
Closing 9.1
Closing Date su 9.1
Code Recitals
Collateral Certificate 3.20(a)
Collateral Certificate Pool 3.20(a)
clo
Company Preamble
Company Benefit Plans 3.11(a)
Company By-laws 3.1(b)
re
-iv-
m
Company Securitization Trust 3.21(m)
Company Sponsored Asset Securitization Transaction 3.21(j)
co
Company Stock Plans 1.5(a)
Confidentiality Agreements 6.2(b)
Convertible Note Agreement 4.2(a)
d.
Controlled Group Liability 3.11(d)
Copyrights 3.18(a)
au
Covered Employees 6.6(a)
Custodial Account 3.20(a)
Custodial File 3.20(a)
Fr
Customer Information 3.18(a)
Derivative Transactions 3.14(a)
DGCL 1.1(a)
re
DLLCA 1.1(a)
DPC Common Shares su 1.4(b)
Effective Time 1.2
Employees 5.3(c)
Environmental Laws 5.2(c)
clo
Environmental Laws 3.19
ERISA 3.11(a)
ERISA Affiliate 3.11(d)
Exchange Act 3.5(c)
re
FHLMC 3.20(a)
FNMA 3.20(a)
Foreclosure 3.20(a)
w.
GNMA 3.20(a)
Governmental Entity 3.4
HUD 3.20(a)
Home Owners’ Loan Act 3.1(a)
m
HSR Act 3.4
Indemnified Parties 6.7(a)
Insurance Amount 6.7(c)
co
Insurance Contracts 3.22(d)
Insurance Department 3.5(a)
Insurance Subsidiary 3.22(a)
d.
Insurer 3.20(a)
au
-v-
Fr
Intellectual Property 3.18(a)
Investment Commitment 3.20(a)
re
Investor 3.20(a)
IRS su 3.10(a)
Leased Properties 3.16
Letter of Transmittal 2.3(a)
License Agreement 3.18(a)
clo
Licensed Company IP 3.18(a)
Liens 3.2(b)
Loans 3.20(a)
re
Mortgage 3.20(a)
Mortgage Loan Documents 3.20(a)
Mortgage Note 3.20(a)
w.
Mortgagor 3.20(a)
Nonqualified Deferred Compensation Plan 3.11(k)
NYSE 2.3(f)
Open Source Software 3.18(a)
m
Owned Company IP 3.18(a)
Originator 3.20(a)
Other Regulatory Approvals 3.4
co
OTS 3.1(a)
Owned Properties 3.16
Paid Off Loan 3.20(a)
d.
Permitted Encumbrances 3.17
Parent Preamble
au
Parent Bylaws 4.1(a)
Parent Capitalization Date 4.2(a)
Parent Certificate 4.1(a)
Fr
Parent Closing Price 1.5(a)
Parent Common Stock 1.4(c)
re
Parent Disclosure Schedule Art. IV
Parent Preferred Stock 4.2(a)
Parent Regulatory Agreement su 4.5(b)
Parent Requisite Regulatory Approvals 7.2(d)
Parent Restricted Share Right 1.5(b)
clo
-vi-
re
m
Reinsurance Contracts 3.22(g)
REMIC 3.20(a)
REO 3.20(a)
co
Restrictive Covenant 3.18(a)
Retained Interest 3.21(m)
Rights 3.2(a)
d.
Rights Agreement 3.2(a)
Sarbanes-Oxley Act 3.5(b)
au
SAP 3.22(b)
SBA 3.4
SEC 3.4
Fr
Securities Act 3.2(a)
Securitization Disclosure Documents 3.21(j)
re
Seller and Servicing Guides 3.20(a)
Series B Preferred Stock 1.4(e)
Serviced Loan su 3.20(a)
Servicer 3.20(a)
Servicer Default 3.21(m)
Servicer Default or Termination 3.21(c)
clo
Servicing 3.20(a)
Servicing Agreements 3.20(a)
Servicing Compensation 3.20(a)
re
Software 3.18(a)
SRO 3.4
State Agency 3.20(a)
Fo
-vii-
w.
m
Trust Account Common Shares 1.4(b)
VA 3.20(a)
VA Loans 3.20(a)
co
Voting Debt 3.2(a)
Warehouse Loans 3.16(a)
WARN 3.11(n)
d.
au
-viii-
Fr
AGREEMENT AND PLAN OF MERGER
re
“Agreement”), among Countrywide Financial Corporation, a Delaware corporation
(“Company”), Bank of America Corporation, a Delaware corporation (“Parent”), and Red
su
Oak Merger Corporation, a Delaware corporation and wholly-owned subsidiary of Parent
(“Merger Sub”).
W I T N E S S E T H:
clo
WHEREAS, the Boards of Directors of Company, Parent and Merger Sub have
determined that it is in the best interests of their respective companies and their
stockholders to consummate the strategic business combination transaction provided for
re
in this Agreement in which Company will, on the terms and subject to the conditions set
forth in this Agreement, merge with and into, Merger Sub (the “Merger”), with Merger
Sub as the surviving company in the Merger (sometimes referred to in such capacity as
Fo
WHEREAS, prior to the Merger, Merger Sub shall be converted into a Delaware
op
WHEREAS, for federal income Tax purposes, it is the intent of the parties hereto that
the Merger shall qualify as a “reorganization” under the provisions of Section 368(a) of
St
the Internal Revenue Code of 1986, as amended (the “Code”), and this Agreement is
intended to be and is adopted as a “plan of reorganization” for purposes of Sections 354
and 361 of the Code; and
w.
Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained in this Agreement, and other good and valuable
m
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties agree as follows:
co
ARTICLE I
THE MERGER
d.
1.1 The Merger. (a) Subject to the terms and conditions of this Agreement, in
au
accordance with the Delaware General Corporation Law (the “DGCL”) and the Delaware
Limited Liability Company Act (the “DLLCA”), at the Effective Time, Company shall
merge with and into Merger Sub. Merger Sub shall be the Surviving Company in the
Merger and shall continue its existence as a limited liability company under the laws of
Fr
the State of Delaware. As of the Effective Time, the separate corporate existence of
Company shall cease.
re
(b) Parent may at any time change the method of effecting the combination (including
by providing for the merger of Company and a wholly-owned subsidiary of Parent
su
1
clo
other than Merger Sub) if and to the extent requested by Parent and consented to by
Company (such consent not to be unreasonably withheld or delayed); provided, however,
that no such change shall (i) alter or change the amount or kind of the Merger
re
Consideration provided for in this Agreement, (ii) adversely affect the Tax treatment of
Company’s stockholders as a result of receiving the Merger Consideration or the Tax
treatment of either party pursuant to this Agreement or (iii) materially impede or delay
Fo
1.2 Effective Time. The Merger shall become effective as set forth in the certificate of
op
merger (the “Certificate of Merger”) that shall be filed with the Secretary of State of the
State of Delaware on the Closing Date. The term “Effective Time” shall be the date and
time when the Merger becomes effective as set forth in the Certificate of Merger.
St
1.3 Effects of the Merger. At and after the Effective Time, the Merger shall have the
effects set forth in the DGCL and DLLCA.
w.
1.4 Conversion of Stock and LLC Interests. At the Effective Time, by virtue of the
Merger and without any action on the part of Parent, Merger Sub, Company or the holder
of any of the following securities:
ww
(a) All limited liability company interests of Merger Sub issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding and shall not
m
be affected by the Merger.
co
(b) All shares of common stock, par value $0.05 per share, of Company issued and
outstanding immediately prior to the Effective Time (the “Company Common Stock”)
that are owned by Company, Parent or any wholly-owned subsidiary of Company or
Parent (other than shares of Company Common Stock held in trust accounts, managed
d.
accounts, mutual funds and the like, or otherwise held in a fiduciary or agency capacity,
that are beneficially owned by third parties (any such shares, “Trust Account Common
au
Shares”) and other than shares of Company Common Stock held, directly or indirectly,
by Company or Parent in respect of a debt previously contracted (any such shares, “DPC
Common Shares”)) shall be cancelled and shall cease to exist and no stock of Parent or
other consideration shall be delivered in exchange therefor.
Fr
(c) Subject to Section 1.4(f), each share of the Company Common Stock, except for
shares of Company Common Stock owned by Company, Parent or any wholly-owned
re
subsidiary of Company or Parent (other than Trust Account Common Shares and DPC
Common Shares), shall be converted, in accordance with the procedures set forth in
Article II, into the right to receive 0.1822 (the “Exchange Ratio”) of a share of common
su
stock, par value $0.01 per share, of Parent (“Parent Common Stock”) (the “Merger
Consideration”).
clo
(d) All of the shares of Company Common Stock converted into the right to receive
the Merger Consideration pursuant to this Article I shall no longer be outstanding and
shall automatically be cancelled and shall cease to exist as of the Effective Time, and
each certificate previously representing any such shares of Company Common Stock
re
(each, a “Certificate”) shall thereafter represent only the right to receive the Merger
Consideration and/or
Fo
2
op
cash in lieu of fractional shares into which the shares of Company Common Stock
represented by such Certificate have been converted pursuant to this Section 1.4 and
Section 2.3(f), as well as any dividends to which holders of Company Common Stock
St
(e) Each share of 7.25% Series B Non-Voting Convertible Preferred Stock, par value
w.
$0.05 per share, of Company (the “Series B Preferred Stock”) issued and outstanding
immediately prior to the Effective Time shall be cancelled and shall cease to exist and no
stock of Parent or other consideration shall be delivered in exchange therefor.
ww
(f) If, between the date of this Agreement and the Effective Time, the outstanding
shares of Parent Common Stock shall have been increased, decreased, changed into or
exchanged for a different number or kind of shares or securities as a result of a
reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock
m
split, or other similar change in capitalization, an appropriate and proportionate
adjustment shall be made to the Merger Consideration.
co
1.5 Stock Options and Other Stock-Based Awards; ESPP.
(a) As of the Effective Time, by virtue of the Merger and without any action on the
d.
part of the holders thereof, each option to purchase shares of Company Common Stock
granted under the Amended and Restated 1993 Stock Option Plan, as amended, the 2000
au
Equity Incentive Plan and the 2006 Equity Incentive Plan (collectively, the “Company
Stock Plans”) that is outstanding immediately prior to the Effective Time (collectively,
the “Company Options”) shall be converted into an option (an “Adjusted Option”) to
purchase, on the same terms and conditions as applied to each such Company Option
Fr
immediately prior to the Effective Time (taking into account any accelerated vesting or
other rights, such as the right to surrender for cash, with respect to such Company
Options in accordance with the terms thereof), the number of whole shares of Parent
re
Common Stock that is equal to the number of shares of Company Common Stock subject
to such Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio (rounded down to the nearest whole share), at an exercise price per share
su
of Parent Common Stock (rounded up to the nearest whole penny) equal to the exercise
price for each such share of Company Common Stock subject to such Company Option
immediately prior to the Effective Time divided by the Exchange Ratio provided, further,
clo
that, in the case of any Company Option to which Section 421 of the Code applies as of
the Effective Time (after taking into account the effect of any accelerated vesting thereof)
by reason of its qualification under Section 422 of the Code, the exercise price, the
number of shares of Parent Common Stock subject to such option and the terms and
re
conditions of exercise of such option shall be determined in a manner consistent with the
requirements of Section 424(a) of the Code.
Fo
(b) As of the Effective Time, by virtue of the Merger and without any action on the
part of the holders thereof, each stock appreciation right with respect to shares of
Company Common Stock granted under a Company Stock Plan that is outstanding
op
immediately prior to the Effective Time (collectively, the “Company SARs”) shall be
converted into a stock appreciation right (an “Adjusted SAR”) with respect to, on the
same terms and conditions as applied to each such Company SAR immediately prior to
the Effective Time (taking into account any
St
3
w.
accelerated vesting or other rights, such as the right to surrender for cash, with respect to
ww
such Company SARs in accordance with the terms thereof), the number of whole shares
of Parent Common Stock that is equal to the number of shares of Company Common
Stock with respect to which such Company SAR is subject to immediately prior to the
Effective Time multiplied by the Exchange Ratio (rounded down to the nearest whole
share), at a base price per share of Parent Common Stock (rounded up to the nearest
m
whole penny) equal to the base price for each such share of Company Common Stock
subject to such Company SAR immediately prior to the Effective Time divided by the
co
Exchange Ratio.
(c) As of the Effective Time, each restricted share of Company Common Stock
granted under a Company Stock Plan that is outstanding immediately prior to the
d.
Effective Time (collectively, the “Company Restricted Shares”) shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted into the
au
right to receive (the “Parent Restricted Share Right”), on the same terms and conditions
as applied to each such Company Restricted Share immediately prior to the Effective
Time (including the same transfer restrictions taking into account any accelerated vesting
of such Company Restricted Share in accordance with the terms thereof), the Merger
Fr
Consideration; provided, however, that, upon the lapsing of restrictions with respect to
each such Parent Restricted Share Right in accordance with the terms applicable to the
corresponding Company Restricted Share immediately prior to the Effective Time, Parent
re
shall be entitled to deduct and withhold such amounts as may be required to be deducted
and withheld under the Code and any applicable state or local Tax law with respect to the
lapsing of such restrictions. su
(d) As of the Effective Time, each restricted share unit with respect to shares of
Company Common Stock granted under a Company Stock Plan that is outstanding
clo
immediately prior to the Effective Time (collectively, the “Company RSUs”) shall, by
virtue of the Merger and without any action on the part of the holder thereof, be
converted into a restricted share unit, on the same terms and conditions as applied to each
such Company RSU immediately prior to the Effective Time (taking into account any
re
accelerated vesting of such Company RSU in accordance with the terms thereof), with
respect to the number of shares of Parent Common Stock that is equal to the number of
shares of Company Common Stock subject to the Company RSU immediately prior to
Fo
the Effective Time multiplied by the Exchange Ratio (rounded to the nearest whole
share) (a “Parent RSU”) The obligations in respect of the Parent RSUs shall be payable
or distributable in accordance with the terms of the agreement, plan or arrangement
op
(e) As of the Effective Time, all amounts denominated in Company Common Stock
and held in participant accounts (collectively, the “Company Deferred Equity Units”)
St
either pursuant to Company’s 2003 Non-Employee Directors’ Fee Plan, Company’s 2004
Executive Equity Deferral Program or pursuant to any other nonqualified deferred
compensation program or any individual deferred compensation agreements (collectively,
w.
the “Company Deferred Equity Unit Plans”) shall, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into deferred equity units, on
the same terms and conditions as applied to such Company Deferred Equity Units
ww
immediately prior to the Effective Time (taking into account any accelerated vesting of
such Company Deferred Equity Units in accordance with the terms thereof), with respect
to the number of shares of Parent Common Stock that is equal to the number of shares of
Company Common Stock in which such Company Deferred Equity
m
4
co
Units are denominated immediately prior to the Effective Time multiplied by the
d.
Exchange Ratio (rounded to the nearest whole share) (a “Parent Deferred Equity Unit”).
The obligations in respect of the Parent Deferred Equity Units shall be payable or
au
distributable in accordance with the terms of the Company Deferred Equity Unit Plan
relating to such Parent Deferred Equity Units.
(f) As of the Effective Time, Parent shall assume the obligations and succeed to the
Fr
rights of Company under the Company Stock Plans with respect to the Company Options
(as converted into Adjusted Options), the Company SARs (as converted into Adjusted
SARs), the Company RSUs (as converted into Parent RSUs), the Company Deferred
re
Equity Units (as converted into Parent Deferred Equity Units) and Company Restricted
Shares (as converted into Parent Restricted Share Rights). Company and Parent agree that
prior to the Effective Time each of the Company Stock Plans shall be amended, to the
su
extent possible without requiring stockholder approval of such amendments, (i) if and to
the extent necessary and practicable, to reflect the transactions contemplated by this
Agreement, including the conversion of the Company Options, Company SARs,
clo
Company Restricted Shares and Company RSUs pursuant to paragraphs (a), (b), (c), (d)
and (e) above and the substitution of Parent for Company thereunder to the extent
appropriate to effectuate the assumption of such Company Stock Plans by Parent, (ii) to
preclude any automatic or formulaic grant of options, restricted shares or other awards
re
thereunder on or after the Effective Time (other than with respect to the dividend
reinvestment feature of any such plan), and (iii) to the extent requested by Parent in a
timely manner and subject to compliance with applicable law and the terms of the plan, to
Fo
terminate any or all Company Stock Plans effective immediately prior to the Effective
Time (other than with respect to outstanding awards thereunder). From and after the
Effective Time, all references to Company (other than any references relating to a
op
“Change in Control” of Company) in each Company Stock Plan and in each agreement
evidencing any award of Company Options, Company SARs, Company Restricted
Shares, Company RSUs or Company Deferred Equity Units shall be deemed to refer to
Parent, unless Parent determines otherwise.
St
(g) Parent shall take all action necessary or appropriate to have available for issuance
or transfer a sufficient number of shares of Parent Common Stock for delivery upon
w.
exercise of the Adjusted Options or the Adjusted SARs or settlement of the Parent RSUs
or Parent Deferred Equity Units. All of the conversions and adjustments made pursuant to
this Section 1.5, including without limitation, the determination of the number of shares
ww
of Parent Common Stock subject to any award and the exercise price of the Adjusted
Options or base price of the Adjusted SARs, shall be made in a manner consistent with
the requirements of Section 409A of the Code. Promptly after the Effective Time, Parent
shall prepare and file with the SEC a post-effective amendment converting the Form S-4
to a Form S-8 (or file such other appropriate form) registering a number of shares of
m
Parent Common Stock necessary to fulfill Parent’s obligations under this paragraph (g).
co
(h) Company shall, prior to the Effective Time, take all actions necessary to terminate
the employee stock purchase plan portion of Company’s Global Stock Plan (such portion,
the “Company ESPP”) effective as of the Effective Time and all outstanding rights
thereunder at the Effective Time. The offering period in effect as of immediately prior to
d.
the Effective Time shall end in accordance with the terms of the Company ESPP and
each participant in the Company ESPP will be credited with the number of share(s) of
au
Company
Fr
Common Stock purchased for his or her account(s) under the Company ESPP in respect
re
of the applicable offering period in accordance with the terms of the Company ESPP. The
options to acquire Company Common Stock under the UK ShareSave Scheme of
Company’s Global Stock Plan (the “Company SAYE”) shall be treated in accordance
su
with Section 6 of the Company SAYE and, to the extent required thereunder to remain
outstanding following the Effective Time and converted into the right to receive shares of
Parent Common Stock in the same manner as provided in Section 1.5(a) or as otherwise
clo
required by applicable law.
shall, by virtue of the Merger, be amended and restated in its entirety to read as the
certificate of formation of Merger Sub in effect immediately prior to the Effective Time,
except that Item 1 thereof shall read as follows: “The name of the limited liability
Fo
immediately prior to the Effective Time, shall be the limited liability company agreement
of the Surviving Company until thereafter amended in accordance with applicable law
and the terms of such limited liability company agreement.
St
1.7 Directors and Officers. The directors of Company and its Subsidiaries immediately
prior to the Effective Time shall submit their resignations to be effective as of the
Effective Time. The directors, if any, and officers of Merger Sub shall, from and after the
w.
Effective Time, become the directors and officers, respectively, of the Surviving
Company until their successors shall have been duly elected, appointed or qualified or
until their earlier death, resignation or removal in accordance with the limited liability
ww
m
Agreement shall constitute a “plan of reorganization” for purposes of Sections 354 and
361 of the Code.
co
ARTICLE II
d.
2.1 Exchange Agent. Prior to the Effective Time Parent shall appoint a bank or trust
au
company Subsidiary of Parent or another bank or trust company reasonably acceptable to
Company, or Parent’s transfer agent, pursuant to an agreement (the “Exchange Agent
Agreement”) to act as exchange agent (the “Exchange Agent”) hereunder.
Fr
2.2 Deposit of Merger Consideration. At or prior to the Effective Time, Parent shall (i)
authorize the Exchange Agent to issue an aggregate number of shares of Parent Common
Stock equal to the aggregate Merger Consideration, and (ii) deposit, or cause to be
re
deposited with, the Exchange Agent, to the extent then determinable, any cash payable in
lieu of fractional shares pursuant to Section 2.3(f) (the “Exchange Fund”).
su
6
clo
(a) As soon as reasonably practicable after the Effective Time, the Exchange Agent
re
shall mail to each holder of record of Certificate(s) which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock whose shares
were converted into the right to receive the Merger Consideration pursuant to Section 1.4
Fo
and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in
consideration therefor (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to Certificate(s) shall pass, only upon delivery of
op
Certificate(s) (or affidavits of loss in lieu of such Certificates)) to the Exchange Agent
and shall be substantially in such form and have such other provisions as shall be
prescribed by the Exchange Agent Agreement (the “Letter of Transmittal”) and (ii)
instructions for use in surrendering Certificate(s) in exchange for the Merger
St
Consideration, any cash in lieu of fractional shares of Parent Common Stock to be issued
or paid in consideration therefor and any dividends or distributions to which such holder
is entitled pursuant to Section 2.3(c).
w.
Common Stock will be entitled to receive promptly after the Effective Time the Merger
Consideration and any cash in lieu of fractional shares of Parent Common Stock to be
issued or paid in consideration therefor in respect of the shares of Company Common
Stock represented by its Certificate or Certificates. Until so surrendered, each such
Certificate shall represent after the Effective Time, for all purposes, only the right to
m
receive, without interest, the Merger Consideration and any cash in lieu of fractional
shares of Parent Common Stock to be issued or paid in consideration therefor upon
co
surrender of such Certificate in accordance with, and any dividends or distributions to
which such holder is entitled pursuant to, this Article II.
(c) No dividends or other distributions with respect to Parent Common Stock shall be
d.
paid to the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby, in each case unless and until the surrender of such
au
Certificate in accordance with this Article II. Subject to the effect of applicable
abandoned property, escheat or similar laws, following surrender of any such Certificate
in accordance with this Article II, the record holder thereof shall be entitled to receive,
without interest, (i) the amount of dividends or other distributions with a record date after
Fr
the Effective Time theretofore payable with respect to the whole shares of Parent
Common Stock represented by such Certificate and not paid and/or (ii) at the appropriate
payment date, the amount of dividends or other distributions payable with respect to
re
shares of Parent Common Stock represented by such Certificate with a record date after
the Effective Time (but before such surrender date) and with a payment date subsequent
to the issuance of the Parent Common Stock issuable with respect to such Certificate.
su
(d) In the event of a transfer of ownership of a Certificate representing Company
Common Stock that is not registered in the stock transfer records of Company, the
clo
fractional shares of Parent Common Stock and cash in lieu of fractional shares of Parent
Common Stock comprising the Merger Consideration shall be issued or paid in exchange
therefor to a person other than the person in whose name the Certificate so surrendered is
registered if the Certificate formerly representing such Company Common Stock shall be
re
7
Fo
op
in proper form for transfer and the person requesting such payment or issuance shall pay
any transfer or other similar Taxes required by reason of the payment or issuance to a
person other than the registered holder of the Certificate or establish to the satisfaction of
Parent that the Tax has been paid or is not applicable. The Exchange Agent (or,
St
subsequent to the earlier of (x) the one-year anniversary of the Effective Time and (y) the
expiration or termination of the Exchange Agent Agreement, Parent) shall be entitled to
deduct and withhold from any cash in lieu of fractional shares of Parent Common Stock
w.
otherwise payable pursuant to this Agreement to any holder of Company Common Stock
such amounts as the Exchange Agent or Parent, as the case may be, is required to deduct
and withhold under the Code, or any provision of state, local or foreign Tax law, with
ww
respect to the making of such payment. To the extent the amounts are so withheld by the
Exchange Agent or Parent, as the case may be, and timely paid over to the appropriate
Governmental Entity, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of shares of Company Common Stock in
respect of whom such deduction and withholding was made by the Exchange Agent or
m
Parent, as the case may be.
co
(e) After the Effective Time, there shall be no transfers on the stock transfer books of
Company of the shares of Company Common Stock that were issued and outstanding
immediately prior to the Effective Time other than to settle transfers of Company
Common Stock that occurred prior to the Effective Time. If, after the Effective Time,
d.
Certificates representing such shares are presented for transfer to the Exchange Agent,
they shall be cancelled and exchanged for the Merger Consideration and any cash in lieu
au
of fractional shares of Parent Common Stock to be issued or paid in consideration
therefor in accordance with the procedures set forth in this Article II.
Fr
fractional shares of Parent Common Stock shall be issued upon the surrender of
Certificates for exchange, no dividend or distribution with respect to Parent Common
Stock shall be payable on or with respect to any fractional share, and such fractional
re
share interests shall not entitle the owner thereof to vote or to any other rights of a
stockholder of Parent. In lieu of the issuance of any such fractional share, Parent shall
pay to each former stockholder of Company who otherwise would be entitled to receive
su
such fractional share an amount in cash (rounded to the nearest cent) determined by
multiplying (i) the average, rounded to the nearest one ten thousandth, of the closing sale
prices of Parent Common Stock on the New York Stock Exchange (the “NYSE”) as
clo
reported by The Wall Street Journal for the five trading days immediately preceding the
date of the Effective Time by (ii) the fraction of a share (after taking into account all
shares of Company Common Stock held by such holder at the Effective Time and
rounded to the nearest thousandth when expressed in decimal form) of Parent Common
re
Stock to which such holder would otherwise be entitled to receive pursuant to Section
1.4.
Fo
(g) Any portion of the Exchange Fund that remains unclaimed by the stockholders of
Company as of the first anniversary of the Effective Time may be paid to Parent. In such
event, any former stockholders of Company who have not theretofore complied with this
op
Article II shall thereafter look only to Parent with respect to the Merger Consideration,
any cash in lieu of any fractional shares and any unpaid dividends and distributions on
the Parent Common Stock deliverable in respect of each share of Company Common
Stock such stockholder holds as determined pursuant to this Agreement, in each case,
St
8
w.
ww
thereon. Notwithstanding the foregoing, none of Parent, the Surviving Company, the
Exchange Agent or any other person shall be liable to any former holder of shares of
Company Common Stock for any amount delivered in good faith to a public official
pursuant to applicable abandoned property, escheat or similar laws.
m
(h) In the event any Certificate shall have been lost, stolen or destroyed, upon the
co
making of an affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if reasonably required by Parent or the Exchange Agent, the
posting by such person of a bond in such amount as Parent may determine is reasonably
necessary as indemnity against any claim that may be made against it with respect to such
d.
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration deliverable in respect thereof pursuant to this
au
Agreement.
ARTICLE III
Fr
REPRESENTATIONS AND WARRANTIES OF COMPANY
re
delivered by Company to Parent prior to the execution of this Agreement (which
schedule sets forth, among other things, items the disclosure of which is necessary or
appropriate either in response to an express disclosure requirement contained in a
su
provision hereof or as an exception to one or more representations or warranties
contained in this Article III, or to one or more of Company’s covenants contained herein,
provided, however, that disclosure in any section of such schedule shall apply only to the
clo
indicated Section of this Agreement except to the extent that it is reasonably apparent on
the face of such disclosure that such disclosure is relevant to another Section of this
Agreement, provided, further, that notwithstanding anything in this Agreement to the
contrary, (i) no such item is required to be set forth in such schedule as an exception to a
re
representation or warranty if its absence would not result in the related representation or
warranty being deemed untrue or incorrect under the standard established by Section 9.2
and (ii) the mere inclusion of an item in such schedule as an exception to a representation
Fo
or warranty shall not be deemed an admission that such item represents a material
exception or material fact, event or circumstance or that such item has had or would be
reasonably likely to have a Material Adverse Effect (as defined in Section 3.8) on
op
(a) Company is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware. Company has the requisite corporate power and
authority to own or lease all of its properties and assets and to carry on its business as it is
w.
now being conducted, and is duly licensed or qualified to do business in each jurisdiction
in which the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or qualification
ww
necessary. Company is duly registered with the Office of Thrift Supervision (“OTS”) as a
savings and loan holding company under the Home Owners’ Loan Act of 1933, as
amended (the “Home Owners’ Loan Act”).
9
m
co
(b) True, complete and correct copies of the Restated Certificate of Incorporation of
Company (the “Company Certificate”), and the Amended and Restated Bylaws of
Company (the “Company Bylaws”), as in effect as of the date of this Agreement, have
previously been made available to Parent.
d.
(c) Each Subsidiary of Company (i) is duly incorporated or duly formed, as applicable
au
to each such Subsidiary, and validly existing and in good standing under the laws of its
jurisdiction of organization, (ii) has the requisite corporate power and authority or other
power and authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted and (iii) is duly licensed or qualified to do business
Fr
in each jurisdiction in which the nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it makes such licensing or
qualification necessary. The certificates of incorporation, by-laws and similar governing
re
documents of each Subsidiary of Company, copies of which have previously been made
available to Parent, are true, complete and correct copies of such documents as of the date
of this Agreement. As used in this Agreement, the word “Subsidiary”, when used with
su
respect to either party, means any bank, corporation, partnership, limited liability
company or other organization, whether incorporated or unincorporated, that is
consolidated with such party for financial reporting purposes under U.S. generally
clo
accepted accounting principles (“GAAP”).
(d) The deposit accounts of Countrywide Bank, fsb are insured by the Federal Deposit
Insurance Corporation (the “FDIC”) through the Deposit Insurance Fund to the fullest
re
extent permitted by law, and all premiums and assessments required to be paid in
connection therewith have been paid when due. Countrywide Bank, fsb is a member in
good standing of the Federal Home Loan Bank of Atlanta (the “FHLBA”).
Fo
(e) The minute books of Company previously made available to Parent contain true,
complete and correct records of all meetings and other corporate actions held or taken
op
since January 1, 2005 of its stockholders and Board of Directors (including committees of
its Board of Directors).
1,000,000,000 shares of Company Common Stock, par value $0.05 per share, of which,
as of December 31, 2007 (the “Company Capitalization Date”), 578,919,834 shares,
including all Company Restricted Shares, were issued and outstanding, and 1,500,000
w.
shares of preferred stock, par value $0.05 per share (the “Company Preferred Stock”), of
which, as of the Company Capitalization Date, (i) 250,000 shares were designated as
Series A Participating Preferred Stock, none of which were outstanding, and (ii) 20,000
ww
shares were designated, issued and outstanding as Series B Preferred Stock. As of the
Company Capitalization Date, no shares of Company Common Stock or Company
Preferred Stock were reserved for issuance except for (u) 49,693,066 shares of Company
Common Stock reserved for issuance in connection with Company Options and
Company SARs under the Company Stock Plans that are outstanding as of the Company
m
Capitalization Date, (v) 1,056,172 shares of Company Common Stock reserved for
issuance upon settlement of the Company RSUs and Company Deferred Equity Units that
co
are outstanding as of the Company Capitalization Date, (w) 111,111,111 shares of
Company Common Stock reserved for issuance upon conversion of the Series B
Preferred Stock, (x) 72,300,000 shares of Company Common Stock reserved for issuance
upon conversion of
d.
10
au
Company’s Series A and Series B floating rate convertible debentures, (y) 26,601,024
Fr
shares of Company Common Stock reserved for issuance under Company’s dividend
reinvestment plan and 401(k) plan and (z) 250,000 shares of Series A Participating
Preferred Stock reserved for issuance in accordance with the Amended and Restated
re
Rights Agreement, dated as of November 27, 2001, as amended, between Company and
American Stock Transfer & Trust Company, as Rights Agent (the “Rights Agreement”),
pursuant to which Company has issued rights to purchase Series A Participating Preferred
su
Stock (“Rights”). All of the issued and outstanding shares of Company Common Stock
have been duly authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership thereof. As of the
clo
date of this Agreement, no bonds, debentures, notes or other indebtedness having the
right to vote on any matters on which shareholders of Company may vote (“Voting
Debt”) are issued or outstanding. As of the date of this Agreement, except pursuant to
this Agreement, including with respect to the Company Stock Plans as set forth herein,
re
the Certificate of Designation of the Series B Preferred Stock, and the Rights Agreement,
Company does not have and is not bound by any outstanding subscriptions, options,
warrants, calls, rights, commitments or agreements of any character calling for the
Fo
purchase or issuance of, or the payment of any amount based on, any shares of Company
Common Stock, Company Preferred Stock, Voting Debt or any other equity securities of
Company or any securities representing the right to purchase or otherwise receive any
op
shares of Company Common Stock, Company Preferred Stock, Voting Debt or other
equity securities of Company. As of the date of this Agreement, except as provided in the
Certificate of Designation of the Series B Preferred Stock, there are no contractual
obligations of Company or any of its Subsidiaries (I) to repurchase, redeem or otherwise
St
acquire any shares of capital stock of Company or any equity security of Company or its
Subsidiaries or any securities representing the right to purchase or otherwise receive any
shares of capital stock or any other equity security of Company or its Subsidiaries or (II)
w.
(b) Company has provided Parent with a true, complete and correct list of the
aggregate number of shares of Company Common Stock issuable upon the exercise of
each Company Option and Company SAR and settlement of each Company RSU and
Company Deferred Equity Unit granted under the Company Stock Plans that were
m
outstanding as of the Company Capitalization Date and the exercise price for each such
Company Option and Company SAR. Other than the Company Options, Company SARs,
co
Company Restricted Shares, Company RSUs and Company Deferred Equity Units that
are outstanding as of the Company Capitalization Date, no other equity-based awards are
outstanding as of the Company Capitalization Date. Since the Company Capitalization
Date through the date hereof, Company has not (A) issued or repurchased any shares of
d.
Company Common Stock, Company Preferred Stock, Voting Debt or other equity
securities of Company, other than the issuance of shares of Company Common Stock in
au
connection with the exercise of Company Options or Company SARs or settlement of the
Company RSUs or Company Deferred Equity Units granted under the Company Stock
Plans or Company Deferred Equity Unit Plans that were outstanding on the Company
Capitalization Date or (B) issued or awarded any options, stock appreciation rights,
Fr
restricted shares, restricted stock units, deferred equity units, awards based on the value
of Company capital stock or any other equity-based awards under any of the Company
Stock Plans.
re
11
su
(c) Except for any director qualifying shares, all of the issued and outstanding shares
clo
of capital stock or other equity ownership interests of each Subsidiary of Company are
owned by Company, directly or indirectly, free and clear of any liens, pledges, charges,
claims and security interests and similar encumbrances (“Liens”), and all of such shares
or equity ownership interests are duly authorized and validly issued and are fully paid,
re
other equity security of such Subsidiary or any securities representing the right to
purchase or otherwise receive any shares of capital stock or any other equity security of
such Subsidiary.
op
3.3 Authority; No Violation. (a) Company has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
St
transactions contemplated hereby have been duly, validly and unanimously approved by
the Board of Directors of Company. The Board of Directors of Company has determined
unanimously that this Agreement is advisable and in the best interests of Company and its
w.
this Agreement by the affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock entitled to vote at such meeting, no other corporate
proceedings on the part of Company are necessary to approve this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by Company and (assuming due authorization, execution
m
and delivery by Parent and Merger Sub) constitutes the valid and binding obligation of
Company, enforceable against Company in accordance with its terms (except as may be
co
limited by bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or
similar laws of general applicability relating to or affecting the rights of creditors
generally and subject to general principles of equity (the “Bankruptcy and Equity
Exception”)).
d.
(b) Neither the execution and delivery of this Agreement by Company nor the
au
consummation by Company of the transactions contemplated hereby, nor compliance by
Company with any of the terms or provisions of this Agreement, will (i) violate any
provision of the Company Certificate or Company Bylaws or (ii) assuming that the
consents, approvals and filings referred to in Section 3.4 are duly obtained and/or made,
Fr
(A) violate any law, judgment, order, injunction or decree applicable to Company, any of
its Subsidiaries or any of their respective properties or assets or (B) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under, constitute a default
re
(or an event which, with notice or lapse of time, or both, would constitute a default)
under, result in the termination of or a right of termination or cancellation under,
accelerate the performance required by, or result in the creation of any Lien upon any of
su
the respective properties or assets of Company or any of its Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, franchise, permit, Company Securitization Document, agreement, by-law
clo
or other instrument or obligation to which Company or any of its Subsidiaries is a party
or by which any of them or any of their respective properties or assets is bound.
12
re
Fo
3.4 Consents and Approvals. Except for (i) the filing of an application (the “BHCA
Application”) with the Board of Governors of the Federal Reserve System (the “Federal
Reserve Board”) under Section 4 of the Bank Holding Company Act of 1956, as
op
amended (the “BHC Act”) and approval of such application, (ii) the filing of any required
applications, filings or notices with any foreign, federal or state banking, consumer
finance, mortgage banking, insurance or other regulatory, self-regulatory or enforcement
authorities or any courts, administrative agencies or commissions or other governmental
St
“Form S-4”) in which the Proxy Statement will be included as a prospectus, and
declaration of effectiveness of the Form S-4 and the filing and effectiveness of the
registration statement contemplated by Section 1.5(e), (iv) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware pursuant to the DGCL, (v)
any notices to or filings with the Small Business Administration (the “SBA”), (vi) any
m
consents, authorizations, approvals, filings or exemptions in connection with compliance
with the rules and regulations of any applicable industry self-regulatory organization
co
(“SRO”), and the rules of the NYSE, (vii) any notices or filings under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) and (viii) such
filings and approvals as are required to be made or obtained under the securities or “Blue
Sky” laws of various states in connection with the issuance of the shares of Parent
d.
Common Stock pursuant to this Agreement and approval of listing of such Parent
Common Stock on the NYSE, no consents or approvals of or filings or registrations with
au
any Governmental Entity are necessary in connection with the consummation by
Company of the Merger and the other transactions contemplated by this Agreement. No
consents or approvals of or filings or registrations with any Governmental Entity are
necessary in connection with the execution and delivery by Company of this Agreement.
Fr
3.5 Reports; Regulatory Matters.
re
(a) Company and each of its Subsidiaries have timely filed all reports, registrations,
statements and certifications, together with any amendments required to be made with
respect thereto, that they were required to file since January 1, 2005 with (i) the OTS, (ii)
su
the Federal Reserve Board, (iii) the FDIC, (iv) the Office of the Comptroller of the
Currency, (v) the NYSE, (vi) any state consumer finance or mortgage banking regulatory
authority or other Agency, (vii) any state agency charged with the regulation of the
clo
business of insurance (an “Insurance Department”), (viii) the SEC, (ix) any foreign
regulatory authority and (x) any SRO (collectively, and together with applicable
insurance regulatory authorities, “Regulatory Agencies”) and with each other applicable
Governmental Entity, and all other reports and statements required to be filed by them
re
since January 1, 2005, including any report or statement required to be filed pursuant to
the laws, rules or regulations of the United States, any state, any foreign entity, or any
Regulatory Agency or other Governmental Entity, and have paid all fees and assessments
Fo
due and payable in connection therewith. Except for normal examinations conducted by a
Regulatory Agency or other Governmental Entity in the ordinary course of the business
of Company and its Subsidiaries, no Regulatory Agency or other Governmental Entity
op
has initiated since January 1, 2005 or has pending any proceeding, enforcement action or,
to the
13
St
w.
m
2005, there have been no formal or informal inquiries by, or disagreements or disputes
with, any Regulatory Agency or other Governmental Entity with respect to the business,
co
operations, policies or procedures of Company or any of its Subsidiaries (other than
normal examinations conducted by a Regulatory Agency or other Governmental Entity in
Company’s ordinary course of business).
d.
(b) Neither Company nor any of its Subsidiaries is subject to any cease-and-desist or
other order or enforcement action issued by, or is a party to any written agreement,
au
consent agreement or memorandum of understanding with, or is a party to any
commitment letter or similar undertaking to, or is subject to any order or directive by, or
has been ordered to pay any civil money penalty by, or has been since January 1, 2005 a
recipient of any supervisory letter from, or since January 1, 2005 has adopted any
Fr
policies, procedures or board resolutions at the request or suggestion of, any Regulatory
Agency or other Governmental Entity that currently restricts in any material respect the
conduct of its business (or to Company’s knowledge that, upon consummation of the
re
Merger, would restrict in any material respect the conduct of the business of Parent or
any of its Subsidiaries), or that in any material manner relates to its capital adequacy, its
ability to pay dividends, its credit, risk management or compliance policies, its internal
su
controls, its management or its business, other than those of general application that
apply to similarly situated savings and loan holding companies or their Subsidiaries (each
item in this sentence, a “Company Regulatory Agreement”), nor has Company or any of
clo
its Subsidiaries been advised since January 1, 2005 by any Regulatory Agency or other
Governmental Entity that it is considering issuing, initiating, ordering, or requesting any
such Company Regulatory Agreement. To the knowledge of Company, there has not
been any event or occurrence since January 1, 2005 that would result in a determination
re
that Countrywide Bank, fsb is not “well capitalized” as a matter of U.S. federal banking
law.
Fo
(c) Company has previously made available to Parent an accurate and complete copy
of each (i) final registration statement, prospectus, report, schedule and definitive proxy
statement filed with or furnished to the SEC by Company or any of its Subsidiaries
op
pursuant to the Securities Act or the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) since January 1, 2005 (the “Company SEC Reports”) and prior to the
date of this Agreement and (ii) communication mailed by Company to its stockholders
since January 1, 2005 and prior to the date of this Agreement. No such Company SEC
St
Report or communication, at the time filed, furnished or communicated (and, in the case
of registration statements and proxy statements, on the dates of effectiveness and the
dates of the relevant meetings, respectively), contained any untrue statement of a material
w.
fact or omitted to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances in which they were
made, not misleading, except that information as of a later date (but before the date of
ww
m
co
with the published rules and regulations of the SEC with respect thereto. Each current
Subsidiary of Company that has filed since January 1, 2005 a Form S-3 registration
statement with the SEC meets the requirements for the use of Form S-3, and no event has
occurred that would reasonably be expected to result in Form S-3 eligibility requirements
d.
no longer being satisfied by any such Subsidiary. No executive officer of Company has
failed in any respect to make the certifications required of him or her under Section 302
au
or 906 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
Fr
(a) The financial statements of Company and its Subsidiaries included (or
incorporated by reference) in the Company SEC Reports (including the related notes,
where applicable) (i) have been prepared from, and are in accordance with, the books and
re
records of Company and its Subsidiaries, (ii) fairly present in all material respects the
consolidated results of operations, cash flows, changes in stockholders’ equity and
consolidated financial position of Company and its Subsidiaries for the respective fiscal
su
periods or as of the respective dates therein set forth (subject in the case of unaudited
statements to recurring year-end audit adjustments normal in nature and amount), (iii)
complied as to form, as of their respective dates of filing with the SEC, in all material
clo
respects with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and (iv) have been prepared in accordance
with GAAP consistently applied during the periods involved, except, in each case, as
indicated in such statements or in the notes thereto. The books and records of Company
re
and its Subsidiaries have been, and are being, maintained in all material respects in
accordance with GAAP and any other applicable legal and accounting requirements and
reflect only actual transactions. KPMG LLP has not resigned or been dismissed as
Fo
(b) Neither Company nor any of its Subsidiaries has any material liability or
obligation of any nature whatsoever (whether absolute, accrued, contingent, determined,
determinable or otherwise and whether due or to become due), except for (i) those
St
liabilities that are reflected or reserved against on the consolidated balance sheet of
Company included in its Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2007 (including any notes thereto) and (ii) liabilities incurred in the
w.
ordinary course of business consistent with past practice since September 30, 2007 or in
connection with this Agreement and the transactions contemplated hereby.
ww
(c) The records, systems, controls, data and information of Company and its
Subsidiaries are recorded, stored, maintained and operated under means (including any
electronic, mechanical or photographic process, whether computerized or not) that are
under the exclusive ownership and direct control of Company or its Subsidiaries or
accountants (including all means of access thereto and therefrom), except for any non-
m
exclusive ownership and non-direct control that would not reasonably be expected to
have a material adverse effect on the system of internal accounting controls described
co
below in this Section 3.6(c). Company (x) has implemented and maintains disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) to ensure that
material information relating to Company, including its consolidated Subsidiaries, is
made known to the chief executive officer and the chief financial
d.
15
au
officer of Company by others within those entities, and (y) has disclosed, based on its
Fr
most recent evaluation prior to the date hereof, to Company’s outside auditors and the
audit committee of Company’s Board of Directors (i) any significant deficiencies and
material weaknesses in the design or operation of internal controls over financial
re
reporting (as defined in Rule 13a-15(f) of the Exchange Act) which are reasonably likely
to adversely affect Company’s ability to record, process, summarize and report financial
information and (ii) any fraud, whether or not material, that involves management or
su
other employees who have a significant role in Company’s internal controls over
financial reporting. These disclosures were made in writing by management to
Company’s auditors and audit committee, a copy of which has previously been made
clo
available to Parent. As of the date hereof, there is no reason to believe that Company’s
outside auditors, chief executive officer and chief financial officer will not be able to give
the certifications and attestations required pursuant to the rules and regulations adopted
pursuant to Section 404 of the Sarbanes-Oxley Act, without qualification, when next due.
re
(d) Since December 31, 2006, (i) neither Company nor any of its Subsidiaries nor, to
the knowledge of Company, any director, officer, employee, auditor, accountant or
Fo
3.7 Broker’s Fees. Neither Company nor any of its Subsidiaries nor any of their
ww
respective officers, directors, employees or agents has utilized any broker, finder or
financial advisor or incurred any liability for any broker’s fees, commissions or finder’s
fees in connection with the Merger or any other transactions contemplated by this
Agreement, other than as set forth on Section 3.7 of the Company Disclosure Schedule
and pursuant to letter agreements, true, complete and correct copies of which have been
m
previously delivered to Parent.
co
3.8 Absence of Certain Changes or Events. (a) Since September 30, 2007, no event or
events have occurred that have had or would reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect on Company. As used in this
Agreement, the term “Material Adverse Effect” means, with respect to Parent or
d.
Company, as the case may be, a material adverse effect on (i) the financial condition,
results of operations or business of such party and its Subsidiaries taken as a whole
au
(provided, however, that, with respect to this clause (i), a “Material Adverse Effect” shall
not be deemed to include effects to the extent resulting from (A) changes, after the date
hereof, in GAAP or regulatory accounting requirements applicable generally to
companies in the industries in which such party and its Subsidiaries operate, (B) changes,
Fr
after the date hereof, in laws, rules or regulations of general applicability to companies in
the industries in which such party and its Subsidiaries operate, (C) actions or omissions
taken with the prior written consent of the other party, (D) changes, after the
re
16
su
date hereof, in global or national political conditions or general economic or market
clo
conditions generally affecting other companies in the industries in which such party and
its Subsidiaries operate or (E) the public disclosure of this Agreement or the transactions
contemplated hereby, except, with respect to clauses (A) and (B), to the extent that the
effects of such change are disproportionately adverse to the financial condition, results of
re
operations or business of such party and its Subsidiaries, taken as a whole, as compared
to other companies in the industry in which such party and its Subsidiaries operate) or (ii)
the ability of such party to timely consummate the transactions contemplated by this
Fo
Agreement.
(b) Since September 30, 2007 through and including the date of this Agreement,
op
Company and its Subsidiaries have carried on their respective businesses in all material
respects in the ordinary course of business consistent with their past practice.
(c) Since September 30, 2007, neither Company nor any of its Subsidiaries has (i)
St
except for (A) normal increases for or payments to employees (other than officers subject
to the reporting requirements of Section 16(a) of the Exchange Act (the “Executive
Officers”)) made in the ordinary course of business consistent with past practice or (B) as
w.
amount thereof in effect as of September 30, 2007, granted any severance or termination
pay, entered into any contract to make or grant any severance or termination pay (in each
case, except as required under the terms of agreements or severance plans listed on
Section 3.11 of the Company Disclosure Schedule, as in effect as of the date hereof ), or
paid any bonus other than the customary year-end bonuses in amounts consistent with
m
past practice, (ii) granted any options to purchase shares of Company Common Stock,
any restricted shares of Company Common Stock or any right to acquire any shares of its
co
capital stock, or any right to payment based on the value of Company’s capital stock, to
any Executive Officer or other employee or director other than grants to employees (other
than Executive Officers) made in the ordinary course of business consistent with past
practice under the Company Stock Plans, (iii) changed any financial accounting methods,
d.
principles or practices of Company or its Subsidiaries affecting its assets, liabilities or
businesses, including any reserving, renewal or residual method, practice or policy, (iv)
au
suffered any strike, work stoppage, slowdown, or other labor disturbance, or (v) except
for publicly disclosed ordinary dividends on the Company Common Stock or Series B
Preferred Stock and except for distributions by wholly-owned Subsidiaries of Company
to Company or another wholly-owned Subsidiary of Company, made or declared any
Fr
distribution in cash or kind to its stockholder or repurchased any shares of its capital
stock or other equity interests.
re
3.9 Legal Proceedings. (a) Neither Company nor any of its Subsidiaries is a party to
any, and there are no pending or, to the best of Company’s knowledge, threatened, legal,
administrative, arbitral or other proceedings, claims, actions, suits or governmental or
su
regulatory investigations of any nature against Company or any of its Subsidiaries or to
which any of their assets are subject.
clo
(b) There is no judgment, settlement agreement, order, injunction, decree or regulatory
restriction (other than those of general application that apply to similarly situated savings
and loan holding companies or their Subsidiaries) imposed upon Company, any of its
re
17
Fo
Subsidiaries or the assets of Company or any of its Subsidiaries (or that, upon
consummation of the Merger, would apply to Parent or any of its Subsidiaries).
op
(a) Each of Company and its Subsidiaries has duly and timely filed (including all
St
applicable extensions) all material Tax Returns required to be filed by it on or prior to the
date of this Agreement (all such Tax Returns being accurate and complete in all material
respects), has paid all Taxes shown thereon as arising and has duly paid or made
w.
provision for the payment of all material Taxes that have been incurred or are due or
claimed to be due from it by federal, state, foreign or local taxing authorities other than
Taxes that are not yet delinquent or are being contested in good faith, have not been
ww
finally determined and have been adequately reserved against under GAAP. The federal,
California and New York state income Tax returns of Company and its Subsidiaries have
been examined by the Internal Revenue Service (the “IRS”) or other relevant taxing
authority for all years to and including the years ending December 2004, December 2001
and February 2001, respectively, and any liability with respect thereto has been satisfied
m
or any liability with respect to deficiencies asserted as a result of such examination is
covered by reserves that are adequate under GAAP. There are no material disputes
co
pending, or written claims asserted, for Taxes or assessments upon Company or any of its
Subsidiaries for which Company does not have reserves that are adequate under GAAP.
Neither Company nor any of its Subsidiaries is a party to or is bound by any Tax sharing,
allocation or indemnification agreement or arrangement (other than such an agreement or
d.
arrangement exclusively between or among Company and its Subsidiaries). Within the
past five years (or otherwise as part of a “plan (or series of related transactions)” within
au
the meaning of Section 355(e) of the Code of which the Merger is also a part), neither
Company nor any of its Subsidiaries has been a “distributing corporation” or a
“controlled corporation” in a distribution intended to qualify under Section 355(a) of the
Code. Neither Company nor any of its Subsidiaries is required to include in income any
Fr
adjustment pursuant to Section 481(a) of the Code, no such adjustment has been proposed
by the IRS and no pending request for permission to change any accounting method has
been submitted by Company or any of its Subsidiaries. The aggregate balance of the
re
reserve for bad debts described in any provision under state or local laws and regulations
similar to Section 593(g)(2)(A)(ii) of the Code of Company and its Subsidiaries is not
greater than $1,000,000. Neither Company nor any of its Subsidiaries has participated in
su
a “listed transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2).
(b) As used in this Agreement, the term “Tax” or “Taxes” means (i) all federal, state,
clo
local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains,
property, capital, sales, transfer, use, payroll, employment, severance, withholding,
duties, intangibles, franchise, backup withholding, value added and other taxes, charges,
levies or like assessments together with all penalties and additions to tax and interest
re
thereon and (ii) any liability for Taxes described in clause (i) above under Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law).
Fo
(c) As used in this Agreement, the term “Tax Return” means a report, return or other
information (including any amendments) required to be supplied to a governmental entity
with respect to Taxes including, where permitted or required, combined or consolidated
op
returns for any group of entities that includes Company or any of its Subsidiaries.
18
St
(d) Company and its Subsidiaries have complied in all material respects with all
w.
applicable laws relating to the payment and withholding of Taxes (including withholding
of Taxes pursuant to Sections 1441, 1442 and 3402 of the Code or any comparable
provision of any state, local or foreign laws) and have, within the time and in the manner
ww
prescribed by applicable law, withheld from and paid over all amounts required to be so
withheld and paid over under applicable laws.
3.11 Employee Matters.
m
(a) Section 3.11 of the Company Disclosure Schedule sets forth a true, complete and
correct list of each “employee benefit plan” as defined in Section 3(3) of the Employee
co
Retirement Income Security Act of 1974, as amended (“ERISA”), whether or not subject
to ERISA, and each employment, consulting, bonus, incentive or deferred compensation,
vacation, stock option or other equity-based, severance, termination, retention, change of
control, profit-sharing, fringe benefit or other similar plan, program, agreement or
d.
commitment, whether written or unwritten, for the benefit of any employee, former
employee, director or former director of Company or any of its Subsidiaries entered into,
au
maintained or contributed to by Company or any of its Subsidiaries or to which Company
or any of its Subsidiaries is obligated to contribute, or with respect to which Company or
any of its Subsidiaries has any liability, direct or indirect, contingent or otherwise
(including any liability arising out of an indemnification, guarantee, hold harmless or
Fr
similar agreement) or otherwise providing benefits to any current, former or future
employee, officer or director of Company or any of its Subsidiaries or to any beneficiary
or dependant thereof (such plans, programs, agreements and commitments, herein
re
referred to as the “Company Benefit Plans”).
(b) With respect to each Company Benefit Plan, Company has made available to
su
Parent true, complete and correct copies of the following (as applicable): (i) the written
document evidencing such Company Benefit Plan or, with respect to any such plan that is
not in writing, a written description of the material terms thereof; (ii) the summary plan
clo
description; (iii) the most recent annual report, financial statement and/or actuarial report;
(iv) the most recent determination letter from the IRS; (v) the most recent Form 5500
required to have been filed with the IRS, including all schedules thereto; (vi) any related
trust agreements, insurance contracts or documents of any other funding arrangements;
re
(vii) any notices to or from the IRS or any office or representative of the Department of
Labor relating to any compliance issues in respect of any such Company Benefit Plan;
(viii) all amendments, modifications or material supplements to any Company Benefit
Fo
Plan; and (ix) documents evidencing any discrimination or coverage tests performed
during the last plan year. Except as specifically provided in the foregoing documents
made available to Parent, there are no amendments to any Company Benefit Plan that
op
have been adopted or approved nor has Company or any of its Subsidiaries taken
substantial steps to make any such amendments or to adopt or approve any new Company
Benefit Plan.
St
(c) With respect to each of the Company Benefit Plans, no event has occurred and
there exists no condition or set of circumstances in connection with which Company or
any of its Subsidiaries would be subject to any liability that, individually or in the
w.
19
m
with all applicable laws and the terms of each such plan. The terms of each Company
Benefit Plan are in compliance with all applicable laws. Each Company Benefit Plan that
co
is intended to be “qualified” under Section 401 and/or 409 of the Code has received a
favorable determination letter from the IRS to such effect and, to the knowledge of
Company, no fact, circumstance or event has occurred or exists since the date of such
determination letter that would reasonably be expected to adversely affect the qualified
d.
status of any such Company Benefit Plan. There are no pending or, to the knowledge of
Company, threatened or anticipated claims by, on behalf of or against any of the
au
Company Benefit Plans, any fiduciaries of such Company Benefit Plan (with respect to
whom Company has an indemnification obligation) with respect to their duties to any
Company Benefit Plan, or against the assets of such Company Benefit Plan or any trust
maintained in connection with such Company Benefit Plan (other than routine claims for
Fr
benefits). All contributions, premiums and other payments required to be made with
respect to any Company Benefit Plan have been made on or before their due dates under
applicable law and the terms of such Company Benefit Plan, and with respect to any such
re
contributions, premiums or other payments required to be made with respect to any
Company Benefit Plan that are not yet due, to the extent required by GAAP, adequate
reserves are reflected on the consolidated balance sheet of Company included in the
su
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007
(including any notes thereto) or liability therefor was incurred in the ordinary course of
business consistent with past practice since September 30, 2007. There is not now, and to
clo
the knowledge of Company there are no existing circumstances that would reasonably be
expected to give rise to, any requirement for the posting of security with respect to a
Company Benefit Plan or the imposition of any pledge, lien, security interest or
encumbrance on the assets of Company or any of its Subsidiaries or any of their
re
respective ERISA Affiliates (as defined below) under ERISA or the Code, or similar laws
of foreign jurisdictions. No “excess contributions” have been made that would be non-
deductible or that would subject Company or any of its Subsidiaries to the excise tax
Fo
imposed under Section 4972 of the Code. To the extent any Company Benefit Plan
provides benefits in the form of, or permits investment in, securities of Company or any
of its Subsidiaries, the interests in such Company Benefit Plan are subject to a current,
op
effective registration statement under the Securities Act, or are subject to an exemption
from registration and the requirements of such exemption have been satisfied, and the
participants in such plan have been provided a current prospectus to the extent required
by applicable law.
St
(d) Neither Company nor any of its Subsidiaries nor any trade or business, whether or
not incorporated, that, together with Company or any of its Subsidiaries would be
w.
deemed to be a “single employer” within the meaning of Section 4001(b) of ERISA (an
“ERISA Affiliate”), maintains or contributes to, or during the five-year period prior to the
date hereof has maintained or contributed to, (x) any “employee benefit plan” within the
ww
meaning of Section 3(3) of ERISA that is subject to Section 412 of the Code or Section
302 or Title IV of ERISA or (y) a “multiemployer plan” within the meaning of Section
3(37) and 4001(a)(3) of ERISA or a “multiple employer plan” within the meaning of
Sections 4063/4064 of ERISA or Section 413(c) of the Code. Neither Company nor any
of its Subsidiaries has incurred, either directly or indirectly (including as a result of any
m
indemnification or joint and several liability obligation), any liability pursuant to Title I
or IV of ERISA other than plan funding obligations in the ordinary course and Pension
co
Benefit Guaranty Corporation (“PBGC”) premiums (including any Controlled Group
Liability as a result of its relationship with an ERISA Affiliate) or the penalty Tax, excise
Tax or joint and several liability provisions of the Code relating to employee benefit
d.
20
au
plans, whether contingent or otherwise, including pursuant to any non-exempt
“prohibited transactions” as such term is defined in Section 406 of ERISA or Section
Fr
4975 of the Code, and no event, transaction, fact or condition exists that presents a risk to
Company or any ERISA Affiliate of Company of incurring any such liability, or after the
Effective Time, to Parent or any of its Affiliates, in each case, with respect to the
re
Company Benefit Plans. No Company Benefit Plan has an “accumulated funding
deficiency” (whether or not waived) within the meaning of Section 412 of the Code or
Section 302 of ERISA. With respect to each Company Benefit Plan that is a
su
“multiemployer plan,” no complete or partial withdrawal from such plan has been made
by Company or any of its Subsidiaries, or by any other person, that would reasonably be
expected to result in any material liability to Company or any of its Subsidiaries, whether
clo
such liability is contingent or otherwise, and if Company or any of its Subsidiaries were
to withdraw from any such Company Benefit Plan, such withdrawal would not result in
any material liability to Company or any of its Subsidiaries. During the five-year period
prior to the date hereof, with respect to any Company Benefit Plan subject to Title IV or
re
Section 302 of ERISA or Section 412 or 4971 of the Code (i) there has not been a partial
termination, and (ii) none of the following events has occurred: (x) the filing of a notice
of intent to terminate, (y) the treatment of an amendment to such a Company Benefit Plan
Fo
interpretations thereunder which required a notice to the PBGC which has not been fully
and accurately reported in a timely fashion, as required, or which, whether or not
reported, would constitute grounds for the PBGC to institute involuntary termination
proceedings with respect to any Company Benefit Plan that is subject to Title IV of
St
ERISA. “Controlled Group Liability” means any and all liabilities (i) under Title IV of
ERISA, (ii) under Section 302 of ERISA, (iii) under Sections 412 and 4971 of the Code,
(iv) resulting from a violation of the continuation coverage requirements of Section 601
w.
et seq. of ERISA and Section 4980B of the Code or the group health plan requirements of
Sections 601 et seq. of the Code and Section 601 et seq. of ERISA and (v) under
corresponding or similar provisions of foreign laws or regulations.
ww
(e) With respect to each Company Benefit Plan that is subject to Title IV or Section
302 of ERISA or Section 412 or 4971 of the Code, as of the last day of the most recent
plan year ended prior to the date hereof, the actuarially determined present value of all
“benefit liabilities” within the meaning of Section 4001(a)(16) of ERISA did not exceed
m
the then current value of assets of such Company Benefit Plan or, if such liabilities did
exceed such assets, the amount thereof was properly reflected on the financial statements
co
of Company or its applicable Subsidiary previously filed with the SEC. With respect to
each Company Benefit Plan for which financial statements are required there has been no
material adverse change in the financial status of such Company Benefit Plan since the
date of the most recent financial statements provided to Parent by Company.
d.
(f) No Company Benefit Plan is under audit or is the subject of an investigation by the
au
IRS, the Department of Labor, the PBGC, the SEC or any other Governmental Entity, nor
is any such audit or investigation pending or, to Company’s knowledge, threatened.
(g) Neither the execution or delivery of this Agreement nor the consummation of the
Fr
transactions contemplated by this Agreement will, either alone or in conjunction with any
21
re
su
other event, (i) result in any payment or benefit becoming due or payable, or required to
be provided, to any director, employee or independent contractor of Company or any of
its Subsidiaries, (ii) increase the amount or value of any benefit or compensation
clo
otherwise payable or required to be provided to any such director, employee or
independent contractor, (iii) result in the acceleration of the time of payment, vesting or
funding of any such benefit or compensation, (iv) result in any amount failing to be
deductible by reason of Section 280G of the Code or (v) result in any limitation on the
re
(i) Neither Company nor any of its Subsidiaries has any liability with respect to an
St
(j) With respect to the employees of Company and its Subsidiaries, all social security
payments, including payments to any public pension scheme, compulsory retirement
ww
m
Compensation Plan”) and any award thereunder, in each case that is subject to Section
409A of the Code has been operated in compliance in all material respects with Section
co
409A of the Code since January 1, 2005, based upon a good faith, reasonable
interpretation of (A) Section 409A of the Code and (B)(1) the proposed and final
Treasury Regulations issued thereunder and (2) Internal Revenue Service Notice 2005-1,
all subsequent Internal Revenue Service Notices and other interim guidance on Section
d.
409A of the Code and (clauses (A) and (B), together, the “409A Authorities”). No
Company Benefit Plan that would be a Nonqualified Deferred Compensation Plan subject
au
to Section 409A of the Code but for the effective date provisions that are applicable to
Section 409A of the Code, as set forth in Section 885(d) of the American Jobs Creation
Act of 2004, as amended (the “AJCA”), has been “materially modified” within the
meaning of Section 885(d)(2)(B) of the AJCA after October 3, 2004, based upon a good
Fr
faith reasonable interpretation of the AJCA and the 409A Authorities. No assets set aside
for the payment of benefits under any Nonqualified Deferred Compensation Plan are held
outside of the United States, except to the extent that substantially all of the services to
re
which such benefits are attributable have been performed in the jurisdiction in which
such assets are held. To the extent any Nonqualified Deferred Compensation Plan
provides for earnings with respect to deferred amounts that are measured other than by
su
reference to a fixed rate of return, the interests in such Nonqualified Deferred
Compensation Plan are subject to a current, effective registration
clo
22
re
statement under the Securities Act or are subject to an exemption from registration and
the requirements of such exemption have been satisfied.
Fo
(l) All Company Options have been granted in compliance with the terms of the
applicable Company Benefit Plans, with applicable law, and with the applicable
provisions of the Company Certificate and Company Bylaws as in effect at the applicable
op
time, and all such Company Options are accurately disclosed as required under applicable
law in the Company SEC Reports, including the financial statements contained therein or
attached thereto (if amended or superseded by a filing with the SEC made prior to the
date of this Agreement, as so amended or superseded). In addition, Company has not
St
(m) Neither Company nor any of its Subsidiaries is a party to or bound by any labor or
ww
m
council or labor organization. There are no labor related controversies, strikes,
slowdowns, walkouts or other work stoppages pending or, to the knowledge of Company,
co
threatened and neither Company nor any of its Subsidiaries has experienced any such
labor related controversy, strike, slowdown, walkout or other work stoppage within the
past three years. Neither Company nor any of its Subsidiaries is a party to, or otherwise
bound by, any consent decree with, or citation by, any Governmental Entity relating to
d.
employees or employment practices. Each of Company and its Subsidiaries are in
compliance with all applicable laws relating to labor, employment, termination of
au
employment or similar matters, including but not limited to laws relating to
discrimination, disability, labor relations, hours of work, payment of wages and overtime
wages, pay equity, immigration, workers compensation, working conditions, employee
scheduling, occupational safety and health, family and medical leave, and employee
Fr
terminations, and have not engaged in any unfair labor practices or similar prohibited
practices. Except as would not result in any material liability to Company or any of its
Subsidiaries, there are no complaints, lawsuits, arbitrations, administrative proceedings,
re
or other proceedings of any nature pending or, to the knowledge of Company, threatened
against Company or any of its Subsidiaries brought by or on behalf of any applicant for
employment, any current or former employee, any person alleging to be a current or
su
former employee, any class of the foregoing, or any Governmental Entity, relating to any
such law or regulation, or alleging breach of any express or implied contract of
employment, wrongful termination of employment, or alleging any other discriminatory,
clo
wrongful or tortious conduct in connection with the employment relationship. Company
has made available to Parent a copy of all written policies and procedures related to
Company’s and its Subsidiaries’ employees and a written description of all material
unwritten policies and procedures related to Company’s and its Subsidiaries’ employees.
re
(n) Within the last six months, neither Company nor any of its Subsidiaries has
incurred any liability or obligation which remains unsatisfied under the Worker
Fo
Adjustment and
23
op
Retraining Notification Act (“WARN”) or any similar state or local laws regarding the
St
(o) No material penalties have been imposed on Company, any Subsidiary, any
w.
Company Benefit Plan, or any employee, officer, director, administrator or agent thereof
under Sections 1176 or 1177 of the Health Insurance Portability and Accountability Act
of 1996, as amended.
ww
(p) Neither Company nor any of its Subsidiaries has taken any action to take
corrective action or make a filing under any voluntary correction program of the IRS,
Department of Labor or any other Governmental Entity with respect to any Company
Benefit Plan, and neither Company nor any of its Subsidiaries has any knowledge of any
m
material plan defect that would qualify for correction under any such program.
co
3.12 Compliance with Applicable Law. (a) Company and each of its Subsidiaries hold
all licenses, franchises, permits and authorizations necessary for the lawful conduct of
their respective businesses under and pursuant to each, and have complied in all respects
with and are not in default in any respect under any, law applicable to Company or any of
d.
its Subsidiaries.
au
(b) Company and each of its Subsidiaries has properly administered all accounts for
which it acts as a fiduciary, including accounts for which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment advisor, in
accordance with the terms of the governing documents and applicable law. None of
Fr
Company, any of its Subsidiaries, or any director, officer or employee of Company or of
any of its Subsidiaries has committed any breach of trust or fiduciary duty with respect to
any such fiduciary account and the accountings for each such fiduciary account are true
re
and correct and accurately reflect the assets of such fiduciary account.
3.13 Certain Contracts. (a) Neither Company nor any of its Subsidiaries is a party to or
su
bound by any contract, arrangement, commitment or understanding (whether written or
oral) (i) with respect to the employment of any directors, Executive Officers, employees
or consultants, other than in the ordinary course of business consistent with past practice,
clo
(ii) which, upon execution of this Agreement or consummation or stockholder approval
of the transactions contemplated by this Agreement will (either alone or upon the
occurrence of any additional acts or events) result in any payment or benefits (whether of
severance pay or otherwise) becoming due from Parent, Company, the Surviving
re
of this Agreement that has not been filed or incorporated by reference in the Company
SEC Reports filed prior to the date hereof, (iv) that materially restricts the conduct of any
line of business by Company or any of its Subsidiaries or, to the knowledge of Company,
op
upon consummation of the Merger will materially restrict the ability of Parent, the
Surviving Company or any of their respective Subsidiaries to engage in any line of
business, (v) that obligates Company or any of its Subsidiaries to conduct business on an
exclusive or preferential basis with any third party or upon consummation of the Merger
St
will obligate Parent, the Surviving Company or any of their respective Subsidiaries to
conduct business with any third
w.
24
ww
party on an exclusive or preferential basis, (vi) that requires Company or any of its
Subsidiaries to repurchase or indemnify with respect to a material portion of Previously
Disposed of Loans, (vii) with or to a labor union or guild (including any collective
bargaining agreement) or (viii) including any stock option plan, stock appreciation rights
m
plan, restricted stock plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the execution of
co
this Agreement, the occurrence of any stockholder approval or the consummation of any
of the transactions contemplated by this Agreement, or the value of any of the benefits of
which will be calculated on the basis of or affected by any of the transactions
contemplated by this Agreement. Each contract, arrangement, commitment or
d.
understanding of the type described in this Section 3.13(a), whether or not set forth in the
Company Disclosure Schedule, is referred to as an “Company Contract.”
au
(b) (i) Each Company Contract is valid and binding on Company or its applicable
Subsidiary, enforceable against it in accordance with its terms (subject to the Bankruptcy
and Equity Exception), and is in full force and effect, (ii) Company and each of its
Fr
Subsidiaries and, to Company’s knowledge, each other party thereto has duly performed
all obligations required to be performed by it to date under each Company Contract and
(iii) no event or condition exists that constitutes or, after notice or lapse of time or both,
re
will constitute, a breach, violation or default on the part of Company or any of its
Subsidiaries or, to Company’s knowledge, any other party thereto under any such
Company Contract. There are no disputes pending or, to Company’s knowledge,
su
threatened with respect to any Company Contract.
3.14 Risk Management Instruments. (a) “Derivative Transactions” means any swap
clo
transaction, option, warrant, forward purchase or sale transaction, futures transaction, cap
transaction, floor transaction or collar transaction relating to one or more currencies,
commodities, bonds, equity securities, loans, servicing rights, interest rates, prices,
values, or other financial or non-financial assets, credit-related events or conditions or
re
any indexes, or any other similar transaction or combination of any of these transactions,
including collateralized mortgage obligations or other similar instruments or any debt or
equity instruments evidencing or embedding any such types of transactions, and any
Fo
(b) All Derivative Transactions, whether entered into for the account of Company or
any of its Subsidiaries or for the account of a customer of Company or any of its
Subsidiaries, were entered into in the ordinary course of business consistent with past
St
practice and in accordance with prudent banking practice and applicable laws, rules,
regulations and policies of any Regulatory Authority and in accordance with the
investment, securities, commodities, risk management and other policies, practices and
w.
procedures employed by Company and its Subsidiaries, and with counterparties believed
at the time to be financially responsible and able to understand (either alone or in
consultation with their advisers) and to bear the risks of such Derivative Transactions. All
ww
of such Derivative Transactions are valid and binding obligations of Company or one of
its Subsidiaries enforceable against it in accordance with their terms (subject to the
Bankruptcy and Equity Exception), and are in full force and effect. Company and its
Subsidiaries and, to Company’s knowledge, all other parties thereto have duly performed
their obligations under the Derivative Transactions to the extent that such obligations to
m
perform have
co
25
d.
accrued and, to Company’s knowledge, there are no breaches, violations or defaults or
allegations or assertions of such by any party thereunder.
au
3.15 Investment Securities and Commodities. (a) Except as would not reasonably be
expected to have a Material Adverse Effect on Company, each of Company and its
Subsidiaries has good title to all securities and commodities owned by it (except those
Fr
sold under repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Liens, except to the extent such securities or commodities are pledged in the
ordinary course of business to secure obligations of Company or its Subsidiaries. Such
re
securities and commodities are valued on the books of Company in accordance with
GAAP in all material respects.
su
(b) Company and its Subsidiaries and their respective businesses employ investment,
securities, commodities, risk management and other policies, practices and procedures
(the “Policies, Practices and Procedures”) which Company believes are prudent and
clo
reasonable in the context of such businesses. Prior to the date hereof, Company has made
available to Parent in writing the material Policies, Practices and Procedures.
(a) Section 3.16(a) of the Company Disclosure Schedule sets forth the aggregate
outstanding principal amount, as of December 31, 2007, of all loan agreements, notes or
Fo
borrowing arrangements payable to Company or its Subsidiaries other than Loans (as
defined in Section 3.20) (collectively, “Warehouse Loans”).
op
(b) Section 3.16(b) of the Company Disclosure Schedule sets forth all Warehouse
Loans outstanding as of December 31, 2007 that were designated as of such date by
Company as “Special Mention”, “Substandard”, “Doubtful”, “Loss”, or words of similar
import, together with the principal amount of each such Warehouse Loan and the amount
St
3.17 Property. Company or one of its Subsidiaries (a) has good and marketable title to
w.
all the properties and assets reflected in the latest audited balance sheet included in such
Company SEC Reports as being owned by Company or one of its Subsidiaries or
acquired after the date thereof (except properties sold or otherwise disposed of since the
ww
date thereof in the ordinary course of business) (the “Owned Properties”), free and clear
of all Liens of any nature whatsoever, except (i) statutory Liens securing payments not
yet due, (ii) Liens for real property Taxes not yet due and payable, (iii) easements, rights
of way, and other similar encumbrances that do not materially affect the use of the
properties or assets subject thereto or affected thereby or otherwise materially impair
m
business operations at such properties and (iv) such imperfections or irregularities of title
or Liens as do not materially affect the use of the properties or assets subject thereto or
co
affected thereby or otherwise materially impair business operations at such properties
(collectively, “Permitted Encumbrances”), and (b) is the lessee of all leasehold estates
reflected in the latest audited financial statements included in such Company SEC
Reports or acquired after the date thereof (except for leases that have expired by their
d.
terms since the date thereof) (the “Leased Properties” and, collectively with the Owned
Properties, the “Real Property”), free and clear of all Liens of any nature whatsoever,
au
except for Permitted Encumbrances, and is in possession of the properties purported to be
leased thereunder, and each
26
Fr
re
such lease is valid without default thereunder by the lessee or, to Company’s knowledge,
the lessor. The Real Property is in material compliance with all applicable zoning laws
and building codes, and the buildings and improvements located on the Real Property are
su
in good operating condition and in a state of good working order, ordinary wear and tear
excepted. There are no pending or, to the knowledge of Company, threatened
condemnation proceedings against the Real Property. Company and its Subsidiaries are in
clo
compliance with all applicable health and safety related requirements for the Real
Property, including those under the Americans with Disabilities Act of 1990 and the
Occupational Health and Safety Act of 1970. Company and its Subsidiaries own and have
good and valid title to, or have valid rights to use, all material tangible personal property
re
used by them in connection with the conduct of their businesses, in each case, free and
clear of all Liens, other than Permitted Encumbrances.
Fo
(a) Definitions. For purposes of this Agreement, the following terms shall have the
op
“Company IP” means all Intellectual Property owned, used, held for use or exploited
by Company or any of its Subsidiaries.
St
“Intellectual Property” means collectively, all intellectual property and other similar
proprietary rights in any jurisdiction throughout the world, whether owned, used or held
ww
for use under license, whether registered or unregistered, including such rights in and to:
(i) trademarks, service marks, brand names, certification marks, trade dress, logos, trade
names and corporate names and other indications of origin, and the goodwill associated
with any of the foregoing (collectively, “Trademarks”); (ii) patents and patent
applications, and any and all divisions, continuations, continuations-in-part, reissues,
m
continuing patent applications, provisional patent applications, re-examinations, and
extensions thereof, any counterparts claiming priority therefrom, utility models, patents
co
of importation/confirmation, certificates of invention, certificates of registration and like
rights (collectively, “Patents”), and inventions, invention disclosures, discoveries and
improvements, whether or not patentable; (iii) trade secrets (including, those trade secrets
defined in the Uniform Trade Secrets Act and under corresponding foreign statutory law
d.
and common law), business, technical and know-how information, non-public
information, and confidential information and rights to limit the use or disclosure thereof
au
by any person (collectively, “Trade Secrets”); (iv) all works of authorship (whether
copyrightable or not), copyrights and proprietary rights in copyrighted works including
writings, other works of authorship, and databases (or other collections of information,
data, works or other materials) (collectively, “Copyrights”); (v) software, including data
Fr
files, source code, object code, firmware, mask works, application programming
interfaces, computerized databases and other software-related specifications and
documentation (collectively, “Software”); (vi) designs and industrial designs; (vii)
re
Internet domain names; (viii) rights of publicity and other rights to use the names and
likeness of individuals; (ix) moral rights; and (x) claims, causes of action and defenses
relating to the past, present and future enforcement of any of the foregoing; in each case
su
of (i) to (ix) above, including any registrations of, applications to
27
clo
register, and renewals and extensions of, any of the foregoing with or by any
re
“License Agreement” means any legally binding contract, whether written or oral, and
Fo
agreements), pursuant to which any interest in, or any right to use or exploit any
Intellectual Property has been granted.
“Licensed Company IP” means the Intellectual Property owned by a third party that
St
Company or any of its Subsidiaries has a right to use or exploit by virtue of a License
Agreement.
w.
“Open Source Software” means any Software that is subject to the terms of any
license agreement in a manner that requires that such Software, or other Software
incorporated into, derived from or distributed with such Software, be (i) disclosed or
ww
distributed in source code form; (ii) licensed for the purpose of making derivative works;
or (iii) redistributable at no charge. Without limiting the foregoing, any Software that is
subject to the terms of any of the licenses certified by the Open Source Initiative and
listed on its website (www.opensource.org) is Open Source Software.
m
“Owned Company IP” means the Intellectual Property that is owned by Company or
co
any of its Subsidiaries.
(b) Company and its Subsidiaries collectively own all right, title and interest in, or
have the valid right to use, all of the Company IP, free and clear of any Liens, and there
d.
are no obligations to, covenants to or restrictions from third parties affecting Company’s
or its applicable Subsidiary’s use, enforcement, transfer or licensing of the Owned
au
Company IP.
(c) The Owned Company IP and Licensed Company IP constitute all the Intellectual
Property necessary and sufficient to conduct the businesses of Company and its
Fr
Subsidiaries as they are currently conducted, as they have been conducted since
December 31, 2006.
re
(d) The Owned Company IP and, to the knowledge of Company, Licensed Company
IP, are valid, subsisting and enforceable. Company and each of its Subsidiaries have
complied with and are in compliance with all laws (including marking requirements and
su
payment of all applicable fees) with respect to any such Intellectual Property that is
issued, granted or registered by or with any Governmental Entity or for which an
application therefor has been filed with any Governmental Entity, and all registrations of
clo
Owned Company IP are currently in good standing and subsisting.
(e) Neither Company nor any of its Subsidiaries has infringed, misappropriated or
otherwise violated any Intellectual Property of any third party. There is no action, suit,
re
claim, investigation, arbitration or any other proceeding pending or, to the knowledge of
Company, threatened, (i) asserting that (A) any use or exploitation of any of the
Company IP by Company or any of its Subsidiaries, or (B) the conduct of the businesses
Fo
of Company and its Subsidiaries as they are currently conducted or have been conducted
since December 31, 2001; in each case,
op
28
St
applicable Subsidiary of such item, and there are no grounds for any such claim or
challenge. There is no outstanding order, judgment, writ, stipulation, award, injunction,
decree, arbitration award or finding of any Governmental Entity by or with any
ww
m
Intellectual Property. To the knowledge of Company, no third party has infringed,
misappropriated or otherwise violated any Owned Company IP, and there are no facts
co
that would reasonably be expected to result in any such infringement, misappropriation or
other violation. Neither Company nor any of its Subsidiaries has given any warranty or
indemnification in connection with any Company IP to any third party, except for
warranties or indemnities given in the ordinary course of business.
d.
(g) Company and each of its Subsidiaries have taken all reasonable actions to maintain
au
and protect each item of Owned Company IP and no loss of Owned Company IP is
pending, reasonably foreseeable or threatened. Without limiting the foregoing, Company
and each of its Subsidiaries have taken all reasonable security measures to protect the
secrecy, confidentiality and value of all Company IP. The Trade Secrets of Company and
Fr
its Subsidiaries have not been disclosed to any third party other than under such
confidentiality agreements or other confidentiality obligations. All former and current
employees, consultants and contractors of Company or any of its Subsidiaries who
re
contribute or have contributed to the creation or development of any Company IP have
executed written instruments with Company or such Subsidiary that assign to Company
or such Subsidiary all rights, title and interest in and to any such contributions that
su
Company or such Subsidiary does not already own by operation of law. No current or
former employee, officer, director, stockholder, consultant or independent contractor has
any valid right, claim or interest in or with respect to any Owned Company IP. No
clo
inventor listed on Company’s or its Subsidiaries’ Patents is under any obligation to assign
its rights in such Patents to a former employer, person, or entity, nor is the validity of any
of Company’s or its Subsidiaries’ Patents affected by the prior employment of any such
inventor. Neither Company nor any of its Subsidiaries has developed jointly with any
re
third party any Intellectual Property with respect to which such third party has any rights,
and all Owned Company IP is solely owned by Company or one of its Subsidiaries.
Fo
consummation of the transactions provided for herein. Neither Company, nor its
Subsidiaries, nor, to the knowledge of Company, any third party, is in default under any
material License Agreement to which Company or any of its Subsidiaries is a party.
St
(i) Company’s and its Subsidiaries’ collection, storage, use and dissemination of
Customer Information and any personally identifiable information are and have been in
material compliance with all applicable laws relating to privacy, data security and data
w.
29
ww
applicable privacy policies and terms of use or other contractual obligations. All use,
exploitation and disclosure by Company and its Subsidiaries of Customer Information
m
and any personally identifiable information owned by a third party has been pursuant to
the terms of a License Agreement or another written agreement with such third party, or
co
is otherwise lawful. Company and each of its Subsidiaries have reasonable security and
data protections in place, consistent with general industry practices, with respect to
Customer Information and personally identifiable information, and there has been no
material breach thereof or loss of data since December 31, 2005.
d.
(j) To the knowledge of Company, the Software included in the Company IP, and the
au
hardware and information technology systems currently used by Company and its
Subsidiaries, are sufficient in all material respects for the purposes for which they are
used in the businesses of Company and its Subsidiaries. To the knowledge of Company,
the Software included in the Company IP does not contain any computer code or any
Fr
other mechanisms which may (i) disrupt, disable, erase or harm in any way such
Software’s operation, or cause such Software to damage or corrupt any data, hardware,
storage media, programs, equipment or communications, or (ii) permit any third party to
re
access such Software without authorization. No source code for any Software included in
Owned Company IP has been delivered, licensed or made available to any escrow agent
or other third party and neither Company nor any of its Subsidiaries has any current duty
su
or obligation to deliver, license or make available such source code to any escrow agent
or other third party.
clo
(k) No Owned Company IP contains or is derived from Open Source Software and no
Software that contains or is derived from Open Source Software has been distributed or
licensed by Company or any of its Subsidiaries to third parties.
re
(l) No License Agreement that is binding upon Company or any of its Subsidiaries
contains any provision that would restrict or otherwise impair the freedom of operation of
Company or such Subsidiaries, whether prior to or after the Closing Date, including by
Fo
the transactions contemplated hereunder will not result in Parent or any of its Affiliates
(i) being bound by any Restrictive Covenant or (ii) granting any rights or licenses to any
Intellectual Property of Parent or any of its Affiliates to any third party (including by
means of a covenant not to sue or cross-license). The consummation of the transactions
St
contemplated by this Agreement (including the Merger) will not alter, impair or
extinguish any rights in Company IP.
w.
(m) Section 3.18(m)(i) of the Company Disclosure Schedule sets forth a complete and
correct list of the following categories of Owned Company IP: (i) Patents, Patent
applications and invention disclosures, (ii) registered and applied for Trademarks and
ww
material unregistered Trademarks, (iii) registered and applied for Copyrights and (iv)
domain names; in each case listing, as applicable (A) the name of the current owner of
record, (B) the application and/or registration number and (C) the filing date and/or issue
date. Except as disclosed on Section 3.18(m)(iii) of the Company Disclosure Schedule,
neither Company nor any of its Subsidiaries has granted exclusively to any third party
m
any rights under any Company IP.
co
30
d.
3.19 Environmental Liability. There are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action or notices with respect to any
au
environmental, health or safety matters or any private or governmental environmental,
health or safety investigations or remediation activities of any nature, whether relating to
the Real Property, the Mortgaged Property or otherwise, seeking to impose, or that are
reasonably likely to result in, any liability or obligation of Company or any of its
Fr
Subsidiaries arising under common law or under any local, state or federal
environmental, health or safety statute, regulation, ordinance, or other requirement of any
Governmental Entity, including the Comprehensive Environmental Response,
re
Compensation and Liability Act of 1980, as amended, and any similar state laws
(“Environmental Laws”), pending or threatened against Company or any of its
Subsidiaries. To the knowledge of Company, there is no reasonable basis for, or
su
circumstances that are reasonably likely to give rise to, any such proceeding, claim,
action, cause of action, notice, investigation, or remediation activities that would result in
any such liability or obligation of Company or any of its Subsidiaries. Neither Company
clo
nor any of its Subsidiaries is subject to any agreement, order, judgment, decree, letter or
memorandum by or with any Governmental Entity or third party imposing any liability or
obligation with respect to any of the foregoing. Company, its Subsidiaries, and the
activities, operations and conditions on the Real Property have complied with all
re
(a) Definitions. For purposes of this Section 3.20, the following terms shall have the
following meanings:
op
“Advances” means, with respect to Company, any of its Subsidiaries or the Servicing
Agreements, the moneys that have been advanced by Company or any of its Subsidiaries
on or before the Closing Date from its funds in connection with its servicing of the Loans
St
“Agency or Agencies” means FHA, VA, HUD, a State Agency, FNMA, FHLMC,
w.
respect to the origination of the Pipeline Loans, or the origination, purchase, sale and
servicing of the Loans, or handling of REO, or the Servicing Agreements, all of the
following (in each case to the extent applicable to any particular Pipeline Loan, Loan,
REO or Servicing Agreement): (i) all contractual obligations of Company and its
Subsidiaries, including with respect to any Servicing under any Servicing Agreement,
m
Master Servicing Agreement, Mortgage Note, Mortgage and other Mortgage Loan
Document or any commitment or other contractual obligation relating to a Pipeline Loan,
co
(ii) all applicable underwriting, servicing and other guidelines of Company or any of its
Subsidiaries as incorporated in the Seller and Servicing Guides, (iii) all laws applicable to
Company or any of its Subsidiaries, (iv) all other applicable requirements and guidelines
of each governmental agency, board, commission, instrumentality and other
d.
governmental or quasi-governmental body or office having jurisdiction, including those
of any applicable Agency, Investor or Insurer and (v) all other applicable judicial and
au
administrative judgments, orders, stipulations, awards, writs and injunctions.
31
Fr
“Certificate Insurer” means a provider of an insurance policy insuring against certain
re
specified losses or shortfalls with respect to Collateral Certificates or Collateral
Certificate Pools.
su
“Collateral Certificate” means a security directly or indirectly based on and backed by
a Mortgage Pool, which security has been pledged, granted or sold to secure or support
payments on specific asset-backed securities that are administered pursuant to a Servicing
clo
Agreement, including any Company Securitization Interests.
“Collateral Certificate Pool” means a group of Collateral Certificates that have been
pledged, granted or sold to secure or support payments on specific asset-backed securities
re
“Custodial Account” means all funds held or directly controlled by Company or any
Fo
of its Subsidiaries with respect to any Loan or any Collateral Certificate or any Collateral
Certificate Pool, including all principal and interest funds and any other funds due
Investors, buydown funds, suspense funds, funds for the payment of taxes, assessments,
op
insurance premiums, ground rents and similar charges, funds from hazard insurance loss
drafts and other mortgage escrow and impound amounts (including interest thereon for
the benefit of Mortgagors, if applicable).
St
“Custodial File” means, with respect to a Loan, all of the documents that must be
maintained on file with a document custodian, Investor, trustee or other designated agent
under Applicable Requirements.
w.
“FHA” means the Federal Housing Administration of HUD or any successor thereto.
ww
“FHLMC” means the Federal Home Loan Mortgage Corporation or any successor
thereto.
“FNMA” means the Federal National Mortgage Association or any successor thereto.
m
“Foreclosure” means the process culminating in the acquisition of title to a mortgaged
property in a foreclosure sale or by a deed in lieu of foreclosure or pursuant to any other
co
comparable procedure allowed under Applicable Requirements.
d.
“HUD” means the Department of Housing and Urban Development.
au
“Insurer” means a person who (i) insures or guarantees all or any portion of the risk of
loss on any Loan, including, without limitation, any Agency and any provider of private
mortgage insurance, standard hazard insurance, flood insurance, earthquake insurance or
Fr
title insurance with respect to any Loan or related Mortgaged Property, (ii) provides any
fidelity
re
32
su
bond, direct surety bond, letter of credit, other credit enhancement instrument or errors
and omissions policy or (iii) is a Certificate Insurer.
clo
“Investor” means, with respect to the Mortgage Servicing Portfolio, any Agency or
Fo
Private Investor who owns or holds Loans, Collateral Certificates or Collateral Certificate
Pools master serviced, serviced or subserviced by Company or any of its Subsidiaries,
pursuant to a Servicing Agreement including a holder of mortgage-backed securities,
op
“Loans” means Loans Held for Sale, Serviced Loans, Previously Disposed of Loans,
St
“Loans Held for Sale” means a mortgage loan owned by Company or any of its
w.
Subsidiaries, including a mortgage loan that has closed but not funded, and that is
intended to be sold to an Investor in the ordinary course.
ww
m
or enforce the Mortgage Loan Documents against individual Mortgagors, except perhaps
in the event the servicer is terminated; (ii) causing Loans to be serviced in the event a
co
servicer is terminated until a replacement servicer is retained; (iii) the calculation of
payments due to owners of mortgage-backed securities, asset-backed securities,
participation certificates or other similar securities or Loans; (iv) the transmittal of
payments related to Loans, Collateral Certificates or Collateral Certificate Pools to the
d.
Investor; (v) the transmittal or payment of Advances; (vi) the preparation of reports to
Investors, Tax authorities and the SEC; and (vii) if applicable, the compliance with
au
REMIC or other relevant Tax requirements. For purposes of this Agreement, Master
Servicing does not include Servicing where the master servicer either delegates its duties
to a subservicer or servicer and has responsibility to the Investor for the acts, errors or
omissions of such subservicer or servicer or otherwise has responsibility to the Investor
Fr
for the primary servicing of the Loans with respect to the Mortgagors.
re
any of its Subsidiaries provides Master Servicing (including any rights to master
servicing fees).
su
“Mortgage” means with respect to a Loan, a mortgage, deed of trust or other security
instrument creating a lien upon real property and any other property described therein
clo
33
re
which secures a Mortgage Note, together with any assignment, reinstatement, extension,
endorsement or modification thereof.
Fo
“Mortgage Loan Documents” means the Custodial File and all other documents
relating to Loans required to document and service the Loans in accordance with
Applicable Requirements, whether on hard copy, microfiche or its equivalent or in
op
electronic format and, to the extent required by Applicable Requirements, credit and
closing packages and disclosures.
“Mortgage Note” means, with respect to a Loan, a promissory note or notes, or other
St
“Mortgage Pool” means a group of mortgage loans that have been pledged, granted or
sold to secure or support payments on specific mortgage-backed securities or specific
ww
m
Subsidiaries pursuant to Servicing Agreements.
co
“Mortgaged Property” means the real property and improvements that secure a
Mortgage Note and that are subject to a Mortgage.
d.
“Originator” means, with respect to any Loan, the person or persons that (i) took the
au
relevant Mortgagor’s loan application, (ii) processed the relevant Mortgagor’s loan
application or (iii) closed and/or funded such Loan.
“Paid Off Loan” means a mortgage loan or any other type of loan that, at any time, has
Fr
been owned and/or serviced (including, without limitation, master servicing and
subservicing) by Company or any of its Subsidiaries (including any predecessor in
interest) and has been paid off, foreclosed, or otherwise liquidated.
re
“Pipeline Loans” means applications in process for mortgage loans to be made by
Company or any of its Subsidiaries, whether or not registered or designated as price
su
protected on Company’s mortgage loan origination system and, in either case, that have
not closed or been funded.
clo
“Portfolio Loan” means a residential mortgage loan owned by Company or any
Subsidiary or REO owned by Company or any Subsidiary which is not a Loan Held for
Sale.
re
“Previously Disposed of Loans” means mortgage loans or any other type of loans or
loan servicing rights that, as of any time, Company or any of its Subsidiaries or any
predecessor in interest of Company or any of its Subsidiaries owned and subsequently
Fo
sold, transferred, conveyed or assigned and for which Company or any of its Subsidiaries
retains a contingent liability to third parties for failure to originate, service, sell,
securitize, or otherwise handle such loans or servicing rights in accordance with the then
op
current Applicable
34
St
“Prior Servicer” means any person that was a master servicer, servicer or subservicer
ww
of any Loan before Company, any Subsidiary or the current Servicer, as applicable,
became the master servicer, servicer or subservicer of such Loan.
“Private Investors” means Company, any of its Subsidiaries or any person other than
the Agencies who owns Loans master serviced, serviced or subserviced by Company of
m
any of its Subsidiaries pursuant to a Master Servicing Agreement or Servicing
Agreement.
co
“Recourse” means any arrangement pursuant to which Company or any of its
Subsidiaries bears the risk to (i) an Investor or (i) a purchaser of Previously Disposed of
Loans of any part of the ultimate credit losses incurred in connection with a default under
d.
or Foreclosure of a Loan, except insofar as such risk of loss is based upon (A) a breach
by Company or any of its Subsidiaries of any of their contractual representations,
au
warranties or covenants or (B) expenses, such as legal fees, in excess of the
reimbursement limits, if any, set forth in the Applicable Requirements. The parties
acknowledge that no Recourse results from or arises under (x) the Applicable
Requirements pertaining to GNMA or (y) with respect to any Master Servicing
Fr
Agreement, losses as to which the responsibility or liability of Company or any of its
Subsidiaries is limited to customary special hazard, bankruptcy and fraud coverages, the
amount of which coverages is established by nationally recognized rating agencies in
re
connection with rated series of mortgage pass-through certificates, participation
certificates, mortgage backed securities or other similar securities.
su
“REMIC” means a “real estate mortgage investment conduit” within the meaning of
Section 860D of the Code.
clo
“REO” means any property acquired in the conduct of Company’s or any of its
Subsidiaries’ mortgage servicing business as a result of any Foreclosure or any other
method in satisfaction of indebtedness (whether for Company’s or any of its Subsidiaries’
own account or on behalf of an Investor or Insurer).
re
“Seller and Servicing Guides” means the (i) seller and servicer guides utilized by the
Agencies and other Investors to which Company or any of its Subsidiaries have sold
Fo
residential mortgage loans and/or for which Company or any of its Subsidiaries services
residential mortgage loans and (ii) the manuals, guidelines and related employee
reference materials utilized by Company or any of its Subsidiaries to govern its
op
“Serviced Loan” means any mortgage loan with respect to which Company or any of
St
“Servicer” means the person responsible for performing the master servicing,
w.
35
ww
“Servicing” means mortgage loan servicing and subservicing rights and obligations
including one or more of the following functions (or a portion thereof): (i) the
m
administration and collection of payments for the reduction of principal and/or the
application of interest on a mortgage loan; (ii) the collection of payments on account of
co
taxes and insurance; (iii) the remittance of appropriate portions of collected payments;
(iv) the provision of full escrow administration; (v) the pursuit of Foreclosure and
alternate remedies against a related Mortgaged Property; (vi) the administration and
liquidation of REO; (vii) the right to receive the Servicing Compensation and any
d.
ancillary fees arising from or connected to the Serviced Loans, earnings on and other
benefits of the related Custodial Accounts and any other related accounts maintained by
au
Company or any of its Subsidiaries pursuant to Applicable Requirements; (viii) any other
obligation relating to servicing of mortgage loans, Collateral Certificates or Collateral
Certificate Pools required under any Servicing Agreement not otherwise described in the
foregoing clauses; (ix) the right to exercise any clean up calls; (x) the performance of
Fr
administrative functions relating to any of the foregoing; and (xi) the provision of Master
Servicing and, in each case, all rights, powers and privileges incident to any of the
foregoing, and expressly includes the related Custodial Accounts, the Mortgage Loan
re
Documents and the right to enter into arrangements with third parties that generate
ancillary fees and benefits with respect to the Serviced Loans.
su
“Servicing Agreements” mean agreements, including Master Servicing Agreements,
pursuant to which Company or any of its Subsidiaries provides Servicing in connection
with Serviced Loans.
clo
“Servicing Compensation” means any servicing fees and any excess servicing
compensation which Company or any of its Subsidiaries is entitled to receive pursuant to
any Servicing Agreement.
re
“State Agency” means any state agency or other state entity with authority to regulate
the mortgage-related activities of Company or any of its Subsidiaries or to determine the
Fo
“VA Loans” means mortgage loans that are guaranteed or are eligible to be guaranteed
St
by the VA.
(b) Without limiting the generality of Section 3.12(a), one or more of Company and its
w.
FNMA, FHLMC and FHLBA to originate and service residential mortgage loans.
(c) The Advances are valid and subsisting amounts owing to Company and its
applicable Subsidiary, were made in accordance with Applicable Requirements and are
m
carried on the books of Company or the applicable Subsidiary at values determined in
accordance with
co
36
d.
GAAP, and are not subject to setoffs or claims arising from acts or omissions of
au
Company or any of its Subsidiaries. No Investor has claimed any defense, offset or
counterclaim to repayment of any Advance that is pending.
Fr
Servicing Agreements provides for Recourse to Company or any of its Subsidiaries.
(e) With respect to each Loan and, if and to the extent specified, each Pipeline Loan
re
(provided, for purposes of this Section 3.20(e), notwithstanding anything else to the
contrary in this Agreement, the Investor, if any, for any Loans Held for Sale shall be the
Investor that is party to the applicable Investment Commitment and the representations
su
and warranties pertaining to Previously Disposed of Loans and Paid Off Loans shall be
limited to Sections 3.20(e)(i) -(iv):
clo
(i) Each Loan was originated in accordance with Applicable Requirements. Each
Loan (other than a Portfolio Loan), Collateral Certificate or Collateral Certificate Pool in
the Mortgage Servicing Portfolio was eligible in all material respects for sale to,
insurance by, or pooling to back securities issued or guaranteed by, the applicable
re
Investor or Insurer upon such sale, issuance of insurance or pooling, except for Serviced
Loans, Collateral Certificates or Collateral Certificate Pools as to which the ineligibility
for such sale, issuance of insurance or pooling would not be the contractual or legal
Fo
an Investment Commitment. Each Loan Held for Sale not allocated to a particular
Investor in accordance with the foregoing sentence would be otherwise eligible for sale in
all material respects under an Investment Commitment upon allocation to an Investor.
There exists no fact or circumstance that would entitle the applicable Insurer or Investor
St
to (A) demand from Company or any of its Subsidiaries either repurchase of any Serviced
Loan or Previously Disposed of Loan or any Collateral Certificate or Collateral
Certificate Pool or indemnification for losses or refuse to purchase a Loan Held for Sale,
w.
obligation of Company or any of its Subsidiaries under any agreement. Each Pipeline
Loan complies in all material respects with Applicable Requirements for the stage of
processing that it has achieved based on the Investor or Insurer program, if applicable,
under which Company or its applicable Subsidiary originated the Pipeline Loan.
m
(ii) Each Loan is evidenced by a Mortgage Note and is duly secured by a valid first
co
lien or subordinated lien on the related Mortgaged Property, in each case, on such forms
and with such terms as comply with all Applicable Requirements. Each Mortgage Note
and the related Mortgage is genuine and each is the legal, valid and binding obligation of
the maker thereof, enforceable in accordance with its terms, subject to bankruptcy,
d.
insolvency and similar laws affecting generally the enforcement of creditors’ rights and
the discretion of a court to grant specific performance. No Loan
au
37
Fr
(including Paid Off Loans and Previously Disposed of Loans) is subject to any rights of
rescission, set-off, counterclaim or defense, including the defense of usury, nor will the
re
operation of any of the terms of the Mortgage Note or the Mortgage, or the exercise of
any right thereunder, render either the Mortgage Note or the Mortgage unenforceable by
Company or any of its Subsidiaries, in whole or in part, or subject to any right of
su
rescission (except any Loans Held for Sale which are closed but not funded), set-off,
counterclaim or defense, including the defense of usury, and no such right of rescission,
set-off, counterclaim, or defense has been asserted with respect thereto. For purposes of
clo
this Section 3.20(e)(ii), references to Mortgage Notes shall be deemed to include
mortgage notes in respect of REO and Paid-Off Loans.
(iii) Company and each of its Subsidiaries (in their respective capacities as Servicer
re
or otherwise) and, to the knowledge of Company, each Originator and Prior Servicer
have complied, and each Loan complied and comply, in all material respects with the
Applicable Requirements including the federal Fair Housing Act, federal Equal Credit
Fo
Opportunity Act and Regulation B, federal Fair Credit Reporting Act, federal Truth in
Lending Act and Regulation Z, National Flood Insurance Act of 1968, federal Flood
Disaster Protection Act of 1973, federal Real Estate Settlement Procedures Act and
op
Regulation X, federal Fair Debt Collection Practices Act, federal Home Mortgage
Disclosure Act and applicable state consumer credit and usury laws.
(iv) There has been no material fraudulent action on the part of the Originator or
St
parties acting on behalf of the Originator in connection with the origination of any Loan
or Pipeline Loan or the application of any insurance proceeds with respect to a Loan or
the Mortgaged Property for which Company or any of its Subsidiaries is responsible to
w.
(v) Each material Servicing Agreement is valid and binding on Company or its
ww
applicable Subsidiary, enforceable against it in accordance with its terms (subject to the
Bankruptcy and Equity Exception), and is in full force and effect without notice by the
applicable Investor of termination thereof. Company and each of its Subsidiaries and, to
Company’s knowledge, each other party thereto has duly performed all obligations
required to be performed by it to date under each material Servicing Agreement. No
m
event or condition exists that constitutes or, after notice or lapse of time or both, will
constitute, a breach, violation or default on the part of Company or any of its Subsidiaries
co
or, to Company’s knowledge, any other party thereto under any such material Servicing
Agreement. There are no disputes pending or, to Company’s knowledge, threatened with
respect to any material Servicing Agreement. The Servicing of the Loans, Collateral
Certificates and Collateral Certificate Pools complies in all material respects with all
d.
Applicable Requirements.
au
(vi) The custodial files relating to all Mortgage Pools have been initially certified,
finally certified and/or recertified if required by the applicable Servicing Agreement and
otherwise in accordance in all material respects with Applicable Requirements.
Fr
38
re
(vii) All Custodial Accounts required to be maintained by Company or any of its
Subsidiaries have been established and continuously maintained in accordance with
su
Applicable Requirements in all material respects. Subject to and in accordance with the
Applicable Requirements pertaining generally to the type, size, rating or capitalization of
depository institutions qualified to hold such balances, Company has the right and power
clo
to determine the financial institution in which the Custodial Accounts are held. All
Mortgage Loan Documents required to be obtained and maintained by Company or any
of its Subsidiaries have been obtained and continuously maintained in accordance with
Applicable Requirements in all material respects.
re
(viii) Except for customary industry standards for indemnification and repurchase
remedies in connection with agreements for the sale or servicing of mortgage loans, none
Fo
of Company or any of its Subsidiaries is now nor has been, since January 1, 2005, subject
to any material fine, suspension, settlement or other agreement or administrative
agreement or sanction by, or any obligation to indemnify, an Agency, an Insurer or an
op
(ix) No Loan is a “High Cost Loan” or “Covered Loan”, as applicable, under either
the Home Ownership Equity Protection Act or a similar state or local anti-predatory
St
lending Law, including, without limitation, as such terms are defined in the then current
Standard & Poor’s LEVELS® Glossary of Terms which is now Version 5.7 Revised,
Appendix E, and no mortgage Loan originated on or after October 1, 2002 through March
w.
(f) Company or one of its Subsidiaries is the sole owner of the Loans Held for Sale,
ww
Portfolio Loans, and Servicing, free and clear of any Liens, other than Liens in favor of
Company’s or its Subsidiaries’ lenders pursuant to financing arrangements, except to the
extent any Loan Held for Sale or Portfolio Loan is prepaid in full or subject to a
completed Foreclosure action (or non judicial proceeding or deed in lieu of Foreclosure)
in which case Company or one of its Subsidiaries shall be the sole owner of the real
m
property securing such foreclosed loan or shall have received the proceeds of such action
to which Company or its Subsidiaries was entitled, in each case free and clear of any
co
Liens.
d.
(a) Each of Company and its applicable Subsidiaries and, to the knowledge of
Company, each other party thereto has performed in all material respects the obligations
au
to be performed by it under each of the Company Securitization Documents, including
any required filing of any financing statements, continuation statements or amendments
under the Uniform Commercial Code of each applicable jurisdiction with the appropriate
filing offices.
Fr
(b) Each of the Company Securitization Interests, each series of certificates or other
securities issued by any Company Securitization Trust and each of the Company
re
Securitization Documents to which Company, any of its Subsidiaries, or any Company
Securitization Trust, as the case may be, is a party, is in full force and effect and is a
valid, binding and enforceable obligation of Company, such Subsidiary or any Company
su
Securitization Trust, as the case may be, and, to the knowledge of Company, of the other
parties thereto, subject
clo
39
re
advances in transactions for which Company or any of its Subsidiaries serves as servicer
or master servicer.
op
(c) All Company Securitization Documents required to be qualified under the Trust
Indenture Act of 1939, as amended, have been so qualified and no Company
Securitization Trust is required to be registered under the Investment Company Act of
1940, as amended. The sale of all securities issued by any Company Securitization Trust
St
was either duly registered under, or exempt from the registration requirements of, the
Securities Act.
w.
(d) Since January 1, 2005, on a consolidated basis, Company has properly accounted
for the sale of all Loans under GAAP, including Statement of Financial Accounting
Standards No. 140, and including in respect of the reporting of income arising from the
ww
m
hereof in connection with any transaction related to a Company Securitization Trust.
co
(f) Since January 1, 2005, neither Company nor any of its Subsidiaries has owned any
security issued by a Company Securitization Trust that includes an embedded derivative
under GAAP.
d.
(g) Company or its applicable Subsidiary has made all reasonably necessary plans and
preparations in order to comply in a timely manner with all requirements of Regulation
au
AB promulgated by the SEC.
(h) All reports required to be filed since January 1, 2005 with the SEC or any other
Governmental Entity in connection with any Company Sponsored Asset Securitization
Fr
Transaction complied as to form in all material respects with the published rules and
regulations of the SEC or such other Governmental Entity with respect thereto. No person
has failed in any respect to make the certifications required of him or her under Section
re
302 of the Sarbanes-Oxley Act with respect to such reports. All assessments and
attestations regarding servicing compliance required to be delivered or filed by Company
or any of its Subsidiaries have been timely and accurately filed, and no material instances
su
of noncompliance have been identified in such assessments or attestations. Since
December 31, 2006, neither Company nor any of its Subsidiaries nor, to the knowledge
of Company, any director, officer, employee, auditor, accountant or representative of
clo
Company or any of its Subsidiaries has received or otherwise had or obtained knowledge
of any material complaint, allegation, assertion or claim, whether written or oral,
regarding the accounting or auditing practices, procedures, methodologies or methods of
any Company Securitization Trust or their respective internal accounting controls,
re
including any material complaint, allegation, assertion or claim that any Company
Securitization Trust has engaged in questionable accounting or auditing practices, and no
attorney representing Company, any of its Subsidiaries, or any Company Securitization
Fo
Trust, whether or not employed by Company or any of its Subsidiaries, has reported
evidence of a material violation of securities laws, breach of fiduciary duty or similar
violation by Company, any of its Subsidiaries,
op
40
St
(i) No event or condition exists which does now or with either notice or the passage of
ww
time would constitute a default, event of default, early redemption event, payout event,
early amortization event or other similar event under any Company Securitization
Document. No Adverse Development has occurred and is continuing in connection with
any Company Sponsored Asset Securitization Transaction. No event or condition exists
which constitutes a Servicer Default or other similar event permitting the termination of
m
the servicer under any of the Company Securitization Documents (a “Servicer Default or
Termination”). The consummation of the transactions contemplated hereby (including the
co
Merger) shall not cause the occurrence of any Adverse Development or Servicer Default
or Termination. Each Subsidiary of Company which acts as a servicer, master servicer or
trustee and, to the knowledge of Company, each other party which acts as servicer,
master servicer or trustee under the Company Securitization Documents has properly
d.
administered all accounts in accordance with the terms of the governing documents,
prudent banking practices and applicable law and the accountings for each such account
au
are true and correct and accurately reflect the assets of such account. Company and each
applicable Subsidiary has timely made all required advances in all transactions for which
it serves as servicer or master servicer or is otherwise required to make advances.
Fr
(j) No registration statement, prospectus, preliminary prospectus, free writing
prospectus, term sheet, computational materials, preliminary private placement
memorandum, private placement memorandum or other offering document, or any report
re
or schedule filed with or furnished to the SEC or any other Governmental Entity, or any
amendments or supplements to any of the foregoing (collectively, “Securitization
Disclosure Documents”), utilized in connection with the offering of securities in any loan
su
or other asset securitization transaction in which Company or any of its Subsidiaries was
an issuer, sponsor or depositor (each, a “Company Sponsored Asset Securitization
Transaction”), and no disclosure concerning Company, any of its Subsidiaries, or any
clo
assets or business operations of either provided to any other party in connection with the
offering of securities in any loan or other asset securitization transaction in which
Company, any of its Subsidiaries or any such other party was a servicer or seller or
otherwise had disclosure obligations, as of its effective date (in the case of a registration
re
statement) or its issue date (in the case of any other such document) and as of the date on
which Company or any of its Subsidiaries agreed to sell any such security, contained any
untrue statement of any material fact or omitted to state any material fact required to be
Fo
stated therein or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
op
(k) Section 3.21(k) of the Company Disclosure Schedule sets forth a true and correct
list as of the date hereof of all outstanding Company Sponsored Asset Securitization
Transactions, and for each such transaction, any associated retained instruments and any
other forms of recourse or other direct or indirect exposures retained by Company and its
St
Subsidiaries, and includes the principal amount as of the most current reporting date prior
to the date hereof for each security listed thereon. No Company Sponsored Asset
Securitization Transaction has a
w.
41
ww
clean up call feature that is triggered at a level greater than 10% of the remaining
collateral balance.
m
(l) To the knowledge of Company, the issuer of any security issued in any Company
co
Sponsored Asset Securitization Transaction, and all such securities, meet the
requirements for, and are entitled to, the Tax characterization or Tax treatment for
federal, state or local income or franchise Tax purposes described in the related
Securitization Disclosure Documents. Neither Company nor any of its Subsidiaries nor,
d.
to the knowledge of Company, any trustee, master servicer, servicer or issuer with respect
to any Company Sponsored Asset Securitization Transaction, has taken or failed to take
au
any action which action or failure to act might adversely affect the intended Tax
characterization or Tax treatment for federal, state or local income or franchise Tax
purposes of the issuer or any securities issued in any such Company Sponsored Asset
Securitization Transaction. All federal, state and local income or franchise Tax and
Fr
information returns and reports required to be filed by the issuer, master servicer, servicer
or trustee relating to any Company Sponsored Asset Securitization Transactions, and all
Tax elections required to be made in connection therewith, have been properly and timely
re
filed or made and are correct in all material respects.
(m) For purposes of this Agreement, the following terms shall have the meanings
su
assigned below:
“Adverse Development” means any event or condition which is or with either notice
clo
or the passage of time would (i) constitute a breach, default, event of default, early
redemption event, payout event, early amortization event or other similar event under any
Company Securitization Document or (ii) trigger any requirement under any Company
Securitization Document to (x) fund an increase in any form of internal credit
re
enhancement, external credit enhancement, spread account or similar account (other than
with respect to spread accounts that have already been funded), (y) draw on any such
internal or external credit enhancement or account under the terms of any Company
Fo
underwriting agreement, purchase agreement and each other material agreement related
to any such security and each supplement, terms or pricing agreement or other agreement
relating to the foregoing and each document required to be delivered in connection
w.
therewith.
“Company Securitization Interests” means any securities, any Retained Interest, any
ww
reserve account, cash collateral account, other residual or servicing interest or other
ongoing obligations (in each case whether or not certificated) owned by Company or any
of its Subsidiaries created pursuant to or associated with any Company Securitization
Document.
m
“Company Securitization Trust” means any trust or other special purpose vehicle
co
created by Company.
42
d.
au
“Retained Interest” means any interest retained by Company or any of its Subsidiaries
pursuant to the Company Securitization Documents.
Fr
specified in the relevant pooling and servicing agreement, indenture or other Company
Securitization Document, as the case may be.
re
(n) For purposes of this Section 3.21 and Section 3.5(c), “Subsidiary” shall include
any Subsidiary of Company and, if and to the extent not otherwise included, also include
each issuer, sponsor and/or depositor in each Company Sponsored Assed Securitization
su
Transaction.
otherwise eligible to transact the business of insurance in each other jurisdiction where it
is required to be so licensed, authorized or eligible; and (iii) duly licensed, authorized or
eligible in its jurisdiction of incorporation and each other applicable jurisdiction to write
Fo
each line of insurance reported as being written in the Statutory Statements. Each
jurisdiction in which any Insurance Subsidiary is licensed, authorized or eligible is set
forth in Section 3.22(a) of the Company Disclosure Schedule. There is no proceeding or
op
(b) Each statement, together with all exhibits and schedules thereto, and all actuarial
opinions, affirmations and certifications required in connection therewith, and all
w.
required supplemental materials, filed by each Insurance Subsidiary with any Insurance
Department since January 1, 2005 (the “Statutory Statements”) was prepared in
conformity with the statutory accounting practices prescribed or permitted by the
ww
m
reporting periods, and was correct and complete when filed. No deficiencies or violations
have been asserted in writing (or, to the knowledge of Company, orally) by any Insurance
co
Department with respect to any such Statutory Statement which have not been cured or
otherwise resolved to the satisfaction of such Insurance Department. Section 3.22(b) of
the Company Disclosure Schedule sets forth a complete list of permitted practices under
SAP that are used in any of the Statutory Statements of any Insurance Subsidiary.
d.
(c) The aggregate reserves for claims, losses (including incurred but not reported
au
losses), loss adjustment expenses (whether allocated or unallocated) and unearned
premium, as reflected in each of the Statutory Statements, (A) were determined in
accordance with presently
Fr
43
re
accepted actuarial standards consistently applied (except as otherwise noted in the
financial statements and notes thereto included in such financial statements); (B) are
su
fairly stated in accordance with sound actuarial principles; (C) were computed on the
basis of methodologies consistent in all material respects with those used in computing
the corresponding reserves in the prior fiscal years (except as otherwise noted in the
clo
financial statements and notes thereto included in such financial statements) and (D)
include provisions for all actuarial reserves and related items reasonably required to be
established in accordance with applicable laws.
re
(d) All policies, binders, slips, certificates, and other agreements of insurance issued
or distributed by any Insurance Subsidiary in any jurisdiction (“Insurance Contracts”)
have been issued or distributed, to the extent required by law, on forms filed with and
Fo
to the extent required by law, have been filed with and approved by all applicable
Insurance Departments or were not objected to by any such Insurance Department within
any period provided for objection. All such premium rates comply with applicable laws
and are within the amount permitted by such laws.
St
(e) All underwriting, management and administration agreements entered into by any
Insurance Subsidiary are, to the extent required by law, in forms acceptable to all
w.
applicable Insurance Departments or have been filed with and approved by all applicable
Insurance Departments or were not objected to by any such Insurance Department within
any period provided for objection.
ww
(f) All advertising, promotional, sales and solicitation materials and all product
illustrations used by any Insurance Subsidiary or any agent, broker, intermediary,
manager or producer employed or engaged by any Insurance Subsidiary (each, a
“Producer”) of any Insurance Subsidiary are in compliance with applicable laws.
m
(g) Each reinsurance contract, treaty or arrangement (including any facultative
co
agreements, indemnity agreements, or other agreements involving cession or assumption
of reinsurance, coinsurance, excess insurance, or retrocessions and any terminated or
expired reinsurance contract, treaty or agreement under which there remains any
outstanding material liability) (“Reinsurance Contracts”) to which any Insurance
d.
Subsidiary is a party or by which any Insurance Subsidiary is bound or subject is a valid
and binding obligation of the parties thereto, is in full force and effect, and is enforceable
au
in accordance with its terms. Neither any Insurance Subsidiary nor, to the knowledge of
Company, any other party thereto is in default with regard to any such Reinsurance
Contract. There are no disputes pending or, to the knowledge of Company, threatened
with respect to any such Reinsurance Contract.
Fr
(h) Each Insurance Subsidiary is entitled under applicable law to take full credit in its
Statutory Statements for all amounts recoverable by it pursuant to any Reinsurance
re
Contract, and all such amounts recoverable have been properly recorded in the books and
records of account of Company and its Insurance Subsidiaries and are properly reflected
in the Statutory Statements. To Company’s knowledge, all such amounts recoverable by
su
Company or any of its Insurance Subsidiaries are fully collectible in due course. Neither
Company nor any of its Insurance Subsidiaries has received notice that any other party to
any Reinsurance Contract
clo
44
re
intends not to perform fully under any such Reinsurance Contract, and, to Company’s
knowledge, the financial condition of each party to each Reinsurance Contract pursuant
Fo
to which any Insurance Subsidiary has ceded any premiums is not impaired to the extent
that a default thereunder could reasonably be anticipated.
op
(i) Since January 1, 2005, no rating agency has imposed conditions (financial or
otherwise) on retaining any currently held rating assigned to any Insurance Subsidiary or
stated to Company that it is considering lowering any rating assigned to any Insurance
Subsidiary or placing any Insurance Subsidiary on an “under review” status. As of the
St
date of this Agreement, each Insurance Subsidiary has the A.M. Best rating set forth in
Section 3.22(i) of the Company Disclosure Schedule.
w.
(j) No single Producer generated more than ten percent (10%) of the aggregate gross
written premium of any Insurance Subsidiary during the year ended December 31, 2007.
To Company’s knowledge, no Producer is engaged in, or has been engaged in, any
ww
m
aggregate gross written premiums of any Insurance Subsidiary during the year ended
December 31, 2007.
co
(k) “PMI Reinsurance Agreements” means all reinsurance agreements, treaties, trust
agreements and other agreements, and all amendments to any of the foregoing, relating to
any reinsurance assumed by any Insurance Subsidiary (on an indemnity reinsurance basis
d.
or otherwise) of private mortgage insurance written directly by any insurance company.
Each PMI Reinsurance Agreement is a valid and binding obligation of the parties thereto,
au
is in full force and effect, and is enforceable in accordance with its terms. Neither any
Insurance Subsidiary nor, to the knowledge of Company, any other party thereto is in
default with regard to any PMI Reinsurance Agreement. There are no material disputes
pending or, to the knowledge of Company, threatened with respect to any PMI
Fr
Reinsurance Agreement.
(l) The maximum liability of Company and any Insurance Subsidiary under any PMI
re
Reinsurance Agreement is limited to the amount of funds held in trust under such PMI
Reinsurance Agreement at such time as Company or such Insurance Subsidiary may elect
not to deposit additional funds in such trust. Each Insurance Subsidiary has an absolute,
su
unrestricted right to elect not to deposit additional funds in any trust established pursuant
to any PMI Reinsurance Agreement, which election may be exercised at any time at the
sole discretion of such Insurance Subsidiary.
clo
(m) As of the date of this Agreement, each trust established pursuant to any PMI
Reinsurance Agreement is fully funded as required by such PMI Reinsurance Agreement.
Neither Company nor any Insurance Subsidiary has received any written or oral notice,
re
the Insurance Subsidiaries or the cedents under any Reinsurance Agreement has
withdrawn at any time any funds from any trust
op
45
St
related to any of the PMI Reinsurance Agreements. Each Insurance Subsidiary that is a
party to any PMI Reinsurance Agreement has performed or received, on no less than an
annual basis, reconciliations of each trust account established pursuant such PMI
w.
and from the cedents under any such PMI Reinsurance Agreement. Each Insurance
Subsidiary that is a party to any PMI Reinsurance Agreement has performed at least
annual audits of the reinsurance programs established in connection with such PMI
Reinsurance Agreements and of the cedents under such PMI Reinsurance Agreements.
No Insurance Subsidiary that is a party to any PMI Reinsurance Agreement has
m
transferred or ceded, in whole or in part, to any person any insurance risk assumed by
such Insurance Subsidiary under such PMI Reinsurance Agreement. The reinsurance
co
programs established in connection with the PMI Reinsurance Agreements are not, and
have not been, in violation of applicable laws and such reinsurance programs have not
been the subject of sanctions, fines or penalties of any kind imposed by any
Governmental Entity. To the knowledge of Company, since January 1, 2005, the
d.
reinsurance programs established in connection with the PMI Reinsurance Agreements
are not, and have not been, the subject of any charges or allegations of any kind of any
au
violation of applicable laws.
3.23 State Takeover Laws. The Board of Directors of Company has unanimously
approved this Agreement and the transactions contemplated hereby as required to render
Fr
inapplicable to this Agreement and such transactions the restrictions on “business
combinations” set forth in Section 203 of the DGCL or any other “moratorium,” “control
share,” “fair price,” “takeover” or “interested stockholder” law (any such laws,
re
“Takeover Statutes”).
3.24 Rights Agreement. Company or the Board of Directors of Company, as the case
su
may be, has (a) taken all necessary actions so that the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not result
in a “Distribution Date” (as defined in the Rights Agreement) or result in Parent being an
clo
“Acquiring Person” (as defined in the Rights Agreement) and (b) amended the Rights
Agreement to (i) render it inapplicable to this Agreement and the transactions
contemplated hereby and (ii) provide that the “Final Expiration Date” (as defined in the
Rights Agreement) shall occur immediately prior to the Closing.
re
3.25 Interested Party Transactions. Except as set forth in the Company SEC
Documents or Section 3.25 of the Company Disclosure Schedule, no event has occurred
Fo
since December 31, 2006 that would be required to be reported by Company pursuant to
Item 404(a) of Regulation S-K promulgated by the SEC.
op
3.26 Reorganization; Approvals. As of the date of this Agreement, Company (a) is not
aware of any fact or circumstance that could reasonably be expected to prevent the
Merger from qualifying as a “reorganization” within the meaning of Section 368(a) of the
Code, and (b) knows of no reason why all regulatory approvals from any Governmental
St
Entity required for the consummation of the transactions contemplated by this Agreement
should not be obtained on a timely basis.
w.
46
ww
3.27 Opinion. The Board of Directors of Company has received the opinions of each
of Goldman, Sachs & Co. and Sandler O'Neill & Partners, L.P., respectively, to the effect
that, as of the date hereof, and based upon and subject to the factors and assumptions set
forth therein, the Merger Consideration is fair from a financial point of view to the
m
holders of Company Common Stock.
co
3.28 Company Information. The information relating to Company and its Subsidiaries
that is provided by Company or its representatives for inclusion in the Proxy Statement
and Form S-4, or in any application, notification or other document filed with any other
Regulatory Agency or other Governmental Entity in connection with the transactions
d.
contemplated by this Agreement, will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in light of the
au
circumstances in which they are made, not misleading. The portions of the Proxy
Statement relating to Company and its Subsidiaries and other portions within the
reasonable control of Company and its Subsidiaries will comply in all material respects
with the provisions of the Exchange Act and the rules and regulations thereunder.
Fr
ARTICLE IV
re
REPRESENTATIONS AND WARRANTIES OF PARENT
the face of such disclosure that such disclosure is relevant to another Section of this
Agreement, provided, however, that notwithstanding anything in this Agreement to the
contrary, (i) no such item is required to be set forth in such schedule as an exception to a
Fo
representation or warranty if its absence would not result in the related representation or
warranty being deemed untrue or incorrect under the standard established by Section 9.2,
and (ii) the mere inclusion of an item in such schedule as an exception to a representation
op
or warranty shall not be deemed an admission that such item represents a material
exception or material fact, event or circumstance or that such item has had or would be
reasonably likely to have a Material Adverse Effect on Parent), Parent hereby represents
and warrants to Company as follows:
St
4.1 Corporate Organization. (a) Each of Parent and Merger Sub is a corporation or
limited liability company duly incorporated or organized, validly existing and in good
w.
standing under the laws of the State of Delaware. Each of Parent and Merger Sub has the
requisite corporate or limited liability company power and authority to own or lease all of
its properties and assets and to carry on its business as it is now being conducted, and is
ww
duly licensed or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and assets owned or
leased by it
47
m
co
makes such licensing or qualification necessary. Parent is duly registered as a bank
holding company under the BHC Act and is a financial holding company pursuant to
Section 4(1) of the BHC Act and meets the applicable requirements for qualification as
such. True, complete and correct copies of the Amended and Restated Certificate of
d.
Incorporation, as amended (the “Parent Certificate”), and Bylaws of Parent (the “Parent
Bylaws”), as in effect as of the date of this Agreement, have previously been made
au
available to Company.
(b) Each Subsidiary of Parent (i) is duly incorporated or duly formed, as applicable to
each such Subsidiary, and validly existing and in good standing under the laws of its
Fr
jurisdiction of organization, (ii) has the requisite corporate power and authority or other
power and authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted and (iii) is duly qualified to do business in each
re
jurisdiction in which the nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it makes such licensing or
qualification necessary. su
4.2 Capitalization. The authorized capital stock of Parent consists of 7,500,000,000
shares of Parent Common Stock, of which, as of December 31, 2007 (the “Parent
clo
Capitalization Date”), 4,437,885,419 shares were issued and outstanding, and
100,000,000 shares of preferred stock, $0.01 par value (the “Parent Preferred Stock”), of
which, as of the Parent Capitalization Date, (i) 3,000,000 shares were authorized as
ESOP Convertible Preferred Stock, Series C, none of which were issued and outstanding,
re
(ii) 35,045 shares were authorized as Cumulative Redeemable Preferred Stock, Series B,
7,667 of which were issued and outstanding, (iii) 20,000,000 shares were authorized as
$2.50 Cumulative Convertible Preferred Stock, Series BB, none of which were issued
Fo
and outstanding, (iv) 85,100 shares were authorized as Floating Rate Non-Cumulative
Preferred Stock, Series E, of which and issued 81,000 shares were issued and
outstanding, (v) 34,500 shares were authorized as 6.204% Non-Cumulative Series D
op
Preferred Stock, of which 33,000 were issued and outstanding, (vi) 7,001 were authorized
as Floating Rate Non-Cumulative Preferred Stock, Series F, none of which were issued
and outstanding, (vii) 8,501 were authorized as Adjustable Rate Non-Cumulative
Preferred Stock, Series G, none of which were issued and outstanding, (viii) 25,300 were
St
Capitalization Date, no shares of Parent Common Stock were held in Parent’s treasury.
As of the Parent Capitalization Date, no shares of Parent Common Stock or Parent
Preferred Stock were reserved for issuance, except for (i) 383,878,759 shares of Parent
ww
Common Stock reserved for issuance upon exercise of options issued pursuant to
employee and director stock plans of Parent or a Subsidiary of Parent in effect as of the
date of this Agreement (the “Parent Stock Plans”) and (ii) 159,954 shares of Parent
Common Stock reserved for issuance pursuant to a convertible note agreement (the
“Convertible Note Agreement”). All of the issued and outstanding shares of Parent
m
Common Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability attaching to the
co
ownership thereof. As of the date of this Agreement, no Voting Debt of Parent is issued
or outstanding. As of the Parent Capitalization Date, except pursuant to this Agreement,
the Parent Stock Plans, the Convertible Note Agreement, Parent’s dividend reinvestment
plan and stock repurchase plans entered into by Parent from time to time, Parent does not
d.
have and is not bound by any outstanding subscriptions, options, warrants, calls, rights,
commitments or agreements of any character
au
48
Fr
calling for the purchase or issuance of any shares of Parent Common Stock, Parent
Preferred Stock, Voting Debt of Parent or any other equity securities of Parent or any
re
securities representing the right to purchase or otherwise receive any shares of Parent
Common Stock, Parent Preferred Stock, Voting Debt of Parent or other equity securities
of Parent. The shares of Parent Common Stock to be issued pursuant to the Merger will
su
be duly authorized and validly issued and, at the Effective Time, all such shares will be
fully paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof.
clo
4.3 Authority; No Violation. (a) Each of Parent and Merger Sub has full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement and the
re
consummation of the transactions contemplated hereby have been duly and validly
approved by the Boards of Directors of Parent and Merger Sub (by the unanimous vote of
all directors present) and no other corporate proceedings on the part of Parent or Merger
Fo
delivery by Company) constitutes the valid and binding obligation of each of Parent and
Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its
terms (subject to the Bankruptcy and Equity Exception).
St
(b) Neither the execution and delivery of this Agreement by Parent or Merger Sub, nor
the consummation by Parent or Merger Sub of the transactions contemplated hereby, nor
compliance by Parent or Merger Sub with any of the terms or provisions of this
w.
Agreement, will (i) violate any provision of the Parent Certificate or the Parent Bylaws or
the certificate of incorporation or bylaws of Merger Sub, or (ii) assuming that the
consents, approvals and filings referred to in Section 4.4 are duly obtained and/or made,
ww
(A) violate any law, judgment, order, injunction or decree applicable to Parent, any of its
Subsidiaries or any of their respective properties or assets or (B) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under, constitute a default
(or an event which, with notice or lapse of time, or both, would constitute a default)
under, result in the termination of or a right of termination or cancellation under,
m
accelerate the performance required by, or result in the creation of any Lien upon any of
the respective properties or assets of Parent or any of its Subsidiaries under, any of the
co
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which any of them or any of their respective properties or
assets is bound.
d.
4.4 Consents and Approvals. Except for (i) the filing of the BHCA Application and
au
approval of such application, (ii) the Other Regulatory Approvals, (iii) the filing with the
SEC of the Proxy Statement and the filing and declaration of effectiveness of the Form S-
4 and the filing and effectiveness of the registration statement contemplated by Section
1.5(e), (iv) the filing of the Certificate of Merger with the Secretary of State of the State
Fr
of Delaware pursuant to the DGCL, (v) any notices to or filings with the SBA, (vi) any
consents, authorizations, approvals, filings or exemptions in connection with compliance
with the rules and regulations of any applicable SRO, and the rules of the NYSE, (vii)
re
any notices or filings under the HSR Act, and (viii) such filings and approvals as are
required to be made or obtained under the securities or “Blue Sky” laws of various states
in connection with the issuance of the shares of Parent Common Stock pursuant to this
su
Agreement and approval of listing of such Parent Common
49
clo
necessary in connection with the execution and delivery by Parent or Merger Sub of this
Agreement.
op
(a) Parent and each of its Subsidiaries have timely filed all reports, registration
statements, proxy statements and other materials, together with any amendments required
St
to be made with respect thereto, that they were required to file since January 1, 2005 with
the Regulatory Agencies and each other applicable Governmental Entity, and all other
reports and statements required to be filed by them since January 1, 2005, including any
w.
report or statement required to be filed pursuant to the laws, rules or regulations of the
United States, any state, any foreign entity, or any Regulatory Agency or other
Governmental Entity, and have paid all fees and assessments due and payable in
ww
m
Subsidiaries. Since January 1, 2005, no Regulatory Agency or other Governmental Entity
has resolved any proceeding, enforcement action or, to the knowledge of Parent,
co
investigation into the business, disclosures or operations of Parent or any of its
Subsidiaries. There is no unresolved violation, criticism, comment or exception by any
Regulatory Agency or other Governmental Entity with respect to any report or statement
relating to any examinations or inspections of Parent or any of its Subsidiaries. Since
d.
January 1, 2005 there has been no formal or informal inquiries by, or disagreements or
disputes with, any Regulatory Agency or other Governmental Entity with respect to the
au
business, operations, policies or procedures of Parent or any of its Subsidiaries (other
than normal examinations conducted by a Regulatory Agency or other Governmental
Entity in Parent’s ordinary course of business).
Fr
(b) Neither Parent nor any of its Subsidiaries is subject to any cease-and-desist or
other order or enforcement action issued by, or is a party to any written agreement,
consent agreement or memorandum of understanding with, or is a party to any
re
commitment letter or similar undertaking to, or is subject to any order or directive by, or
has been since January 1, 2005 a recipient of any supervisory letter from, or has been
ordered to pay any civil money penalty by, or since January 1, 2005 has adopted any
su
policies, procedures or board resolutions at the request or suggestion of, any Regulatory
Agency or other Governmental Entity that currently restricts in any material respect the
conduct of its business or that in any material manner relates to its capital adequacy, its
clo
ability to pay dividends, its credit, risk management or compliance policies, its internal
controls, its management or its business, other than those of general application that
apply to bank holding companies or their Subsidiaries (each, a “Parent Regulatory
Agreement”), nor has Parent or any of its Subsidiaries been advised since January 1, 2005
re
50
op
(c) Parent has previously made available to Company an accurate and complete copy
of each (i) final registration statement, prospectus, report, schedule and definitive proxy
statement filed with or furnished to the SEC by Parent pursuant to the Securities Act or
St
the Exchange Act since January 1, 2005 (the “Parent SEC Reports”) and prior to the date
of this Agreement and (ii) communication mailed by Parent to its stockholders since
January 1, 2005 and prior to the date of this Agreement. No such Parent SEC Report or
w.
or omitted to state any material fact required to be stated therein or necessary in order to
make the statements made therein, in light of the circumstances in which they were made,
not misleading, except that information as of a later date (but before the date of this
Agreement) shall be deemed to modify information as of an earlier date. As of their
respective dates, all Parent SEC Reports complied as to form in all material respects with
m
the published rules and regulations of the SEC with respect thereto. No executive officer
of Parent has failed in any respect to make the certifications required of him or her under
co
Section 302 or 906 of the Sarbanes-Oxley Act.
d.
(a) The financial statements of Parent and its Subsidiaries included (or incorporated by
reference) in the Parent SEC Reports (including the related notes, where applicable) (i)
au
have been prepared from, and are in accordance with, the books and records of Parent
and its Subsidiaries; (ii) fairly present in all material respects the consolidated results of
operations, cash flows, changes in stockholders’ equity and consolidated financial
position of Parent and its Subsidiaries for the respective fiscal periods or as of the
Fr
respective dates therein set forth (subject in the case of unaudited statements to recurring
year-end audit adjustments normal in nature and amount); (iii) complied as to form, as of
their respective dates of filing with the SEC, in all material respects with applicable
re
accounting requirements and with the published rules and regulations of the SEC with
respect thereto; and (iv) have been prepared in accordance with GAAP consistently
applied during the periods involved, except, in each case, as indicated in such statements
su
or in the notes thereto. The books and records of Parent and its Subsidiaries have been,
and are being, maintained in all material respects in accordance with GAAP and any
other applicable legal and accounting requirements and reflect only actual transactions.
clo
PricewaterhouseCoopers LLP has not resigned or been dismissed as independent public
accountants of Parent as a result of or in connection with any disagreements with Parent
on a matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
re
(b) Neither Parent nor any of its Subsidiaries has any material liability or obligation of
any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether
Fo
due or to become due), except for those liabilities that are reflected or reserved against on
the consolidated balance sheet of Parent included in its Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2007 (including any notes thereto) and for
op
liabilities incurred in the ordinary course of business consistent with past practice since
September 30, 2007 or in connection with this Agreement and the transactions
contemplated hereby.
St
51
w.
(c) The records, systems, controls, data and information of Parent and its Subsidiaries
are recorded, stored, maintained and operated under means (including any electronic,
ww
mechanical or photographic process, whether computerized or not) that are under the
exclusive ownership and direct control of Parent or its Subsidiaries or accountants
(including all means of access thereto and therefrom), except for any non-exclusive
ownership and non-direct control that would not reasonably be expected to have a
material adverse effect on the system of internal accounting controls described below in
m
this Section 4.6(c) . Parent (x) has implemented and maintains disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act) to ensure that material
co
information relating to Parent, including its consolidated Subsidiaries, is made known to
the chief executive officer and the chief financial officer of Parent by others within those
entities, and (y) has disclosed, based on its most recent evaluation prior to the date hereof,
to Parent’s outside auditors and the audit committee of Parent’s Board of Directors (i)
d.
any significant deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)
au
which are reasonably likely to adversely affect Parent’s ability to record, process,
summarize and report financial information and (ii) any fraud, whether or not material,
that involves management or other employees who have a significant role in Parent’s
internal controls over financial reporting. These disclosures were made in writing by
Fr
management to Parent’s auditors and audit committee, a copy of which has previously
been made available to Company. As of the date hereof, there is no reason to believe that
Parent’s outside auditors, chief executive officer and chief financial officer will not be
re
able to give the certifications and attestations required pursuant to the rules and
regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, without
qualification, when next due. su
(d) Since December 31, 2006, (x) neither Parent nor any of its Subsidiaries nor, to the
knowledge of the officers of Parent, any director, officer, employee, auditor, accountant
clo
or representative of Parent or any of its Subsidiaries has received or otherwise had or
obtained knowledge of any material complaint, allegation, assertion or claim, whether
written or oral, regarding the accounting or auditing practices, procedures, methodologies
or methods of Parent or any of its Subsidiaries or their respective internal accounting
re
controls, including any material complaint, allegation, assertion or claim that Parent or
any of its Subsidiaries has engaged in questionable accounting or auditing practices, and
(y) no attorney representing Parent or any of its Subsidiaries, whether or not employed by
Fo
4.7 Broker’s Fees. Neither Parent nor any of its Subsidiaries nor any of their
respective officers or directors has employed any broker or finder or incurred any liability
St
for any broker’s fees, commissions or finder’s fees in connection with the Merger or
related transactions contemplated by this Agreement, other than as set forth on Section
4.7 of the Parent Disclosure Schedule.
w.
4.8 Absence of Certain Changes or Events. Since September 30, 2007, no event or
events have occurred that have had or would reasonably be expected to have a Material
ww
52
m
(a) Since September 30, 2007 through and including the date of this Agreement,
Parent and its Subsidiaries have carried on their respective businesses in all material
co
respects in the ordinary course of business consistent with their past practice.
4.9 Legal Proceedings. (a) Neither Parent nor any of its Subsidiaries is a party to any,
and there are no pending or, to the best of Parent’s knowledge, threatened, legal,
d.
administrative, arbitral or other proceedings, claims, actions or governmental or
regulatory investigations of any nature against Parent or any of its Subsidiaries or to
au
which any of their assets are subject.
(b) There is no judgment, order, injunction, decree or regulatory restriction (other than
those of general application that apply to similarly situated bank holding companies or
Fr
their Subsidiaries) imposed upon Parent, any of its Subsidiaries or the assets of Parent or
any of its Subsidiaries.
re
4.10 Taxes and Tax Returns. Each of Parent and its Subsidiaries has duly and timely
filed (including all applicable extensions) all material Tax Returns required to be filed by
it on or prior to the date of this Agreement (all such returns being accurate and complete
su
in all material respects), has paid all Taxes shown thereon as arising and has duly paid or
made provision for the payment of all material Taxes that have been incurred or are due
or claimed to be due from it by federal, state, foreign or local taxing authorities other than
clo
Taxes that are not yet delinquent or are being contested in good faith, have not been
finally determined and have been adequately reserved against. There are no material
disputes pending, or claims asserted, for Taxes or assessments upon Parent or any of its
Subsidiaries for which Parent does not have reserves that are adequate under GAAP.
re
4.11 Compliance with Applicable Law. Parent and each of its Subsidiaries hold all
licenses, franchises, permits and authorizations necessary for the lawful conduct of their
Fo
respective businesses under and pursuant to each, and have complied in all respects with
and are not in default in any respect under any, law applicable to Parent or any of its
Subsidiaries.
op
4.12 Reorganization; Approvals. As of the date of this Agreement, Parent (a) is not
aware of any fact or circumstance that could reasonably be expected to prevent the
Merger from qualifying as a “reorganization” within the meaning of Section 368(a) of the
St
Code, and (b) knows of no reason why all regulatory approvals from any Governmental
Entity required for the consummation of the transactions contemplated by this Agreement
should not be obtained on a timely basis.
w.
4.13 Parent Information. The information relating to Parent and its Subsidiaries that is
provided by Parent or its representatives for inclusion in the Proxy Statement and the
ww
Form S-4, or in any application, notification or other document filed with any other
Regulatory Agency or other Governmental Entity in connection with the transactions
contemplated by this Agreement, will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading. The portions of the Proxy
m
Statement relating to Parent and its Subsidiaries and other portions within the reasonable
control of Parent and its Subsidiaries will comply in all material respects with the
co
provisions of the Exchange Act and the rules and
53
d.
au
regulations thereunder. The Form S-4 will comply in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
ARTICLE V
Fr
COVENANTS RELATING TO CONDUCT OF BUSINESS
re
5.1 Conduct of Businesses Prior to the Effective Time. Except as expressly
contemplated by or permitted by this Agreement or with the prior written consent of the
other party, during the period from the date of this Agreement to the Effective Time, each
su
of Company and Parent shall, and shall cause each of its respective Subsidiaries to, (a)
conduct its business in the ordinary course in all material respects, (b) use reasonable best
efforts to maintain and preserve intact its business organization and advantageous
clo
business relationships and retain the services of its key officers and key employees and
(c) take no action that is intended to or would reasonably be expected to adversely affect
or materially delay the ability of Company, Parent or Merger Sub to obtain any necessary
approvals of any Regulatory Agency or other Governmental Entity required for the
re
transactions contemplated hereby or to perform its covenants and agreements under this
Agreement or to consummate the transactions contemplated hereby or thereby.
Fo
5.2 Company Forbearances. During the period from the date of this Agreement to the
Effective Time, except as set forth in Section 5.2 of the Company Disclosure Schedule
and except as expressly contemplated or permitted by this Agreement, Company shall
op
not, and shall not permit any of its Subsidiaries to, without the prior written consent of
Parent:
(a) other than in the ordinary course of business consistent with past practice, incur
St
investment in, any person (it being understood and agreed that incurrence of indebtedness
in the ordinary course of business consistent with past practice shall include the creation
of deposit liabilities, purchases of Federal funds, FHLBA advances, securitizations, sales
ww
of certificates of deposit and entering into repurchase agreements, in each case in the
ordinary course of business consistent with past practice);
(b) (i) adjust, split, combine or reclassify any of its capital stock;
m
(ii) make, declare or pay any dividend, or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital
co
stock or any securities or obligations convertible (whether currently convertible or
convertible only after the passage of time or the occurrence of certain events) into or
exchangeable for any shares of its capital stock (except (A) for regular quarterly cash
dividends on the Company Common Stock at a rate not in excess of $0.15 per share with
d.
record dates and payment dates consistent with the prior year, (B) dividends on the Series
B Preferred Stock, (C) dividends paid by any of the Subsidiaries of Company to
au
Company or to any of its wholly-owned Subsidiaries, and (D) the acceptance of shares of
Company Common Stock in payment of the exercise price or withholding Taxes incurred
54
Fr
re
by any employee or director in connection with the exercise of stock options or stock
appreciation rights or the vesting of restricted shares of (or settlement of other equity-
based awards in respect of) Company Common Stock granted under a Company Stock
su
Plan or Company Deferred Equity Unit Plan, in each case in accordance with past
practice and the terms of the applicable Company Stock Plan and related award
agreements or Company Deferred Equity Unit Plan);
clo
(iii) grant any stock options, stock appreciation rights, restricted shares, restricted
stock units, deferred equity units, awards based on the value of Company’s capital stock
or other equity-based award with respect to shares of Company Common Stock under
re
any of the Company Stock Plans or otherwise, or grant any individual, corporation or
other entity any right to acquire any shares of its capital stock; or
Fo
(iv) issue any additional shares of capital stock or other securities, except pursuant
to the exercise of stock options or stock appreciation rights or the settlement of other
equity-based awards granted under a Company Stock Plan or Company Deferred Equity
op
(c) except (A) as required under applicable law or the terms of any Company Benefit
Plan existing as of the date hereof, (B) for increases in annual base salary at times and in
St
amounts in the ordinary course of business consistent with past practice, which shall not
exceed 4% in the aggregate (on an annualized basis) and (C) for promotions (other than
promotions to senior managing director or above) at times in the ordinary course of
w.
business consistent with past practice, (i) increase in any manner the compensation or
benefits of any of the current or former directors, officers or employees of Company or
its Subsidiaries (collectively, “Employees”), (ii) pay any amounts to Employees not
ww
required by any current plan or agreement (other than base salary in the ordinary course
of business) to any Employee, (iii) become a party to, establish, amend, commence
participation in, terminate or commit itself to the adoption of any stock option plan or
other stock-based compensation plan, compensation (including any employee co-
investment fund), severance, pension, retirement, profit-sharing, welfare benefit, or other
m
employee benefit plan or agreement or employment agreement with or for the benefit of
any Employee (or newly hired employees), (iv) accelerate the vesting of any stock-based
co
compensation or other long-term incentive compensation under any Company Benefit
Plans, or (v) (x) hire employees in the position of senior vice president or above (or with
respect to the retail products divisions in the position of regional vice president or above)
or (y) terminate the employment of any employee in the position of executive vice
d.
president or above (other than due to terminations for cause);
au
(d) sell, transfer, pledge, lease, license, mortgage, encumber or otherwise dispose of
any material amount of its properties or assets (including pursuant to securitizations) to
any individual, corporation or other entity other than a Subsidiary or cancel, release or
assign any material amount of indebtedness to any such person or any claims held by any
Fr
such person, in each case other than in the ordinary course of business consistent with
past practice or pursuant to contracts in force at the date of this Agreement;
re
55
su
(e) enter into any new line of business or change in any material respect its lending,
investment, underwriting, risk and asset liability management and other banking,
clo
operating, securitization and servicing policies, except as required by applicable law,
regulation or policies imposed by any Governmental Entity;
(f) transfer ownership, or grant any license or other rights, to any person or entity of or
re
in respect of any material Company IP, other than grants of non-exclusive licenses
pursuant to License Agreements entered into in the ordinary course of business consistent
with past practice;
Fo
(h) take any action, or knowingly fail to take any action, which action or failure to act
is reasonably likely to prevent the Merger from qualifying as a reorganization within the
St
(i) amend its charter or bylaws, or otherwise take any action to exempt any person or
w.
entity (other than Parent or its Subsidiaries) or any action taken by any person or entity
from any Takeover Statute or similarly restrictive provisions of its organizational
documents or terminate, amend or waive any provisions of any confidentiality or
ww
m
or the manner in which the portfolio is classified or reported;
co
(k) change in any material respect the policies, practices and procedures governing
Mortgage Loan operations of Company and its Subsidiaries, including the policies,
practices and procedures governing credit and collection matters, related to the
solicitation, origination, maintenance and servicing of Mortgage Loans;
d.
(l) (i) amend or otherwise modify, except in the ordinary course of business, or
au
knowingly violate in any material respect the terms of, any Company Contract, or (ii)
create, renew or amend any agreement or contract or, except as may be required by
applicable law, other binding obligation of Company or its Subsidiaries containing (A)
any material restriction on the ability of Company or its Subsidiaries to conduct its
Fr
business as it is presently being conducted or (B) any material restriction on the ability of
Company or its affiliates to engage in any type of activity or business;
re
(m) commence or settle any material claim, action or proceeding;
(n) take any action or willfully fail to take any action that is intended or may
su
reasonably be expected to result in any of the conditions to the Merger set forth in Article
VII not being satisfied;
clo
56
re
(o) implement or adopt any change in its Tax accounting or financial accounting
principles, practices or methods, other than as may be required by applicable law, GAAP
or regulatory guidelines;
Fo
(p) file or amend any Tax Return other than in the ordinary course of business, make
or change any material Tax election, or settle or compromise any material Tax liability;
op
or
(q) agree to take, make any commitment to take, or adopt any resolutions of its board
of directors in support of, any of the actions prohibited by this Section 5.2.
St
5.3 Parent Forbearances. Except as expressly permitted by this Agreement or with the
prior written consent of Company, during the period from the date of this Agreement to
w.
the Effective Time, Parent shall not, and shall not permit any of its Subsidiaries to, (a)
amend, repeal or otherwise modify any provision of the Parent Certificate or the Parent
Bylaws in a manner that would adversely affect Company, the stockholders of Company
ww
or the transactions contemplated by this Agreement; (b) take any action, or knowingly
fail to take any action, which action or failure to act is reasonably likely to prevent the
Merger from qualifying as a “reorganization” within the meaning of Section 368(a) of the
Code; (c) take any action or willfully fail to take any action that is intended or may
reasonably be expected to result in any of the conditions to the Merger set forth in Article
m
VII not being satisfied; (d) take any action that would be reasonably expected to prevent,
materially impede or materially delay the consummation of the transactions contemplated
co
by this Agreement; or (e) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions prohibited by this
Section 5.3.
d.
ARTICLE VI
au
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters. (a) Parent and Company shall promptly prepare and file with
the SEC the Form S-4, in which the Proxy Statement will be included as a prospectus.
Fr
Each of Parent and Company shall use its reasonable best efforts to have the Form S-4
declared effective under the Securities Act as promptly as practicable after such filing,
and Company shall thereafter mail or deliver the Proxy Statement to its stockholders.
re
Parent shall also use its reasonable best efforts to obtain all necessary state securities law
or “Blue Sky” permits and approvals required to carry out the transactions contemplated
by this Agreement, and Company shall furnish all information concerning Company and
su
the holders of Company Common Stock as may be reasonably requested in connection
with any such action.
clo
(b) The parties shall cooperate with each other and use their respective reasonable best
efforts to promptly prepare and file all necessary documentation, to effect all
applications, notices, petitions and filings, to obtain as promptly as practicable all
permits, consents, approvals and authorizations of all third parties (including any unions,
re
works councils or other labor organizations) and Governmental Entities that are
necessary or advisable to consummate the transactions contemplated by this Agreement
(including the Merger), and to comply with the terms and conditions of all such permits,
Fo
consents, approvals and authorizations of all such third parties or Governmental Entities.
Company and Parent shall have the right to review in advance,
op
57
St
and, to the extent practicable, each will consult the other on, in each case subject to
applicable laws relating to the confidentiality of information, all the information relating
to Company or Parent, as the case may be, and any of their respective Subsidiaries, that
w.
appear in any filing made with, or written materials submitted to, any third party or any
Governmental Entity in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties shall act reasonably and
ww
as promptly as practicable. The parties shall consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third parties and
Governmental Entities necessary or advisable to consummate the transactions
contemplated by this Agreement and each party will keep the other apprised of the status
of matters relating to completion of the transactions contemplated by this Agreement.
m
Notwithstanding the foregoing, nothing contained herein shall be deemed to require
Parent to take any action, or commit to take any action, or agree to any condition or
co
restriction, in connection with obtaining the foregoing permits, consents, approvals and
authorizations of third parties or Governmental Entities, that would reasonably be
expected to have a material adverse effect (measured on a scale relative to Company) on
either Parent or Company (a “Materially Burdensome Regulatory Condition”).
d.
(c) Each of Parent and Company shall, upon request, furnish to the other all
au
information concerning itself, its Subsidiaries, directors, officers and stockholders and
such other matters as may be reasonably necessary or advisable in connection with the
Proxy Statement, the Form S-4 or any other statement, filing, notice or application made
by or on behalf of Parent, Company or any of their respective Subsidiaries to any
Fr
Governmental Entity in connection with the Merger and the other transactions
contemplated by this Agreement.
re
(d) Each of Parent and Company shall promptly advise the other upon receiving any
communication from any Governmental Entity the consent or approval of which is
required for consummation of the transactions contemplated by this Agreement that
su
causes such party to believe that there is a reasonable likelihood that any Parent Requisite
Regulatory Approval or Company Requisite Regulatory Approval, respectively, will not
be obtained or that the receipt of any such approval may be materially delayed.
clo
6.2 Access to Information. (a) Upon reasonable notice and subject to applicable laws
relating to the confidentiality of information, each of Company and Parent shall, and shall
cause each of its Subsidiaries to, afford to the officers, employees, accountants, counsel,
re
advisors, agents and other representatives of the other party, reasonable access, during
normal business hours during the period prior to the Effective Time, to all its properties,
books, contracts, commitments and records, and, during such period, such party shall, and
Fo
shall cause its Subsidiaries to, make available to the other party (i) a copy of each report,
schedule, registration statement and other document filed or received by it during such
period pursuant to the requirements of federal securities laws or federal or state banking
op
or insurance laws (other than reports or documents that such party is not permitted to
disclose under applicable law) and (ii) all other information concerning its business,
properties and personnel as the other party may reasonably request (in the case of a
request by Company, information concerning Parent that is reasonably related to the
St
access or disclosure would jeopardize the attorney-client privilege of such party or its
58
ww
Subsidiaries or contravene any law, rule, regulation, order, judgment, decree, fiduciary
duty or binding agreement entered into prior to the date of this Agreement. The parties
m
shall make appropriate substitute disclosure arrangements under circumstances in which
the restrictions of the preceding sentence apply.
co
(b) All information and materials provided pursuant to this Agreement shall be subject
to the provisions of the Confidentiality Agreements entered into between the parties as of
November 12, 2007 and as of January 10, 2008 (the “Confidentiality Agreements”).
d.
(c) No investigation by a party hereto or its representatives shall affect the
au
representations and warranties of the other party set forth in this Agreement.
6.3 Stockholder Approval. Company shall call a meeting of its stockholders to be held
as soon as reasonably practicable for the purpose of obtaining the requisite stockholder
Fr
approval required in connection with the Merger, on substantially the terms and
conditions set forth in this Agreement, and shall use its reasonable best efforts to cause
such meeting to occur as soon as reasonably practicable. The Board of Directors of
re
Company shall use its reasonable best efforts to obtain from its stockholders the
stockholder vote approving the Merger, on substantially the terms and conditions set
forth in this Agreement, required to consummate the transactions contemplated by this
su
Agreement. Company shall submit this Agreement to its stockholders at the stockholder
meeting even if its Board of Directors shall have withdrawn, modified or qualified its
recommendation. The Board of Directors of Company has adopted resolutions approving
clo
the Merger, on substantially the terms and conditions set forth in this Agreement, and
directing that the Merger, on such terms and conditions, be submitted to Company’s
stockholders for their consideration.
re
6.4 Affiliates. Company shall use its reasonable best efforts to cause each director,
executive officer and other person who is an “affiliate” (for purposes of Rule 145 under
the Securities Act) of Company to deliver to Parent, as soon as practicable after the date
Fo
of this Agreement, and prior to the date of the meeting of Company stockholders to be
held pursuant to Section 6.3, a written agreement, in the form of Exhibit A.
op
6.5 NYSE Listing. Parent shall cause the shares of Parent Common Stock to be issued
in the Merger to be approved for listing on the NYSE, subject to official notice of
issuance, prior to the Effective Time.
St
6.6 Employee Matters. (a) Following the Closing Date, Parent shall maintain or cause
to be maintained employee benefit plans and compensation opportunities for the benefit
of employees (as a group) who are actively employed by Company and its Subsidiaries
w.
on the Closing Date (“Covered Employees”) that provide employee benefits and
compensation opportunities which, in the aggregate, are substantially comparable to the
employee benefits and compensation opportunities that are generally made available to
ww
similarly situated employees of Parent or its Subsidiaries (other than Company and its
Subsidiaries), as applicable; provided, that in no event shall any Covered Employee be
eligible to participate in any closed or frozen plan of Parent or its Subsidiaries; provided,
further, that until such time as Parent shall cause Covered Employees to participate in the
benefit plans and compensation opportunities that are made available to similarly situated
m
employees of Parent or its Subsidiaries (other than Company and
co
59
d.
its Subsidiaries), a Covered Employee’s continued participation in employee benefit
plans and compensation opportunities of Company and its Subsidiaries shall be deemed
au
to satisfy the foregoing provisions of this sentence (it being understood that participation
in the Parent plans may commence at different times with respect to each Parent plan).
Notwithstanding anything contained herein to the contrary, from and after the Effective
Time, a Covered Employee who is eligible to participate in the Company Change in
Fr
Control Severance Plan (the “Company Severance Plan”) and who is terminated during
the period commencing at the Effective Time and ending on the second anniversary
thereof shall be entitled to receive the severance payments and benefits under the
re
Company Severance Plan (without amendment to the Company Severance Plan during
such two year period following the Effective Time).
su
(b) To the extent that a Covered Employee becomes eligible to participate in an
employee benefit plan maintained by Parent or any of its Subsidiaries (other than
Company or its Subsidiaries), Parent shall cause such employee benefit plan to (i)
clo
recognize the service of such Covered Employee with Company or its Subsidiaries (or
their predecessor entities) for purposes of eligibility, participation, vesting and, except
under defined benefit pension plans (other than as provided in the last sentence of this
Section 6.6(b)), benefit accrual under such employee benefit plan of Parent or any of its
re
Subsidiaries, to the same extent such service was recognized immediately prior to the
Effective Time under a comparable Company Benefit Plan in which such Covered
Employee was eligible to participate immediately prior to the Effective Time or, if there
Fo
is no such comparable benefit plan, to the same extent such service was recognized under
the Company 401(k) Savings and Investment Plan immediately prior to the Effective
Time; provided that such recognition of service shall not operate to duplicate any benefits
op
of a Covered Employee with respect to the same period of service, and (ii) with respect to
any health, dental, vision plan or other welfare of Parent or any of its Subsidiaries (other
than Company and its Subsidiaries) in which any Covered Employee is eligible to
participate for the plan year in which such Covered Employee is first eligible to
St
participate, use its reasonable best efforts to (x) cause any pre-existing condition
limitations or eligibility waiting periods under such Parent or Subsidiary plan to be
waived with respect to such Covered Employee to the extent such limitation would have
w.
been waived or satisfied under the Company Benefit Plan in which such Covered
Employee participated immediately prior to the Effective Time, and (y) recognize any
health, dental or vision expenses incurred by such Covered Employee in the year that
ww
includes the Closing Date (or, if later, the year in which such Covered Employee is first
eligible to participate) for purposes of any applicable deductible and annual out-of-pocket
expense requirements under any such health, dental or vision plan of Parent or any of its
Subsidiaries. For purposes of any cash balance pension plan maintained or contributed to
by Parent or any of its Subsidiaries in which Covered Employees become eligible to
m
participate following the Effective Time, the Covered Employees’ level of benefit
accruals under any such plans (for periods of service following the date on which the
co
Covered Employees commence participation in such plans) shall be determined based on
the Covered Employees’ credited service prior to the Effective Time (as determined
under Company’s tax qualified retirement plans immediately prior to the Effective Time)
and with the Surviving Company following the Effective Time.
d.
(c) From and after the Effective Time, Parent shall, or shall cause its Subsidiaries to,
au
honor, in accordance with the terms thereof as in effect as of the date hereof or as may be
amended after the date hereof with the prior written consent of Parent, each employment
agreement and change in control agreement listed on Section 3.11 of the Company
Disclosure
Fr
60
re
Schedule and the obligations of Company and its Subsidiaries as of the Effective Time
su
under each deferred compensation plan or agreement listed on Section 3.11 of the
Company Disclosure Schedule.
clo
(d) Nothing in this Section 6.6 shall be construed to limit the right of Parent or any of
its Subsidiaries (including, following the Closing Date, Company and its Subsidiaries) to
amend or terminate any Company Benefit Plan or other employee benefit plan, to the
extent such amendment or termination is permitted by the terms of the applicable plan,
re
nor shall anything in this Section 6.6 be construed to require the Parent or any of its
Subsidiaries (including, following the Closing Date, Company and its Subsidiaries) to
retain the employment of any particular Covered Employee for any fixed period of time
Fo
(e) Without limiting the generality of Section 9.10, the provisions of this Section 6.6
op
are solely for the benefit of the parties to this Agreement, and no current or former
employee, director or independent contractor or any other individual associated therewith
shall be regarded for any purpose as a third-party beneficiary of the Agreement, and
nothing herein shall be construed as an amendment to any Company Benefit Plan or other
St
(a) In the event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative (a “Claim”), including any such
ww
Claim in which any individual who is now, or has been at any time prior to the date of
this Agreement, or who becomes prior to the Effective Time, a director or officer of
Company or any of its Subsidiaries or who is or was serving at the request of Company
or any of its Subsidiaries as a director or officer of another person (the “Indemnified
Parties”), is, or is threatened to be, made a party based in whole or in part on, or arising in
m
whole or in part out of, or pertaining to (i) the fact that he or she is or was a director or
officer of Company or any of its Subsidiaries prior to the Effective Time or (ii) this
co
Agreement or any of the transactions contemplated by this Agreement, whether asserted
or arising before or after the Effective Time, the parties shall cooperate and use their best
efforts to defend against and respond thereto. All rights to indemnification and
exculpation from liabilities for acts or omissions occurring at or prior to the Effective
d.
Time now existing in favor of any Indemnified Party as provided in their respective
certificates or articles of incorporation or by-laws (or comparable organizational
au
documents), and any existing indemnification agreements set forth in Section 6.7 of the
Company Disclosure Schedule, shall survive the Merger and shall continue in full force
and effect in accordance with their terms, and shall not be amended, repealed or
otherwise modified for a period of six years after the Effective Time in any manner that
Fr
would adversely affect the rights thereunder of such individuals for acts or omissions
occurring at or prior to the Effective Time or taken at the request of Parent pursuant to
Section 6.8 hereof, it being understood that nothing in this sentence shall require any
re
amendment to the certificate of incorporation or by-laws of the Surviving Company.
(b) From and after the Effective Time, Parent shall cause the Surviving Company to,
su
to the fullest extent permitted by applicable law, indemnify, defend and hold harmless,
and provide advancement of expenses to, each Indemnified Party against all losses,
claims, damages,
clo
61
re
of the fact that such person is or was a director or officer of Company or any of its
Subsidiaries, and pertaining to any matter existing or occurring, or any acts or omissions
occurring, at or prior to the Effective Time, whether asserted or claimed prior to, or at or
op
after, the Effective Time (including matters, acts or omissions occurring in connection
with the approval of this Agreement and the consummation of the transactions
contemplated hereby) or taken at the request of Parent pursuant to Section 6.8 hereof.
St
(c) Parent shall cause the individuals serving as officers and directors of Company or
any of its Subsidiaries immediately prior to the Effective Time to be covered for a period
of six years from the Effective Time by the directors’ and officers’ liability insurance
w.
policy maintained by Company (provided that Parent may substitute therefor policies of
at least the same coverage and amounts containing terms and conditions that are not less
advantageous than such policy) with respect to acts or omissions occurring prior to the
ww
Effective Time that were committed by such officers and directors in their capacity as
such; provided that in no event shall Parent be required to expend annually in the
aggregate an amount in excess of 250% of the annual premiums currently paid by
Company (which current amount is set forth in Section 6.7 of the Company Disclosure
Schedule) for such insurance (the “Insurance Amount”), and provided further that if
m
Parent is unable to maintain such policy (or such substitute policy) as a result of the
preceding proviso, Parent shall obtain as much comparable insurance as is available for
co
the Insurance Amount.
(d) The provisions of this Section 6.7 shall survive the Effective Time and are
intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and
d.
his or her heirs and representatives.
au
6.8 Additional Agreements. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement (including
any merger between a Subsidiary of Parent, on the one hand, and a Subsidiary of
Company, on the other) or to vest the Surviving Company with full title to all properties,
Fr
assets, rights, approvals, immunities and franchises of either party to the Merger, the
proper officers and directors of each party and their respective Subsidiaries shall, at
Parent’s sole expense, take all such necessary action as may be reasonably requested by
re
Parent.
6.9 Advice of Changes. Each of Parent and Company shall promptly advise the other
su
of any change or event (i) having or reasonably likely to have a Material Adverse Effect
on it or (ii) that it believes would or would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties or covenants contained in this
clo
Agreement; provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties (or remedies with respect thereto) or
the conditions to the obligations of the parties under this Agreement; and provided further
that a failure to comply with this Section 6.9 shall not constitute a breach of this
re
Agreement or the failure of any condition set forth in Article VII to be satisfied unless the
underlying Material Adverse Effect or material breach would independently result in the
failure of a condition set forth in Article VII to be satisfied.
Fo
62
op
6.10 Exemption from Liability Under Section 16(b). Prior to the Effective Time,
Parent and Company shall each take all such steps as may be necessary or appropriate to
St
under Rule 16b-3 promulgated under the Exchange Act, including any such actions
specified in the No-Action Letter dated January 12, 1999, issued by the SEC to Skadden,
Arps, Slate, Meagher & Flom, LLP.
ww
6.11 No Solicitation.
(a) None of Company, its Subsidiaries or any officer, director, employee, agent or
representative (including any investment banker, financial advisor, attorney, accountant
m
or other representative) of Company or any of its Subsidiaries shall directly or indirectly
(i) solicit, initiate, encourage, facilitate (including by way of furnishing information) or
co
take any other action designed to facilitate any inquiries or proposals regarding any
merger, share exchange, consolidation, sale of assets, sale of shares of capital stock
(including by way of a tender offer) or similar transactions involving Company or any of
its Subsidiaries that, if consummated, would constitute an Alternative Transaction (any of
d.
the foregoing inquiries or proposals, including the indication of any intention to propose
any of the foregoing, being referred to herein as an “Alternative Proposal”), (ii)
au
participate in any discussions or negotiations regarding an Alternative Transaction or (iii)
enter into any agreement regarding any Alternative Transaction. Notwithstanding the
foregoing, the Board of Directors of Company shall be permitted, prior to the meeting of
Company stockholders to be held pursuant to Section 6.3, and subject to compliance with
Fr
the other terms of this Section 6.11 and to first entering into a confidentiality agreement
with the person proposing such Alternative Proposal on terms substantially similar to,
and no less favorable to Company than, those contained in the Confidentiality Agreement
re
dated November 12, 2007, to consider and participate in discussions and negotiations
with respect to a bona fide Alternative Proposal received by Company, if and only to the
extent that and so long as the Board of Directors of Company reasonably determines in
su
good faith (after consultation with outside legal counsel) that failure to do so would cause
it to violate its fiduciary duties to Company stockholders under applicable law.
clo
As used in this Agreement, “Alternative Transaction” means any of (i) a transaction
pursuant to which any person (or group of persons) (other than Parent or its affiliates),
directly or indirectly, acquires or would acquire more than 15% of the outstanding shares
of Company or any of its Subsidiaries or outstanding voting power or of any new series
re
or new class of preferred stock that would be entitled to a class or series vote with respect
to a merger with Company or any of its Subsidiaries, whether from Company or pursuant
to a tender offer or exchange offer or otherwise, (ii) a merger, share exchange,
Fo
of assets (including for this purpose the outstanding equity securities of subsidiaries of
Company and securities of the entity surviving any merger or business combination
including any of Company’s Subsidiaries) of Company or any of its Subsidiaries
representing more than 15% of the fair market value of all the assets, net revenues or net
St
income of Company and its Subsidiaries, taken as a whole, immediately prior to such
63
w.
ww
m
transactions to which Company is a party and in which the stockholders of Company
immediately prior to the consummation thereof would not hold at least 66 2/3% of the
co
total voting power of the surviving company in such transaction or of its publicly traded
parent corporation.
(b) Company shall notify Parent promptly (but in no event later than 24 hours) after
d.
receipt of any Alternative Proposal, or any material modification of or material
amendment to any Alternative Proposal, or any request for nonpublic information relating
au
to Company or any of its Subsidiaries or for access to the properties, books or records of
Company or any of its Subsidiaries, other than any such request that does not relate to
and would not reasonably be expected to lead to, an Alternative Proposal. Such notice to
Parent shall be made orally and in writing, and shall indicate the identity of the person
Fr
making the Alternative Proposal or intending to make or considering making an
Alternative Proposal or requesting non-public information or access to the books and
records of Company or any of its Subsidiaries, and a copy (if in writing) and summary of
re
the material terms of any such Alternative Proposal or modification or amendment to an
Alternative Proposal. Company shall keep Parent fully informed, on a current basis, of
any material changes in the status and any material changes or modifications in the terms
su
of any such Alternative Proposal, indication or request. Company shall also provide
Parent 24 hours written notice before it enters into any discussions or negotiations
concerning any Alternative Proposal in accordance with Section 6.11(a).
clo
(c) Company and its Subsidiaries shall immediately cease and cause to be terminated
any existing discussions or negotiations with any persons (other than Parent) conducted
heretofore with respect to any of the foregoing, and shall use reasonable best efforts to
re
cause all persons other than Parent who have been furnished confidential information
regarding Company in connection with the solicitation of or discussions regarding an
Alternative Proposal within the 12 months prior to the date hereof promptly to return or
Fo
destroy such information. Company agrees not to, and to cause its Subsidiaries not to,
release any third party from the confidentiality and standstill provisions of any agreement
to which Company or its Subsidiaries is or may become a party, and shall immediately
op
take all steps necessary to terminate any approval that may have been heretofore given
under any such provisions authorizing any person to make an Alternative Proposal.
Neither Company nor the Board of Directors of Company shall approve or take any
action to render inapplicable to any Alternative Proposal or Alternative Transaction
St
(d) Except as expressly permitted by this Section 6.11(d), neither the Board of
w.
Directors of Company nor any committee thereof shall (i) withdraw, modify or qualify,
or propose publicly to withdraw, modify or qualify, the recommendation by the Board of
Directors of Company of this Agreement and/or the Merger to Company’s stockholders,
ww
(ii) take any public action or make any public statement in connection with the meeting
of Company stockholder to be held pursuant to Section 6.3 inconsistent with such
recommendation or (iii) approve or recommend, or publicly propose to approve or
recommend, or fail to recommend against, any Alternative Proposal (any of the actions
described in clauses (i), (ii) or (iii), a
m
64
co
“Change of Recommendation”). Notwithstanding the foregoing, the Board of Directors of
d.
Company may make a Change of Recommendation, if, and only if, each of the following
conditions is satisfied:
au
(i) it receives a Alternative Proposal not solicited in breach of this Section 6.11 that
constitutes a Superior Proposal and such Superior Proposal has not been withdrawn;
Fr
(ii) Company has not breached in any material respect any of the provisions set
forth in Section 6.3 or this Section 6.11;
re
(iii) it reasonably determines in good faith (after consultation with outside legal
counsel), that in light of a Superior Proposal the failure to effect such Change of
Recommendation would cause it to violate its fiduciary duties to Company stockholders
su
under applicable law;
the manner in which it intends or may intend to do so and (2) include the identity of the
person making such Alternative Proposal and a copy (if in writing) and summary of
material terms of such Alternative Proposal; providedthat any material amendment to the
Fo
(v) during any such notice period, Company and its advisors has negotiated in good
faith with Parent to make adjustments in the terms and conditions of this Agreement such
that such Alternative Proposal would no longer constitute a Superior Proposal.
St
As used in this Agreement, “Superior Proposal” means any proposal made by a third
party (A) to acquire, directly or indirectly, for consideration consisting of cash and/or
securities, 100% of the outstanding shares of Company Common Stock or 100% of the
w.
assets, net revenues or net income of Company and its Subsidiaries, taken as a whole and
(B) which is otherwise on terms which the Board of Directors of Company determines in
its reasonable good faith judgment (after consultation with its financial advisor and
ww
outside legal counsel), taking into account, among other things, all legal, financial,
regulatory and other aspects of the proposal and the person making the proposal, that the
proposal, (i) if consummated would result in a transaction that is more favorable, from a
financial point of view, to Company’s stockholders than the Merger and the other
transactions contemplated hereby and (ii) is reasonably capable of being completed,
m
including to the extent required, financing which is then committed or which, in the good
faith judgment of the Board of Directors of Company, is reasonably capable of being
co
obtained by such third party.
65
d.
au
(e) Company shall ensure that the officers, directors and all employees, agents and
representatives (including any investment bankers, financial advisors, attorneys,
accountants or other representatives) of Company or its Subsidiaries are aware of the
restrictions described in this Section 6.11 as reasonably necessary to avoid violations
Fr
thereof. It is understood that any violation of the restrictions set forth in this Section 6.11
by any officer, director, employee, agent or representative (including any investment
banker, financial advisor, attorney, accountant or other representative) of Company or its
re
Subsidiaries shall be deemed to be a breach of this Section 6.11 by Company.
(f) Nothing contained in this Section 6.11 shall prohibit Company or its Subsidiaries
su
from taking and disclosing to its stockholders a position required by Rule 14e-2(a) or
Rule 14d-9 promulgated under the Exchange Act.
clo
6.12 Restructuring Efforts. If Company shall have failed to obtain the requisite vote or
votes of its stockholders for the consummation of the transactions contemplated by this
Agreement at a duly held meeting of its stockholders or at any adjournment or
postponement thereof, then, unless this Agreement shall have been terminated pursuant to
re
its terms, each of the parties shall in good faith use its reasonable best efforts to negotiate
a restructuring of the transaction provided for herein (it being understood that neither
party shall have any obligation to alter or change the amount or kind of the Merger
Fo
Consideration, or the Tax treatment of the Merger, in a manner adverse to such party or
its stockholders) and to resubmit the transaction to Company’s stockholders for approval,
with the timing of such resubmission to be determined at the reasonable request of
op
Parent.
6.13 Dividends. After the date of this Agreement, each of Parent and Company shall
coordinate with the other regarding the declaration of any dividends in respect of Parent
St
Common Stock and Company Common Stock and the record dates and payment dates
relating thereto, it being the intention of the parties that holders of Company Common
Stock shall not receive two dividends, or fail to receive one dividend, for any quarter with
w.
respect to their shares of Company Common Stock and any shares of Parent Common
Stock any such holder receives in exchange therefor in the Merger.
ww
6.14 Tax Matters. Company shall consult with Parent (including in connection with
the preparation of Company’s 2007 federal income Tax return) regarding Company’s
utilization of Tax losses and any issues that could reasonably be expected to give rise to
creation of or increase in “net operating loss” carryforwards, and shall, in Company’s
reasonable discretion, take account of Parent’s views on such matters to the extent
m
reasonably feasible.
co
ARTICLE VII
CONDITIONS PRECEDENT
d.
7.1 Conditions to Each Party’s Obligation To Effect the Merger. The respective
obligations of the parties to effect the Merger shall be subject to the satisfaction at or
au
prior to the Effective Time of the following conditions:
66
Fr
(a) Stockholder Approval. This Agreement, on substantially the terms and conditions
re
set forth in this Agreement, shall have been approved and adopted by the requisite
affirmative vote of the holders of Company Common Stock entitled to vote thereon.
su
(b) NYSE Listing. The shares of Parent Common Stock to be issued to the holders of
Company Common Stock upon consummation of the Merger shall have been authorized
for listing on the NYSE, subject to official notice of issuance.
clo
(c) Form S-4. The Form S-4 shall have become effective under the Securities Act and
no stop order suspending the effectiveness of the Form S-4 shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
re
the consummation of the Merger or any of the other transactions contemplated by this
Agreement shall be in effect.
op
7.2 Conditions to Obligations of Parent. The obligation of Parent and Merger Sub to
effect the Merger is also subject to the satisfaction, or waiver by Parent, at or prior to the
Effective Time, of the following conditions:
St
(a) Representations and Warranties. Subject to the standard set forth in Section 9.2,
the representations and warranties of Company set forth in this Agreement shall be true
and correct as of the date of this Agreement and as of the Effective Time as though made
w.
on and as of the Effective Time (except that representations and warranties that by their
terms speak specifically as of the date of this Agreement or another date shall be true and
correct as of such date); and Parent shall have received a certificate signed on behalf of
ww
Company by the Chief Executive Officer or the Chief Financial Officer of Company to
the foregoing effect.
(b) Performance of Obligations of Company. Company shall have performed in all
material respects all obligations required to be performed by it under this Agreement at or
m
prior to the Effective Time; and Parent shall have received a certificate signed on behalf
of Company by the Chief Executive Officer or the Chief Financial Officer of Company to
co
such effect.
(c) Federal Tax Opinion. Parent shall have received the opinion of its counsel, Cleary
Gottlieb Steen & Hamilton LLP, in form and substance reasonably satisfactory to Parent,
d.
dated the Closing Date, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion that are consistent with the state
au
of facts existing at the Effective Time, the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code. In rendering such opinion, counsel
may require and rely upon customary representations contained in certificates of officers
of Company and Parent.
Fr
(d) Regulatory Approvals. All regulatory approvals set forth in Section 4.4 required to
consummate the transactions contemplated by this Agreement, including the Merger,
re
shall have been obtained and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired (all such approvals and the expiration of all
such waiting periods being referred as the “Parent Requisite Regulatory Approvals”), and
su
no such
67
clo
regulatory approval shall have resulted in the imposition of any Materially Burdensome
re
Regulatory Condition.
(e) Annual Report; Audit Opinion. Company shall have filed with the SEC its Annual
Fo
Report on Form 10-K for the year ended December 31, 2007, which Annual Report shall
have included an unqualified opinion of KPMG LLP (or another independent registered
accounting firm reasonably acceptable to Parent) regarding the consolidated financial
op
statements of Company contained in such Annual Report, and KPMG LLP (or such other
accounting firm) shall not have subsequently withdrawn or qualified such opinion.
(a) Representations and Warranties. Subject to the standard set forth in Section 9.2,
the representations and warranties of Parent set forth in this Agreement shall be true and
correct as of the date of this Agreement and as of the Effective Time as though made on
ww
and as of the Effective Time (except that representations and warranties that by their
terms speak specifically as of the date of this Agreement or another date shall be true and
correct as of such date); and Company shall have received a certificate signed on behalf
of Parent by the Chief Executive Officer or the Chief Financial Officer of Parent to the
foregoing effect.
m
(b) Performance of Obligations of Parent. Parent shall have performed in all material
co
respects all obligations required to be performed by it under this Agreement at or prior to
the Effective Time, and Company shall have received a certificate signed on behalf of
Parent by the Chief Executive Officer or the Chief Financial Officer of Parent to such
effect.
d.
(c) Federal Tax Opinion. Company shall have received the opinion of its counsel,
au
Wachtell, Lipton, Rosen & Katz, in form and substance reasonably satisfactory to
Company, dated the Closing Date, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion that are consistent with the state
of facts existing at the Effective Time, the Merger will be treated as a reorganization
Fr
within the meaning of Section 368(a) of the Code. In rendering such opinion, counsel
may require and rely upon customary representations contained in certificates of officers
of Company and Parent.
re
(d) Regulatory Approvals. All regulatory approvals set forth in Section 3.4 required to
consummate the transactions contemplated by this Agreement, including the Merger,
su
shall have been obtained and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired (all such approvals and the expiration of all
such waiting periods being referred as the “Company Requisite Regulatory Approvals”).
clo
ARTICLE VIII
8.1 Termination. This Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection with the
Fo
68
op
(b) by either Company or Parent, if any Governmental Entity that must grant a Parent
w.
m
Closing to occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party set
co
forth in this Agreement;
(d) by either Company or Parent (provided that the terminating party is not then in
material breach of any representation, warranty, covenant or other agreement contained
d.
herein), if there shall have been a breach of any of the covenants or agreements or any of
the representations or warranties set forth in this Agreement on the part of Company, in
au
the case of a termination by Parent, or Parent or Merger Sub, in the case of a termination
by Company, which breach, either individually or in the aggregate, would result in, if
occurring or continuing on the Closing Date, the failure of the conditions set forth in
Section 7.2 or 7.3, as the case may be, and which is not cured within 30 days following
Fr
written notice to the party committing such breach or by its nature or timing cannot be
cured within such time period;
re
(e) by Parent, if (i) the Board of Directors of Company shall have (A) failed to
recommend in the Proxy Statement the approval and adoption of this Agreement, (B)
made any Change of Recommendation, (C) approved or recommended, or publicly
su
proposed to approve or recommend, any Alternative Proposal, whether or not permitted
by the terms hereof or (D) failed to recommend to Company’s stockholders that they
reject any tender offer or exchange offer that constitutes an Alternative Transaction
clo
within the ten business day period specified in Rule 14e-2(a) of the Exchange Act, (ii)
Company shall have breached its obligations under Section 6.11 in any material respect
adverse to Parent or (iii) Company shall have breached its obligations under Section 6.3
in any material respect by failing to call, convene and hold a meeting of its stockholders
re
(f) by either Company or Parent, if its Board of Directors determines in good faith that
Fo
the other party has substantially engaged in bad faith in breach of its obligations under
Section 6.12.
op
The party desiring to terminate this Agreement pursuant to clause (b), (c), (d), (e) or
(f) of this Section 8.1 shall give written notice of such termination to the other party in
accordance with Section 9.4, specifying the provision or provisions hereof pursuant to
which such termination is effected.
St
void and
69
ww
have no effect, and none of Company, Parent, any of their respective Subsidiaries or any
of the officers or directors of any of them shall have any liability of any nature
m
whatsoever under this Agreement, or in connection with the transactions contemplated by
this Agreement, except that (i) Sections 6.2(b), 8.2, 8.3, 8.4, 9.3, 9.4, 9.5, 9.6, 9.7, 9.8, 9.9
co
and 9.10 shall survive any termination of this Agreement, and (ii) neither Company nor
Parent shall be relieved or released from any liabilities or damages arising out of its
knowing breach of any provision of this Agreement.
d.
8.3 Fees and Expenses. Except with respect to costs and expenses of printing and
mailing the Proxy Statement and all filing and other fees paid to the SEC in connection
au
with the Merger, which shall be borne equally by Company and Parent, all fees and
expenses incurred in connection with the Merger, this Agreement, and the transactions
contemplated by this Agreement shall be paid by the party incurring such fees or
expenses, whether or not the Merger is consummated.
Fr
8.4 Termination Fee.
re
(a) If:
(1) Parent pursuant to Section 8.1(d) if the breach giving rise to such
re
(3) either Parent or Company pursuant to Section 8.1(c) and prior to the date
of termination this Agreement shall not have been adopted and approved by the requisite
op
(B) in any such case, an Alternative Proposal shall have been publicly announced
or otherwise communicated or made known to the senior management or Board of
St
Directors of Company (or any person shall have publicly announced, communicated or
made known an intention, whether or not conditional, to make an Alternative Proposal) at
any time after the date of this Agreement and prior to the date of the termination and shall
w.
not have been irrevocably withdrawn prior to the date of such termination, then if within
12 months after such termination, Company or any of its Subsidiaries enters into a
definitive agreement with respect to, or consummates, an Alternative Transaction, then
ww
70
m
Parent, by wire transfer of immediately available funds, the Termination Fee on the date
of such execution or consummation.
co
(b) Company acknowledges that the agreements contained in this Section 8.4 are an
integral part of the transactions contemplated by this Agreement, and that, without these
agreements, Parent would not enter into this Agreement. In the event that Company fails
d.
to pay when due any amounts payable under this Section 8.4, then (i) Company shall
reimburse Parent for all reasonable costs and expenses (including disbursements and
au
reasonable fees of counsel) incurred in connection with the collection of such overdue
amount, and (ii) Company shall pay to Parent interest on such overdue amount (for the
period commencing as of the date that such overdue amount was originally required to be
paid and ending on the date that such overdue amount is actually paid in full) at a rate per
Fr
annum equal to three percent (3%) over the “prime rate” (as announced by Bank of
America, N.A.) in effect on the date that such overdue amount was originally required to
be paid.
re
8.5 Amendment. This Agreement may be amended by the parties, by action taken or
authorized by their respective Boards of Directors, at any time before or after approval of
su
the matters presented in connection with Merger by the stockholders of Company;
provided, however, that after any approval of the transactions contemplated by this
Agreement by the stockholders of Company, there may not be, without further approval
clo
of such stockholders, any amendment of this Agreement that requires further approval
under applicable law. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
re
8.6 Extension; Waiver. At any time prior to the Effective Time, the parties, by action
taken or authorized by their respective Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or other acts of
Fo
the other party, (b) waive any inaccuracies in the representations and warranties
contained in this Agreement or (c) waive compliance with any of the agreements or
conditions contained in this Agreement. Any agreement on the part of a party to any such
op
extension or waiver shall be valid only if set forth in a written instrument signed on
behalf of such party, but such extension or waiver or failure to insist on strict compliance
with an obligation, covenant, agreement or condition shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure.
St
ARTICLE IX
w.
GENERAL PROVISIONS
9.1 Closing. On the terms and subject to the conditions set forth in this Agreement, the
ww
closing of the Merger (the “Closing”) shall take place at 10:00 a.m. on a date and at a
place to be specified by the parties, which date shall be no later than five business days
after the satisfaction or waiver (subject to applicable law) of the latest to occur of the
conditions set forth in Article VII (other than those conditions that by their nature are to
be satisfied or waived at the Closing), unless extended by mutual agreement of the parties
m
(the “Closing Date”). If the conditions set forth in Article VII are satisfied or waived
during the two weeks immediately prior
co
71
d.
to the end of a fiscal quarter of Parent, then Parent may postpone the Closing until the
au
first full week after the end of that fiscal quarter.
Fr
purpose under this Agreement, and no party hereto shall be deemed to have breached a
representation or warranty for any purpose under this Agreement, in any case as a
consequence of the existence or absence of any fact, circumstance or event unless such
re
fact, circumstance or event, individually or when taken together with all other facts,
circumstances or events inconsistent with any representations or warranties contained in
Article III, in the case of Company, or Article IV, in the case of Parent, has had or would
su
reasonably be expected to have a Material Adverse Effect with respect to Company or
Parent, respectively (disregarding for purposes of this Section 9.2 all qualifications or
limitations set forth in any representations or warranties as to “materiality,” “Material
clo
Adverse Effect” and words of similar import). Notwithstanding the immediately
preceding sentence, the representations and warranties contained in (x) Section 3.2(a)
shall be deemed untrue and incorrect if not true and correct except to a de minimis extent
(relative to Section 3.2(a) taken as a whole), (y) Sections 3.2(b), 3.3(a), 3.3(b)(i), 3.7 and
re
3.27, in the case of Company, and Sections 4.2, 4.3(a), 4.3(b)(i) and 4.7, in the case of
Parent, shall be deemed untrue and incorrect if not true and correct in all material respects
and (z) Section 3.8(a), in the case of Company, and Section 4.8(a), in the case of Parent,
Fo
shall be deemed untrue and incorrect if not true and correct in all respects.
Effective Time.
9.4 Notices. All notices and other communications in connection with this Agreement
w.
shall be in writing and shall be deemed given if delivered personally, sent via facsimile
(with confirmation), mailed by registered or certified mail (return receipt requested) or
delivered by an express courier (with confirmation) to the parties at the following
ww
addresses (or at such other address for a party as shall be specified by like notice):
m
Calabasas, CA 91302
co
Attention: Sandor E. Samuels
Fax: (818) 225-4055
with a copy to:
d.
Wachtell, Lipton, Rosen & Katz
au
72
Fr
51 West 52nd Street
New York, NY 10019
re
Attention: Edward D. Herlihy
Craig M. Wasserman
Nicholas G. Demmo
su
Fax: (212) 403-2000
and
(b) if to Parent, to:
clo
Charlotte, NC 28255
Washington, DC 20006
Derek M. Bush
Fax: (202) 974-1999
and
ww
m
Benet J. O’Reilly
Fax: (212) 225-3999
co
9.5 Interpretation. When a reference is made in this Agreement to Articles, Sections,
Exhibits or Schedules, such reference shall be to a Article or Section of or Exhibit or
d.
Schedule to this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
au
“include,” “includes” or “including” are used in this Agreement, they shall be deemed to
be followed by the words
Fr
73
re
“without limitation.” The Company Disclosure Schedule and the Parent Disclosure
Schedule, as well as all other schedules and all exhibits hereto, shall be deemed part of
su
this Agreement and included in any reference to this Agreement. This Agreement shall
not be interpreted or construed to require any person to take any action, or fail to take any
action, if to do so would violate any applicable law.
clo
9.6 Counterparts. This Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each of the parties and delivered to the other party, it
re
being understood that each party need not sign the same counterpart.
9.7 Entire Agreement. This Agreement (including the documents and the instruments
Fo
9.8 Governing Law; Jurisdiction. This Agreement shall be governed and construed in
accordance with the internal laws of the State of Delaware applicable to contracts made
St
and wholly-performed within such state, without regard to any applicable conflicts of law
principles. The parties hereto agree that any suit, action or proceeding brought by either
party to enforce any provision of, or based on any matter arising out of or in connection
w.
with, this Agreement or the transactions contemplated hereby shall be brought in any
federal or state court located in the State of Delaware. Each of the parties hereto submits
to the jurisdiction of any such court in any suit, action or proceeding seeking to enforce
any provision of, or based on any matter arising out of, or in connection with, this
ww
Agreement or the transactions contemplated hereby and hereby irrevocably waives the
benefit of jurisdiction derived from present or future domicile or otherwise in such action
or proceeding. Each party hereto irrevocably waives, to the fullest extent permitted by
law, any objection that it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit, action or
m
proceeding brought in any such court has been brought in an inconvenient forum.
co
9.9 Publicity. Neither Company nor Parent shall, and neither Company nor Parent
shall permit any of its Subsidiaries to, issue or cause the publication of any press release
or other public announcement with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement without the prior consent
d.
(which consent shall not be unreasonably withheld) of Parent, in the case of a proposed
announcement or statement by Company, or Company, in the case of a proposed
au
announcement or statement by Parent; provided, however, that either party may, without
the prior consent of the other party (but after prior consultation with the other party to the
extent practicable under the circumstances) issue or cause the publication of any press
release or other public announcement to the extent required by law or by the rules and
Fr
regulations of the NYSE.
9.10 Assignment; Third Party Beneficiaries. Neither this Agreement nor any of the
re
rights, interests or obligations under this Agreement shall be assigned by either of the
parties (whether by operation of law or otherwise) without the prior written consent of the
other party. Subject to the preceding sentence, this Agreement shall be binding upon,
su
inure to the benefit of
74
clo
and be enforceable by each of the parties and their respective successors and assigns.
re
Except as otherwise specifically provided in Section 6.7, this Agreement (including the
documents and instruments referred to in this Agreement) is not intended to and does not
confer upon any person other than the parties hereto any rights or remedies under this
Fo
Agreement.
75
St
IN WITNESS WHEREOF, Company, Parent and Merger Sub have caused this
w.
m
Name: Angelo R. Mozilo
Title: Chairman and Chief Executive Officer
co
BANK OF AMERICA CORPORATION
d.
By: /s/ Joe L. Price
au
Name: Joe L. Price
Title: Chief Financial Officer
Fr
RED OAK MERGER CORPORATION
re
By: /s/ Joe L. Price
su
Name: Joe L. Price
Title: Officer
clo
76
re
Fo
Exhibit A
Form of Affiliate Letter
Bank of America Corporation
op
I have been advised that as of the date hereof I may be deemed to be an “affiliate” of
Countrywide Financial Corporation, a Delaware corporation (“Company”), as the term
w.
“affiliate” is defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and
Regulations (the “Rules and Regulations”) of the Securities and Exchange Commission
(the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”). I have
ww
been further advised that pursuant to the terms of the Agreement and Plan of Merger
dated as of January 10, 2008 (the “Merger Agreement”), among Bank of America
Corporation, a Delaware corporation (“Parent”), Red Oak Merger Corporation, a
Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”) and
Company, Company shall be merged with and into Merger Sub (the “Merger”). All terms
used in this letter but not defined herein shall have the meanings ascribed thereto in the
m
Merger Agreement.
co
I represent, warrant and covenant to Parent that in the event I receive any Parent
Common Stock as a result of the Merger:
(a) I shall not make any sale, transfer or other disposition of Parent Common Stock in
d.
violation of the Securities Act or the Rules and Regulations.
au
(b) I have carefully read this letter and the Merger Agreement and discussed its
requirements and other applicable limitations upon my ability to sell, transfer or
otherwise dispose of Parent Common Stock to the extent I believed necessary with my
counsel or counsel for Company.
Fr
(c) I have been advised that the issuance of Parent Common Stock to me pursuant to
the Merger will be registered with the Commission under the Securities Act on a
re
Registration Statement on Form S-4. However, I have also been advised that, since at the
time the Merger will be submitted for a vote of the stockholders of Company I may be
deemed to have been an affiliate of Company and the distribution by me of Parent
su
Common Stock has not been registered under the Securities Act, I may not sell, transfer
or otherwise dispose of Parent Common Stock issued to me in the Merger unless (i) such
sale, transfer or other disposition has been registered under the Securities Act, (ii) such
clo
sale, transfer or other disposition is made in conformity with the volume and other
limitations of Rule 145 promulgated by the Commission under the Securities Act, or (iii)
in the opinion of counsel reasonably acceptable to Parent, such sale, transfer or other
disposition is otherwise exempt from registration under the Securities Act.
re
A-1
Fo
(d) I understand that Parent is under no obligation to register the sale, transfer or other
op
(e) I also understand that stop transfer instructions will be given to Parent’s transfer
agents with respect to Parent Common Stock and that there will be placed on the
certificates for Parent Common Stock issued to me, or any substitutions therefor, a legend
w.
stating in substance:
“The securities represented by this certificate have been issued in a transaction to which
ww
Rule 145 promulgated under the Securities Act of 1933 applies and may only be sold or
otherwise transferred in compliance with the requirements of Rule 145 or pursuant to a
registration statement under said act or an exemption from such registration.”
(f) I also understand that unless the transfer by me of my Parent Common Stock has
been registered under the Securities Act or is a sale made in conformity with the
m
provisions of Rule 145, Parent reserves the right to put the following legend on the
certificates issued to my transferee:
co
“The shares represented by this certificate have not been registered under the Securities
Act of 1933 and were acquired from a person who received such shares in a transaction to
which Rule 145 promulgated under the Securities Act of 1933 applies. The shares have
d.
been acquired by the holder not with a view to, or for resale in connection with, any
distribution thereof within the meaning of the Securities Act of 1933 and may not be sold,
au
pledged or otherwise transferred except in accordance with an exemption from the
registration requirements of the Securities Act of 1933.”
It is understood and agreed that the legends set forth above shall be removed by
Fr
delivery of substitute certificates without such legend, and/or the issuance of a letter to
Parent’s transfer agent removing such stop transfer instructions, and the above
restrictions on sale will cease to apply, if (A) one year (or such other period as may be
re
required by Rule 145(d)(2) under the Securities Act or any successor thereto) shall have
elapsed from the Closing Date and the provisions of such Rule are then available to me;
or (B) if two years (or such other period as may be required by Rule 145(d)(3) under the
su
Securities Act or any successor thereto) shall have elapsed from the Closing Date and the
provisions of such Rule are then available to me; or (C) I shall have delivered to Parent
(i) a copy of a letter from the staff of the SEC, or an opinion of counsel in form and
clo
substance reasonably satisfactory to Parent, or other evidence reasonably satisfactory to
Parent, to the effect that such legend and/or stop transfer instructions are not required for
purposes of the Securities Act or (ii) reasonably satisfactory evidence or representations
that the securities represented by such certificates are being or have been
re
A-2
Fo
transferred in a transaction made in conformity with the provisions of Rule 145 under the
op
I recognize and agree that the foregoing provisions also apply to (i) my spouse, (ii)
any relative of mine or my spouse occupying my home, (iii) any trust or estate in which I,
St
my spouse or any such relative owns at least 10% beneficial interest or of which any of
us serves as trustee, executor or in any similar capacity and (iv) any corporate or other
organization in which I, my spouse or any such relative owns at least 10% of any class of
w.
It is understood and agreed that this letter agreement shall terminate and be of no
ww
further force and effect if the Merger Agreement is terminated in accordance with its
terms.
Execution of this letter agreement should not be construed as an admission on my part
that I am an “affiliate” of Company as described in the first paragraph of this letter or as a
m
waiver of any rights I may have to object to any claim that I am such an affiliate on or
after the date of this letter.
co
Very truly yours,
By: _________________________
d.
Name:
Accepted this [___] day of
au
[__________], 2008
Fr
By: ________________________
Name:
Title:
re
A-3
su
clo
re
Fo
op
St
w.
ww
8-K 1 d8k.htm FORM 8-K
As filed with the Securities and Exchange Commission on November 10, 2008
m
co
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
d.
FORM 8-K
au
Fr
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
re
Date of Report (Date of earliest event reported):
November 7, 2008
su
clo
BANK OF AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
re
Fo
704.386.5681
St
Not Applicable
w.
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing
obligation of the registrant under any of the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
m
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
co
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
d.
au
ITEM 8.01.OTHER EVENTS.
On November 7, 2008, in connection with the integration of Countrywide Financial Corporation
(“Countrywide”) with the Registrant’s other businesses and operations, Countrywide and its subsidiary
Fr
Countrywide Home Loans, Inc. (“CHL”) transferred substantially all of their assets and operations to the
Registrant, and as part of the consideration for such transfer, the Registrant assumed debt securities and
related guarantees of Countrywide in an aggregate amount of approximately $16.6 billion. The indentures
for all such assumed debt securities and related guarantees are attached as exhibits to this Current Report on
re
Form 8-K.
4.2 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York),
as Trustee, to the Indenture dated as of February 1, 2005, incorporated herein by reference to
Exhibit 4.2 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
2008
op
4.3 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York),
as Trustee, to the Indenture dated as of February 1, 2005
St
4.4 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL and
The Bank of New York Mellon (formerly The Bank of New York), as Trustee, to the
Indenture dated as of February 1, 2005
w.
4.5 Indenture dated May 16, 2006 between Countrywide and The Bank of New York, as Trustee,
relating to 6.25% Subordinated Notes due May 15, 2016, incorporated herein by reference to
Exhibit 4.27 to Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed on
ww
4.6 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of May 16, 2006, incorporated herein by reference to
Exhibit 4.1 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
m
2008
co
4.7 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of May 16, 2006
d.
4.8 Indenture dated as of January 1, 1992 among CHL, Countrywide and The Bank of New York,
as Trustee, incorporated herein by reference to Exhibit 4.1 to the Registration Statement on
Form S-3 (File No. 33-50661) of CHL and Countrywide
au
4.9 Supplemental Indenture No. 1 dated as of June 15, 1995 among CHL, Countrywide and The
Bank of New York, as Trustee, to the Indenture dated as of January 1, 1992, incorporated
herein by reference to Exhibit 4.9 to Amendment No. 2 to the Registration Statement on Form
Fr
S-3 (File No. 33-59559) of Countrywide and CHL
4.10 Second Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
re
Trustee, to the Indenture dated as of January 1, 1992, incorporated herein by reference to
Exhibit 4.3 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
4.11
su
Third Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of January 1, 1992
clo
4.12 Fourth Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of January 1, 1992
4.13 Indenture dated as of December 1, 2001 among CHL, Countrywide and The Bank of New
re
4.14 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
Fo
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of December 1, 2001, incorporated herein by reference to
Exhibit 4.4 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
op
4.15 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of December 1, 2001
St
4.16 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of December 1, 2001
w.
4.17 Indenture dated as of May 22, 2007, among Countrywide, CHL and The Bank of New York, as
Trustee, incorporated herein by reference to Exhibit 4.1 to Countrywide’s Current Report on
Form 8-K (File No. 1-8422) filed May 29, 2007
ww
4.18 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
Countrywide, the Registrant and The Bank of New York Mellon (formerly The Bank of New
York), as Trustee, to the Indenture dated as of May 22, 2007, incorporated herein by reference
to Exhibit 4.5 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
2008
m
4.19 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
co
Trustee, to the Indenture dated as of May 22, 2007
4.20 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL and
The Bank of New York Mellon (formerly The Bank of New York), as Trustee, to the Indenture
d.
dated as of May 22, 2007
4.21 Junior Subordinated Indenture dated as of November 8, 2006, by and between Countrywide and
The Bank of New York, as Trustee, incorporated herein by reference to Exhibit 4.28 to
au
Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed November 13, 2006
4.22 Supplemental Indenture dated as of November 8, 2006 by and between Countrywide and The
Bank of New York, as Trustee, to the Junior Subordinated Indenture dated as of November 8,
Fr
2006, incorporated herein by reference to Exhibit 4.29 to Countrywide’s Current Report on
Form 8-K (File No. 1-8422) filed November 13, 2006
4.23 Second Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
re
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Junior Subordinated Indenture dated as of November 8, 2006, incorporated
herein by reference to Exhibit 4.7 of Countrywide’s Current Report on Form 8-K (File No. 1-
su
8422) filed July 8, 2008
clo
4.24 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Junior Subordinated Indenture dated as of November 8, 2006
4.25 Subordinated Indenture dated as of April 11, 2003 among Countrywide, CHL and The Bank of
re
4.26 First Supplemental Indenture dated as of April 11, 2003 among Countrywide, CHL and The
Fo
Bank of New York, as Trustee, to the Subordinated Indenture dated as of April 11, 2003,
incorporated herein by reference to Exhibit 4.27 to Countrywide’s Current Report on Form 8-K
(File No. 1-8422) filed April 15, 2003
op
4.27 Second Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Subordinated Indenture dated as of April 11, 2003, incorporated herein by
reference to Exhibit 4.6 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed
July 8, 2008
St
4.28 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York), as
w.
4.29 Fourth Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL and
The Bank of New York Mellon (formerly The Bank of New York), as Trustee, to the
ww
4.30 Indenture dated as of June 4, 1997, among CHL, Countrywide and The Bank of New York, as
Trustee, incorporated herein by reference to Exhibit 4.4 to the Registration Statement on Form
S-4 (File No. 333-37047) of CHL and Countrywide
4.31 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
m
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of June 4, 1997, incorporated herein by reference to Exhibit
4.8 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
co
4.32 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of June 4, 1997
d.
4.33 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
au
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of June 4, 1997
4.34 Trust Deed dated 1st May, 1998, among CHL, Countrywide and Bankers Trustee Company
Fr
Limited, as Trustee, for Euro Medium Notes of CHL, incorporated herein by reference to
Exhibit 4.15 to Countrywide’s Quarterly Report on Form 10-Q (File No. 1-8422) for the
quarter ended May 31, 1998
re
4.35 First Supplemental Trust Deed dated 16th December, 1998, modifying the provisions of the
Trust Deed dated 1st May 1998, among CHL, Countrywide and Bankers Trustee Company
Limited, as Trustee, incorporated herein by reference to Exhibit 4.16 to Countrywide’s Annual
4.36
su
Report on Form 10-K (File No. 1-8422) for the year ended February 28, 1999
Second Supplemental Trust Deed dated 23rd December, 1999, further modifying the provisions
of the Trust Deed dated 1st May, 1998, among CHL, Countrywide and Bankers Trustee
Company Limited, as Trustee, incorporated herein by reference to Exhibit 4.16.3 to
clo
Countrywide’s Annual Report on Form 10-K (File No. 1-8422) for the year ended February 28,
2001
4.37 Third Supplemental Trust Deed dated 12th January, 2001, further modifying the provisions of
Trust Deed dated 1st May, 1998, among CHL, Countrywide and Bankers Trustee Company
re
4.38 Fourth Supplemental Trust Deed dated 12th January, 2002, further modifying the provisions of
Trust Deed dated May 1, 1998, among CHL, Countrywide and Bankers Trustee Company
Limited, as Trustee, incorporated herein by reference to Exhibit 4.46 of Countrywide’s
Quarterly Report on Form 10-Q (File No. 1-8422) for the quarter ended March 31, 2002
op
4.39 Fifth Supplemental Trust Deed dated July 1, 2008, further modifying the provisions of Trust
Deed dated May 1, 1998, among Red Oak Merger Corporation, CHL, Countrywide and
Deutsche Trustee Company Limited (formerly Bankers Trustee Company Limited), as Trustee,
incorporated herein by reference to Exhibit 4.10 to Countrywide’s Current Report on Form 8-K
St
4.40 Form of Sixth Supplemental Trust Deed dated November 7, 2008, further modifying the
provisions of Trust Deed dated May 1, 1998, among the Registrant, CHL, Countrywide and
w.
4.41 Trust Deed between Countrywide, CHL and Deutsche Trustee Company Limited, as Trustee,
dated August 15, 2005, incorporated herein by reference to Exhibit 10.108 to Countrywide’s
Quarterly Report on Form 10-Q (File No. 1-8422) for the quarter ended September 30, 2005
4.42 First Supplemental Trust Deed between Countrywide, CHL and Deutsche Trustee Company
Limited, as Trustee, dated August 31, 2006, to the Trust Deed dated August 15, 2005,
m
incorporated herein by reference to Exhibit 4.63 to Countrywide’s Quarterly Report on Form
10-Q (File No. 1-8422) for the quarter ended September 30, 2006
co
4.43 Second Supplemental Trust Deed, dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide, CHL and Deutsche Trustee Company Limited, as Trustee, to the Trust Deed
dated August 15, 2005, incorporated herein by reference to Exhibit 4.9 to Countrywide’s
Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
d.
4.44 Form of Third Supplemental Trust Deed, dated November 7, 2008, between the Registrant,
Countrywide, CHL and Deutsche Trustee Company Limited, as Trustee, to the Trust Deed
dated August 15, 2005
au
4.45 Note Deed Poll, dated as of April 29, 2005, by Countrywide in favor of each person who is
from time to time an Australian dollar denominated Noteholder, incorporated herein by
reference to Exhibit 10.103 to Countrywide’s Quarterly Report on Form 10-Q (File No. 1-
Fr
8422) for the quarter ended June 30, 2005
4.46 First Supplemental Note Deed Poll, dated July 1, 2008, between Red Oak Merger Corporation
and Countrywide to the Note Deed Poll dated April 29, 2005, incorporated herein by reference
re
to Exhibit 4.11 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
2008
4.47
su
Form of Second Supplemental Note Deed Poll, dated November 7, 2008, between the
Registrant, Countrywide and CHL, to the Note Deed Poll dated April 29, 2005
4.48 Deed Poll Guaranty and Indemnity, dated as of April 29, 2005, by Countrywide in favor of
clo
each person who is from time to time an Australian dollar denominated noteholder,
incorporated herein by reference to Exhibit 10.104 to Countrywide’s Quarterly Report on Form
10-Q (File No. 1-8422) for the quarter ended June 30, 2005
4.49 Form of First Supplemental Note Deed Poll Guarantee and Indemnity, dated as of November 7,
re
2008, by the Registrant and CHL, to the Deed Poll Guaranty and Indemnity dated April 29,
2005
Fo
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
op
BANK OF AMERICA
CORPORATION
St
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
4.1 Indenture dated as of February 1, 2005 among Countrywide, CHL and The Bank of New
m
York, as Trustee, incorporated herein by reference to Exhibit 4.58 of Countrywide’s
Quarterly Report on Form 10-Q (File No. 1-8422) for the quarter ended March 31, 2006
co
4.2 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York),
as Trustee, to the Indenture dated as of February 1, 2005, incorporated herein by reference to
Exhibit 4.2 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
d.
2008
4.3 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York),
au
as Trustee, to the Indenture dated as of February 1, 2005
4.4 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL and
The Bank of New York Mellon (formerly The Bank of New York), as Trustee, to the
Fr
Indenture dated as of February 1, 2005
4.5 Indenture dated May 16, 2006 between Countrywide and The Bank of New York, as Trustee,
relating to 6.25% Subordinated Notes due May 15, 2016, incorporated herein by reference to
re
Exhibit 4.27 to Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed on
May 16, 2006
4.6
su
First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of May 16, 2006, incorporated herein by reference to
Exhibit 4.1 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
clo
2008
4.7 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant,
re
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of May 16, 2006
4.8 Indenture dated as of January 1, 1992 among CHL, Countrywide and The Bank of New York,
Fo
4.9 Supplemental Indenture No. 1 dated as of June 15, 1995 among CHL, Countrywide and The
op
Bank of New York, as Trustee, to the Indenture dated as of January 1, 1992, incorporated
herein by reference to Exhibit 4.9 to Amendment No. 2 to the Registration Statement on Form
S-3 (File No. 33-59559) of Countrywide and CHL
4.10 Second Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
St
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of January 1, 1992, incorporated herein by reference to
Exhibit 4.3 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
w.
4.11 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of January 1, 1992
ww
4.12 Fourth Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of January 1, 1992
4.13 Indenture dated as of December 1, 2001 among CHL, Countrywide and The Bank of New
York, as Trustee, incorporated herein by reference to Exhibit 4.25 to Countrywide’s Annual
m
Report on Form 10-K (File No. 1-8422) for the year ended December 31, 2003
4.14 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
co
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of December 1, 2001, incorporated herein by reference to
Exhibit 4.4 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
d.
4.15 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of December 1, 2001
au
4.16 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Fr
Trustee, to the Indenture dated as of December 1, 2001
4.17 Indenture dated as of May 22, 2007, among Countrywide, CHL and The Bank of New York, as
Trustee, incorporated herein by reference to Exhibit 4.1 to Countrywide’s Current Report on
re
Form 8-K (File No. 1-8422) filed May 29, 2007
4.18 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
su
Countrywide, the Registrant and The Bank of New York Mellon (formerly The Bank of New
York), as Trustee, to the Indenture dated as of May 22, 2007, incorporated herein by reference
to Exhibit 4.5 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
2008
clo
4.19 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of May 22, 2007
re
4.20 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL and
The Bank of New York Mellon (formerly The Bank of New York), as Trustee, to the Indenture
dated as of May 22, 2007
Fo
4.21 Junior Subordinated Indenture dated as of November 8, 2006, by and between Countrywide and
The Bank of New York, as Trustee, incorporated herein by reference to Exhibit 4.28 to
Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed November 13, 2006
op
4.22 Supplemental Indenture dated as of November 8, 2006 by and between Countrywide and The
Bank of New York, as Trustee, to the Junior Subordinated Indenture dated as of November 8,
2006, incorporated herein by reference to Exhibit 4.29 to Countrywide’s Current Report on
Form 8-K (File No. 1-8422) filed November 13, 2006
St
4.23 Second Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Junior Subordinated Indenture dated as of November 8, 2006, incorporated
w.
herein by reference to Exhibit 4.7 of Countrywide’s Current Report on Form 8-K (File No. 1-
8422) filed July 8, 2008
ww
4.24 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Junior Subordinated Indenture dated as of November 8, 2006
4.25 Subordinated Indenture dated as of April 11, 2003 among Countrywide, CHL and The Bank of
New York, as Trustee, incorporated herein by reference to Exhibit 4.26 to Countrywide’s
m
Current Report on Form 8-K (File No. 1-8422) filed April 15, 2003
4.26 First Supplemental Indenture dated as of April 11, 2003 among Countrywide, CHL and The
co
Bank of New York, as Trustee, to the Subordinated Indenture dated as of April 11, 2003,
incorporated herein by reference to Exhibit 4.27 to Countrywide’s Current Report on Form 8-K
(File No. 1-8422) filed April 15, 2003
d.
4.27 Second Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Subordinated Indenture dated as of April 11, 2003, incorporated herein by
reference to Exhibit 4.6 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed
au
July 8, 2008
4.28 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide, CHL and The Bank of New York Mellon (formerly The Bank of New York), as
Fr
Trustee, to the Subordinated Indenture dated as of April 11, 2003
4.29 Fourth Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL and
The Bank of New York Mellon (formerly The Bank of New York), as Trustee, to the
re
Subordinated Indenture dated as of April 11, 2003
4.30 Indenture dated as of June 4, 1997, among CHL, Countrywide and The Bank of New York, as
su
Trustee, incorporated herein by reference to Exhibit 4.4 to the Registration Statement on Form
S-4 (File No. 333-37047) of CHL and Countrywide
4.31 First Supplemental Indenture dated July 1, 2008, among Red Oak Merger Corporation, CHL,
clo
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of June 4, 1997, incorporated herein by reference to Exhibit
4.8 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
4.32 Second Supplemental Indenture dated as of November 7, 2008 among the Registrant, CHL,
re
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of June 4, 1997
Fo
4.33 Third Supplemental Indenture dated as of November 7, 2008 among the Registrant,
Countrywide and The Bank of New York Mellon (formerly The Bank of New York), as
Trustee, to the Indenture dated as of June 4, 1997
op
4.34 Trust Deed dated 1st May, 1998, among CHL, Countrywide and Bankers Trustee Company
Limited, as Trustee, for Euro Medium Notes of CHL, incorporated herein by reference to
Exhibit 4.15 to Countrywide’s Quarterly Report on Form 10-Q (File No. 1-8422) for the
quarter ended May 31, 1998
St
4.35 First Supplemental Trust Deed dated 16th December, 1998, modifying the provisions of the
Trust Deed dated 1st May 1998, among CHL, Countrywide and Bankers Trustee Company
w.
4.36 Second Supplemental Trust Deed dated 23rd December, 1999, further modifying the provisions
ww
of the Trust Deed dated 1st May, 1998, among CHL, Countrywide and Bankers Trustee
Company Limited, as Trustee, incorporated herein by reference to Exhibit 4.16.3 to
Countrywide’s Annual Report on Form 10-K (File No. 1-8422) for the year ended February 28,
2001
4.37 Third Supplemental Trust Deed dated 12th January, 2001, further modifying the provisions of
Trust Deed dated 1st May, 1998, among CHL, Countrywide and Bankers Trustee Company
m
Limited, as Trustee, incorporated herein by reference to Exhibit 4.16.4 to Countrywide’s
Annual Report on Form 10-K (File No. 1-8422) for the year ended February 28, 2001
co
4.38 Fourth Supplemental Trust Deed dated 12th January, 2002, further modifying the provisions of
Trust Deed dated May 1, 1998, among CHL, Countrywide and Bankers Trustee Company
Limited, as Trustee, incorporated herein by reference to Exhibit 4.46 of Countrywide’s
Quarterly Report on Form 10-Q (File No. 1-8422) for the quarter ended March 31, 2002
d.
4.39 Fifth Supplemental Trust Deed dated July 1, 2008, further modifying the provisions of Trust
Deed dated May 1, 1998, among Red Oak Merger Corporation, CHL, Countrywide and
Deutsche Trustee Company Limited (formerly Bankers Trustee Company Limited), as Trustee,
au
incorporated herein by reference to Exhibit 4.10 to Countrywide’s Current Report on Form 8-K
(File No. 1-8422) filed July 8, 2008
4.40 Form of Sixth Supplemental Trust Deed dated November 7, 2008, further modifying the
Fr
provisions of Trust Deed dated May 1, 1998, among the Registrant, CHL, Countrywide and
Deutsche Trustee Company Limited (formerly Bankers Trustee Company Limited)
re
4.41 Trust Deed between Countrywide, CHL and Deutsche Trustee Company Limited, as Trustee,
dated August 15, 2005, incorporated herein by reference to Exhibit 10.108 to Countrywide’s
su
Quarterly Report on Form 10-Q (File No. 1-8422) for the quarter ended September 30, 2005
4.42 First Supplemental Trust Deed between Countrywide, CHL and Deutsche Trustee Company
Limited, as Trustee, dated August 31, 2006, to the Trust Deed dated August 15, 2005,
clo
incorporated herein by reference to Exhibit 4.63 to Countrywide’s Quarterly Report on Form
10-Q (File No. 1-8422) for the quarter ended September 30, 2006
4.43 Second Supplemental Trust Deed, dated July 1, 2008, among Red Oak Merger Corporation,
Countrywide, CHL and Deutsche Trustee Company Limited, as Trustee, to the Trust Deed
re
dated August 15, 2005, incorporated herein by reference to Exhibit 4.9 to Countrywide’s
Current Report on Form 8-K (File No. 1-8422) filed July 8, 2008
4.44 Form of Third Supplemental Trust Deed, dated November 7, 2008, between the Registrant,
Fo
Countrywide, CHL and Deutsche Trustee Company Limited, as Trustee, to the Trust Deed
dated August 15, 2005
4.45 Note Deed Poll, dated as of April 29, 2005, by Countrywide in favor of each person who is
op
4.46 First Supplemental Note Deed Poll, dated July 1, 2008, between Red Oak Merger Corporation
St
and Countrywide to the Note Deed Poll dated April 29, 2005, incorporated herein by reference
to Exhibit 4.11 of Countrywide’s Current Report on Form 8-K (File No. 1-8422) filed July 8,
2008
w.
4.47 Form of Second Supplemental Note Deed Poll, dated November 7, 2008, between the
Registrant, Countrywide and CHL, to the Note Deed Poll dated April 29, 2005
ww
4.48 Deed Poll Guaranty and Indemnity, dated as of April 29, 2005, by Countrywide in favor of
each person who is from time to time an Australian dollar denominated noteholder,
incorporated herein by reference to Exhibit 10.104 to Countrywide’s Quarterly Report on Form
10-Q (File No. 1-8422) for the quarter ended June 30, 2005
4.49 Form of First Supplemental Note Deed Poll Guarantee and Indemnity, dated as of November 7,
2008, by the Registrant and CHL, to the Deed Poll Guaranty and Indemnity dated April 29,
m
2005
co
d.
au
Fr
re
su
clo
re
Fo
op
St
w.
ww
EX-4.40 16 dex440.htm 6TH SUPP TRUST DEED DATED 11/07/08, MODIFYING
THE PROV. OF TRUST DEED 5/01/98
m
Exhibit 4.40
co
EXECUTION VERSION
d.
Sixth Supplemental Trust Deed
au
Bank of America Corporation
and
Fr
Countrywide Home Loans, Inc.
and
re
Countrywide Financial Corporation
and
su
Deutsche Trustee Company Limited
clo
Supplementing the Trust Deed dated 1 May 1998 as modified and restated by the First Supplemental Trust
Deed dated 16 December 1998, the Second Supplemental Trust Deed dated 23 December 1999, the Third
Supplemental Trust Deed dated 12 January 2001, the Fourth Supplemental Trust Deed dated 29 January
2002 and the Fifth Supplemental Trust Deed dated 1 July 2008
re
7 November 2008
CONTENTS
Fo
CLAUSE PAGE
1. ASSUMPTION BY SUCCESSOR CORPORATION AND SUPPLEMENTAL
op
PROVISIONS 2
2. MISCELLANEOUS 3
SCHEDULE 1 9
St
THIS SIXTH SUPPLEMENTAL TRUST DEED dated 7 November 2008 (the “Sixth Supplemental
Trust Deed”) is made
ww
BETWEEN:
(1) BANK OF AMERICA CORPORATION, a Delaware corporation (“BAC”);
(2) COUNTRYWIDE HOME LOANS, INC., a New York corporation (“CHL”);
(3) COUNTRYWIDE FINANCIAL CORPORATION, formerly Red Oak Merger Corporation, a
Delaware corporation (“CFC”); and
m
(4) DEUTSCHE TRUSTEE COMPANY LIMITED, a company incorporated with limited liability in
England and Wales, as Trustee (the “Trustee”) under the Trust Deed referred to herein.
co
WHEREAS
(A) CHL, CFC and the Trustee are parties to a Trust Deed dated 1 May 1998, as modified and restated by
d.
the First Supplemental Trust Deed dated 16 December 1998, as supplemented by the Second
Supplemental Trust Deed dated 23 December 1999, the Third Supplemental Trust Deed dated
12 January 2001, the Fourth Supplemental Trust Deed dated 29 January 2002 and the Fifth
Supplemental Trust Deed dated 1 July 2008 (as amended and supplemented, the “Trust Deed”),
au
providing for the issuance of Notes by CHL, as Issuer thereunder.
(B) There is outstanding under the terms of the Trust Deed one or more series of Notes (the “Securities”).
(C) Amongst others, BAC and CHL have entered into an Asset Purchase Agreement (the “CHL Purchase
Fr
Agreement”) dated as of 7 November, 2008 pursuant to which BAC will purchase substantially all of
the properties and assets of CHL (the “CHL Acquisition”) the consideration for which will include the
assumption by BAC of the indebtedness of CHL under the Trust Deed (the “CHL Assumption”).
re
(D) The CHL Acquisition and the CHL Assumption are expected to be effective as of 7 November, 2008.
(E) Clause 19(D)(1) of the Trust Deed provides that in the case of a conveyance and transfer of the
su
properties and assets of CHL substantially as an entirety to a corporation organised and existing under
the laws of the United States of America, any political subdivision thereof or any state thereof, the
transferee shall expressly assume by a supplemental trust deed all the obligations and covenants under
the Securities and the Trust Deed to be performed and observed by CHL.
clo
(F) Amongst others, BAC and CFC have entered into a Stock Purchase Agreement (the “CFC Purchase
Agreement”) dated as of 7 November, 2008 pursuant to which BAC will purchase substantially all of
the properties and assets of CFC (the “CFC Acquisition”) the consideration for which will include the
assumption by BAC of the indebtedness of CFC under the Securities and the Trust Deed (the “CFC
Assumption”).
re
(G) The CFC Acquisition and the CFC Assumption are expected to be effective as of 7 November, 2008.
(H) Clause 19(D)(3) of the Trust Deed provides that in the case of a conveyance and transfer of the
Fo
properties and assets of CFC substantially as an entirety to a corporation organised and existing under
the laws of the United States of America, any political subdivision thereof or any state thereof, the
transferee shall expressly assume by a supplemental trust deed the obligations of CFC contained in
clause 7 of the Trust Deed and the performance of every covenant under the Securities and the Trust
op
(I) This Sixth Supplemental Trust Deed has been duly authorised by all necessary corporate action on the
part of each of BAC, CHL and CFC.
(J) The Trustee has determined that this Sixth Supplemental Trust Deed is proper and satisfactory in form.
w.
(K) All things necessary to make this Sixth Supplemental Trust Deed a valid trust deed and agreement
according to its terms have been done.
(L) In consideration of these premises, BAC, CHL, CFC and the Trustee agree as follows for the benefit of
ww
m
1.1 The Representations and Warranties
With effect on and from the Effective Date (as defined in Clause 2.1) BAC represents and warrants
that:
co
(a) it is a corporation organised and existing under the laws of the State of Delaware and is the
transferee of the properties and assets of each of CHL and CFC in each case substantially as an
entirety; and
d.
(b) the execution, delivery and performance of this Sixth Supplemental Trust Deed has been duly
authorised by the Board of Directors of BAC.
au
1.2 Assumption of Indebtedness from CHL
(a) The parties hereto agree that with effect on and from the Effective Date:
Fr
(i) BAC hereby expressly takes over and assumes the due and punctual payment of the principal
of and any interest on all the Securities and the due and punctual performance of all
obligations and the performance of every covenant of the Trust Deed on the part of the Issuer
(as defined in the Trust Deed) to be performed or observed;
re
(ii) all the rights, obligations and liabilities of CHL under or in respect of the Securities and
under the Trust Deed shall be taken over and assumed by BAC including, but without
limiting the generality of the foregoing, the obligation to pay (a) interest on the Securities
su
accrued up to and including the Effective Date but unpaid and (b) all other moneys payable in
respect of the Securities or under or pursuant to the Trust Deed accrued up to and including,
or payable prior to, the Effective Date but unpaid, and any other amounts payable under the
Securities and under the Trust Deed; and
clo
(iii) all the terms, provisions and conditions of the Trust Deed and the Securities and theretofore
applying to CHL shall apply to BAC in all respects as if BAC had been a party to the Trust
Deed in place of CHL and the Trust Deed in respect thereof shall be read and construed as if
all references therein to CHL were references to BAC.
re
(b) BAC hereby covenants with the Trustee that with effect on and from the Effective Date it will duly
observe and perform and be bound by all of the covenants (including, but without limiting the
generality of the foregoing, any covenant to
Fo
pay), conditions and provisions of the Trust Deed, the Securities issued under the Programme by
op
CHL and the Conditions of the Securities as prior thereto have been expressed to be binding on
CHL.
St
covenant under the Trust Deed shall be taken over and assumed by BAC; and
(ii) all the terms, provisions and conditions of the Trust Deed and theretofore applying to CFC
shall apply to BAC in all respects as if BAC had been a party to the Trust Deed in place of
ww
CFC and the Trust Deed in respect thereof shall be read and construed as if all references
therein to CFC were references to BAC.
(b) BAC hereby covenants with the Trustee that with effect on and from the Effective Date it will duly
observe and perform and be bound by all of the covenants (including, but without limiting the
generality of the foregoing, any covenant to pay), conditions and provisions of the Trust Deed.
generality of the foregoing, any covenant to pay), conditions and provisions of the Trust Deed.
m
1.4 Name
Effective on and from the Effective Date, the name of the Issuer and the Guarantor (each as defined
co
in the Trust Deed) shall be “Bank of America Corporation”, as the successor corporation under the
Trust Deed.
d.
1.5 Trustee’s Acceptance
The Trustee hereby accepts this Sixth Supplemental Trust Deed and agrees to perform the same
under the terms and conditions set forth in the Trust Deed.
au
2. MISCELLANEOUS
Fr
2.1 Effect of Sixth Supplemental Trust Deed
Upon the first date upon which each of the following events shall have occurred (the “Effective
Date”):
re
(a) the execution and delivery of this Sixth Supplemental Trust Deed by BAC, CHL, CFC and the
Trustee; and
(b) the closing date of the CHL Acquisition and the CFC Acquisition (the “Closing Date”);
su
(c) the receipt by the Trustee of certificates signed by two authorised officers of each of CHL and
CFC substantially in the form set out in schedules 1 and 2 hereto (dated the Closing Date);
(d) the receipt by the Trustee of legal opinions from:
clo
Deed shall be effective and shall form a part of the Trust Deed for all purposes, and every holder of
Securities heretofore or hereafter authenticated and delivered under the Trust Deed shall be bound
thereby.
Fo
Except as supplemented hereby, all provisions in the Trust Deed shall remain in full force and effect.
This Sixth Supplemental Trust Deed is supplemental to and in implementation of the Trust Deed, and
the Trust Deed and this Sixth Supplemental Trust Deed shall henceforth be read and construed
together.
w.
and preserved.
2.5 Severability
In case any provision in this Sixth Supplemental Trust Deed shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not in any way be affected
m
or impaired thereby.
co
2.6 Terms Defined in the Trust Deed
(a) All capitalised terms not otherwise defined herein shall have the meanings ascribed to them in the
Trust Deed.
d.
(b) All references to a “certificate signed by two Directors”, a “certificate signed by two of its
Directors”, a “certificate signed by any two Directors”, a “certificate in writing signed by two of its
Directors” or any such reference however described shall hereafter be deemed to be references to a
au
“certificate signed by two authorised officers”. For the purposes of the Trust Deed “authorised
officer” means the Chief Executive Officer, the Chief Financial Officer, any Executive Vice
President, any Senior Vice President, the General Counsel, any Deputy General Counsel, any
Associate General Counsel, the Secretary and any Assistant Secretary of the relevant corporation.
Fr
2.7 Addresses for Notice, etc., to BAC and the Trustee
Any notice or demand which by any provisions of this Sixth Supplemental Trust Deed or the Trust
re
Deed is required or permitted to be given or served by the Trustee or by the holders of Securities to
or on BAC may be given or served by pre-paid post (first class if inland, first class airmail if
overseas) or by facsimile transmission or by delivering it by hand (until another address is filed by
BAC with the Trustee) as follows: su
Bank of America Corporation
Bank of America Corporate Center
100 North Tryon Street
clo
NCI-007-07-13
Corporate Treasury Division
Charlotte, North Carolina 28255
re
2.8 Headings
The clause headings of this Sixth Supplemental Trust Deed have been inserted for convenience of
reference only, are not to be considered part of this Sixth Supplemental Trust Deed and shall in no
m
way modify or restrict any of the terms or provisions hereof.
co
2.9 Benefits of Sixth Supplemental Trust Deed, etc.
Nothing in this Sixth Supplemental Trust Deed or the Securities, express or implied, shall give to any
Person, other than the parties hereto and thereto and their successors hereunder and thereunder and
the holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the
d.
Trust Deed, this Sixth Supplemental Trust Deed or the Securities.
au
2.10Certain Duties and Responsibilities of the Trustees
In entering into this Sixth Supplemental Trust Deed, the Trustee shall be entitled to the benefit of
every provision of the Trust Deed relating to the conduct or affecting the liability or affording
protection to the Trustee, whether or not elsewhere herein so provided.
Fr
2.11Counterparts
re
The parties may sign any number of copies of this Sixth Supplemental Trust Deed. Each signed copy
shall be an original, but all of them together represent the same agreement.
2.12Governing Law
su
This Sixth Supplemental Trust Deed is governed by, and shall be construed in accordance with,
English law.
clo
2.13Submission to Jurisdiction
(a) Each of BAC, CHL and CFC irrevocably agrees for the benefit of the Trustee that the courts of
England are to have jurisdiction to settle any disputes which may arise out of or in connection with
re
this Sixth Supplemental Trust Deed and that accordingly any suit, action or proceedings arising out
of or in connection with this Sixth Supplemental Trust Deed (together referred to as
“Proceedings”) may be brought in the courts of England. Each of BAC, CHL and CFC
Fo
irrevocably and unconditionally waives and agrees not to raise any objection which it may have
now or subsequently to the laying of the venue of any Proceedings in the courts of England and
any claim that any Proceedings have been brought in an inconvenient forum and further
irrevocably and unconditionally agrees that a judgment in any Proceedings brought in the courts of
op
England shall be conclusive and binding upon it and may be enforced in the courts of any other
jurisdiction. Nothing in this clause shall limit any right to take Proceedings against BAC, CHL or
CFC in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or
more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether
concurrently or not.
St
5
w.
(b) Each of BAC, CHL and CFC irrevocably and unconditionally appoints Clifford Chance Secretaries
Limited at its registered office for the time being (being at the date hereof at 10 Upper Bank Street,
London E14 5JJ) and in the event of its ceasing so to act will appoint such other person as the
Trustee may approve and as BAC, CHL and CFC may nominate in writing to the Trustee for the
ww
purpose of accepting service of process on their behalf in England in respect of any Proceedings.
Each of BAC, CHL and CFC:
(i) agrees to procure that, so long as any of the Notes issued by the Issuer remains liable to
prescription, there shall be in force an appointment of such a person approved by the Trustee
with an office in London with authority to accept service as aforesaid;
with an office in London with authority to accept service as aforesaid;
m
(ii) agrees that failure by any such person to give notice of such service of process to BAC, CHL
or CFC shall not impair the validity of such service or of any judgment based thereon; and
(iii) agrees that nothing in this Sixth Supplemental Trust Deed shall affect the right to serve
co
process in any other manner permitted by law.
6
d.
IN WITNESS WHEREOF this Sixth Supplemental Trust Deed has been duly executed as a deed by the
parties as of the date first written above.
au
Executed as a deed by )
BANK OF AMERICA CORPORATION )
by )
Fr
acting under the authority of that )
company in the presence of: )
re
Signature of officer
Signature of witness
Name of witness su
Address of witness
clo
Occupation of witness
Executed as a deed by )
re
Signature of officer
Signature of witness
op
Name of witness
Address of witness
St
Occupation of witness
7
w.
Executed as a deed by )
ww
COUNTRYWIDE FINANCIAL )
CORPORATION (formerly Red Oak )
Merger Corporation) )
by )
acting under the authority of )
that company in the presence of:
m
Signature of officer
co
Signature of witness
Name of witness
Address of witness
d.
Occupation of witness
au
The common seal of )
DEUTSCHE TRUSTEE COMPANY )
Fr
LIMITED )
was affixed in the presence of: )
re
Director
Associate Director
su
8
SCHEDULE 1
clo
Countrywide Home Loans, Inc.
Officers’ Certificate
Each of the undersigned authorised officers of Countrywide Home Loans, Inc., a New York corporation
(“CHL”), pursuant to clause 19(D)(1)(c) of the Trust Deed dated 1 May 1998, by and among Countrywide
re
Financial Corporation (“CFC”), CHL, and Deutsche Trustee Company Limited, a company incorporated
with limited liability in England and Wales, as trustee (the “Trustee”), as supplemented by (i) the First
Supplemental Trust Deed dated 16 December 1998 (ii) the Second Supplemental Trust Deed dated
Fo
23 December 1999 (iii) the Third Supplemental Trust Deed dated 12 January 2001 (iv) the Fourth
Supplemental Trust Deed dated 29 January 2002 and (v) the Fifth Supplemental Trust Deed dated 1 July
2008 (and as further amended and supplemented, the “Trust Deed”), in each case as among inter alia
CHL, CFC and the Trustee, hereby certifies, on behalf of CHL in the undersigned’s respective capacity as
an authorised officer of CHL, and not individually, that:
op
(A) on the date hereof, CHL conveyed substantially all of its properties and assets to Bank of America
Corporation, a Delaware corporation (“BAC”);
(B) the undersigned has read and is familiar with the provisions of the Trust Deed and the Sixth
St
Supplemental Trust Deed, dated as of the date hereof, by and among BAC, CFC, CHL and the Trustee
(the “Sixth Supplemental Trust Deed”), including all covenants and conditions precedent provided
therein;
w.
(C) the undersigned’s statements and opinions contained herein are based on his or her examination or
investigation of the provisions of the Trust Deed, including all covenants and conditions precedent and
the definitions relating thereto, and the Sixth Supplemental Trust Deed, as well as such other
instruments, agreements and documents as the undersigned has deemed necessary or appropriate to
ww
m
informed opinion as to the CHL Acquisition and CHL Assumption and the Sixth Supplemental Trust
Deed;
(E) all conditions precedent and covenants provided for in the Trust Deed relating to the CHL Acquisition
co
and CHL Assumption and the Sixth Supplemental Trust Deed have been complied with;
(F) the CHL Acquisition and CHL Assumption and the execution of the Sixth Supplemental Trust Deed
comply with the requirements of clause 19(D)(1) of the Trust Deed;
d.
(G) no Event of Default or Potential Event of Default has happened or has been or is anticipated and,
immediately following the CHL Acquisition and CHL Assumption, no Event of Default or Potential
Event of Default will have happened, will happen or is anticipated to happen;
au
(H) on the date hereof CHL is solvent and is able to pay its debts as and when they fall due and meet its
other obligations as and when they fall to be performed and immediately following the execution of the
Sixth Supplemental Trust Deed CHL will be solvent and able to pay its debts as and when they fall due
Fr
and meet its other obligations as and when they fall to be performed; and
re
(I) (a) the CHL Acquisition and CHL Assumption shall not breach any applicable law or regulation; and
(b) on or before the date hereof, all governmental, regulatory and other approvals, consents and
licences in respect of the CHL Acquisition and CHL Assumption have been obtained and on the
su
date hereof are in full force and effect.
Capitalised terms used but not defined herein shall have the meaning assigned to them in the Trust Deed.
clo
IN WITNESS WHEREOF, I have hereunder signed my name on behalf of CHL (and not on my
individual behalf) this Seventh day of November 2008.
re
By:
Fo
By:
op
10
St
SCHEDULE 2
Officers’ Certificate
Each of the undersigned authorised officers of Countrywide Financial Corporation (formerly Red Oak
Merger Corporation), a Delaware corporation (“CFC”), pursuant to clause 19(D)(3)(C) of the Trust Deed
ww
dated 1 May 1998, by and among CFC, Countrywide Home Loans, Inc., a New York corporation
(“CHL”), and Deutsche Trustee Company Limited, a company incorporated with limited liability in
England and Wales, as trustee (the “Trustee”), as supplemented by (i) the First Supplemental Trust Deed
dated 16 December 1998 (ii) the Second Supplemental Trust Deed dated 23 December 1999 (iii) the Third
Supplemental Trust Deed dated 12 January 2001 (iv) the Fourth Supplemental Trust Deed dated 29 January
2002 and (v) the Fifth Supplemental Trust Deed dated 1 July 2008 (and as further amended and
m
supplemented, the “Trust Deed”), in each case as among inter alia CFC, CHL and the Trustee, hereby
certifies, on behalf of CFC in the undersigned’s respective capacity as an authorised officer of CFC, and
not individually, that:
co
(A) on the date hereof, CFC conveyed substantially all of its properties and assets to Bank of America
Corporation, a Delaware corporation (“BAC”);
(B) the undersigned has read and is familiar with the provisions of the Trust Deed and the Sixth
d.
Supplemental Trust Deed, dated as of the date hereof, by and among BAC, CFC, CHL and the Trustee
(the “Sixth Supplemental Trust Deed”), including all covenants and conditions precedent provided
therein;
au
(C) the undersigned’s statements and opinions contained herein are based on his or her examination or
investigation of the provisions of the Trust Deed, including all covenants and conditions precedent and
the definitions relating thereto, and the Sixth Supplemental Trust Deed, as well as such other
instruments, agreements and documents as the undersigned has deemed necessary or appropriate to
Fr
certify as to the matters set forth herein;
(D) the undersigned has made such examination or investigation as is necessary to enable the undersigned
to express an informed opinion as to whether the covenants and the conditions precedent provided for
re
in the Trust Deed relating to the CFC Acquisition and CFC Assumption (as defined in the Sixth
Supplemental Trust Deed) and the Sixth Supplemental Trust Deed have been complied with and has an
informed opinion as to the CFC Acquisition and CFC Assumption and the Sixth Supplemental Trust
su
Deed;
(E) all conditions precedent and covenants provided for in the Trust Deed relating to the CFC Acquisition
and CFC Assumption and the Sixth Supplemental Trust Deed have been complied with;
clo
(F) the CFC Acquisition and CFC Assumption and the execution of the Sixth Supplemental Trust Deed
comply with the requirements of clause 19(D)(3) of the Trust Deed;
(G) no Event of Default or Potential Event of Default has happened or has been or is anticipated and,
immediately following the CFC Acquisition and CFC Assumption, no Event of Default or Potential
re
Sixth Supplemental Trust Deed CFC will be solvent and able to pay its debts as and when they fall due
and meet its other obligations as and when they fall to be performed; and
11
op
(I) (a) the CFC Acquisition and CFC Assumption shall not breach any applicable law or regulation; and
(b) on or before the date hereof, all governmental, regulatory and other approvals, consents and
licences in respect of the CFC Acquisition and CFC Assumption have been obtained and on the
St
Capitalised terms used but not defined herein shall have the meaning assigned to them in the Trust Deed.
w.
IN WITNESS WHEREOF, I have hereunder signed my name on behalf of CFC (and not on my
individual behalf) this Seventh day of November 2008.
ww
By:
Title: Authorised Officer
m
By:
co
Title: Authorised Officer
12
d.
au
Fr
re
su
clo
re
Fo
op
St
w.
ww
EX-4.44 17 dex444.htm 3RD SUPP. TRUST DEED 11/07/08, TO THE TRUST DEED
DATED 8/15/05
m
Exhibit 4.44
co
EXECUTION VERSION
d.
au
Third Supplemental Trust Deed
Bank of America Corporation
and
Fr
Countrywide Financial Corporation
and
Countrywide Home Loans, Inc.
re
and
Deutsche Trustee Company Limited su
Supplementing the Trust Deed dated 15 August 2005 as modified and restated by the First Supplemental
Trust Deed dated 31 August 2006 and the Second Supplemental Trust Deed dated 1 July 2008
clo
7 November 2008
CONTENTS
re
CLAUSE PAGE
1. ASSUMPTION BY SUCCESSOR CORPORATION AND SUPPLEMENTAL
Fo
PROVISIONS 2
2. MISCELLANEOUS 3
SCHEDULE 1 9
Countrywide Financial Corporation Officers’ Certificate 9
op
SCHEDULE 2 11
Countrywide Home Loans, Inc. Officers’ Certificate 11
THIS THIRD SUPPLEMENTAL TRUST DEED dated 7 November 2008 (the “Third Supplemental
St
BETWEEN:
w.
(3) COUNTRYWIDE HOME LOANS, INC., a New York corporation (“CHL”); and
(4) DEUTSCHE TRUSTEE COMPANY LIMITED, a company incorporated with limited liability in
England and Wales, as Trustee (the “Trustee”) under the Trust Deed referred to herein.
WHEREAS
m
(A) CFC, CHL and the Trustee are parties to a Trust Deed dated 15 August 2005, as modified and restated
by the First Supplemental Trust Deed dated 31 August 2006 and as supplemented by the Second
Supplemental Trust Deed dated 1 July 2008 (as amended and supplemented, the “Trust Deed”),
providing for the issuance of Notes by CFC, as Issuer thereunder.
co
(B) There is outstanding under the terms of the Trust Deed one or more series of Notes (the “Securities”).
(C) Amongst others, BAC and CFC have entered into a Stock Purchase Agreement (the “CFC Purchase
d.
Agreement”) dated as of 7 November, 2008 pursuant to which BAC will purchase substantially all of
the properties and assets of CFC (the “CFC Acquisition”) the consideration for which will include the
assumption by BAC of the indebtedness of CFC under the Securities and the Trust Deed (the “CFC
Assumption”).
au
(D) The CFC Acquisition and the CFC Assumption are expected to be effective as of 7 November, 2008.
(E) Clause 19(D)(1) of the Trust Deed provides that in the case of a conveyance and transfer of the
properties and assets of CFC substantially as an entirety to a corporation organised and existing under
Fr
the laws of the United States of America, any political subdivision thereof or any state thereof, the
transferee shall expressly assume by a supplemental trust deed all the obligations and covenants under
the Securities and the Trust Deed to be performed and observed by CFC.
re
(F) Amongst others, BAC and CHL have entered into an Asset Purchase Agreement (the “CHL Purchase
Agreement”) dated as of 7 November, 2008 pursuant to which BAC will purchase substantially all of
the properties and assets of CHL (the “CHL Acquisition”) the consideration for which will include the
su
assumption by BAC of the indebtedness of CHL under the Trust Deed (the “CHL Assumption”).
(G) The CHL Acquisition and the CHL Assumption are expected to be effective as of 7 November, 2008.
(H) Clause 19(D)(3) of the Trust Deed provides that in the case of a conveyance and transfer of the
clo
properties and assets of CHL substantially as an entirety to a corporation organised and existing under
the laws of the United States of America, any political subdivision thereof or any state thereof, the
transferee shall expressly assume by a supplemental trust deed the obligations of CHL contained in
clause 7 of the Trust Deed and the performance of every covenant under the Securities and the Trust
Deed to be performed and observed by CHL.
re
1
Fo
(I) This Third Supplemental Trust Deed has been duly authorised by all necessary corporate action on the
part of each of BAC, CFC and CHL.
(J) The Trustee has determined that this Third Supplemental Trust Deed is proper and satisfactory in form.
op
(K) All things necessary to make this Third Supplemental Trust Deed a valid trust deed and agreement
according to its terms have been done.
(L) In consideration of these premises, BAC, CFC, CHL and the Trustee agree as follows for the benefit of
the holders of the Securities.
St
that:
(a) it is a corporation organised and existing under the laws of the State of Delaware and is the
transferee of the properties and assets of each of CFC and CHL in each case substantially as an
entirety; and
(b) the execution, delivery and performance of this Third Supplemental Trust Deed has been duly
m
authorised by the Board of Directors of BAC.
co
(a) The parties hereto agree that with effect on and from the Effective Date:
(i) BAC hereby expressly takes over and assumes the due and punctual payment of the principal
of and any interest on all the Securities and the due and punctual performance of all
d.
obligations and the performance of every covenant of the Trust Deed on the part of the Issuer
(as defined in the Trust Deed) to be performed or observed;
(ii) all the rights, obligations and liabilities of CFC under or in respect of the Securities and under
au
the Trust Deed shall be taken over and assumed by BAC including, but without limiting the
generality of the foregoing, the obligation to pay (a) interest on the Securities accrued up to
and including the Effective Date but unpaid and (b) all other moneys payable in respect of the
Securities or under or pursuant to the Trust Deed accrued up to and including, or payable
Fr
prior to, the Effective Date but unpaid, and any other amounts payable under the Securities
and under the Trust Deed; and
(iii) all the terms, provisions and conditions of the Trust Deed and the Securities and theretofore
re
applying to CFC shall apply to BAC in all respects as if BAC had been a party to the Trust
Deed in place of CFC and the Trust Deed in respect thereof shall be read and construed as if
all references therein to CFC were references to BAC.
su
(b) BAC hereby covenants with the Trustee that with effect on and from the Effective Date it will duly
observe and perform and be bound by all of the covenants (including, but without limiting the
generality of the foregoing, any covenant to pay), conditions and provisions of the Trust Deed, the
Securities issued under the Programme by CFC and the Conditions of the Securities as prior
clo
thereto have been expressed to be binding on CFC.
(a) The parties hereto agree that with effect on and from the Effective Date:
(i) all the obligations of CHL under or in respect of the Trust Deed and the performance of every
Fo
covenant under the Trust Deed shall be taken over and assumed by BAC; and
(ii) all the terms, provisions and conditions of the Trust Deed and theretofore applying to CHL
shall apply to BAC in all respects as if BAC had been a party to the Trust Deed in place of
CHL and the Trust Deed in respect thereof shall be read and construed as if all references
op
generality of the foregoing, any covenant to pay), conditions and provisions of the Trust Deed.
1.4 Name
w.
Effective on and from the Effective Date, the name of the Issuer and the Guarantor (each as defined
in the Trust Deed) shall be “Bank of America Corporation”, as the successor corporation under the
Trust Deed.
ww
m
2.1 Effect of Third Supplemental Trust Deed
Upon the first date upon which each of the following events shall have occurred (the “Effective
co
Date”):
(a) the execution and delivery of this Third Supplemental Trust Deed by BAC, CFC, CHL and the
Trustee; and
d.
(b) the closing date of the CFC Acquisition and the CHL Acquisition (the “Closing Date”);
(c) the receipt by the Trustee of certificates signed by two authorised officers of each of CFC and
au
CHL substantially in the form set out in schedules 1 and 2 hereto (dated the Closing Date); and
(d) the receipt by the Trustee of legal opinions from:
(i) Ashurst LLP as to English law; and
Fr
(ii) McGuireWoods LLP as to the laws of New York and Delaware,
the Trust Deed shall be supplemented in accordance herewith, and this Third Supplemental Trust
Deed shall be effective and shall form a part of the Trust Deed for all purposes, and every holder of
re
Securities heretofore or hereafter authenticated and delivered under the Trust Deed shall be bound
thereby.
su
3
together.
The Trust Deed as supplemented by this Third Supplemental Trust Deed is in all respects confirmed
and preserved.
2.5 Severability
op
In case any provision in this Third Supplemental Trust Deed shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
St
Trust Deed.
(b) All references to a “certificate signed by two Directors”, a “certificate signed by two of its
Directors”, a “certificate signed by any two Directors”, a “certificate in writing signed by two of its
ww
Directors” or any such reference however described shall hereafter be deemed to be references to a
“certificate signed by two authorised officers”. For the purposes of the Trust Deed “authorised
officer” means the Chief Executive Officer, the Chief Financial Officer, any Executive Vice
President, any Senior Vice President, the General Counsel, any Deputy General Counsel, any
Associate General Counsel, the Secretary and any Assistant Secretary of the relevant corporation.
Associate General Counsel, the Secretary and any Assistant Secretary of the relevant corporation.
m
2.7 Addresses for Notice, etc., to BAC and the Trustee
Any notice or demand which by any provisions of this Third Supplemental Trust Deed or the Trust
co
Deed is required or permitted to be given or served by the Trustee or by the holders of Securities to
or on BAC may be given or served by pre-paid post (first class if inland, first class airmail if
overseas) or by facsimile transmission or by delivering it by hand (until another address is filed by
BAC with the Trustee) as follows:
d.
Bank of America Corporation
Bank of America Corporate Center
100 North Tryon Street
au
NCI-007-07-13
Corporate Treasury Division
Charlotte, North Carolina 28255
Fr
Telephone: (980) 387-3776 begin_of_the_skype_highlighting (980) 387-
3776 end_of_the_skype_highlighting
Facsimile: (980) 387-8794
re
Attention: B. Kenneth Burton, Jr.
4
su
Together with a copy to:
Bank of America Corporation
clo
Legal Department
NCI-002-29-01
101 South Tryon Street
Charlotte, North Carolina 28255
re
2.8 Headings
op
The clause headings of this Third Supplemental Trust Deed have been inserted for convenience of
reference only, are not to be considered part of this Third Supplemental Trust Deed and shall in no
way modify or restrict any of the terms or provisions hereof.
St
the holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the
Trust Deed, this Third Supplemental Trust Deed or the Securities.
ww
m
The parties may sign any number of copies of this Third Supplemental Trust Deed. Each signed copy
shall be an original, but all of them together represent the same agreement.
co
2.12Governing Law
This Third Supplemental Trust Deed is governed by, and shall be construed in accordance with,
English law.
d.
2.13Submission to Jurisdiction
au
(a) Each of BAC, CHL and CFC irrevocably agrees for the benefit of the Trustee that the courts of
England are to have jurisdiction to settle any disputes which may arise out of or in connection with
this Third Supplemental Trust Deed and that accordingly any suit, action or proceedings arising
out of or in connection with this Third Supplemental Trust Deed (together referred to as
Fr
“Proceedings”) may be brought in the courts of England. Each of BAC, CHL and CFC
irrevocably and unconditionally waives and agrees not to raise any objection which it may have
now or subsequently to the laying of the venue of any Proceedings in the courts of England and
any claim that any Proceedings have been brought in an inconvenient forum and further
re
irrevocably and unconditionally agrees that a judgment in any Proceedings brought in the courts of
England shall be conclusive and binding upon it and may be enforced in the courts of any other
jurisdiction. Nothing in this clause shall limit any right to take Proceedings against BAC, CHL or
su
CFC in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or
more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether
concurrently or not.
clo
5
(b) Each of BAC, CHL and CFC irrevocably and unconditionally appoints Clifford Chance Secretaries
Limited at its registered office for the time being (being at the date hereof at 10 Upper Bank Street,
London E14 5JJ) and in the event of its ceasing so to act will appoint such other person as the
re
Trustee may approve and as BAC, CHL and CFC may nominate in writing to the Trustee for the
purpose of accepting service of process on their behalf in England in respect of any Proceedings.
Each of BAC, CHL and CFC:
Fo
(i) agrees to procure that, so long as any of the Notes issued by the Issuer remains liable to
prescription, there shall be in force an appointment of such a person approved by the Trustee
with an office in London with authority to accept service as aforesaid;
(ii) agrees that failure by any such person to give notice of such service of process to BAC, CHL
op
or CFC shall not impair the validity of such service or of any judgment based thereon; and
(iii) agrees that nothing in this Third Supplemental Trust Deed shall affect the right to serve
process in any other manner permitted by law.
St
IN WITNESS WHEREOF this Third Supplemental Trust Deed has been duly executed as a deed by the
w.
Executed as a deed by )
BANK OF AMERICA CORPORATION )
by )
acting under the authority of that )
company in the presence of: )
m
Signature of officer
Signature of witness
co
Name of witness
Address of witness
d.
au
Occupation of witness
Fr
Executed as a deed by
COUNTRYWIDE FINANCIAL )
CORPORATION (formerly Red Oak )
Merger Corporation) )
re
by )
acting under the authority of that )
company in the presence of: su )
Signature of officer
Signature of witness
clo
Name of witness
Address of witness
re
Fo
Occupation of witness
7
op
Executed as a deed by )
COUNTRYWIDE HOME LOANS, INC. )
St
by )
acting under the authority of that )
company in the presence of: )
w.
Signature of officer
Signature of witness
ww
Name of witness
Address of witness
Occupation of witness
m
The common seal of )
DEUTSCHE TRUSTEE COMPANY )
co
LIMITED )
was affixed in the presence of: )
Director
d.
Associate Director
au
8
SCHEDULE 1
Fr
Countrywide Financial Corporation
Officers’ Certificate
Each of the undersigned authorised officers of Countrywide Financial Corporation (formerly Red Oak
re
Merger Corporation), a Delaware corporation (“CFC”), pursuant to clause 19(D)(1)(c) of the Trust Deed
dated 15 August 2005, by and among CFC, Countrywide Home Loans, Inc., a New York corporation
(“CHL”), and Deutsche Trustee Company Limited, a company incorporated with limited liability in
su
England and Wales, as trustee (the “Trustee”), as supplemented by (i) the First Supplemental Trust Deed
dated 31 August 2006 among Countrywide Financial Corporation, CHL and the Trustee and (ii) the Second
Supplemental Trust Deed dated 1 July 2008 among Countrywide Financial Corporation, CHL, Red Oak
Merger Corporation and the Trustee (and as further amended and supplemented, the “Trust Deed”),
clo
hereby certifies, on behalf of CFC in the undersigned’s respective capacity as an authorised officer of CFC,
and not individually, that:
(A) on the date hereof, CFC conveyed substantially all of its properties and assets to Bank of America
Corporation, a Delaware corporation (“BAC”);
re
(B) the undersigned has read and is familiar with the provisions of the Trust Deed and the Third
Supplemental Trust Deed, dated as of the date hereof, by and among BAC, CFC, CHL and the Trustee
(the “Third Supplemental Trust Deed”), including all covenants and conditions precedent provided
Fo
therein;
(C) the undersigned’s statements and opinions contained herein are based on his or her examination or
investigation of the provisions of the Trust Deed, including all covenants and conditions precedent and
the definitions relating thereto, and the Third Supplemental Trust Deed, as well as such other
op
instruments, agreements and documents as the undersigned has deemed necessary or appropriate to
certify as to the matters set forth herein;
(D) the undersigned has made such examination or investigation as is necessary to enable the undersigned
to express an informed opinion as to whether the covenants and the conditions precedent provided for
St
in the Trust Deed relating to the CFC Acquisition and CFC Assumption (as defined in the Third
Supplemental Trust Deed) and the Third Supplemental Trust Deed have been complied with and has an
informed opinion as to the CFC Acquisition and CFC Assumption and the Third Supplemental Trust
w.
Deed;
(E) all conditions precedent and covenants provided for in the Trust Deed relating to the CFC Acquisition
and CFC Assumption and the Third Supplemental Trust Deed have been complied with;
ww
(F) the CFC Acquisition and CFC Assumption and the execution of the Third Supplemental Trust Deed
comply with the requirements of clause 19(D)(1) of the Trust Deed;
(G) no Event of Default or Potential Event of Default has happened or has been or is anticipated and,
immediately following the CFC Acquisition and CFC Assumption, no Event of Default or Potential
immediately following the CFC Acquisition and CFC Assumption, no Event of Default or Potential
Event of Default will have happened, will happen or is anticipated to happen;
m
(H) on the date hereof CFC is solvent and is able to pay its debts as and when they fall due and meet its
other obligations as and when they fall to be performed and immediately following the execution of the
Third Supplemental Trust Deed CFC will be solvent and able to pay its debts as and when they fall due
co
and meet its other obligations as and when they fall to be performed; and
9
d.
(I) (a) the CFC Acquisition and CFC Assumption shall not breach any applicable law or regulation;
and
au
(b) on or before the date hereof, all governmental, regulatory and other approvals, consents and
licences in respect of the CFC Acquisition and CFC Assumption have been obtained and on the
date hereof are in full force and effect.
Fr
Capitalised terms used but not defined herein shall have the meaning assigned to them in the Trust Deed.
IN WITNESS WHEREOF, I have hereunder signed my name on behalf of CFC (and not on my
individual behalf) this Seventh day of November 2008.
re
su By:
Title: Authorised Officer
clo
By:
Title: Authorised Officer
re
10
SCHEDULE 2
Fo
Each of the undersigned authorised officers of Countrywide Home Loans, Inc., a New York corporation
op
(“CHL”), pursuant to clause 19(D)(3)(c) of the Trust Deed dated 15 August 2005, by and among
Countrywide Financial Corporation (“CFC”), CHL, and Deutsche Trustee Company Limited, a company
incorporated with limited liability in England and Wales, as trustee (the “Trustee”), as supplemented by
(i) the First Supplemental Trust Deed dated 31 August 2006 among CFC, CHL and the Trustee and (ii) the
St
Second Supplemental Trust Deed dated 1 July 2008 among CFC, CHL, Red Oak Merger Corporation and
the Trustee (and as further amended and supplemented, the “Trust Deed”), hereby certifies, on behalf of
CHL in the undersigned’s respective capacity as an authorised officer of CHL, and not individually, that:
w.
(A) on the date hereof, CHL conveyed substantially all of its properties and assets to Bank of America
Corporation, a Delaware corporation (“BAC”);
(B) the undersigned has read and is familiar with the provisions of the Trust Deed and the Third
ww
Supplemental Trust Deed, dated as of the date hereof, by and among BAC, CFC, CHL and the Trustee
(the “Third Supplemental Trust Deed”), including all covenants and conditions precedent provided
therein;
(C) the undersigned’s statements and opinions contained herein are based on his or her examination or
investigation of the provisions of the Trust Deed, including all covenants and conditions precedent and
investigation of the provisions of the Trust Deed, including all covenants and conditions precedent and
the definitions relating thereto, and the Third Supplemental Trust Deed, as well as such other
m
instruments, agreements and documents as the undersigned has deemed necessary or appropriate to
certify as to the matters set forth herein;
(D) the undersigned has made such examination or investigation as is necessary to enable the undersigned
co
to express an informed opinion as to whether the covenants and the conditions precedent provided for
in the Trust Deed relating to the CHL Acquisition and CHL Assumption (as defined in the Third
Supplemental Trust Deed) and the Third Supplemental Trust Deed have been complied with and has an
informed opinion as to the CHL Acquisition and CHL Assumption and the Third Supplemental Trust
d.
Deed;
(E) all conditions precedent and covenants provided for in the Trust Deed relating to the CHL Acquisition
au
and CHL Assumption and the Third Supplemental Trust Deed have been complied with;
(F) the CHL Acquisition and CHL Assumption and the execution of the Third Supplemental Trust Deed
comply with the requirements of clause 19(D)(3) of the Trust Deed;
Fr
(G) no Event of Default or Potential Event of Default has happened or has been or is anticipated and,
immediately following the CHL Acquisition and CHL Assumption, no Event of Default or Potential
Event of Default will have happened, will happen or is anticipated to happen;
re
(H) on the date hereof CHL is solvent and is able to pay its debts as and when they fall due and meet its
other obligations as and when they fall to be performed and immediately following the execution of the
Third Supplemental Trust Deed CHL will be solvent and able to pay its debts as and when they fall due
su
and meet its other obligations as and when they fall to be performed; and
11
(I) (a) the CHL Acquisition and CHL Assumption shall not breach any applicable law or regulation; and
clo
(b) on or before the date hereof, all governmental, regulatory and other approvals, consents and
licences in respect of the CHL Acquisition and CHL Assumption have been obtained and on the
date hereof are in full force and effect.
re
Capitalised terms used but not defined herein shall have the meaning assigned to them in the Trust Deed.
IN WITNESS WHEREOF, I have hereunder signed my name on behalf of CHL (and not on my
Fo
By:
Title: Authorised Officer
St
By:
Title: Authorised Officer
w.
12
ww
EX-99.1 2 v43700exv99w1.htm EXHIBIT 99.1
m
Exhibit 99.1
co
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
On July 1, 2008, Countrywide Financial Corporation, a Delaware corporation (“Countrywide”),
completed its merger (the “Merger”) with Red Oak Merger Corporation (“Red Oak” or the “Registrant”), a
Delaware corporation and a wholly-owned subsidiary of Bank of America Corporation, a Delaware
d.
corporation (“Bank of America”), pursuant to the terms of the previously announced Agreement and Plan of
Merger, dated as of January 11, 2008 (the “Merger Agreement”), by and among Bank of America, Red Oak
and Countrywide. Upon consummation of the Merger, Red Oak was renamed “Countrywide Financial
au
Corporation”.
The Merger was announced on January 11, 2008 and provided for each outstanding share of
Countrywide common stock to be converted into the right to receive 0.1822 of a share of Bank of America
common stock. As discussed in Note 3—Pro Forma Adjustments from Transactions, the Registrant sold or
Fr
otherwise disposed of assets to other wholly-owned subsidiaries of Bank of America subsequent to the
completion of the Merger (the “Transactions”).
The following unaudited pro forma condensed financial information and explanatory notes present the
re
impact of the Merger and the Transactions on Countrywide’s historical financial position and results of
operations under the purchase method of accounting with the Registrant treated as the acquirer. The
unaudited pro forma condensed financial information has been derived from and should be read in
su
conjunction with the historical consolidated financial statements and the related notes of Countrywide.
Under the purchase method of accounting, the assets and liabilities of Countrywide have been recorded by
the Registrant at their estimated fair values as of the date of the Merger. The unaudited pro forma
condensed balance sheet as of June 30, 2008 assumes the Merger and Transactions were completed on that
clo
date. The unaudited pro forma condensed statements of operations give effect to the Merger and
Transactions as if the Merger and Transactions had been completed on January 1, 2007.
The unaudited pro forma condensed financial information is presented for illustrative purposes only and
does not indicate the financial results of Countrywide Financial Corporation had the Merger and
re
Transactions occurred at the beginning of each period presented, nor the impact of possible business model
changes. The unaudited pro forma condensed financial information also does not consider the impact of
current market conditions on revenues, expense efficiencies, asset dispositions and share repurchases,
among other factors. In addition, as explained in more detail in the accompanying notes to the unaudited
Fo
pro forma condensed financial information, the preliminary allocation of the purchase price reflected in the
pro forma condensed financial information is subject to adjustment.
1
op
St
w.
ww
m
Countrywide Financial Corporation
co
Pro Forma Condensed Balance Sheet
(unaudited)
The following preliminary unaudited pro forma condensed balance sheet adjusts the historical balance sheet
of Countrywide assuming the Merger and Transactions had occurred on June 30, 2008.
d.
June 30, 2008
Preliminary
au
Purchase
Accounting Pro
(Dollars in millions) As reported Adjustments (1) Transactions (1) Forma
Assets
Fr
Cash $ 6,650 $ — $ 4,940 L,M,N,P,R $ 11,590
Mortgage loans held for sale 11,816 — (472 ) M,O 11,344
re
Trading securities owned, at P
estimated fair value 1,193 — (147 ) 1,046
Securities purchased under
agreements to resell, securities su
borrowed and federal funds sold 6,649 — — 6,649
Loans held for investment, net of
allowance for loan losses of
$5,036
clo
94,231 (9,313 ) A (9,170 ) M 75,748
Investments in other financial
instruments, at estimated fair
value 18,848 (324 ) B (1,520 ) R 17,004
Mortgage servicing rights, at
re
Liabilities
Deposit liabilities $ 62,812 $ 179 H $ — $ 62,991
St
value 31 — — 31
Notes payable and other liabilities 92,988 819 I (12,973 ) N 80,834
Income taxes payable 2,281 — — 2,281
ww
Shareholders’ Equity
Preferred stock 1 (1 ) K — —
Common stock 29 (29 ) K — —
m
Additional paid-in capital 4,222 (4,222 ) K — 6,181
6,181 K —
Retained earnings 7,209 (7,209 ) K — —
co
Accumulated other comprehensive K
loss (1,041 ) 1,041 — —
Total shareholders’ equity 10,420 (4,239 ) — 6,181
d.
Total liabilities and
shareholders’ equity $ 172,076 $ (3,241 ) $ (12,973 ) $ 155,862
au
(1) See Notes to Unaudited Pro Forma Condensed Financial Information.
Fr
2
re
su
clo
re
Fo
op
St
w.
ww
m
Countrywide Financial Corporation
co
Pro Forma Condensed Statement of Operations
(unaudited)
The following preliminary unaudited pro forma condensed statement of operations adjusts the historical
statement of operations of Countrywide assuming the Merger and Transactions had occurred on January 1,
d.
2007.
au
Preliminary
Purchase
Accounting
(Dollars in millions, except per share data) As reported Adjustments (1) Transactions (1) Pro Forma
Fr
Revenues
Gain on sale of loans and
securities $ 162 $ — $ — $ 162
re
Interest income 5,269 290 A,B (589 ) L,M,O,P,Q 4,970
Interest expense (3,882 ) 80 E,H,I 215 N (3,587 )
Net interest income
Provision for loan losses
1,387
(3,832 )
su370
1,942 A
(374 )
495 M
1,383
(1,395 )
Net interest expense after
provision for loan losses (2,445 ) 2,312 121 (12 )
clo
Loan servicing fees and other
income from mortgage
servicing rights and retained
interests 2,745 — (2,542 ) L 203
re
Expenses
Compensation 2,051 — (110 ) L 1,941
Occupancy and other office 492 (10 ) D (20 ) L 462
Insurance claims 722 — — 722
Advertising and promotion 139 — — 139
m
Other 960 35 E (180 ) L 815
Total expenses 4,364 25 (310 ) 4,079
co
Loss before income tax benefit (5,308 ) 2,307 (410 ) (3,411 )
Benefit for income taxes (2,085 ) 856 G (152 ) G (1,381 )
d.
NET LOSS $ (3,223 ) $ 1,451 $ (258 ) $ (2,030 )
au
Loss per Common Share:
Basic $ (5.68 ) $ (3.50 ) J
Diluted $ (5.68 ) $ (3.50 ) J
Weighted Average Common
Fr
Shares Outstanding:
Basic 580,649 — — 580,649
Diluted 580,649 — — 580,649
re
su
(1) See Notes to Unaudited Pro Forma Condensed Financial Information.
3
clo
re
Fo
op
St
w.
ww
m
Countrywide Financial Corporation
co
Pro Forma Condensed Statement of Operations
(unaudited)
The following preliminary unaudited pro forma condensed statement of operations presents the historical
statement of operations of Countrywide assuming the Merger and Transactions had occurred on January 1,
d.
2007.
au
Preliminary
Purchase
Accounting
(Dollars in millions, except per share data) As reported Adjustments (1) Transactions (1) Pro Forma
Fr
Revenues
Gain on sale of loans and
securities $ 2,435 $ — $ — $ 2,435
re
Interest income 13,162 585 A,B (1,765 ) L,M,O, P,Q 11,982
Interest expense (10,288 ) (10 ) E,H,I 247 N (10,051 )
Net interest income
Provision for loan losses
2,874
(2,286 )
su575
1,526 A
(1,518 )
385 M
1,931
(375 )
Net interest income after
provision for loan losses 588 2,101 (1,133 ) 1,556
clo
Loan servicing fees and other
income from mortgage
servicing rights and retained
interests 5,716 — (5,361 ) L 355
re
Expenses
ww
m
Loss before income tax benefit (1,311 ) 2,106 (3,653 ) (2,858 )
co
Benefit for income taxes (607 ) 781 G (1,355 ) G (1,181 )
d.
Loss per Common Share:
Basic $ (2.03 ) $ (2.89 ) J
au
Diluted $ (2.03 ) $ (2.89 ) J
Weighted Average Common
Shares Outstanding:
Basic 581,025 — — 581,025
Fr
Diluted 581,025 — — 581,025
re
(1) See Notes to Unaudited Pro Forma Condensed Financial Information.
su
4
clo
re
Fo
op
St
w.
ww
m
COUNTRYWIDE FINANCIAL CORPORATION
co
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION
Note 1 — Basis of Pro Forma Presentation
d.
The unaudited pro forma condensed financial information related to the Merger and Transactions are
included as of June 30, 2008 and for the year ended December 31, 2007 and for the six months ended
June 30, 2008. The pro forma adjustments included herein reflect the conversion of Countrywide common
au
stock into Bank of America common stock using an exchange ratio of 0.1822 of a share of Bank of
America common stock for each of the 583 million shares of Countrywide common stock outstanding at
June 30, 2008. The estimated purchase price of $4.2 billion, which includes the value of equity-based
awards and certain deal costs, is based on a per share price for Bank of America common stock of $38.73,
which was the average of the closing prices of Bank of America common stock for the period commencing
Fr
two trading days before and ending two trading days after January 11, 2008, the date of the Merger
Agreement. The $2.0 billion Series B convertible preferred shares of Countrywide that were previously
held by Bank of America were cancelled.
re
The unaudited pro forma condensed financial information includes preliminary estimated adjustments to
record the assets and liabilities of Countrywide at their respective fair values and represents management’s
estimates based on available information. The pro forma preliminary adjustments included herein may be
su
revised as additional information becomes available and as additional analyses are performed. The final
allocation of the purchase price will be determined after completion of a final analysis determining the fair
values of Countrywide’s tangible and identifiable intangible assets and liabilities as of July 1, 2008.
Accordingly, the final purchase accounting adjustments and exit and termination costs may be materially
clo
different from the pro forma adjustments presented in this document. Increases or decreases in the fair
value of the net assets and other items of Countrywide as compared to the information shown in this
document may change the amount of the purchase price allocated to goodwill, other assets and liabilities
and may impact the statement of operations due to adjustments in yield and/or amortization of the adjusted
assets or liabilities.
re
The unaudited pro forma condensed financial information is presented for illustrative purposes only and
does not indicate the financial results of Countrywide had the Merger and Transactions occurred at the
beginning of each period presented and had the impact of possible business model changes as a result of
Fo
current market conditions which may impact revenues, expense efficiencies, asset dispositions and share
repurchases, among other factors, been considered.
Note 2 — Preliminary Purchase Accounting Allocation
op
The unaudited pro forma condensed financial information for the Merger and Transactions includes the
pro forma condensed balance sheet as of June 30, 2008 assuming the Merger and Transactions were
completed on June 30, 2008. The pro forma condensed statements of operations for the six months ended
June 30, 2008 and the year ended December 31, 2007 were prepared assuming the Merger and Transactions
St
preferred stock investment in Countrywide. Common stock issued in the exchange was valued using the
methodology discussed in Note 1 above.
The Merger will be accounted for using the purchase method of accounting; accordingly, Bank of
America’s cost to acquire Countrywide will be allocated to the assets (including identifiable intangible
ww
assets) and liabilities of Countrywide at their respective fair values as of July 1, 2008. Accordingly, the
purchase price was preliminarily allocated to the assets acquired and the liabilities assumed based on their
estimated fair values at the Merger date as summarized in the following table.
ww
w.
St
op
Fo
re
5
clo
su
re
Fr
au
d.
co
m
m
Preliminary Purchase Price Allocation (unaudited)
co
(Dollars in billions)
Purchase price
Countrywide common stock exchanged (in thousands) 583,256
d.
Exchange ratio .1822
Total shares of Bank of America’s common stock exchanged (in thousands) 106,269
Purchase price per share of Bank of America’s common stock (1) $ 38.73
au
Total purchase price $ 4.2
Preliminary allocation of the purchase price
Countrywide shareholders’ equity (2) 8.4
Fr
Pre-tax adjustments to reflect assets acquired and liabilities assumed at fair
value:
Loans (9.3 )
Mortgage servicing rights (1.6 )
re
All other (2.2 )
Pre-tax total adjustments (13.1 )
Deferred income taxes
After tax total adjustments
su 4.8
(8.3 )
Fair value of net assets acquired 0.1
clo
Preliminary goodwill resulting from the Merger $ 4.1
(1)
The value of the shares of common stock exchanged with Countrywide shareholders was based upon
re
the average of the closing prices of Bank of America’s common stock for the period commencing two
trading days before and ending two trading days after January 11, 2008, the date of the Merger
Agreement.
Fo
(2)
Represents the remaining Countrywide shareholders’ equity as of the Merger date after the cancellation
of the $2.0 billion Series B convertible preferred shares held by Bank of America.
The preliminary purchase accounting allocation included in the unaudited pro forma condensed
op
A Adjustment to record impaired loans at fair value and non-impaired loans at present value of
amounts to be received at current interest rates. For non-impaired loans, Countrywide’s existing
St
allowance for loan losses was retained. The adjustments were approximately $8.2 billion and
$1.6 billion for the impaired and non-impaired portfolios, respectively. Additionally, approximately
$470 million of net deferred costs and basis adjustments were written off. The effect of these
adjustments is to increase interest income by approximately $115 million and $235 million and
w.
decrease provision for loan losses for the impaired portfolio by approximately $1.9 billion and
$1.5 billion for the six months ended June 30, 2008 and the twelve months ended December 31,
2007, respectively. The adjustments reflected herein are based on current assumptions and
valuations which are subject to change.
ww
B Adjustment to fair value investments in other securities. Prior to the acquisition of Countrywide by
Red Oak, Countrywide had recorded a decrease in the fair value of its available for sale securities of
approximately $1.8 billion with a corresponding amount recorded in other comprehensive income,
net of tax. As a result of purchase accounting, this amount is recorded as a discount on the securities
and amortized over the remaining life. The effect of these adjustments is to increase interest income
m
by approximately $175 million and $350 million for the six months ended June 30, 2008 and the
twelve months ended December 31, 2007, respectively.
co
C Adjustment to fair value mortgage servicing rights consistent with Bank of America assumptions,
such as Bank of America’s view of credit and prepayment speeds. The adjustments to the pro forma
condensed statements of operations cannot be reasonably estimated due to the nature of the asset
and ongoing recognition of change in fair value through earnings. The adjustments to the pro forma
d.
condensed balance sheet reflected herein are based on current assumptions and valuations which are
subject to change.
au
D Adjustment to record the fair value of owned real estate, leased property and related improvements,
signage and equipment. The effect of these adjustments is to reduce occupancy and other office
costs by approximately $10 million and $20 million for the six months ended June 30, 2008 and the
twelve months ended December 31, 2007, respectively.
Fr
6
re
su
clo
re
Fo
op
St
w.
ww
m
E Adjustment to write off historical Countrywide goodwill of approximately $45 million, intangible
co
assets of approximately $50 million and debt issue and other deferred costs of approximately $185
million and to record customer and trade name intangible assets (other than goodwill) of
approximately $150 million resulting from the Merger and adjustment of other miscellaneous assets
of approximately $500 million. The impact of the adjustment for debt issue costs is to decrease
d.
interest expense by approximately $15 million and $30 million, the impact of other deferred costs is
to increase other income by approximately $20 million and $55 million and the impact of customer
and trade name intangible assets is to increase other general operating expenses by approximately
au
$35 million and $70 million for the six months ended June 30, 2008 and the twelve months ended
December 31, 2007, respectively. The adjustments reflected herein are based on current
assumptions and valuations which are subject to change.
Fr
F Adjustment to record goodwill created as a result of the Merger.
re
H Adjustment to fair value fixed-rate deposit liabilities based on current interest rates for similar
instruments. The impact of the adjustment was to decrease interest expense by approximately $25
su
million and $50 million for the six months ended June 30, 2008 and the twelve months ended
December 31, 2007, respectively.
I Adjustment to fair value notes payable and other liabilities, including outstanding notes payable for
clo
credit and current interest rates, other accrued expenses including adjustments to the representation
and warranty reserves, recognition of exit and termination costs, including costs for severance of
personnel and closure of vacant facilities, and other miscellaneous liabilities. The impact of the
adjustment was to decrease interest expense by approximately $40 million and increase interest
expense by approximately $90 million for the six months ended June 30, 2008 and the twelve
re
J Includes the elimination of the earnings per share impact of the dividends paid and beneficial
Fo
conversion feature of Bank of America’s $2.0 billion Series B convertible preferred stock
investment in Countrywide of approximately $73 million and $477 million for the six months ended
June 30, 2008 and the twelve months ended December 31, 2007, respectively.
op
As described in Item 2.01 of the Registrant’s Current Report on Form 8-K dated July 8, 2008, the
Registrant sold or otherwise disposed of assets to other wholly-owned subsidiaries of Bank of America
from July 1, 2008 to July 3, 2008 as follows:
• The Registrant sold two entities that own all of the partnership interests in Countrywide Home
w.
• The Registrant sold two pools of held for sale and held for investment residential mortgage loans
held by Countrywide Home Loans, Inc. (“CHL ”) to NBHC (the “Residential Loan Sale”). The
pool of residential mortgage loans included first and second lien mortgages, home equity line of
credit loans, and construction loans.
m
• The Registrant novated to Bank of America, N.A. (“BANA”) a portfolio of derivative instruments.
• The Registrant sold a pool of commercial mortgage loans held by Countrywide Commercial Real
co
Estate Finance to NBHC (the “Commercial Loan Sale”).
• The Company sold a pool of securities to Blue Ridge Investments, LLC (the “CSC Securities
d.
Sale”). The pool of securities included asset-backed securities and mortgage-backed securities held
by Countrywide Securities Corporation.
au
7
Fr
re
su
clo
re
Fo
op
St
w.
ww
m
The Registrant effected the dispositions described above to facilitate and optimize its funding
requirements, including the repayment of all outstanding borrowings under the terminated credit facilities
co
described in Item 1.02 of the Registrant’s Current Report on Form 8-K dated July 8, 2008 (the “Terminated
Credit Facilities”), and the payment of other obligations.
The pro forma adjustments included in the unaudited pro forma condensed financial information are
d.
described below. The estimated impact on the pro forma condensed statements of operations is determined
as if the Transactions occurred as of the beginning of the period based on Countrywide’s historical results.
au
L The impact of the Sale of Servicing LP was to remove the net assets, including mortgage servicing
rights and reimbursable servicing advances of approximately $13.9 billion and $4.4 billion,
respectively, for a fair value purchase price of approximately $19.7 billion, subject to certain
adjustments. In connection with the Sale of Servicing LP, CHL agreed to retain and assume all
Fr
liabilities of Servicing LP as of the date of the sale. The impact of the sale on the pro forma
condensed statements of operations was the removal of CHL’s servicing activities, which resulted
in a decrease to interest income by approximately $440 million and $1.5 billion, net loan servicing
fees and other income from mortgage servicing rights by approximately $925 million and
re
$2.8 billion, and other expenses by approximately $310 million and $280 million for the six months
ended June 30, 2008 and the twelve months ended December 31, 2007, respectively. Subsequent to
these Transactions, the Registrant continues to hold limited mortgage servicing rights.
su
M The Residential Loan Sale, including held for sale and held for investment loans, was completed for
a fair value purchase price of approximately $9.4 billion, subject to certain adjustments. The impact
of the sale on the pro forma condensed statement of operations was to decrease interest income by
clo
approximately $360 million and $720 million and provision for loan losses by approximately
$495 million and $385 million for the six months ended June 30, 2008 and the twelve months
ended December 31, 2007, respectively.
N The Registrant repaid the Terminated Credit Facilities in the amount of approximately
re
$13.0 billion. The impact of the repayment on the pro forma condensed statement of operations was
to decrease interest expense by approximately $215 million and $250 million for the six months
ended June 30, 2008 and the twelve months ended December 31, 2007, respectively.
Fo
O The Commercial Loan Sale was completed for a fair value purchase price of approximately
$238 million, subject to certain adjustments. These commercial mortgage loans exclude loans
scheduled to be sold or mature in the near future. The impact of the sale on the pro forma
op
P The CSC Securities Sale was completed for a fair value purchase price of approximately
$147 million in cash. The impact of the sale on the pro forma condensed statement of operations
was to decrease interest income by approximately $5 million and $2 million and increase other
income by approximately $82 million and $8 million related primarily to the impact of net trading
w.
losses for the six months ended June 30, 2008 and the twelve months ended December 31, 2007,
respectively.
ww
Q In connection with the Transactions, NBHC delivered to CHL promissory notes totaling
approximately $13 billion that bear interest at a rate per annum equal to three-month LIBOR plus
0.65%, are due upon demand and can be prepaid in whole or in part at any time. The impact of the
promissory notes on the pro forma condensed statement of operations was to increase interest
income by approximately $225 million and $450 million for the six months ended June 30, 2008
and the twelve months ended December 31, 2007, respectively.
m
R The Registrant’s novation to BANA was completed in exchange for $1.5 billion in cash. The
impact on the pro forma condensed statement of operations cannot be reasonably estimated, due to
co
the nature of the asset and ongoing recognition of change in fair value through earnings.
d.
au
Fr
re
su
clo
re
Fo
op
St
w.
ww
10-Q 1 a2187147z10-q.htm 10-Q
m
UNITED STATES
co
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
d.
Form 10-Q
au
(Mark
One)
Fr
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
re
For the quarterly period ended June 30, 2008
su
Or
Delaware 26-2209742
op
3000 end_of_the_skype_highlighting
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
ww
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 No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,"
m
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):
co
Large accelerated Accelerated Non-accelerated filer Smaller reporting
filer filer (Do not check if a smaller reporting company
company)
d.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes No
au
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the
latest practicable date.
Fr
Class Outstanding at August 8, 2008
Common Stock $0.01 par value 1,000
re
The Registrant meets the conditions set forth in general instructions H(1)(a) and (b) of Form 10-Q and
is therefore filing this Form 10-Q with the reduced disclosure format.
su
clo
COUNTRYWIDE FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Fo
Page
PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements:
op
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 55
Overview 55
Results of Operations Comparison—Quarters Ended June 30, 2008 and 2007 60
ww
Results of Operations Comparison—Six Months Ended June 30, 2008 and 2007 68
Liquidity and Capital Resources 75
Credit Risk Management 78
Loan Servicing 91
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
m
92
Prospective Trends 94
Regulatory Trends 95
co
Accounting Developments 96
Factors That May Affect Our Future Results 98
Item 4. Controls and Procedures 99
d.
PART II. OTHER INFORMATION 100
Item 1. Legal Proceedings 100
au
Item 6. Exhibits 100
Fr
PART I. FINANCIAL INFORMATION
re
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
su
CONSOLIDATED BALANCE SHEETS
Mortgage loans held for sale (includes $8,638,178 carried at estimated fair
value at June 30, 2008) 11,816,362 11,681,274
Trading securities owned, at estimated fair value 1,193,001 14,504,563
Fo
and $2,399,491 at June 30, 2008 and December 31, 2007, respectively
(includes $46,120 carried at estimated fair value at June 30, 2008) 94,230,990 98,000,713
Investments in other financial instruments, at estimated fair value 18,847,997 25,817,659
Mortgage servicing rights, at estimated fair value 18,402,390 18,958,180
St
LIABILITIES
Deposit liabilities $ 62,811,922 $ 60,200,599
ww
m
Total liabilities 161,656,426 193,711,053
Commitments and contingencies — —
co
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.05—authorized, 1,500,000 shares; issued
and outstanding at June 30, 2008 and December 31, 2007, 20,000 shares
d.
of 7.25% Series B non-voting convertible cumulative shares with a total
liquidation preference of $2,000,000 1 1
Common stock, par value $0.05—authorized, 1,000,000,000 shares;
au
issued, 583,256,956 shares and 578,881,566 shares at June 30, 2008 and
December 31, 2007, respectively; outstanding 583,256,956 shares and
578,434,243 shares at June 30, 2008 and December 31, 2007,
respectively 29,163 28,944
Fr
Additional paid-in capital 4,223,513 4,155,724
Retained earnings 7,208,574 10,644,511
Accumulated other comprehensive loss (1,041,183 ) (173,309 )
re
Total shareholders' equity 10,420,068 14,655,871
Total liabilities and shareholders' equity su $ 172,076,494 $ 208,366,924
The accompanying notes are an integral part of these consolidated financial statements.
clo
1
re
(Unaudited)
(in thousands, except per share data)
Revenues
(Loss) gain on sale of loans and securities $ (126,942 ) $ 1,493,458 $ 162,369 $ 2,727,562
St
m
Change in fair value of mortgage servicing
rights 1,896,008 1,177,330 435,295 1,231,513
Recovery (impairment) of retained interests 35,280 (268,117 ) (705,740 ) (697,718 )
co
Servicing Hedge losses (2,624,321 ) (1,373,089 ) (619,914 ) (1,486,827 )
Net loan servicing fees and other income
from mortgage servicing rights and
d.
retained interests (22,836 ) 100,254 432,621 198,505
Net insurance premiums earned 484,766 352,384 973,595 686,561
au
Realized loss on available for sale investment
securities (467,808 ) (4,889 ) (491,880 ) (3,886 )
Other 184,956 172,118 424,337 331,384
Total revenues (1,622,838 ) 2,548,397 (943,964 ) 4,954,173
Fr
Expenses
re
Compensation 996,848 1,109,016 2,050,833 2,184,424
Occupancy and other office 249,169 269,017 491,948 533,230
Insurance claims 366,469
su 154,769 722,120 212,074
Advertising and promotion 65,638 79,540 138,898 149,557
Other 514,874 271,357 960,300 509,395
Total expenses 2,192,998 1,883,699 4,364,099 3,588,680
clo
(Loss) earnings before income taxes (3,815,836 ) 664,698 (5,308,063 ) 1,365,493
(Benefit) provision for income taxes (1,485,737 ) 179,630 (2,084,911 ) 446,444
NET (LOSS) EARNINGS $ (2,330,099 ) $ 485,068 $ (3,223,152 ) $ 919,049
re
The accompanying notes are an integral part of these consolidated financial statements.
op
2
St
Accumulated
ww
m
payable upon adoption of FIN 48 — — — — (12,719 ) — (12,719 )
Balance as adjusted, January 1,
2007 — 585,182,298 29,273 2,154,438 12,138,972 (17,556 ) 14,305,127
Comprehensive income:
co
Net earnings for the period — — — — 919,049 — 919,049
Other comprehensive income
(loss), net of tax:
Net unrealized losses from
d.
available-for-sale securities — — — — — (130,123 ) (130,123 )
Net change in foreign currency
translation adjustment — — — — — 9,237 9,237
Change in unfunded liability
au
relating to defined benefit
plans — — — — — 2,214 2,214
Fr
to stock-based compensation — 9,887,079 502 226,734 — — 227,236
Excess tax benefit related to stock-
based compensation plans — — — 68,348 — — 68,348
Issuance of common stock, net of
re
treasury stock — 652,447 33 25,862 — — 25,895
Repurchase and cancellation of
common stock — (21,503,512 ) (1,075 ) (862,481 ) — — (863,556 )
Cash dividends paid—$0.30 per
common share
Balance at June 30, 2007 $
—
—
—
su — — (177,532 )
574,218,312 $ 28,733 $ 1,612,901 $ 12,880,489 $
— (177,532 )
(136,228 ) $ 14,385,895
Balance at December 31, 2007 $ 1 578,434,243 $ 28,944 $ 4,155,724 $ 10,644,511 $ (173,309 ) $ 14,655,871
Cumulative effect of adoption of
clo
SFAS 159 — — — — 34,249 (2,197 ) 32,052
Balance as adjusted, January 1,
2008 1 578,434,243 28,944 4,155,724 10,678,760 (175,506 ) 14,687,923
Comprehensive income:
The accompanying notes are an integral part of these consolidated financial statements.
3
m
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
co
Six Months Ended
June 30,
d.
2008 2007
(Unaudited)
(in thousands)
au
Cash flows from operating activities:
Adjustments to reconcile net (loss) earnings to net cash provided (used) by operating activities:
Fr
Gain on sale of loans and securities (162,369 ) (2,727,562 )
re
Amortization of deferred premiums, discounts, fees and costs, net (16,001 ) 209,442
Accretion of fair value adjustments and discount on notes payable (24,694 ) (29,348 )
Change in fair value of hedged notes payable and related interest-rate and foreign-currency
swaps
13,521
(9,787 )
11,113
Impairment of retained interests and accrual for funding obligation under rapid amortization 729,283 759,529
Proceeds from sale and principal repayments of loans held for sale 120,459,780 236,898,474
(Decrease) increase in trading securities sold, not yet purchased, at fair value (3,655,563 ) 731,154
m
Sale (purchases) of mortgage servicing rights, net 1,300,151 (184,511 )
co
Net cash provided (used) by investing activities 5,280,953 (10,010,499 )
Cash flows from financing activities:
Net (decrease) increase in securities sold under agreements to repurchase (14,673,582 ) 4,073,347
d.
Net (decrease) increase in short-term borrowings (2,841,746 ) 3,510,080
au
Repayment of long-term debt (8,060,931 ) (21,364,797 )
Fr
Issuance of common stock 15,984 204,778
re
Net decrease in cash (2,160,082 ) (252,968 )
Cash at beginning of period 8,810,399 1,407,000
The accompanying notes are an integral part of these consolidated financial statements.
clo
4
re
(Unaudited)
These financial statements have been prepared assuming that Countrywide will continue to operate as
a stand-alone entity and do not take into account any purchase accounting adjustments that may be
recorded pursuant to Bank of America's acquisition of the Company, which was effective on July 1, 2008.
ww
These financial statements also do not reflect accounting changes that may be made to conform
Countrywide's accounting policies to those of Bank of America.
The accompanying consolidated financial statements have been prepared in compliance with U.S.
generally accepted accounting principles for interim financial information and with the Securities and
m
Exchange Commission's instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by U.S. generally accepted accounting principles
for complete financial statements.
co
Preparation of financial statements in compliance with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that materially affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and
d.
revenues and expenses during the reporting period. Actual results could differ from those estimates.
au
considered necessary for a fair presentation have been included. Operating results for the periods ended
June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2008. For further information, including a description of the Company's significant
accounting policies, refer to the consolidated financial statements and notes thereto included in the
Fr
Company's Annual Report on Form 10-K for the year ended December 31, 2007 (the "2007 Annual
Report").
re
Certain amounts included in the prior period consolidated financial statements have been reclassified
to conform to the current year presentation.
su
Note 2—Subsequent Events—Merger and Subsequent Transactions with Bank of America
Corporation
clo
On January 11, 2008, Countrywide and Bank of America entered into an Agreement and Plan of
Merger, pursuant to which Countrywide would merge (the "Merger") with and into Red Oak Merger
Corporation, a wholly-owned merger subsidiary of Bank of America ("Merger Sub"), with Merger Sub
continuing as the surviving company. The details of this agreement are contained in a Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 17, 2008, and the Amended
re
Registration Statement on Form S-4 of Bank of America filed on May 28, 2008.
The Merger was concluded on July 1, 2008. On July 1, 2008, Merger Sub was renamed Countrywide
Fo
Financial Corporation. As the result of the Merger, Countrywide common stock was converted into 0.1822
of a share of Bank of America common stock plus an amount of cash in lieu of
5
op
(Unaudited)
ww
any fractional share and all shares of the Company's 7.25% Series B Non-Voting Convertible Preferred
Stock were cancelled.
The Company notified the New York Stock Exchange of the conversion of its shares and related
preferred stock purchase rights, requested that its common stock and preferred stock purchase rights be
m
delisted and cease to trade at the close of business on June 30, 2008, and that the NYSE submit to the SEC
Form 25s to report that the Company's shares of common stock and preferred stock purchase rights are no
longer listed on the NYSE. The NYSE filed the Form 25s with the SEC on July 1, 2008.
co
Following completion of the Merger, the Company sold assets to other subsidiaries of Bank of
America and used proceeds from these sales to repay its unsecured revolving lines of credit and bank loans.
The Company expects to record no material gain or loss on these transactions after giving effect to
d.
purchase price adjustments.
au
The Company sold two entities that own all of the partnership interests in Countrywide Home
Loans Servicing, LP ("Servicing LP") to NB Holdings Corporation ("NBHC") for approximately
$19.7 billion, subject to certain adjustments. At June 30, 2008, Servicing LP's assets included
approximately $15.3 billion of Mortgage Servicing Rights ("MSRs") and $4.4 billion of
Fr
reimbursable servicing advances
•
The Company sold a pool of residential mortgage loans held by Countrywide Home Loans
re
("CHL") to NBHC for approximately $9.5 billion, subject to certain adjustments. The pool of
residential mortgage loans included first and second lien mortgages, home equity line of credit
loans, and construction loans su
•
The Company novated to Bank of America, N.A. a portfolio of derivative instruments held by
CHL in exchange for $1.5 billion
clo
•
The Company sold a pool of commercial mortgage loans held by Countrywide Commercial Real
Estate to NBHC for approximately $238 million, subject to certain adjustments
re
•
The Company sold a pool of securities to Blue Ridge Investments, LLC for approximately
$147 million. The pool of securities included asset-backed securities and mortgage-backed
Fo
•
The Company terminated and repaid its unsecured revolving lines of credit and bank loans,
op
Details of these subsequent events and other transactions, are contained in the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on July 8, 2008.
St
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements, ("SFAS 157"). SFAS 157 provides a
framework for measuring fair value when such measurements are used for accounting purposes. The
ww
framework focuses on an exit price in the principal (or, alternatively, the most advantageous) market
accessible in an orderly transaction between willing market participants. SFAS 157 establishes a three-
tiered fair value hierarchy based on the level of observable inputs used in the measurement of fair value
(e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market and Level 3
representing estimated values based on significant unobservable inputs). Under SFAS 157,
6
m
co
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
d.
(Unaudited)
au
related disclosures are segregated for assets and liabilities measured at fair value based on the level used
within the hierarchy to determine their fair values. The Company adopted SFAS 157 on its effective date of
January 1, 2008 and there was no financial impact. However, as permitted under FASB Staff Position
Fr
No. 157-2, "Effective Date of FASB Statement No. 157," the Company elected to defer the application of
SFAS 157 to certain nonfinancial assets and liabilities, which are not measured at fair value on a recurring
basis, until January 1, 2009.
re
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115, ("SFAS 159"). SFAS 159 permits fair value accounting to be irrevocably elected for most
su
financial assets and liabilities on an individual contract basis at the time of acquisition or remeasurement
event date. Upon adoption of SFAS 159, fair value accounting may also be elected for existing financial
assets and liabilities. For those instruments for which fair value accounting is elected, changes in fair value
will be recognized in earnings and fees and costs associated with origination or acquisition will be
clo
recognized as incurred rather than deferred. The Company adopted SFAS 159 on its effective date of
January 1, 2008 and the financial impact upon adoption was an increase in beginning retained earnings of
$34.2 million. See Note 5—Fair Value for further discussion.
re
In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB
Interpretation No. 39, ("FSP FIN 39-1"). FSP FIN 39-1 amends certain paragraphs of FASB Interpretation
Number 39, Offsetting of Amounts Related to Certain Contracts,—an interpretation of APB Opinion No. 10
and FASB Statement No. 105 ("FIN 39") to permit a reporting entity to offset fair value amounts recognized
Fo
for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts
recognized for derivative instruments executed with the same counterparty under the same master netting
arrangement. Upon adoption on the effective date of January 1, 2008, the Company changed its accounting
policy to offset the right to reclaim or obligation to return cash collateral against fair value amounts
op
recognized for derivative instruments under master netting arrangements. Adoption of FSP FIN 39-1
resulted in a reduction in total assets of $3.4 billion at December 31, 2007.
In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
St
No. 109 ("SAB 109"). SAB 109 supersedes Staff Accounting Bulletin No. 105 ("SAB 105"), Application of
Accounting Principles to Loan Commitments. It clarifies that the expected net future cash flows related to
the associated servicing of a loan should be included in the measurement of all written loan commitments
that are accounted for at fair value through earnings. However, it retains the guidance in SAB 105 that
w.
internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan
commitment. The guidance is effective on a prospective basis to derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. This guidance generally has resulted in
ww
higher fair values being recorded upon initial recognition of derivative interest rate lock commitments. The
initial and subsequent changes in value of interest rate lock commitments are a component of gain on sale
of loans and securities. The effect of the adoption of SAB 109 was to increase gain on sale of loans and
securities by $216.0 million. This amount represents the revenue recognized at the time the loan
commitment was issued that is included in the value of the interest rate lock commitments or Mortgage
Loan Inventory at June 30, 2008.
m
7
co
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
d.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
au
(Unaudited)
Fr
Basic (loss) earnings per share is determined using net (loss) earnings (adjusted for dividends declared
on preferred stock) divided by the weighted-average common shares outstanding during the period. Diluted
re
earnings per share is computed by dividing net (loss) earnings attributable to common shareholders by the
weighted-average shares outstanding, assuming all potentially dilutive common shares were issued. The
Company has potentially dilutive shares in the form of employee stock-based compensation instruments,
convertible debentures and convertible preferred stock. As detailed in Note 18—Shareholders' Equity—
su
Series B Convertible Preferred Stock, included in the consolidated financial statements of the 2007 Annual
Report, the Company issued $2.0 billion of convertible preferred stock on August 22, 2007.
The following table summarizes the basic and diluted (loss) earnings per share calculations for the
clo
periods indicated:
m
Due to the loss attributable to common shareholders for the three and six months ended June 30, 2008,
no potentially dilutive shares are included in loss per share calculation as including such shares in the
co
calculation would be anti-dilutive. During the three and six months ended June 30, 2007, stock appreciation
rights and options to purchase 172,011 shares and 26,390 shares, respectively, were outstanding but not
included in the computation of diluted earnings per share because they were anti-dilutive.
d.
8
au
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
Fr
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
re
Note 5—Fair Value
su
The Company's financial statements include assets and liabilities that are measured based on their
estimated fair values. The application of fair value estimates may be on a recurring or nonrecurring basis
depending on the accounting principles applicable to the specific asset or liability or whether management
has elected to carry the item at its estimated fair value as discussed in the following paragraphs.
clo
As discussed in Note 3—Adoption of New Accounting Pronouncements, effective January 1, 2008, the
Company adopted two pronouncements affecting the Company's fair value measurements and accounting:
SFAS 157 and SFAS 159.
re
Transition Adjustment
Fo
Management identified existing mortgage loans held for sale and commitments to purchase mortgage
loans within the Capital Markets Segment to be accounted for at estimated fair value for consistency with
its peers who generally use fair value accounting as well as to reduce the burden of compliance with the
requirements for hedge accounting. Such loans represented 2% of mortgage loans held for sale at the time
of adoption of SFAS 159.
op
Management elected to account for certain outstanding asset-backed secured financings and the
mortgage loans securing such financings at their estimated fair values to eliminate potential timing
differences between recognition of changes in the estimated fair value of the loans securing these
St
borrowings (which had been recorded at the lower of amortized cost or estimated fair value) and the
estimated fair value of the borrowings (which had been recorded at amortized cost). This election was made
for mortgage-backed secured financings collateralized by mortgage loans where the secondary market for
w.
the securities backed by the loans was disrupted. At the time of adoption, such borrowings represented 25%
of mortgage-backed secured financings and the mortgage loans securing such borrowings represented 23%
of mortgage loans held for sale.
ww
Management elected fair value accounting for those portions of its investments in municipal bonds
included in its available-for-sale securities investment portfolio managed by nonaffiliated investment
managers to improve the operational efficiency of using investment managers. Such investments
represented 1% of the securities investment portfolio at the time of adoption.
9
m
co
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
d.
(Unaudited)
As a result of these elections, the Company recorded a $34.2 million cumulative effect adjustment to
au
opening retained earnings as summarized below:
Fr
Transition Adjustments to
Carrying Value Retained Other Carrying
Before Earnings Comprehensive Value
Adoption Gain/(Loss) Income After Adoption
(in thousands)
re
Assets:
Mortgage loans held for sale(1) $ 2,897,216 $ 237 $ 2,897,453
Investment in other financial instruments:
Investment securities
su 244,902 2,197 $ (2,197 ) 244,902
Interest rate lock commitments(2) — 432 432
clo
Total assets $ 3,142,118 $ 3,142,787
Liabilities:
Notes payable:
Asset-backed secured financings $ 2,353,250 51,060 $ 2,302,190
re
(1)
A lower of cost or market valuation allowance of $96.5 million was recorded as part of the basis
of the loans accounted for at estimated fair value.
w.
(2)
Interest rate lock commitments include commitments to originate or purchase mortgage loans that
qualify as derivative financial instruments under SFAS 133 and commitments to purchase loans
ww
accounted for at estimated fair value under the fair value option.
m
such loans will be reflected in earnings as they occur to match the accounting to related hedging
instruments, as well as to reduce the burden of compliance with the requirements for hedge accounting. The
mortgage loans identified were those that have an existing active market (primarily agency-eligible
co
mortgage loans). Such loans represented 85% and 86% of mortgage loans
10
d.
au
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
Fr
(Unaudited)
re
originated or purchased and held for sale during the three and six months ended June 30, 2008,
respectively.
Liabilities:
Notes Payable:
St
(1)
w.
$90.5 million and $187.0 million of the loss recognized on mortgage loans was related to changes
in the credit risk of the loans for the three and six months ended June 30, 2008, respectively.
ww
Following is the fair value and related principal amount due upon maturity of assets and liabilities
accounted for under the fair value option as of June 30, 2008:
Principal Amount
m
Due Upon
Fair Value Maturity Difference
(in thousands)
Assets:
co
Mortgage loans:
Current through 89 days delinquent $ 8,549,967 $ 9,079,690 $ (529,723 )
90 or more days delinquent 134,331 260,822 (126,491 )
d.
Investments in financial instruments:
Investment securities 358,390 340,485 17,905
au
Liabilities:
Notes Payable:
Asset-backed secured financings 1,212,252 1,672,721 (460,469 )
Fr
11
re
su
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
Following is a summary of financial statement items that are measured at estimated fair value on a
recurring basis—including assets measured under the fair value option as of June 30, 2008:
re
Netting
Level 1 Level 2 Level 3 Adjustments (1) Total
Fo
(in thousands)
Assets:
Mortgage loans $ — $ 7,259,090 $ 1,425,208 $ — $ 8,684,298
Trading securities 3 2,088,091 1,124,351 (2,019,444 ) 1,193,001
op
Liabilities:
Trading securities sold, not yet
purchased 3 1,960,835 — (1,929,423 ) 31,415
m
Notes Payable:
Asset-backed secured
financings — — 1,212,252 — 1,212,252
co
Accounts payable and accrued
liabilities:
Interest rate lock
d.
commitments(2) — — 43,868 — 43,868
Other derivative instruments — 1,459,423 — (1,306,119 ) 153,304
au
(1)
Amounts represent the netting of the impact of qualifying master netting agreements that allow the
Company to settle positive and negative positions in accordance with FIN 39, and cash collateral
held or placed with the same counterparties.
Fr
(2)
Interest rate lock commitments include commitments to originate or purchase mortgage loans that
qualify as derivative financial instruments under SFAS 133 and commitments to purchase loans
re
accounted for at estimated fair value under the fair value option (SFAS 159).
12
su
clo
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
(Unaudited)
re
Following is a summary of changes in balance sheet line items measured using Level 3 inputs:
Fo
Interest
Rate Lock Mortgage
Mortgage Trading Investment Retained Commitments, Servicing
Loans Securities Securities Interests Net Rights Total
(in thousands)
St
Assets:
Balance,
March 31,
w.
m
issuances and
settlements (814,467 ) (137,201 ) (334,881 ) (171,596 ) — 19,460 (1,438,685 )
Transfers to
co
mortgage
loans:
Level 2 — — — — (598,162 ) — (598,162 )
d.
Level 3 (54,827 ) — — — 54,827 — —
Balance,
June 30, 2008 $ 1,425,208 $ 1,124,351 $ 13,424,032 $ 1,510,579 $ 106,949 $ 18,402,390 $ 35,993,509
au
Changes in
unrealized
(losses) gains
relating to
Fr
assets still
held at
June 30, 2008 $ (127,171 ) $ 41,432 $ (457,791 ) $ (152,158 ) $ 109,156 $ 1,896,007 $ 1,309,475
re
su
Notes Payable:
Asset-backed
Secured
clo
Financings
(in thousands)
Liabilities:
Balance, March 31, 2008 $ 1,692,472
Total gains:
re
13
St
(Unaudited)
ww
m
Mortgage Trading Investment Retained Commitments, Servicing
Loans Securities Securities Interests Net Rights Total
(in thousands)
Assets:
co
Balance,
December 31,
2007 $ 3,480,673 $ 1,924,558 $ 16,330,950 $ 3,358,756 $ 107,718 $ 18,958,180 $ 44,160,835
Impact of
d.
SFAS 157
and
SFAS 159
au
adoption 237 — — — 483 — 720
Balance,
January 1,
2008 3,480,910 1,924,558 16,330,950 3,358,756 108,201 18,958,180 44,161,555
Fr
Total (losses)
gains:
Included in
re
earnings (574,725 ) (290,385 ) (491,735 ) (675,047 ) 1,356,915 (985,983 ) (1,660,960 )
Included in
other su
comprehensi
ve income — — (1,369,547 ) (32,633 ) — — (1,402,180 )
Purchases,
issuances and
clo
settlements (1,342,016 ) (509,822 ) (1,045,636 ) (1,140,497 ) — 430,193 (3,607,778 )
Transfers to
mortgage
loans:
Level 2 — — — — (1,497,128 ) — (1,497,128 )
re
relating to
assets still held
at June 30,
2008 $ (509,978 ) $ (2,992 ) $ (491,789 ) $ (707,853 ) $ 1,252 $ 435,295 $ (1,276,065 )
St
w.
Notes Payable:
Asset-backed
Secured
ww
Financings
(in thousands)
Liabilities:
Balance, December 31, 2007 $ 2,353,250
Impact of SFAS 157 and SFAS 159 adoption (51,060 )
m
Balance, January 1, 2008 2,302,190
Total gains:
Included in earnings (388,464 )
co
Purchases, issuances and settlements (701,474 )
Balance, June 30, 2008 $ 1,212,252
Change in unrealized gains relating to liabilities still held at June 30, 2008 $ 423,968
d.
Gains and losses from changes in the estimated fair value of mortgage loans held for sale, interest rate
au
lock commitments ("IRLCs"), trading securities and asset-backed secured financings are included in gain
on sale of loans and securities. Gains and losses from changes in the estimated fair value of investment
securities are included in other income and in realized loss on available for sale securities. Gains and losses
from changes in the estimated fair value of retained interests are included in impairment of retained
Fr
interests. Gains and losses from changes in the estimated fair value of mortgage
14
re
su
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
servicing rights are included in realization of expected cash flows from mortgage servicing rights and
change in fair value of mortgage servicing rights.
Fo
Valuation Techniques
For a complete discussion of valuation techniques used to value financial instruments, refer to
Note 19—Fair Value of Financial Instruments to the consolidated financial statements included in the
op
Company's 2007 Annual Report. The following describes the methods used by the Company in estimating
the fair values of Level 3 financial statement items:
Mortgage Loans
St
The Company estimates the fair value of Level 3 loans based on relevant factors, including dealer
price quotations, whole loan bid sheets, prices available for similar securities and valuation models
intended to approximate the amounts that would be received from a third party. These techniques and
w.
related assumptions are used to approximate the whole loan price that would be received from an
unaffiliated buyer.
ww
The Company regularly compares the values developed from our valuation models to executed trades
to assure that the valuations are reflective of actual sale prices. However, due to the illiquidity of the
mortgage marketplace prevalent at June 30, 2008, which resulted in a lack of executed trades that could be
used to assure that the valuations are reflective of fair value, it was necessary to look for alternative sources
of value, including the whole loan purchase market for similar loans, and to apply more judgment to the
valuations of non-conforming prime, prime home equity and subprime (formerly known as nonprime)
loans, which represented approximately 18% of mortgage loans originated or purchased for resale
m
excluding loans secured by commercial real estate at June 30, 2008.
Trading Securities
co
Level 3 trading securities primarily represent collateralized mortgage obligations for which fair value
is estimated using valuation models and observable and unobservable assumptions intended to approximate
the amounts that would be received from an unaffiliated buyer.
d.
Investments in Other Financial Instruments:
au
Investment Securities
Mortgage-Backed Securities
Fr
Fair value for Level 3 non-agency mortgage-backed securities, which consist primarily of
collateralized mortgage obligations, is estimated using valuation models and observable and
unobservable assumptions intended to approximate the amounts that would be received from an
re
unaffiliated buyer.
Retained Interests su
Fair value of retained interests, with the exception of interest-only securities and mortgage-
backed securities, is estimated through the use of proprietary, "static" (single rate path) discounted
cash flow models. The Company has incorporated mortgage prepayment and credit loss
clo
15
re
(Unaudited)
op
assumptions in its valuation models that it believes other major market participants would consider
in deriving the fair value of such retained interests.
Principal-Only Securities
St
Fair value is estimated through the use of a proprietary, multiple rate path discounted cash
flow model. The Company has incorporated mortgage prepayment assumptions in its valuation
w.
that it believes other major market participants would consider in deriving the fair value of
principal-only securities.
Interest-Only Securities
ww
Fair value is estimated through the use of a proprietary, multiple rate path discounted cash
flow model. The Company has incorporated mortgage prepayment assumptions in its valuation
model that it believes other major market participants would consider in deriving the fair value of
interest-only securities.
m
Interest Rate Lock Commitments
co
Effective January 1, 2008, the Company adopted SAB 109, which is effective on a
prospective basis for IRLCs issued or modified after December 31, 2007. For IRLCs issued or
modified after December 31, 2007, the Company estimates the fair value of an IRLC based on the
estimated fair value of the underlying mortgage loan less the commitment price adjusted for the
d.
probability that the mortgage loan will fund within the terms of the IRLC. The Company generally
estimates the fair value of the underlying loan based on quoted market prices for securities backed
by similar types of loans together with estimated servicing value adjusted for the estimated costs
au
and profit margin associated with securitization to approximate the whole loan price that would be
received from an unaffiliated buyer. The estimated probability of mortgage loan funding is based
on the Company's historical experience and is adjusted to reflect the risk of variability in such
probability using an option pricing model. If quoted market prices for relevant securities are not
Fr
available, fair value is estimated based on other relevant factors, including dealer price quotations,
prices available for similar securities, and valuation models intended to approximate the amounts
that would be received from a third party.
re
For IRLCs issued before January 1, 2008, the Company estimates the fair value of an IRLC
based on the change in estimated fair value of the underlying mortgage loan and the probability
that the mortgage loan will fund within the terms of the IRLC. The change in fair value of the
su
underlying mortgage loan is measured from the date the IRLC is issued. At the time of issuance
the estimated fair value of an IRLC is zero. Subsequent to issuance, the value of an IRLC can be
either positive or negative, depending on the change in value of the underlying mortgage loan. The
Company generally estimates the fair value of the underlying loan based on quoted market prices
clo
for securities backed by similar types of loans. If quoted market prices are not available, fair value
is estimated based on other relevant factors, including dealer price quotations, prices available for
similar instruments, and valuation models intended to approximate the amounts that would be
received from a third party.
re
16
Fo
(Unaudited)
St
The Company estimates the fair value of its MSRs using a process that combines the use of a
discounted cash flow model and analysis of current market data to arrive at an estimate of fair value at each
w.
balance sheet date. The cash flow assumptions (which consider only contractual cash flows) and
prepayment assumptions used in Countrywide's discounted cash flow model are based on market factors
and encompass the historical performance of our MSRs. The key assumptions used in the valuation of
ww
MSRs include mortgage prepayment speeds and discount rates (projected London Inter Bank Offering Rate
("LIBOR") plus option-adjusted spread). These variables can, and generally do, change from quarter to
quarter as market conditions and projected interest rates change. The current market data utilized in the
MSR valuation process and in the assessment of the reasonableness of the MSR valuation are obtained
from peer group MSR valuation surveys, MSR market trades, MSR broker valuations and prices of interest-
only securities.
m
The cash flow model and underlying prepayment and interest rate models used to value the MSRs are
subjected to validation in accordance with the Company's model validation policies. This process includes
co
review of the theoretical soundness of the models and the related development process, back testing of
actual results to model predictions, benchmarking to commercially available models and ongoing
performance monitoring.
d.
Asset-Backed Secured Financings
The Company estimates the fair value of Level 3 asset-backed secured financings based on relevant
au
factors expected to reflect the amounts that would be received by an unaffiliated seller of the financings
from an unaffiliated buyer, including dealer price quotations, prices available for similar instruments, and
valuation models.
Fr
17
re
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
su
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
clo
Following is a summary of items that are measured at estimated fair value on a nonrecurring basis:
re
Gain (Loss)
Three
Months Six Months
Ended Ended
June 30, June 30,
Fo
(1)
The mortgage loans transferred from mortgage loans held for investment to mortgage loans held
for sale during the quarter ended March 31, 2008, consist of loans that had been carried as part of
m
the mortgage loan investment portfolio for an average of 4.0 years. No such transfers were made
during the quarter ended June 30, 2008.
co
Note 6—Derivative Financial Instruments
d.
A significant market risk facing the Company is interest rate risk, which includes the risk that changes
in market interest rates will result in unfavorable changes in the value of our assets or liabilities ("price
au
risk") and the risk that net interest income from our mortgage loan and investment portfolios will change in
response to changes in interest rates. This risk includes both changes in "risk-free" rates (usually the U.S.
Treasury rate for an asset of the same duration) and changes in the premiums to risk-free rates of return
required by investors, which may be the result of liquidity and/or investor perceptions of risk ("Market
Fr
Spread"). The overall objective of the Company's interest rate risk management activities is to reduce the
variability of earnings caused by changes in interest rates.
re
18
su
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
(Unaudited)
The Company manages interest rate risk with derivative financial instruments and by the structure of
re
•
Fo
The Company uses various financial instruments, including derivatives, to manage the interest rate
risk related specifically to the values of its IRLCs, mortgage loans held by the Company pending
sale ("Mortgage Loan Inventory"), MSRs, retained interests, trading securities, and a portion of its
debt.
op
•
Structurally, the Company manages interest rate risk in its mortgage banking activities through the
natural counterbalance of its loan production and servicing businesses while using portfolios of
financial instruments, including derivatives, to separately moderate interest rate driven changes in
St
value of these businesses' assets. However, the market disruption that began in the latter part of
2007 has impacted the availability and the cost of derivative financial instruments used to manage
Market Spread-driven changes in the value of our mortgage banking assets. Although separate
w.
portfolios of financial instruments were maintained to manage the interest rate risk inherent in the
mortgage banking assets, the Company managed its aggregate changes in value of those assets
arising from Market Spread risk during the six months ended June 30, 2008 by relying more on
the opposing Market Spread risk inherent in the loan production and loan servicing assets.
ww
Specifically, as Market Spreads widen the value of our IRLCs and Mortgage Loan Inventory
generally decrease while the value of MSRs increase. Accordingly, Market Spread related changes
in the value of sector assets and the related hedge instruments (collectively the "Position") were
allocated between loan production activities and loan servicing activities in the six months ended
June 30, 2008.
m
•
The Company manages interest rate risk relating to its portfolios of investment securities of loans
co
held for investment largely by funding interest-earning assets with liabilities of similar duration or
a combination of derivative instruments and certain liabilities that create repricing characteristics
that closely reflect the repricing behaviors of those assets.
d.
Risk Management Activities Related to Mortgage Loan Inventory and Interest Rate Lock Commitments
The Company actively manages the risk profiles of its IRLCs and Mortgage Loan Inventory on a daily
au
basis. To manage the price risk associated with the IRLCs, the Company generally uses a combination of
net forward sales of MBS and put and call options on MBS, Treasury futures and Eurodollar futures. The
Company generally enters into forward sales of MBS in an amount equal to the portion of the IRLCs
expected to close, assuming no change in mortgage interest rates. The Company acquires put and call
Fr
options to protect against the variability of loan closings caused by changes in mortgage rates. The
Company may enter into credit default swaps as part of its management of Market Spread risk.
re
The Company manages the price risk related to the Mortgage Loan Inventory primarily by entering
into forward sales of MBS and Eurodollar futures. The value of these forward MBS sales and Eurodollar
futures moves in opposite direction to the value of the Mortgage Loan Inventory. The Company may enter
into credit default swaps or similar instruments as part of its management of Market Spread-driven changes
su
associated with its Mortgage Loan Inventory.
The Company manages the price risk related to its commercial mortgage loans using interest rate
swaps, total rate of return and credit default swaps.
clo
19
re
(Unaudited)
op
During the six months ended June 30, 2008, the interest rate risk management activities associated
with 14% of the fixed-rate mortgage loan inventory and 11% of the adjustable-rate mortgage loan inventory
were accounted for as fair value hedges. These percentages decreased from prior periods because the
Company began accounting for a substantial portion of its inventory at estimated fair value. For the six
St
months ended June 30, 2008 and 2007, the Company recognized pre-tax losses of $18.7 million and
$6.4 million, respectively, representing the ineffective portion of the hedges of its Mortgage Loan
Inventory that qualified as fair value hedges.
w.
Risk Management Activities Related to Mortgage Servicing Rights and Retained Interests
To moderate the impact on earnings caused by a rate-driven decline in fair value of its MSRs and
ww
retained interests from securitization, the Company maintains a portfolio of financial instruments, including
derivatives and securities, which generally increase in value when interest rates decline. During early 2007,
the Company used credit-related derivative financial instruments to moderate the negative impact on
earnings caused by a Market Spread-driven decline in fair value. This portfolio of financial instruments is
collectively referred to as the "Servicing Hedge."
m
The following table summarizes the activity for derivative contracts included in the Servicing Hedge
expressed by notional amounts:
co
Balance, Balance,
December 31, Dispositions/ June 30,
d.
2007 Additions Expirations 2008
(in millions)
Interest rate swaptions $ 102,410 $ 93,200 $ (98,690 ) $ 96,920
au
Interest rate swaps 47,675 100,251 (71,090 ) 76,836
Treasury futures 45,000 21,678 (21,678 ) 45,000
Call options on interest rates futures 15,500 96,550 (112,050 ) —
Mortgage forward rate agreements 13,000 51,100 (15,000 ) 49,100
Fr
MBS forward contracts 9,500 90,830 (94,550 ) 5,780
re
The Company has entered into interest rate swap contracts in which the rate received is fixed and the
rate paid is adjustable and is indexed to LIBOR. These interest rate swaps enable the Company to convert a
su
portion of its fixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of
$2.3 billion as of June 30, 2008) and a portion of its foreign currency-denominated fixed and floating-rate,
long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of $4.0 billion as of
June 30, 2008). These transactions are generally designated as fair value hedges. For the six months ended
clo
June 30, 2008 and 2007, the Company recognized pre-tax gains of $58.2 million and $9.8 million,
respectively, representing the ineffective portion of its fair value hedges of debt.
The Company has entered into interest rate swap contracts that have the effect of converting a portion
of its fixed-rate deposit liabilities to LIBOR-based variable-rate deposit liabilities. These transactions are
designated as fair value hedges. For the six months ended June 30, 2008 and 2007, the Company
Fo
recognized a pre-tax loss of $10.0 million and pre-tax gains of $0.3 million, respectively, representing the
hedge ineffectiveness related to these contracts.
20
op
(Unaudited)
The Company is exposed to price changes in its trading portfolio of fixed-income securities, primarily
MBS, held in connection with its broker-dealer activities. To manage the price risk that results from interest
rate changes during the period it holds the securities, the Company utilizes derivative instruments including
forward sales/purchases of To-Be-Announced ("TBA") MBS, interest rate futures contracts, interest rate
swaps, total rate of return swaps, put/call options on interest rate futures contracts, interest rate caps,
m
receiver swaptions, credit default swaps and forward rate agreements.
co
Note 7—Mortgage Loans Held for Sale
d.
June 30, December 31,
2008 2007
au
(in thousands)
Mortgage loans carried at estimated fair value:
Prime $ 7,225,291 $ —
Fr
Subprime 1,328,074 —
Commercial real estate 84,813 —
8,638,178 —
re
Mortgage loans carried at lower of amortized cost or estimated fair value:
Prime 2,880,816 7,815,880
Subprime
Prime home equity
su 2,432
25,964
3,038,980
82,131
Commercial real estate 270,938 1,055,343
clo
Deferred premiums, discounts, fees and costs, net 44,104 (167,945 )
Lower of cost or market valuation allowance (46,070 ) (143,115 )
3,178,184 11,681,274
re
$ 11,816,362 $ 11,681,274
The Company generally estimates the fair value of loans held for sale based on quoted market prices
Fo
for securities backed by similar types of loans. If quoted market prices are not available, fair value is
estimated based on other relevant factors, including dealer price quotations, prices available for similar
instruments, and valuation models intended to approximate the amounts that would be received from a third
party. We regularly compare the values developed from our valuation models to executed trades to assure
that the valuations are reflective of actual sale prices. However, due to the illiquidity of the mortgage
op
marketplace at June 30, 2008, which resulted in a lack of executed trades that could be used to assure that
the valuations are reflective of fair value, it was necessary to look for alternative sources of value, including
the whole loan purchase market for similar loans, and to apply more judgment to the valuations of non-
conforming prime, prime home equity and subprime loans, which represented approximately 18% of
St
mortgage loans held for sale excluding loans secured by commercial real estate at June 30, 2008.
21
w.
ww
m
At June 30, 2008, the Company had pledged mortgage loans held for sale with unpaid principal
balances totaling $1.3 billion and $0.3 billion to secure collateral for asset-backed secured financings and
secure Federal Home Loan Bank ("FHLB") advances, respectively.
co
At December 31, 2007, the Company had pledged mortgage loans held for sale with unpaid principal
balances totaling $0.3 billion, $0.01 billion, $4.4 billion and $0.8 billion to secure a secured revolving line
of credit, securities sold under agreements to repurchase, collateral for asset-backed secured financings and
d.
to secure FHLB advances, respectively.
au
Note 8—Trading Securities and Trading Securities Sold, Not Yet Purchased
Trading securities, which consist of trading securities owned and trading securities pledged as
collateral, include the following:
Fr
June 30, December 31,
re
2008 2007
(in thousands)
U.S. Treasury securities $ — $ 3,974,806
Agency mortgage pass-through securities
su
Obligations of U.S. Government-sponsored enterprises —
2 13,767,268
781,470
Collateralized mortgage obligations 255,859 1,988,054
Asset-backed securities 55,072 121,582
clo
Interest-only securities 808,191 404,364
Residual securities 5,310 857
Mark-to-market on TBA securities 37,226 67,213
Derivative financial instruments 31,339 231,587
re
Other 2 5,406
$ 1,193,001 $ 21,342,607
Fo
22
op
(Unaudited)
w.
m
securities 2 2 — — — —
Collateralized mortgage
obligations 255,859 227,718 6,266 1,119 19,362 1,394
co
Asset-backed securities 55,072 9,525 32,052 1,025 12,470 —
Interest-only securities 808,191 490,445 — — — 317,746
Residual securities 5,310 23 — 612 1,129 3,546
d.
Other 2 — — — — 2
$ 1,124,436 $ 727,713 $ 38,318 $ 2,756 $ 32,961 $ 322,688
au
(1)
Derivative financial instruments, including mark-to-market on TBA securities, are not included in
this table as derivative financial instruments are contracts between Countrywide and a
Fr
counterparty. Such contracts are not rated by the rating agencies. Countrywide manages its
derivatives counterparty risk by entering into derivatives only with creditworthy counterparties
and limiting its exposure to individual counterparties.
re
(2)
These securities are generally not rated due to their illiquidity and the absence of significant
trading activity. su
As of June 30, 2008, $133.2 million of the Company's trading securities had been pledged as collateral
for financing purposes. None of the financing agreements provided the counterparties with the contractual
right to sell or re-pledge the trading securities.
clo
As of December 31, 2007, $15.4 billion of the Company's trading securities had been pledged as
collateral for financing purposes, of which the counterparty had the contractual right to sell or re-pledge
$6.8 billion.
re
$ 31,415 $ 3,686,978
w.
23
ww
m
Note 9—Securities Purchased Under Agreements to Resell, Securities Borrowed and Federal Funds
Sold
co
The following table summarizes securities purchased under agreements to resell, securities borrowed
and federal funds sold:
d.
June 30, December 31,
2008 2007
au
(in thousands)
Securities purchased under agreements to resell $ 2,874,086 $ 5,384,569
Securities borrowed — 928,857
Federal funds sold 3,775,000 3,327,453
Fr
$ 6,649,086 $ 9,640,879
re
As of June 30, 2008, the Company had accepted collateral related to securities purchased under
agreements to resell and securities borrowed with a fair value of $5.8 billion that it had the contractual
ability to sell or re-pledge, including $3.2 billion related to amounts offset by securities sold under
su
agreements to repurchase under master netting arrangements. As of June 30, 2008, the Company had re-
pledged $4.9 billion of such collateral for financing purposes.
Through June 30, 2008, the Company had an informal agreement with one of its primary securities
clo
custodial banks to have on deposit adequate cash to ensure orderly clearance and settlement of securities
and financing transactions on the date of settlement. At June 30, 2008, Countrywide had $0.5 billion on
deposit with the custodial bank available to clear future transactions.
As of December 31, 2007, the Company had accepted collateral related to securities purchased under
re
agreements to resell and securities borrowed with a fair value of $17.6 billion, that it had the contractual
ability to sell or re-pledge, including $9.0 billion related to amounts offset by securities sold under
agreements to repurchase under master netting arrangements. As of December 31, 2007, the Company had
Fo
24
op
(Unaudited)
w.
m
(in thousands)
Mortgage loans:
Prime
co
Pay option and payment advantage $ 26,409,335 $ 28,509,138
Other 30,071,783 25,517,950
56,481,118 54,027,088
d.
Prime home equity 32,864,577 34,539,144
Subprime 2,454,542 2,725,407
au
Commercial real estate 181,390 265,845
Total mortgage loans 91,981,627 91,557,484
Defaulted FHA-insured and VA-guaranteed loans repurchased from
Fr
securities 3,411,386 2,691,563
Warehouse lending advances secured by mortgage loans 904,647 887,134
96,297,660 95,136,181
re
Premiums, discounts and deferred loan origination fees and costs, net (469,411 ) (363,560 )
Allowance for loan losses (5,035,651 ) (2,399,491 )
su 90,792,598 92,373,130
Mortgage Loans Held in SPEs 3,438,392 5,627,583
Loans held for investment, net $ 94,230,990 $ 98,000,713
clo
Loans are transferred from mortgage loans held for sale to mortgage loans held for investment when
the Company makes the decision to hold such loans for the foreseeable future, which has been defined as
the next twelve months, and has made an assessment that the Company has the ability to hold them for that
time. During the six months ended June 30, 2008, the Company transferred prime, prime home equity and
re
subprime mortgage loans with an unpaid principal balance of $1.5 billion, $0.1 billion and $0.1 billion,
respectively, from mortgage loans held for sale to mortgage loans held for investment, as management
made the decision in the first six months of 2008 to hold those loans for the foreseeable future. In
Fo
connection with these transfers, impairment in the amount of $73.4 million was recorded as a component of
gain on sale of loans and securities.
Mortgage loans with unpaid principal balances totaling $58.8 billion and $62.6 billion were pledged to
secure FHLB advances and to enable additional borrowings from the FHLB at June 30, 2008 and
op
Mortgage loans held for investment with unpaid principal balances totaling $7.4 billion and
$6.0 billion were pledged to secure an unused borrowing facility with the Federal Reserve Bank ("FRB") at
St
Mortgage loans held for investment with unpaid principal balances totaling $0.5 billion were pledged
w.
25
ww
m
(Unaudited)
Defaulted FHA-insured and VA-guaranteed loans repurchased from securities totaling $1.3 billion
co
were pledged to secure securities sold under agreements to repurchase at December 31, 2007. No amounts
were pledged at June 30, 2008.
Mortgage loans with unpaid principal balances totaling $1.9 billion were pledged to secure a revolving
d.
line of credit at December 31, 2007. No amounts were pledged at June 30, 2008.
au
Mortgage loans held in special purpose entities ("SPEs") with carrying values totaling $3.4 billion and
$5.6 billion were pledged to secure asset-backed secured financings at June 30, 2008 and December 31,
2007, respectively. These amounts included $0.2 billion and $0.3 billion of real estate acquired in
settlement of loans as of June 30, 2008 and December 31, 2007, respectively. These assets were re-
recognized on the Company's consolidated balance sheets at their estimated fair value after management
Fr
concluded that certain securities collateralized by these loans it had reacquired as part of its market-making
activities would be held for an other-than-temporary period. The carrying value of the mortgage loans held
in SPEs includes fair value discounts of $862.1 million and $960.7 million at June 30, 2008 and
re
December 31, 2007, respectively.
As of both June 30, 2008 and December 31, 2007, the Company had accepted mortgage loan collateral
su
securing warehouse lending advances of $1.0 billion, that it had the contractual ability to re-pledge.
The Company modified loans for borrowers who would not be able to obtain refinancing from other
lenders under the modified terms. Other loans were modified to retain borrowers with good payment
clo
history but the modifications were considered to represent credit concessions. These transactions were
classified as troubled debt restructurings. The majority of these transactions involved modifications of
current loans from payment option adjustable-rate mortgage ("ARM") loans to payment advantage ARM
loans with interest rates that are fixed for five years. Because these modifications were made at terms not
comparable to market terms that would be offered if the modified loans were fully underwritten, the
re
Troubled debt restructurings at June 30, 2008 and December 31, 2007 totaled $1.2 billion and
Fo
$282.6 million, respectively, the majority of which were the conversions of current payment-option ARM
loans to payment-advantage ARM loans. Of the troubled debt restructurings, $1.1 billion and $6.3 million
were on accrual status as of June 30, 2008 and December 31, 2007, respectively. An impairment allowance
of $117.2 million and $11.0 million relating to these loans is included in the allowance for loan losses as of
June 30, 2008 and December 31, 2007, respectively. Management considered $28.8 million and
op
$37.3 million of warehouse lending loans to be impaired as of June 30, 2008 and December 31, 2007,
respectively. The average investment in impaired loans, consisting of troubled debt restructurings and
nonperforming warehouse lines of credit, during the six months ended June 30, 2008 was $784.9 million
and none during the six months ended June 30, 2007.
St
26
w.
(Unaudited)
Changes in the allowance for loan losses, the composition of the provision for loan losses and the
allowance for loan losses were as follows:
m
Three Months Ended Six Months Ended
co
June 30, June 30,
2008 2007 2008 2007
(in thousands)
Balance, beginning of period $ 3,351,304 $ 464,131 $ 2,399,491 $ 326,817
d.
Provision for loan losses before estimated pool
mortgage insurance recoveries 2,614,321 368,811 4,172,399 544,774
Charge-offs (942,020 ) (157,447 ) (1,571,623 ) (198,516 )
au
Recoveries 12,046 3,060 35,384 5,480
Balance, end of period $ 5,035,651 $ 678,555 $ 5,035,651 $ 678,555
Fr
re
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
su (in thousands)
Provision for loan losses before estimated pool
mortgage insurance recoveries $ 2,614,321 $ 368,811 $ 4,172,399 $ 544,774
Change in estimate of amounts recoverable from
pool mortgage insurance (283,396 ) (75,887 ) (340,122 ) (99,888 )
clo
Provision for loan losses $ 2,330,925 $ 292,924 $ 3,832,277 $ 444,886
re
June 30,
Fo
2008 2007
(in thousands)
Allowance for loan losses $ 5,035,651 $ 678,555
Estimated amount recoverable from pool mortgage insurance (895,925 ) (165,651 )
op
Allowance for loan losses, net of estimated pool mortgage insurance $ 4,139,726 $ 512,904
The Company has recorded a liability for losses on unfunded loan commitments in accounts payable
and accrued liabilities totaling $63.7 million and $38.4 million at June 30, 2008 and December 31, 2007,
St
respectively. The provision for these losses is recorded in other expenses. The following is a summary of
changes in the liability:
w.
(in thousands)
Balance, beginning of period $ 65,835 $ 13,759 $ 38,384 $ 8,104
Provision for losses on unfunded loan commitments (2,181 ) 4,463 25,270 10,118
Balance, end of period $ 63,654 $ 18,222 $ 63,654 $ 18,222
m
27
co
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
d.
(Unaudited)
au
Note 11—Investments in Other Financial Instruments, at Estimated Fair Value
Fr
June 30, December 31,
2008 2007
re
(in thousands)
Securities accounted for as available-for-sale:
change:
m
Prime interest-only and principal-only securities 730,759 745,160
co
Total interests retained in securitization—non credit-sensitive 952,617 1,375,491
d.
Mortgage-backed pass-through securities 22,907 34,424
au
Subprime retained interests 54,518 263,278
Fr
Servicing Hedge principal-only securities — 908,358
re
Total securities accounted for as trading 1,561,465 2,995,336
period of change
su
Total financial instruments with changes in unrealized gains and losses recognized in earnings in the
2,896,955 5,266,742
28
re
Fo
(Unaudited)
Credit Rating
Not
Total(1) AAA AA A <A Rated(2)
(in thousands)
Securities accounted for as available-for-sale:
ww
m
Municipal bonds 167,707 55,775 95,059 16,873 — —
co
Investment securities 15,567,900 15,359,968 158,083 38,721 11,128 —
d.
Mortgage-backed pass-through securities 34,616 22,511 12,105 — — —
au
Total interests retained in securitization—non credit-
sensitive 269,155 224,867 12,105 — — 32,183
Fr
Mortgage-backed pass-through securities 176 — — — 176 —
re
Subprime retained interests 27,382 4,548 — — — 22,834
Total interests retained in securitization—credit-
sensitive 113,987
su 4,548 — — 176 109,263
Total securities accounted for as available-for-sale $ 15,951,042 $ 15,589,383 $ 170,188 $ 38,721 $ 11,304 $ 141,446
Financial instruments with changes in unrealized gains and
losses recognized in earnings in the period of change:
clo
Securities accounted for as trading:
Total securities accounted for as trading 1,561,465 962,153 216,832 127,283 55,785 199,412
Total investments in other financial instruments $ 17,512,507 $ 16,551,536 $ 387,020 $ 166,004 $ 67,089 $ 340,858
ww
(1)
Hedging and mortgage pipeline derivative financial instruments are not included in this table as derivatives are contracts between
Countrywide and a counterparty and are not rated by the rating agencies. Countrywide manages its derivatives counterparty risk by
entering into derivatives only with creditworthy counterparties and limiting its exposure to individual counterparties.
(2)
These securities are generally not rated due to their illiquidity and the absence of significant trading activity.
m
29
co
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
d.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
au
(Unaudited)
At June 30, 2008, the Company had pledged $0.8 billion of investments in other financial instruments
to secure securities sold under agreements to repurchase, which the counterparty had the contractual right
to re-pledge. At June 30, 2008, the Company had pledged $0.05 billion of MBS to secure its derivative
Fr
instrument liabilities and $0.03 billion of MBS to secure a borrowing facility with the FRB.
At December 31, 2007, the Company had pledged $0.08 billion of MBS to secure securities sold under
re
agreements to repurchase, which the counterparty had the contractual right to re-pledge. At December 31,
2007, the Company had also pledged $0.01 billion of MBS to secure margin calls on derivative instruments
and $1.6 billion of MBS to secure a borrowing facility with the FRB. su
At June 30, 2008 and December 31, 2007, the Company had pledged $12.4 billion and $13.4 billion of
MBS to enable future borrowings with the FHLB.
clo
Amortized cost and fair value of available-for-sale securities were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(in thousands)
Fo
m
Prime agency mortgage-backed securities 2,942,460 18,628 (16,878 ) 2,944,210
Subprime mortgage-backed securities 35 — — 35
Obligations of U.S. Government-sponsored
co
enterprises 249,826 5,379 — 255,205
Municipal bonds 415,420 4,678 (558 ) 419,540
U.S. Treasury securities 89,142 3,760 (2 ) 92,900
d.
Interests retained in securitization 392,966 63,690 (20,552 ) 436,104
Corporate bonds 72,519 2,127 (3 ) 74,643
$ 20,896,425 $ 108,409 $ (453,917 ) $ 20,550,917
au
30
Fr
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
re
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
su
(Unaudited)
mortgage-backed
securities $ 7,031,496 $ (917,859 ) $ 5,195,697 $ (861,390 ) $ 12,227,193 $ (1,779,249 )
Prime agency mortgage-
backed securities 447,927 (5,987 ) 491,375 (8,470 ) 939,302 (14,457 )
op
Subprime mortgage-
backed securities 633 (4 ) 153 (12 ) 786 (16 )
Municipal bonds — — 53,366 (358 ) 53,366 (358 )
U.S. Treasury securities 3,483 (28 ) — — 3,483 (28 )
St
Interests retained in
securitization 46,095 (15,876 ) 111,306 (38,546 ) 157,401 (54,422 )
Corporate Bonds 34,426 (1,156 ) 50 — 34,476 (1,156 )
w.
m
Fair Value Loss Fair Value Loss Fair Value Loss
(in thousands)
Prime non-agency
mortgage-backed
co
securities $ 10,000,860 $ (262,031 ) $ 3,210,776 $ (153,893 ) $ 13,211,636 $ (415,924 )
Prime agency mortgage-
backed securities 196,561 (842 ) 833,354 (16,036 ) 1,029,915 (16,878 )
Municipal bonds 11,144 (63 ) 99,658 (495 ) 110,802 (558 )
d.
U.S. Treasury securities — — 7,498 (2 ) 7,498 (2 )
Interests retained in
au
securitization 14,720 (887 ) 114,343 (19,665 ) 129,063 (20,552 )
Corporate Bonds 305 (3 ) 50 — 355 (3 )
$ 10,223,590 $ (263,826 ) $ 4,265,679 $ (190,091 ) $ 14,489,269 $ (453,917 )
Fr
The Company's Asset/Liability Committee ("ALCO") assesses securities classified as available-for-
sale for other-than-temporary impairment on a quarterly basis. This assessment evaluates whether the
Company intends to and is able to recover the amortized cost of the securities when taking into account the
re
Company's present investment objectives and liquidity requirements and whether the creditworthiness of
the issuer calls the realization of contractual cash flows into question.
su
During the six months ended June 30, 2008, ALCO determined that it was no longer reasonably
assured that the decline in value would be recovered during the holding period of certain prime non-agency
mortgage-backed securities. Such securities had a carrying value of $1.5 billion when this determination
was made. As a result of this determination, unrealized losses recorded in accumulated other
clo
comprehensive income totaling $0.5 billion were transferred to earnings during the six months ended
June 30, 2008. No such losses were recorded during the six months ended June 30, 2007.
31
re
Fo
(Unaudited)
Gross gains and losses realized on the sales of available-for-sale securities (excluding recognition of
other than temporary impairment) were as follows:
St
2008 2007
(in thousands)
Prime agency mortgage-backed securities:
ww
m
Gross realized losses (3,394 ) —
Net (3,304 ) —
co
Municipal bonds:
Gross realized gains — 75
Gross realized losses — (857 )
d.
Net — (782 )
Obligations of U.S. Government-sponsored enterprises:
au
Gross realized gains 1,608 —
Gross realized losses — —
Net 1,608 —
Fr
Interests retained in securitization:
Gross realized gains — 1,615
re
Gross realized losses (1,599 ) (12 )
Net (1,599 ) 1,603
Total gains and losses on available-for-sale securities:
su
Gross realized gains 13,191 1,701
Gross realized losses (7,108 ) (869 )
clo
Net $ 6,083 $ 832
32
re
(Unaudited)
op
m
Total additions 1,737,764 4,340,798
Less sales (1,307,571 ) —
Change in fair value:
co
Due to changes in valuation inputs or assumptions used in valuation
model(1) 435,295 1,231,513
Other changes in fair value(2) (1,421,278 ) (1,657,007 )
d.
Balance at end of period $ 18,402,390 $ 20,087,368
au
(1)
Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to
changes in interest rates.
Fr
(2)
Represents changes due to realization of expected cash flows.
re
America Corporation, on July 2, 2008, the Company sold two entities that hold the partnership interests in
the Company's primary loan servicing subsidiary, Servicing LP, to NBHC. Servicing LP's assets included
$15.3 billion of the Company's MSRs at June 30, 2008.su
33
clo
(Unaudited)
Fo
(in thousands)
Reimbursable servicing advances, net $ 5,216,792 $ 3,981,703
Investments in FRB and FHLB stock 1,993,036 2,172,987
w.
m
Mortgage guaranty insurance tax and loss bonds 188,667 165,066
Securities broker-dealer receivables 87,489 203,206
Restricted cash 75,565 86,078
co
Receivables from sale of securities 12,720 98,021
Other 870,043 1,192,735
$ 12,747,151 $ 12,550,775
d.
The Company had pledged $0.01 billion of receivables from sale of securities to secure securities sold
au
under agreements to repurchase at June 30, 2008 and December 31, 2007.
34
Fr
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
re
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
su
(Unaudited)
Commercial
Premier business banking 502,437 545,118
w.
m
(1)
These accounts represent the portion of the investor custodial accounts administered by
co
Countrywide that have been placed on deposit with Countrywide Bank, FSB ("Countrywide
Bank" or the "Bank").
35
d.
au
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
Fr
(Unaudited)
Substantially all of the time deposits outstanding were interest-bearing. The contractual maturities of
re
those deposits as of June 30, 2008, are shown in the following table:
$ 39,231,025
w.
The Company routinely enters into short-term financing arrangements to sell securities under
ww
m
held for investment, $0.8 billion in investments in other financial instruments and $0.01 billion of other
assets. At June 30, 2008, $3.2 billion of the pledged securities purchased under agreements to resell and
securities borrowed related to amounts offset against securities sold under agreements to repurchase
co
pursuant to master netting agreements.
At December 31, 2007, repurchase agreements were secured by $0.01 billion of mortgage loans held
for sale, $15.4 billion of trading securities, $14.3 billion of securities purchased under agreements to resell
d.
and securities borrowed, $1.3 billion in loans held for investment, $0.1 billion in investments in other
financial instruments and $0.01 billion of other assets. At December 31, 2007, $9.0 billion of the pledged
securities purchased under agreements to resell and securities borrowed related to amounts offset against
au
securities sold under agreements to repurchase pursuant to master netting agreements.
36
Fr
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
re
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
su
(Unaudited)
Medium-term notes:
Floating-rate 8,196,680 10,779,722
St
m
Secured Revolving Lines of Credit
co
The Company formed a special purpose entity (Park Monaco) to finance inventory with funding
provided by a group of bank-sponsored conduits that were financed through the issuance of asset-backed
commercial paper. The entity incurred interest based on prevailing money market rates approximating the
cost of asset-backed commercial paper. On May 2, 2008, the Company repaid the outstanding balance, and
d.
on May 9, 2008, the Company terminated the facility.
For the six months ended June 30, 2008, the average borrowings under this facility totaled $0.5 billion
au
and the weighted-average interest rate was 4.43%. For the six months ended June 30, 2007, the average
borrowings under this facility totaled $0.7 billion and the weighted-average interest rate was 5.34%. At
June 30, 2007, the weighted-average interest rate was 5.35%.
Fr
During 2007, the Company had a $4.0 billion master trust facility to finance Countrywide Warehouse
Lending ("CWL") receivables backed by mortgage loans through the sale of such receivables to a multi-
asset conduit finance company financed by issuing extendable maturity asset-backed commercial paper. At
June 30, 2007, the Company had pledged $1.1 billion in loans held for investment to secure this facility.
re
For the six months ended June 30, 2007, the average borrowings under this facility totaled $1.1 billion and
the weighted-average interest rate was 5.38%. At June 30, 2007, the weighted-average interest rate was
5.39%. This facility was terminated during 2007. su
Unsecured Revolving Lines of Credit and Unsecured Bank Loans
clo
As of June 30, 2008, the Company had unsecured credit agreements (revolving credit facilities) with a
group of commercial banks permitting the Company to borrow an aggregate maximum total
37
re
(Unaudited)
op
St
amount of $11.5 billion. In August 2007, the Company borrowed $11.5 billion from these revolving credit
facilities, of which $3.4 billion was converted to unsecured term bank loans with maturities through May
2009.
w.
For the six months ended June 30, 2008, the average outstanding borrowings under the remaining
revolving credit facilities totaled $10.0 billion and the weighted-average interest rate was 3.26%. At
June 30, 2008, the weighted-average interest rate was 3.22%. No amount was outstanding under this
facility at June 30, 2007. For the six months ended June 30, 2008, the average outstanding borrowings
ww
under the unsecured bank loan totaled $1.5 billion and the average interest rate was 3.63%. At June 30,
2008, the weighted average interest rate was 3.42%. On July 1, 2008, all amounts owing under these
facilities were repaid and the facilities were terminated.
Backup Credit Facilities
m
As of June 30, 2008, the Company had pledged $7.4 billion and $0.03 billion of mortgage loans held
for investment and MBS, respectively, to secure an unused borrowing facility with the FRB.
co
Federal Home Loan Bank Advances
During the six months ended June 30, 2008, the Company obtained $0.5 billion of fixed-rate advances
from the FHLB, and repaid $4.5 billion of advances of which, $2.4 billion was fixed-rate. At June 30, 2008,
d.
the Company had pledged $58.8 billion and $12.4 billion respectively, of mortgage loans and investments
in other financial instruments to secure its outstanding FHLB advances and enable future advances.
au
At December 31, 2007, the Company had pledged $62.6 billion and $13.4 billion, respectively, of
mortgage loans and investments in other financial instruments to secure its outstanding FHLB advances
and enable future advances.
Fr
Medium-Term Notes
During the six months ended June 30, 2008, the Company did not issue any medium-term notes and
re
redeemed $4.1 billion of maturing medium-term notes.
As of June 30, 2008, $4.0 billion of foreign currency-denominated medium-term notes were
su
outstanding. Such notes are denominated in Swiss Francs, Pounds Sterling, Canadian Dollars, Australian
Dollars and Euros. These notes have been effectively converted to U.S. dollar-denominated debt through
currency swaps.
clo
Asset-Backed Secured Financings
The Company records certain mortgage loan securitization transactions as secured borrowings when
they do not meet the accounting requirements for sale recognition. The securitization transactions
re
accounted for as secured borrowings totaled $1.2 billion and $3.8 billion at June 30, 2008 and
December 31, 2007, respectively. At June 30, 2008 and December 31, 2007, the Company had pledged
mortgage loans held for sale with unpaid principal balances totaling $2.1 billion and $4.4 billion,
respectively, to secure these borrowings.
Fo
In its market-making and trading activities, CSC would reacquire securities with embedded derivatives
created in Countrywide loan sales activities. After reacquiring certain of those securities during 2007, the
market for non-agency MBS was disrupted. Management subsequently concluded that certain securities it
op
reacquired beginning in 2007 were no longer readily salable. When the Company
38
St
(Unaudited)
holds beneficial interests in its securitizations that include embedded derivatives for other-than market
making purposes, the applicable accounting standards require that the transactions be re-characterized as
m
financing transactions. As a result, liabilities of $3.4 billion and $5.6 billion and related Mortgage Loans
Held in SPEs in loans held for investment were included on the Company's balance sheet at June 30, 2008
and December 31, 2007, respectively.
co
Junior Subordinated Debentures
As more fully discussed in Note 15—Notes Payable included in the consolidated financial statements
d.
of the 2007 Annual Report, the Company has issued junior subordinated debentures to non-consolidated
subsidiary trusts. The trusts finance their holdings of the junior subordinated debentures by issuing
Company-guaranteed capital securities.
au
The Company guarantees the indebtedness of CHL to one of its subsidiary trusts, Countrywide Capital
III, which is excluded from the Company's consolidated financial statements. Following is summarized
information for that trust:
Fr
June 30, December 31,
re
2008 2007
(in thousands)
Balance Sheets:
Junior subordinated debentures receivable
Other assets
su $ 205,377
692
$ 205,356
692
Total assets $ 206,069 $ 206,048
clo
(in thousands)
Statements of Operations:
Revenues $ 8,321 $ 8,321
Expenses (8,321 ) (8,321 )
w.
39
m
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
co
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
d.
Maturities of Notes Payable
au
Principal, Premiums and Discounts
Unsecured
Fr
Revolving
Lines of
Credit and All Other Basis
Bank Loan(1) Notes Payable Adjustment Total
re
(in thousands)
Quarter ending:
September 30, 2008 $ su— $ 1,198,970 $ 62,889 $ 1,261,859
December 31, 2008 660,000 2,971,786 447,696 4,079,482
March 31, 2009 — 1,807,234 43,002 1,850,236
June 30, 2009 2,700,000 1,823,426 40,582 4,564,008
clo
Total twelve months ending June 30, 2009 3,360,000 7,801,416 594,169 11,755,585
Twelve months ending June 30,
2010 — 13,191,063 4,776 13,195,839
2011 6,580,000 18,478,647 348,947 25,407,594
re
(1)
On July 1, 2008, the Company terminated these credit facilities and repaid all the outstanding
borrowings plus accrued interest and fees.
St
Countrywide Bank is regulated by the Office of Thrift Supervision ("OTS") and is therefore subject to
w.
OTS capital requirements. At June 30, 2008, the Bank's regulatory capital ratios and amounts and minimum
required capital ratios for the Bank to maintain a "well capitalized" status are as follows based both on its
actual balances and proforma balances giving effect to the $5.5 billion capital contribution made by the
Company on July 2, 2008:
ww
Actual Proforma(2)
Minimum
Required(1) Ratio Amount Ratio Amount
m
(dollar amounts in thousands)
Tier 1 Capital 5.0 % 6.9 % $ 8,071,716 11.1 % $ 13,601,716
Risk-Based Capital:
co
Tier 1 6.0 % 11.1 % $ 8,071,716 18.7 % $ 13,601,716
Total 10.0 % 12.4 % $ 9,016,959 20.0 % $ 14,545,788
d.
(1)
Minimum required to qualify as "well capitalized."
au
(2)
The proforma capital ratios reflect the cash contributed to the Bank. These ratios will decrease as
we reinvest the proceeds of the capital contribution into interest earning assets with higher risk
weightings.
Fr
40
re
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
su
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
clo
The Bank is required by OTS regulations to maintain tangible capital of at least 1.5% of assets.
However, the Bank is also required to maintain a tangible equity ratio of at least 2% to avoid being
classified as "critically undercapitalized." Critically undercapitalized institutions are subject to the prompt
corrective action provisions of the Financial Institution Reform Recovery and Enforcement Act of 1989.
re
The Bank's tangible capital ratio was 6.9% and 8.0% at June 30, 2008 and December 31, 2007,
respectively.
Fo
The OTS has prescribed that the Company and its affiliates are not authorized to receive, and the Bank
is not authorized to pay the Company or its affiliates, capital distributions without receipt of prior written
OTS non-objection.
op
The Company is also subject to U.S. Department of Housing and Urban Development, Fannie Mae,
Freddie Mac and Government National Mortgage Association ("Ginnie Mae") net worth requirements.
Management believes the Company is in compliance with those requirements.
St
June 30,
2008 2007
(in thousands)
Cash used to pay interest $ 3,939,669 $ 5,356,090
Cash (refunded) used to pay income taxes (704,031 ) 13,796
Non-cash investing activities:
m
Transfer of loans from mortgage loans held for sale at lower of cost or
estimated fair value to loans held for investment (1,625,542 ) (1,636,114 )
Transfer of loans held for investment to mortgage loans held for sale 2,406,307 —
co
Transfer of real estate acquired in settlement of loans from loans receivable
to other assets 865,234 407,302
Servicing resulting from transfers of financial assets 1,730,344 4,156,287
d.
Retention of other financial instruments classified as available-for-sale in
securitization transactions 15,852 1,829
Unrealized loss on available-for-sale securities, foreign currency translation
au
adjustments, cash flow hedges and change in unfunded liability relating
to defined benefit plans, net of tax (865,677 ) (118,672 )
Remeasurement of financial assets and liabilities upon adoption of
SFAS 159 34,249 —
Fr
Remeasurement of income taxes payable upon adoption of FIN 48 — (12,719 )
Decrease in Mortgage Loans Held in SPEs 2,189,191 —
Non-cash financing activities:
re
Decrease in asset-backed secured financings (4,728,777 ) —
41
su
clo
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
(Unaudited)
Fo
Interest income:
Loans $ 1,766,287 $ 2,150,060 $ 3,728,520 $ 4,270,105
Trading securities 142,203 341,932 356,067 660,884
w.
m
Securities sold under agreements to repurchase 208,975 911,104 519,774 1,801,771
Trading securities sold, not yet purchased 19,463 60,375 52,253 122,504
Notes payable 933,575 1,116,212 1,977,786 2,173,445
co
Other 83,751 139,927 182,262 251,104
Total interest expense 1,806,595 2,771,648 3,881,834 5,392,693
Total net interest income $ 655,951 $ 727,996 $ 1,387,271 $ 1,458,933
d.
au
Note 20—Restructuring Charges
During the third quarter of 2007, the Company initiated a program to reduce costs and improve
operating efficiencies in response to lower mortgage market origination volumes and other market
Fr
conditions. As part of this plan, the Company expected to incur lease and other contract termination costs.
Management recorded restructuring charges totaling $144.6 million in 2007 and recorded an additional
$16.1 million in the first six months of 2008. Specific actions taken in 2007 included reducing the
workforce by approximately 11,000 and the closure of 259 branches. These reductions occurred in most
re
geographic locations and levels of the organization. The restructuring charges were recorded in the "Other"
segment. During the first six months of 2008, the specific actions included reducing the workforce by
approximately 1,500. su
42
clo
(Unaudited)
Fo
The following table summarizes the restructuring liability balance, recorded in accounts payable and
accrued liabilities at June 30, 2008, and related activity during the six months ended June 30, 2008:
op
(in thousands)
Severance and benefits $ 2,959 $ 3,264 $ — $ (6,223 ) $ — $ —
Lease termination costs 45,399 10,581 — (24,634 ) (5,884 ) 25,462
Other costs — 2,228 — — (2,228 ) —
w.
m
employees hired after December 31, 2005, the Company makes supplemental contributions to employee
401(k) Plan accounts.
co
Net periodic benefit cost for the Pension Plan during the three and six months ended June 30, 2008
and 2007, includes the following components:
d.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
au
(in thousands)
Service cost $ 17,404 $ 19,400 $ 34,808 $ 41,479
Interest cost 7,158 6,355 14,316 12,337
Expected return on plan assets (5,950 ) (5,483 ) (11,900 ) (10,974 )
Fr
Amortization of prior service cost 87 87 174 174
Recognized net actuarial loss — 217 — 217
Net periodic benefit cost $ 18,699 $ 20,576 $ 37,398 $ 43,233
re
Note 22—Segments and Related Information
su
The Company has five business segments: Mortgage Banking, Banking, Capital Markets, Insurance
and Global Operations.
clo
The Mortgage Banking Segment is comprised of three sectors: Loan Production, Loan Servicing and
Loan Closing Services.
The Loan Production Sector originates prime and subprime loans for sale or securitization through a
re
variety of channels on a national scale. Historically, mortgage banking loan production has occurred in
CHL. Over the past several years, the Company has been transitioning this production to its bank
subsidiary, Countrywide Bank. Effective January 1, 2008, the Company's production channels have moved
Fo
into the Bank, completing the migration of substantially all of Countrywide's loan production activities
from CHL to the Bank. During the six months ended June 30, 2008, over 97% of Countrywide's mortgage
loan production occurred in Countrywide Bank. The mortgage loan production, the related balance sheet
and the income relating to the holding and sale of these loans is
op
43
St
(Unaudited)
ww
included in the Mortgage Banking Segment regardless of whether the activity occurred in CHL or the
Bank.
m
The Loan Production Sector is comprised of three lending channels:
co
•
Retail Channel sources mortgage loans primarily from consumers through the Company's retail
branch network and call centers, as well as through real estate agents and homebuilders
d.
•
Wholesale Lending Channel sources mortgage loans primarily from mortgage brokers
au
•
Correspondent Lending Channel purchases mortgage loans from other mortgage lenders, including
financial institutions, commercial banks, savings and loan associations, home builders and credit
unions.
Fr
The Loan Servicing Sector includes investments in MSRs, retained interests including senior and
mezzanine mortgage-backed securities which remain unsold from prior securitizations, the Mortgage
re
Banking investment loan portfolio as well as the Company's loan servicing operations and subservicing for
other domestic financial institutions. Subsequent to sale, adjustments to the liability for representations and
warranties are included in this sector. The Loan Closing Services Sector is comprised of the LandSafe
companies, which provide credit reports, appraisals, title reports and flood determinations to the Company's
su
Loan Production Sector, as well as to third parties.
The Banking Segment includes Banking Operations—primarily the investment and fee-based
activities of Countrywide Bank—together with the activities of Countrywide Warehouse Lending and
clo
certain loans held for investment and owned by Countrywide Home Loans. Banking Operations invests in
mortgage loans sourced from the Loan Production Sector and mortgage loans and MBS purchased from
non-affiliated entities. Countrywide Warehouse Lending provides third-party mortgage lenders with
temporary financing secured by mortgage loans.
re
The Capital Markets Segment includes the operations of CSC, a registered broker-dealer specializing
in the mortgage securities market. It also includes the operations of Countrywide Asset Management
Corporation, Countrywide Commercial Real Estate Finance Inc., Countrywide Servicing Exchange,
Fo
Countrywide Alternative Investments Inc., CSC Futures Inc., Countrywide Capital Markets Asia (H.K.)
Limited, CAA Management Inc., Countrywide Sunfish Management LLC and Countrywide Derivative
Products, Inc.
op
The Insurance Segment includes Balboa Insurance Group, a national provider of property, casualty,
life, disability and credit insurance; Balboa Reinsurance Company, a primary mortgage reinsurance
company; and Countrywide Insurance Services, a national insurance agency offering a specialized menu of
insurance products directly to consumers.
St
The Global Operations Segment includes Countrywide International Technology Holdings Limited, a
licensor of loan origination processing, servicing and residential real estate value assessment technology;
w.
CFC India Private Limited, a provider of call center, data processing and information technology related
services; and CFC International (Processing Services), Limited, located in Costa Rica, a provider of call
center and data processing services.
ww
Segment selection was based upon internal organizational structures, and the process by which these
operations are managed and evaluated, including how resources are allocated to the operations. Certain
amounts reflected in the prior period have been adjusted to conform to the current period presentation.
Intersegment transactions are generally recorded on an arms-length basis. However, prior to October
2007, the fulfillment fees paid by Banking Operations to the Production Sector for origination costs
m
incurred on mortgage loans funded by Banking Operations were generally determined on an incremental
cost basis, which may be less than the fees that Banking Operations would pay to a third party.
co
44
d.
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
au
(Unaudited)
Fr
Three Months Ended June 30, 2008
Mortgage Banking
Loan Loan Closing Capital Global Total
re
Production Servicing Services Total Banking Markets Insurance Operations Other Consolidated
(in thousands)
Revenues:
External $ 765,710 $ (1,115,865 ) $ 98,888 $ (251,267 ) $ (1,827,393 ) $
su (87,699 ) $ 534,364 $ 12,041 $ (2,884 ) $ (1,622,838 )
Intersegment (3,078 ) 84,692 (480 ) 81,134 (57,108 ) (295 ) (1,812 ) 30,099 (52,018 ) —
Total $ 762,632 $ (1,031,173 ) $ 98,408 $ (170,133 ) $ (1,884,501 ) $ (87,994 ) $ 532,552 $ 42,140 $ (54,902 ) $ (1,622,838 )
Revenues
clo
Pre-tax $ (135,175 ) $ (1,406,754 ) $ 33,115 $ (1,508,814 ) $ (2,145,667 ) $ (170,034 ) $ 12,042 $ 11,723 $ (15,086 ) $ (3,815,836 )
Earnings
(Loss)
Total Assets $ 14,203,239 $ 39,731,833 $ 412,477 $ 54,347,549 $ 107,451,467 $ 5,878,284 $ 4,298,360 $ 259,240 $ (158,406 ) $ 172,076,494
at Period
re
End
Fo
Intersegment 14,366 260,886 (138 ) 275,114 (202,969 ) 21,013 (1,925 ) 21,733 (112,966 ) —
Total $ 1,513,697 $ 40,701 $ 89,259 $ 1,643,657 $ 287,771 $ 244,757 $ 388,817 $ 28,898 $ (45,503 ) $ 2,548,397
Revenues
w.
Pre-tax $ 492,139 $ (200,798 ) $ 28,261 $ 319,602 $ 128,910 $ 109,510 $ 98,721 $ 6,688 $ 1,267 $ 664,698
Earnings
(Loss)
Total Assets $ 32,873,872 $ 33,492,428 $ 333,244 $ 66,699,544 $ 93,464,293 $ 57,457,168 $ 3,342,309 $ 247,572 $ (5,626,980 ) $ 215,583,906
ww
at Period
End
Included in the columns above labeled "Other" are the holding company activities including
restructuring charges of $1.5 million during the three months ended June 30, 2008 and certain
m
reclassifications to conform management reporting to the consolidated financial statements.
45
co
d.
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
au
Six Months Ended June 30, 2008
Mortgage Banking
Fr
Loan Loan Closing Capital Global Total
Production Servicing Services Total Banking Markets Insurance Operations Other Consolidated
(in thousands)
Revenues:
re
External $ 1,879,048 $ (1,709,013 ) $ 196,115 $ 366,150 $ (2,393,666 ) $ (5,786 ) $ 1,091,226 $ 24,467 $ (26,355 ) $ (943,964 )
Intersegment (12,098 ) 197,914 (1,014 ) 184,802 (141,166 ) (763 ) (3,927 ) 59,014 (97,960 ) —
Mortgage Banking
Loan Loan Closing Capital Global Total
Production Servicing Services Total Banking Markets Insurance Operations Other Consolidated
(in thousands)
Revenues:
op
External $ 2,660,943 $ (348,728 ) $ 174,873 $ 2,487,088 $ 1,110,188 $ 451,535 $ 761,908 $ 11,043 $ 132,411 $ 4,954,173
Intersegment 16,897 508,385 (138 ) 525,144 (393,156 ) 53,878 (3,375 ) 38,305 (220,796 ) —
Total $ 2,677,840 $ 159,657 $ 174,735 $ 3,012,232 $ 717,032 $ 505,413 $ 758,533 $ 49,348 $ (88,385 ) $ 4,954,173
Revenues
St
Pre-tax $ 662,793 $ (301,104 ) $ 58,217 $ 419,906 $ 417,004 $ 241,718 $ 278,379 $ 10,694 $ (2,208 ) $ 1,365,493
Earnings
(Loss)
w.
Total Assets $ 32,873,872 $ 33,492,428 $ 333,244 $ 66,699,544 $ 93,464,293 $ 57,457,168 $ 3,342,309 $ 247,572 $ (5,626,980 ) $ 215,583,906
at Period
End
ww
Included in the columns above labeled "Other" are the holding company activities including
restructuring charges of $16.1 million during the six months ended June 30, 2008 and certain
reclassifications to conform management reporting to the consolidated financial statements.
46
m
co
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
d.
(Unaudited)
au
Note 23—Summarized Financial Information
Summarized financial information for Countrywide Financial Corporation (parent only) and
subsidiaries is as follows:
Fr
June 30, 2008
re
Countrywide Countrywide
Financial Home
Corporation Loans, Inc. Other
(Parent Only) (Consolidated)
su Subsidiaries Eliminations Consolidated
(in thousands)
Balance Sheets:
Mortgage loans held for sale $ — $ 1,684,003 $ 10,133,395 $ (1,036 ) $ 11,816,362
Trading securities, at
clo
estimated fair value 168,772 143,085 881,144 — 1,193,001
Securities purchased under
agreements to resell,
securities borrowed and
re
financial instruments, at
estimated fair value 507,524 750,819 17,611,785 (22,131 ) 18,847,997
Mortgage servicing rights, at
estimated fair value — 16,371,301 2,031,089 — 18,402,390
op
co
Countrywide Countrywide
Financial Home
Corporation Loans, Inc. Other
(Parent Only) (Consolidated) Subsidiaries Eliminations Consolidated
(in thousands)
d.
Statements of Operations:
Revenues $ (33,457 ) $ (728,500 ) $ 431,550 $ (613,557 ) $ (943,964 )
Expenses 12,542 1,126,118 3,800,794 (575,355 ) 4,364,099
au
Benefit for income taxes (17,663 ) (701,057 ) (1,350,791 ) (15,400 ) (2,084,911 )
Equity in net loss of (3,194,816 ) — — 3,194,816 —
subsidiaries
Fr
Net loss $ (3,223,152 ) $ (1,153,561 ) $ (2,018,453 ) $ 3,172,014 $ (3,223,152 )
47
re
su
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
Investments in other
financial instruments, at
estimated fair value 549,221 2,949,971 22,318,467 — 25,817,659
Mortgage servicing rights, at
ww
m
Deposit liabilities $ — $ — $ 61,184,312 $ (983,713 ) $ 60,200,599
Securities sold under
agreements to repurchase 440,000 2,228,004 19,307,168 (3,757,010 ) 18,218,162
co
Notes payable 19,156,790 31,619,553 48,452,915 (2,001,845 ) 97,227,413
Other liabilities 10,852,769 32,243,730 13,238,393 (38,270,013 ) 18,064,879
Equity 14,655,871 3,578,874 13,379,170 (16,958,044 ) 14,655,871
d.
Total liabilities and equity $ 45,105,430 $ 69,670,161 $ 155,561,958 $ (61,970,625 ) $ 208,366,924
au
Fr
Six Months Ended June 30, 2007
Countrywide
Financial Countrywide
Corporation Home
(Parent Loans, Inc. Other
re
Only) (Consolidated) Subsidiaries Eliminations Consolidated
(in thousands)
Statements of Operations:
Revenues
Expenses 6,795
su
$ (51,127 ) $ 3,068,101
2,541,297
$ 2,530,976
1,608,111
$ (593,777 ) $ 4,954,173
(567,523 ) 3,588,680
(Benefit) provision for income
taxes (19,264 ) 160,514 313,397 (8,203 ) 446,444
clo
Equity in net earnings of
subsidiaries 957,707 — — (957,707 ) —
Net earnings $ 919,049 $ 366,290 $ 609,468 $ (975,758 ) $ 919,049
re
48
Fo
(Unaudited)
St
As of June 30, 2008 and December 31, 2007, the Company managed $16.5 billion and $19.2 billion,
respectively, of borrower and investor custodial cash accounts. These custodial accounts relate to the
Company's mortgage servicing activities. Of these amounts, $11.2 billion and $12.6 billion, respectively,
were deposited at the Bank, and included in the Company's deposit liabilities as custodial deposit accounts.
ww
The remaining balances were deposited with other depository institutions and are not recorded on the
Company's balance sheets.
Note 25—Loan Commitments
m
The following table summarizes the Company's outstanding contractual loan commitments for the
periods indicated:
co
June 30, December 31,
2008 2007
d.
(in thousands)
Commitments to fund mortgage loans $ 18,987,936 $ 23,940,795
Commitments to fund commercial real estate loans — 480,872
au
Undisbursed home equity lines of credit 5,249,554 9,073,370
Undisbursed construction loans 1,058,994 714,896
Undisbursed warehouse lines of credit 936,713 938,089
Fr
Note 26—Legal Proceedings
re
The Company has been named as a defendant in various legal proceedings involving matters generally
incidental to its businesses and also in the following matters.
placements pursuant to a May 16, 2007 offering memorandum. Both actions assert claims under the
antifraud provisions of the federal securities laws. The NY Funds action also asserts claims under the
Securities Act of 1933 relating to the public offering of certain securities. Both complaints allege, among
Fo
other things, that the Company made misstatements (including in certain SEC filings) concerning the nature
and quality of its loan underwriting practices and its financial results during the relevant period. These
actions seek unspecified compensatory damages, among other remedies. Defendants have filed motions to
dismiss these actions.
op
The Company also has been named as one of the defendants in two class action cases concerning the
Company's common stock pending in Los Angeles Superior Court. One case (entitled Layne v.
Countrywide Financial Corp., et al.) was filed ostensibly on behalf of a putative class of participants in the
St
Company's 401(k) retirement plan whose retirement account contributions were voluntarily
49
w.
(Unaudited)
m
matched by the Company in the form of shares of Countrywide common stock. This case alleges
misstatements in a May 11, 2007 registration statement that the Company filed with the SEC in connection
with these shares. The other case (entitled Teratsonian v. Countrywide Financial Corp. et al.) was filed
co
ostensibly on behalf of a putative class of Countrywide employees who received Countrywide common
stock under the Company's 2006 equity incentive plan and alleges misstatements in an August 8, 2006
registration statement filed in connection with these shares. The alleged misstatements concern, among
other things, the nature and quality of the Company's loan underwriting practices and its financial results
d.
during the relevant period. Both cases assert claims under the Securities Act of 1933. The Company intends
to ask the Court to dismiss these matters on various grounds.
au
Mortgage-Backed Securities Related Matters
The Company has been named as one of the defendants in two putative securities class actions filed in
Los Angeles Superior Court relating to the Company's public offering of various mortgage-backed
Fr
securities. One lawsuit (entitled Luther v. Countrywide Home Loans Servicing LP, et al.) is ostensibly
brought on behalf of a class of purchasers of certain mortgage pass-through certificates for which
CWALT, Inc. and various issuing trusts filed registration statements; the other case (entitled Washington
re
State Plumbing & Pipefitting Pension Trust v. Countrywide Financial Corporation, et al.) is ostensibly
brought on behalf of purchasers of such CWALT, Inc. mortgage pass-through certificates, as well as
various other mortgage-backed securities registered by certain other Company subsidiaries. Both lawsuits
allege, among other things, that the mortgage loans underlying these securities were not originated in
su
accordance with the underwriting guidelines and processes described in the prospectus supplements issued
in connection with the sale of such securities. The complaints seek unspecified compensatory damages,
among other relief. In addition, the Company may have indemnification obligations arising from other
mortgage-backed securities transactions to the purchasers of those securities or to other parties.
clo
The Company has been named as a nominal defendant in two shareholder derivative actions in
re
California. These actions are brought ostensibly on the Company's behalf and do not seek to recover any
amounts from the Company. One action (entitled In re Countrywide Financial Corp. Derivative Litigation)
was filed by the Arkansas Teachers Retirement System and certain other state and municipal pension funds
Fo
in the U.S. District Court for the Central District of California (Arkansas); the other action (entitled In re
Countrywide Financial Corp. Shareholder Derivative Litigation) was filed by Robert Garber in Los
Angeles Superior Court. Both complaints allege, among other things, breaches of fiduciary duty by
Company officers and directors, and misstatements in certain SEC filings concerning the Company's loan
underwriting practices, financial condition and prospects. After the announcement of the Bank of
op
America/Countrywide merger, plaintiffs in both actions amended their complaints to include merger-
related class action claims filed ostensibly on behalf of a putative class of all Countrywide shareholders.
The federal court has stayed those merger-related class claims in favor of substantially identical claims
pending in the Delaware Court of Chancery, as discussed below in Merger-Related Class Action Matters,
St
and the Los Angeles Superior Court has stayed the entire action in favor of the substantially identical
claims pending in California federal court and the Delaware Chancery Court. The federal court has granted
in part and denied in part the defendants' motions to dismiss the Arkansas case. Defendants have also
moved for judgment on the pleadings seeking
w.
50
ww
m
(Unaudited)
co
dismissal of the Arkansas matter on the grounds that plaintiffs may no longer pursue derivative claims on
behalf of the Company because they are no longer Countrywide shareholders after the merger with Bank of
d.
America. That motion is pending.
The Company also has been named as a nominal defendant in a consolidated shareholder derivative
au
action in the U.S. District Court for the District of Delaware (entitled In re Countrywide Financial Corp.
Derivative Litigation) that was filed by the International Brotherhood of Electrical Workers. The complaint
alleges that certain Company officers and directors breached their fiduciary duty by causing the Company
to repurchase its stock at allegedly inflated prices in late 2006 and the spring of 2007. Defendants have
Fr
moved to dismiss the case on various grounds, including on the grounds that plaintiffs may no longer
pursue derivative claims on behalf of the Company because they are no longer Countrywide shareholders.
A shareholder derivative action (entitled Seymour v. Samuels, et al.) has been filed ostensibly on
re
behalf of Countrywide Capital V ("CCV"), a Delaware trust, against the Company and certain other
defendants in the Delaware Court of Chancery by an alleged purchaser of CCV preferred trust securities.
The complaint alleges that CCV was harmed when it purchased certain debentures from the Company
su
whose value the complaint claims the Company had artificially inflated. The Company intends to ask the
Court to dismiss this matter on various grounds.
The Company also has been named as one of the defendants in shareholder derivative lawsuits
clo
ostensibly brought on behalf of the Federal Home Loan Mortgage Corp. ("Freddie Mac") (entitled Bassman
v. Syron, et. al.) in the U.S. District Court for the Southern District of New York, and on behalf of the
Federal National Mortgage Association ("Fannie Mae") (entitled Agnes v. Raines, et al.) in the U.S. District
Court for the District of Columbia. These complaints allege, among other things, that the Company sold
loans to these government-sponsored entities that had not been properly appraised and that the Company
re
misrepresented the appraised value of the loans it sold in the secondary mortgage market. The Company
intends to ask the courts in these matters to dismiss them on various grounds.
Fo
Eighteen class action complaints have been filed against the Company and certain other defendants
alleging violations of the Employee Retirement Income Security Act of 1974 ("ERISA") in the U.S.
op
District Court for the Central District of California. The complaints principally contend that it was not
prudent for the Company to permit employees participating in the Countrywide 401(k) retirement plan to
continue to invest in the Company's common stock during a roughly two year period ending in September
2007. The Court has stayed all but the first-filed ERISA class action case (entitled Alvidres v. Countrywide
St
Financial Corp., et al.). The Court has declined to grant defendants' motions to dismiss the complaint in the
Alvidres matter, and has granted plaintiff's motion to certify the case as a class action on behalf of current
participants in the Company 401(k) plan.
w.
The Company has been named as a defendant in a case filed in the Delaware Court of Chancery by the
ww
Bank of New York Mellon in its capacity as indenture trustee with respect to certain Series B floating rate
convertible senior debentures due 2037 having a principal amount of $2 billion and issued by the Company
under an indenture dated as of May 22, 2007 (the "Indenture"). The complaint alleges, among other things,
that the Company's merger with Bank of America constituted a
51
m
co
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
d.
(Unaudited)
au
"Fundamental Change" as defined in the Indenture which allegedly requires the Company to repurchase
such of the debentures as are surrendered for payment in accordance with the terms of the Indenture and
seeks, among other relief, an order requiring the Company to repurchase such debentures.
Fr
Merger-Related Class Action Matters
re
Various class action lawsuits and claims relating to the Company's merger with Bank of America have
been filed against the Company and other defendants in Los Angeles Superior Court, the U.S. District
Court for the Central District of California, and the Delaware Court of Chancery on behalf of a putative
su
class of all Countrywide shareholders. These lawsuits allege, among other things, that the Company's
directors breached their fiduciary duties by entering into the merger agreement with Bank of America. The
merger-related claims in the California courts have been stayed in favor of the Delaware litigation (entitled
In re Countrywide Financial Corp. Shareholder Litigation), which has been settled in principle. The
clo
proposed settlement is subject to court approval.
Regulatory Matters
From time to time the Company is subject to investigations and reviews in the ordinary course of
re
business involving various regulatory agencies, including the SEC and various state attorneys general, and
in connection therewith such regulatory agencies request materials from us pertaining to our business
operations and other matters. It is the Company's policy to fully cooperate with such regulatory
Fo
Certain state and local government officials have filed proceedings against the Company, including
lawsuits brought by the state attorneys general of California, Connecticut, Florida and Illinois in their
op
respective state courts. These lawsuits allege, among other things, that the Company violated state
consumer protection laws by allegedly engaging in deceptive marketing practices designed to increase the
volume of loans it originated and then sold into the secondary market. These lawsuits seek, among other
remedies, monetary penalties and, in the Connecticut and Illinois actions, rescission or repurchase of
mortgage loans made to Connecticut and Illinois consumers and in the Illinois action an injunction against
St
foreclosure proceedings in certain circumstances. The Director of the Washington State Department of
Financial Institutions also has commenced an administrative proceeding against the Company alleging,
among other things, that the Company did not provide borrowers with certain required disclosures and that
w.
the loan products made available to Washington borrowers of protected races or ethnicities were less
favorable than those the Company made available to other, similarly situated borrowers. This proceeding
seeks, among other things, a monetary fine and an order barring the Company from making consumer loans
in the State for five years.
ww
The Company also has responded to subpoenas from the SEC, which has advised the Company that it
is conducting a formal investigation. Beginning in March 2008, certain news media reported that numerous
industry participants, including the Company, were subject to an investigation by the Federal Bureau of
Investigation ("FBI") in connection with mortgage business practices. The Department of Justice ("DOJ")
has stated to the Company that the DOJ cannot confirm or deny whether the FBI is conducting an
m
investigation of the Company.
The Federal Trade Commission has issued Civil Investigative Demands for Documentary Material and
co
for Written Interrogatories and Report ("CIDs"). The CIDs direct the Company to provide various
documents and items of information in connection with an investigation by the agency regarding
52
d.
au
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
Fr
(Unaudited)
re
whether any laws administered by the Commission have been violated in connection with certain aspects of
su
the Company's loan servicing activities. The Company is cooperating with the investigation.
Although management believes it has meritorious defenses to each of these proceedings and intends to
defend them vigorously, it is difficult to predict the resulting outcome of such proceedings, particularly
clo
where investigations and other proceedings are in their early stages. Given the inherent difficulty in
predicting the outcome of legal proceedings, management cannot estimate losses or ranges of losses for
legal proceedings where there is only a reasonable possibility that a loss may be incurred, such as those
discussed above. The Company provides for potential losses that may arise out of legal proceedings to the
extent such losses are deemed probable and can be estimated. Although the ultimate outcome of the
re
Company's legal proceedings discussed above cannot be ascertained at this time, management believes that
any resulting liability will not materially affect its consolidated financial position; such resolution,
however, could be material to its operating results for a particular future period depending upon the
Fo
outcome of the proceedings and the operating results for a particular period. This assessment is based, in
part, on the existence of insurance coverage.
op
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations, ("SFAS 141(R)"). SFAS 141(R) expanded the scope of SFAS 141 to all business
combinations which previously applied only to business combinations for which control was obtained by
St
transferring consideration. Under SFAS 141(R), the acquisition date is the date at which control is
obtained, requiring the acquirer to recognize and measure the fair value of the acquiree as a whole, and the
assets acquired and liabilities assumed at their full fair value as of that date, regardless of the percentage
w.
ownership in the acquiree. The Company has determined that it will adopt SFAS 141(R) on its effective
date of January 1, 2009 and the financial impact, if any, upon adoption is not expected to be significant.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
ww
m
expanded disclosures are required to identify and distinguish between the interests of the parent's owners
and the interests of the noncontrolling owners of a subsidiary. The Company has determined that it will
adopt SFAS 160 on its effective date of January 1, 2009 and the financial impact, if any, upon adoption is
co
not expected to be significant.
In February 2008, the FASB issued FASB Staff Position No. FSP 140-3, Accounting for Transfers of
Financial Assets and Repurchasing Transactions, ("FSP 140-3"). FSP 140-3 addresses accounting for
d.
repurchase agreements related to previously transferred financial assets when the repurchase arrangement is
between the same parties as the original transfer. This FSP presumes that an initial transfer of a financial
asset and a repurchase agreement are considered part of the same arrangement under Statement of Financial
au
Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, ("SFAS 140"). However, if certain criteria are met, the initial transfer and
repurchase financing shall not be evaluated as a linked transaction and instead
Fr
53
re
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
su
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
clo
should be evaluated separately under SFAS 140. This FSP is effective for financial statements issued for
fiscal years beginning after November 15, 2008 and shall be applied prospectively to initial transfers and
re
repurchase financings for which the initial transfer is executed on or after the beginning of the fiscal year
this FSP is initially applied. The Company has not yet determined the financial impact, if any, upon
adoption.
Fo
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an Amendment to FASB Statement No. 133,
("SFAS 161"). SFAS 161 was issued to improve transparency of a company's derivative instruments and
hedging activities by requiring qualitative disclosures about objectives and strategies for using derivatives,
op
quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and
disclosure about credit-risk related features in derivative agreements. This Statement also requires that the
overall objectives for using derivative instruments be disclosed in terms of underlying risk and accounting
designation. SFAS 161 is effective prospectively for financial statements beginning after November 15,
St
2008.
In May 2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt
w.
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), ("FSP
APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by
the issuer fully or partially in cash. Under this FSP, the issuer must segregate the convertible debt
instrument into two components: (1) a debt component, representing the issuer's contractual obligation to
ww
pay principal and interest and (2) an equity component, representing the holder's option to convert the debt
security into equity of the issuer. The proceeds are allocated between the liability and the equity
components. First, the liability component is measured based on the fair value of a similar debt instrument
with no equity conversion feature. Any remaining proceeds are allocated to the equity component and
recorded as a discount on the debt. The debt discount is amortized as additional interest expense using the
interest method over the expected life of the debt. This FSP is effective for financial statements issued
m
beginning after December 15, 2008 and interim periods within that fiscal year. The FSP is to be applied
retrospectively to all prior periods presented. The Company has preliminary determined that approximately
$200 million of the proceeds from its convertible debt issuance in 2007 will be allocated to the equity
co
conversion feature and represent a discount on that debt.
54
d.
au
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As used in this Report, references to "we," "our," "the Company" or "Countrywide" refer to
Countrywide Financial Corporation and its consolidated subsidiaries unless otherwise indicated. This
Fr
discussion includes forward-looking statements which are subject to certain risks and uncertainties as
discussed in the section Factors That May Affect Our Future Results of this Report.
Overview
re
This section gives an overview of critical items that are discussed in more detail throughout
Management's Discussion and Analysis of Financial Condition and Results of Operations.
su
Merger with Bank of America Corporation
On July 1, 2008, Countrywide Financial Corporation completed its merger with Red Oak Merger
clo
Corporation, a wholly-owned subsidiary of Bank of America Corporation, pursuant to the terms of the
previously announced Agreement and Plan of Merger, dated as of January 11, 2008. Red Oak Merger
Corporation has subsequently been renamed Countrywide Financial Corporation. Under the terms of the
Merger agreement, Countrywide shareholders received 0.1822 of a share of Bank of America Corporation
re
common stock in exchange for one share of Countrywide common stock, plus an amount of cash in lieu of
any fractional share. All shares of the Company's 7.25% Series B Non-Voting Convertible Preferred Stock
were cancelled. Trading of the Company's common stock was ceased and the Company's common stock
has been delisted from the New York Stock Exchange. As a result of the Merger, the Company's principal
Fo
executive officer, principal financial officer, other executive officers and the members of the Company's
Board of Directors resigned and were replaced by individuals appointed by Bank of America.
allowed by general instruction H of Form 10-Q. Specifically, we are omitting Part I, Item 3, Quantitative
and Qualitative Disclosures About Market Risk; Part II, Item 2, Changes in Securities (Unregistered Sales
of Equity Securities and Use of Proceeds) and Part II, Item 4, Submission of Matters to a Vote of Security
Holders. We have also abbreviated Management's Discussion and Analysis of Financial Condition and
St
Results of Operations
w.
Following is a summary of our results of operations for the quarters ended June 30, 2008 and 2007:
ww
m
Diluted (loss) earnings per share $ (4.07 ) $ 0.81
Total assets at period end $ 172,076,494 $ 215,583,906
co
The results for the quarter ended June 30, 2008 were primarily due to high credit-related charges
arising from continuing economic weakness and declining values of the real estate securing our mortgage
loans. Such factors continue to be reflected in our current experience and expectations for increased levels
d.
of mortgage delinquencies, defaults and loss severities.
55
au
Fr
Following is a summary of key credit quality and performance indicators at and for the periods
indicated:
re
Quarters Ended June 30,
%
su 2008 2007 Change
(dollar amounts in thousands)
Key Credit Quality & Performance Indicators
Provision for:
clo
Representations and warranties $ 755,058 $ 73,353 929 %
Corporate guarantees 1,921 2,277 (16 %)
Credit losses (1) 2,328,744 297,387 683 %
Impairment of credit-sensitive retained interests 64,351 416,673 (85 %)
re
m
Loss Reserves and Liabilities:
Allowances for credit losses $ 5,099,305 $ 696,777 632 %
co
Liability for representations and warranties 1,536,347 431,823 256 %
Liability for impairment losses related to future draw
obligations 637,493 — N/M
d.
Liability for corporate guarantees 73,988 56,016 32 %
Liability for reinsurance claims 585,811 112,350 421 %
$ 7,932,944 $ 1,296,966 512 %
au
(1)
The provision for credit losses is comprised of:
Fr
re
Quarters Ended
June 30,
2008 2007
su (in thousands)
Provision for loan losses before pool mortgage insurance recoveries $ 2,614,321 $ 368,811
Provision for losses on unfunded commitments (2,181 ) 4,463
Increase in estimate of amounts recoverable from pool mortgage insurance (283,396 ) (75,887 )
clo
$ 2,328,744 $ 297,387
56
re
(2)
Excludes both loans held in SPEs where the beneficial interest holder of the securitized asset
Fo
retains the credit risk relating to the loans and the allowance for loan losses.
(3)
Excludes $3,022.2 million and $1,361.4 million, at June 30, 2008 and 2007, respectively, of loans
op
that we have the option (but not the obligation) to repurchase but have not exercised that option.
These loans are required to be included on our balance sheet. Also excluded are nonaccrual loans
held for sale that are carried on the consolidated balance sheet at the lower of cost or estimated fair
value and government guaranteed loans held for investment, as follows:
St
w.
June 30,
2008 2007
(in thousands)
Loans held for sale $ 288,532 $ 279,824
ww
m
such carrying value were estimated to be approximately $8.1 billion.
co
During the second half of 2007, our access to capital was severely challenged when the non-agency
segments of the secondary mortgage market and the commercial paper, medium-term note and repurchase
agreement segments of the public corporate debt markets were severely restricted by illiquidity, particularly
d.
for mortgage companies and other financial institutions. These conditions have not abated through the date
of this Report.
au
In response to the disruption in the second half of 2007, we:
•
Modified our funding structure to that of a thrift holding company, which has access to stable,
Fr
non-capital markets based funding, by accelerating the integration of our mortgage banking
activities into our bank subsidiary
re
•
Significantly changed our underwriting standards to focus the majority of our loan production on
loans that are available for direct sale or securitization into programs sponsored by the
government-sponsored agencies su
•
Entered into an agreement and plan of merger with Bank of America on January 11, 2008 and
completed the merger on July 1, 2008.
clo
After being acquired, we sold certain assets to Bank of America for approximately $30.7 billion in
demand notes and cash. We used proceeds from the asset sales to repay our unsecured revolving lines of
credit and bank loans for approximately $11.5 billion and to increase the capital of our Bank subsidiary by
re
$5.5 billion.
On July 1, 2008, Standard and Poor's Ratings Service (S&P) upgraded its credit rating of CFC and
Fo
CHL from BB+ to AA, an investment grade rating. S&P also upgraded its credit rating of the Bank from
BBB to AA+. The Rating Outlook for all three entities was changed from Credit Watch Developing to
Negative.
op
The accounting policies with the greatest impact on our financial condition and results of operations
that require the most judgment, and which are most likely to result in materially different amounts being
St
57
w.
measurement of provisions and reserves associated with credit risk inherent in our operations; our mortgage
ww
loan sale and securitization activities, including valuation of loans pending sale; our investments in MSRs
and retained interests and our use of derivatives to manage interest rate risk, including the valuation of
interest rate lock commitments. A discussion of the critical accounting policies related to these activities is
included in our 2007 Annual Report.
Effective January 1, 2008, we adopted SEC Staff Accounting Bulletin No. 109 ("SAB 109"). SAB 109
supersedes Staff Accounting Bulletin No. 105 ("SAB 105"), Application of Accounting Principles to Loan
m
Commitments. SAB 109 changed the requirements of SAB 105 to require that the expected net future cash
flows related to the servicing of a loan should be included in the measurement of all written loan
commitments that are accounted for at fair value through earnings. The guidance is effective on a
co
prospective basis to derivative loan commitments issued or modified after December 31, 2007. The effect
of this guidance on Countrywide is for us to recognize higher estimated fair values of our interest rate lock
commitments when the commitments are made, effectively changing the timing of revenue recognition to
the time a derivative loan commitment is issued. Before adoption of SAB 109, revenue was recognized
d.
upon transfer of the loans in transactions that met the accounting requirements for sale accounting. The
effect of adoption of SAB 109 was to increase gain on sale of loans and securities by $216.0 million for the
six months ended June 30, 2008. This amount represents the revenue recognized at the time the loan
au
commitment was issued that is included in the value of our interest rate lock commitments or Mortgage
Loan Inventory at June 30, 2008.
For loan commitments issued after December 31, 2007, the Company estimates the fair value of an
Fr
IRLC based on the estimated fair value of the underlying mortgage loan less the commitment price adjusted
for the probability that the mortgage loan will fund within the terms of the IRLC. The Company generally
estimates the fair value of the underlying loan based on quoted market prices for securities backed by
similar types of loans together with estimated servicing value adjusted for the estimated costs and profit
re
margin associated with securitization. The estimated probability of mortgage loan funding is based on the
Company's historical experience and is adjusted to reflect the risk of variability in such probability using an
option pricing model. If quoted market prices for relevant securities are not available, fair value is
su
estimated based on other relevant factors, including dealer price quotations, prices available for similar
securities, and valuation models intended to approximate the amounts that would be received from a third
party.
clo
As detailed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies of our 2007 Annual Report, many of our key accounting policies
rely on estimates of value. The estimates for those items identified in that section of the 2007 Annual
Report all fall in Level 3 of the fair value hierarchy. Accordingly, many of our estimates of the fair value
amounts included in our financial statements depend on significant assumptions that are difficult to observe
re
Changes in significant assumptions underlying our estimates can have a significant effect on the
Fo
values we have recorded. Following is an illustration of the effect of a change in key assumptions—
58
op
where applicable to the specific instrument types—on our estimates of value of these items as of June 30,
St
2008:
w.
(in thousands)
Assets:
Level 3 balances at
June 30, 2008 $ 1,425,208 $ 1,124,351 $ 13,424,032 $ 1,510,579 $ 106,949 $ 18,402,390
Weighted-average rate
(1) or OAS:
m
Effect of 20% adverse
change $ (87,192 ) $ (57,677 ) $ (363,770 ) $ (94,008 ) — $ (674,666 )
Effect of 20%
co
favorable change $ 103,168 $ 67,581 $ 416,095 $ 118,548 — $ 742,010
Weighted-average
prepayment speed:
d.
Effect of 20% adverse
change — $ (84,870 ) $ (229,066 ) $ (60,373 ) — $ (1,292,012 )
Effect of 20%
au
favorable change — $ 96,233 $ 183,265 $ 88,556 — $ 1,597,226
Weighted-average net
lifetime credit losses:
Fr
Effect of 20% adverse
change — — — $ (58,604 ) — $ (180,941 )
Effect of 20%
re
favorable change — — — $ 137,900 — $ 148,043
Weighted-average
funding ratio:
Effect of 20% adverse
su
change — — — — $ (21,390 ) —
Effect of 20%
clo
favorable change — — — — $ 21,390 —
re
(1)
St
The sensitivities shown are solely for illustrative purposes and should be used with caution. This
information is furnished to provide the reader with a basis for assessing the sensitivity of the values
w.
presented to changes in key assumptions. Certain key assumptions are common to several of the financial
statement items that are measured at their estimated fair value. While the qualitative nature of the
assumption may be the same, the assumptions vary by specific instrument and do not necessarily change at
the same rate. A 20% change in an assumption for one of the financial statement items does not necessarily
ww
imply that assumption would also change in the same direction or by the same amount for other items. As
the figures indicate, changes in fair value based on a given percentage variation in individual assumptions
generally cannot be extrapolated. In the preceding table, the effect of a variation in a particular assumption
on the fair value of the item is calculated without changing any other assumption. In reality, changes in one
factor may coincide with changes in another, which could compound or counteract the sensitivities.
m
59
co
Results of Operations Comparison—Quarters Ended June 30, 2008 and 2007
d.
Detailed Line Item Discussion of Consolidated Revenue and Expense Items
au
(Loss) Gain on Sale of Loans and Securities
Fr
Quarters Ended June 30,
2008 2007
re
(Loss) Gain on Sale (Loss) Gain on Sale
Loans Sold Amount Margin Loans Sold Amount Margin
(dollar amounts in thousands)
Prime Mortgage Loans $ 56,759,841 $ 773,954su 1.36 % $ 109,425,578 $ 1,085,656 0.99 %
Subprime Mortgage Loans — (64,655 ) N/M 5,164,101 187,201 3.63 %
Gain on sale of Prime Mortgage Loans decreased in the quarter ended June 30, 2008 compared to the
quarter ended June 30, 2007, due primarily to a 48% decrease in the volume of loans sold. This reduction
was partially offset by improvement in our gain on sale margins compared to the previous period.
ww
m
loss in the quarter ended June 30, 2008 consisted primarily of valuation adjustments on subprime loans held
for sale due to continuing declines in the value of such mortgage loans. These loans consisted primarily of
$1.3 billion of loans that have previously been transferred in securitization transactions but which did not
co
qualify as sales in accordance with SFAS 140.
d.
Gain on sale of Prime Home Equity Loans decreased in the quarter ended June 30, 2008 as compared
to the year-ago period due primarily to a discontinuation of lending and sales of home equity loans, except
for additional draws under existing loan agreements and securitizations.
au
60
Fr
Commercial Real Estate
re
During the quarter ended June 30, 2008, commercial real estate loss on sale increased due to
continuing illiquidity in the commercial mortgage securitization market along with our discontinuation of
commercial real estate lending, and included a net loss on related credit default swaps of $9.2 million.
su
Conduit and Underwriting Activities
During the quarter ended June 30, 2008, both conduit and underwriting gain on sale decreased
clo
compared to the year-ago period as a result of our exit from these activities due in large part to lack of
demand in the mortgage marketplace for non-agency securities.
The negative result for gain on sale arising from securities trading and other activities compared to the
quarter ended June 30, 2007, was primarily due to additional write-downs of trading securities at depressed
Fo
prices.
Our losses on representations and warranties arise when such representations and warranties are
breached and generally only when a loss results from the breach. We estimate our liability for
representations and warranties at the time of sale and update our estimates quarterly. At the time of sale, the
liability is a component of the product's gain on sale. Subsequent to sale, adjustments to our liability for
representations and warranties are included in provision for losses on representations and warranties, which
St
is included in the income statement as a component of (loss) gain on sale of loans and securities. The
expense applicable to our estimate of future representations and warranty claims increased to
$755.1 million in the quarter ended June 30, 2008 from $73.4 million in the year-ago period. Of these
w.
amounts, $677.3 million and $51.9 million for the current quarter and the year-ago quarter, respectively,
were adjustments made subsequent to sale and are included in the provision for losses related to
representations and warranties. The increase was primarily driven by increased levels of claims that we are
currently experiencing along with our expectations for elevated levels of claims in the near future. The
ww
levels of claims is due largely to worsening trends and expectations for delinquencies and home prices and
the related increase in the projection of future defaults to which representation and warranty claims relate.
61
m
Net Interest (Expense) Income and Provision for Loan Losses
co
Quarters Ended
d.
June 30,
2008 2007
(in thousands)
Net interest (expense) income:
au
Investment loans and securities $ 585,883 $ 476,257
Loans and securities relating to mortgage banking activities 44,512 147,647
Net interest income on custodial balances 36,159 224,197
Fr
Net interest expense relating to loan servicing activities (135,133 ) (249,470 )
Securities inventory 74,656 19,915
Other 49,874 109,450
re
Net interest income 655,951 727,996
Provision for loan losses su (2,330,925 ) (292,924 )
Net interest (expense) income after provision for loan losses $ (1,674,974 ) $ 435,072
The increase in net interest income from the investment loans and securities was attributable to growth
clo
in average interest-earning assets partially offset by a decrease in the net interest margin. Average interest-
earning assets in the investment loans and securities increased to $110.5 billion during the quarter ended
June 30, 2008, an increase of $23.8 billion, or 27%, over the year-ago period. Net interest margin relating
to investment loans and securities decreased to 2.11% during the quarter ended June 30, 2008, from 2.17%
re
during the year-ago period primarily as a result of increasing levels of non accrual loans.
The decrease in net interest income from mortgage banking-related loans and securities reflects a
sharp decrease in average interest-earning assets resulting from lower mortgage loan production.
Fo
Interest income on custodial balances decreased from the year-ago period due to a reduction in the
earnings rate along with a reduction in average balances, partially offset by a decrease in interest expense
on paid-off loans resulting from a decrease in payoffs. Interest income on custodial balances is reduced by
op
the interest we are required to pass through to security holders on paid-off loans, which was $62.1 million
and $113.6 million during the quarters ended June 30, 2008 and 2007, respectively.
Net interest expense related to loan servicing assets decreased due to increased interest income on a
St
larger portfolio of mortgage loans held for investment allocated to servicing activities combined with a
reduction in the cost of debt used to finance servicing-related assets partially offset by an increase in our
investment in MSRs and other loan servicing-related assets.
w.
The increase in net interest income from the trading securities and securities purchased under
agreements to resell inventories is attributable to an increase in the net interest margin from 0.11% during
the quarter ended June 30, 2007 to 0.77% during the quarter ended June 30, 2008, partially offset by a 46%
ww
The increase in the provision for loan losses was primarily due to increased losses inherent in the loan
portfolio arising from continuing economic weakness and declining values of the real estate securing our
mortgage loans. Such factors continue to be reflected in our current experience and expectations for levels
of mortgage delinquencies, defaults and loss severities.
m
62
co
Loan Servicing Fees and Other Income from MSRs and Retained Interests
d.
Loan servicing fees and other income from MSRs and retained interests are summarized below:
au
Quarters Ended
June 30,
2008 2007
Fr
(in thousands)
Servicing fees, net of guarantee fees(1) $ 1,112,473 $ 1,102,707
Income from retained interests 92,336 123,941
Late charges 97,198 90,137
re
Prepayment penalties 8,696 70,018
Ancillary fees 27,146 34,452
su
Total loan servicing fees and income from MSRs and retained interests $ 1,337,849 $ 1,421,255
(1)
Includes contractually specified servicing fees.
clo
The increase in servicing fees, net of guarantee fees, was principally due to a 9% increase in the
average servicing portfolio, partially offset by a decrease in the overall annualized net service fee earned
from 0.340% of the average portfolio balance during the quarter ended June 30, 2007 to 0.316% during the
re
The decrease in income from retained interests was due primarily to a 18% decrease in the average
Fo
investment in these assets from the quarter ended June 30, 2007 to the current quarter, combined with a
reduction in the average yield on such instruments from 16% during the year-ago period to 15% during the
current quarter. Income from retained interests excludes any impairment charges or recoveries, which are
included in impairment of retained interests in the consolidated statements of operations. These investments
include interest-only and principal-only securities, and certain mortgage pass-through and residual
op
securities that arise from the securitization of mortgage loans, primarily Subprime Mortgage and Prime
Home Equity Loans.
The change in fair value of MSRs that is included in the statements of operations during the quarters
ended June 30, 2008 and 2007 consists of two primary components—a reduction in fair value due to the
w.
realization of expected cash flows from the MSRs and a change in fair value resulting from changes in
market factors, such as interest rates.
The realization of expected cash flows from MSRs resulted in a value reduction of $667.7 million and
ww
$857.1 million during the quarters ended June 30, 2008 and 2007, respectively. This amount declined
because of a decrease in the prepayment rate of loans in our MSR portfolio due to a worsening housing
market and lesser credit availability in the mortgage market which, in turn, extends the expected life of the
existing asset.
Change in Fair Value of Mortgage Servicing Rights
m
We recorded an increase in the fair value of the MSRs due to changes in market factors in the quarters
ended June 30, 2008 and 2007 of $1,896.0 million and $1,177.3 million, respectively, primarily as a result
of increasing mortgage rates which decreased expected future prepayments, which in turn increases
co
expected cash flows from our current servicing portfolio.
63
d.
au
Recovery (Impairment) of Retained Interests
Fr
Quarters Ended June 30,
2008 2007
re
Asset Asset
Recovery Balance at Recovery Balance at
(Impairment) Period End (Impairment) Period End
(in thousands)
Credit-sensitive retained interests
Non credit-sensitive retained interests
su
$ (64,351 ) $ 288,807
99,631 1,221,772
$ (416,673 ) $ 1,523,016
148,556 1,212,497
Recovery (impairment) of retained interests $ 35,280 $ 1,510,579 $ (268,117 ) $ 2,735,513
clo
In the quarter ended June 30, 2008, we recognized impairment of credit-sensitive retained interests of
$64.4 million, including impairment of $74.5 million related to Subprime and related residual interests
partially offset by a recovery of $17.1 million related to subordinated interests on Prime Home Equity
securitizations. The recovery on Prime Home Equity securitizations consists of impairment of retained
re
interests of $81.3 million and recovery of previously recorded impairment losses of $98.4 million related to
estimated future draw obligations on the securitizations that have entered or are probable to enter rapid
amortization status. The impairment charges were primarily the result of the effect of increased estimates
Fo
for future losses on the loans underlying these securities driven by continued expectations of future declines
in the value of the real estate collateral securing our loans and the effect on delinquencies of significant
tightening of available credit compared to prior periods. The loss estimate, as measured by gross
undiscounted losses embedded in the valuation of subordinated interests as a percentage of the unpaid
op
principal balance of the loans underlying such interests, increased from 11.0% to 15.6% during the quarter
ended June 30, 2008.
The recovery of previously recorded impairment losses related to estimated future draw obligations on
St
the securitizations that have entered or are probable to enter rapid amortization status is due to a reduction
in projections of future expected funding obligations under rapid amortization. The reduction in estimated
future fundings is due primarily to not renewing lines of credit and suspending borrowers' access to existing
lines of credit, in accordance with the borrowers' line of credit agreements, when their loans enter a
w.
specified delinquency status or when their property values decline below a specified threshold.
In the quarter ended June 30, 2007, we recognized impairment of credit-sensitive retained interests of
$416.7 million, including $388.1 million related to subordinated interests on prime home equity
ww
securitizations. The impairment charges on these subordinated interests were driven by weakening housing
market conditions, which resulted in increased estimates for future losses on the loans underlying these
securities. The loss estimate, as measured by undiscounted losses embedded in the valuation of
subordinated interests as a percentage of the unpaid principal balance of the loans underlying such interests,
increased from 3.1% to 5.2% during the quarter ended June 30, 2007.
m
In the quarter ended June 30, 2008, recovery in the estimated fair value of the non credit-sensitive
retained interests was due to the effect of increasing interest rates on the estimated cash flows relating to
co
interest-only securities, partly offset by the offsetting effects of the change in interest rates on the values of
principal-only and prepayment securities. In addition, the value of senior and mezzanine securities that we
began retaining as a result of the market disruption during 2007 continued to decline.
d.
64
au
During the quarter ended June 30, 2007, recovery of non credit-sensitive retained interests was due
primarily to an increase in the value of interest-only securities resulting from an increase in interest rates.
Fr
Servicing Hedge Gains/Losses
The Servicing Hedge is designed to supplement the macro hedge and to offset a portion of the interest
re
rate driven change in the value of MSRs and retained interests recorded in the current period. The values of
the derivatives and securities that are the primary components of the Servicing Hedge are tied to long-term
mortgage, swap and Treasury rates. Overall, these rates increased during the current period. The Servicing
su
Hedge produced a loss of $2,624.3 million, including $519.7 million of time value decay of the options
included in the Servicing Hedge (our "hedge cost"). The composition of the Servicing Hedge is a primary
driver of hedge cost. In selecting among alternative hedge instruments to meet the desired risk profile, we
consider such factors as cost, cash flow requirements and counterparty risk in addition to a particular
clo
instrument's effect on our interest rate risk profile.
During the quarter ended June 30, 2007, interest rates increased and as a result, the Servicing Hedge
incurred a loss of $1,373.1 million, including $125 million of hedge cost.
re
The $132.4 million increase in net insurance premiums earned was primarily attributable to growth in
Fo
Other Revenue
op
Quarters Ended
June 30,
2008 2007
(in thousands)
w.
During the quarter ended June 30, 2008, we recognized other-than temporary impairment totaling
co
$467.8 million in our portfolio of investment securities classified as available-for-sale. This loss was
recognized primarily because, based on the loss estimates embedded in the value of certain non-agency
securities held in our investment portfolio, we no longer believed that it was reasonably assured that the
decline in value would be recovered. This amount compares to a loss totaling $4.9 million in the quarter
d.
ended June 30, 2007.
65
au
Compensation Expenses
Fr
Compensation expenses decreased $112.2 million, or 10%, during the quarter ended June 30, 2008 as
compared to the year-ago period as summarized below:
re
su Quarters Ended
June 30,
2008 2007
(in thousands)
Base salaries $ 560,143 $ 624,734
clo
Incentive bonus and commissions 273,266 475,941
Payroll taxes and other benefits 180,896 195,214
Deferral of loan origination costs (17,457 ) (186,873 )
Total compensation expenses $ 996,848 $ 1,109,016
re
Our average workforce declined from 58,261 during the quarter ended June 30, 2007 to 50,455 during
the quarter ended June 30, 2008. This decline was centered in our mortgage origination operations and
Fo
reflects the dramatic decline in mortgage loan production which began in the third quarter of 2007. This
reduction in headcount, along with reductions in the profitability of the Company's activities upon which
incentive compensation expense is based caused a 22% reduction in compensation expenses before deferral
of loan origination costs.
op
Effective January 1, 2008, we adopted SFAS 159 and have elected to account for most of our
mortgage loans originated or purchased for sale at their estimated fair value. Because of this election, fees
and costs are recorded in earnings as incurred instead of being deferred. Accordingly, the deferral of loan
St
Quarters Ended
June 30,
2008 2007
(in thousands)
Office and equipment rentals $ 74,885 $ 65,221
Depreciation 53,526 59,177
m
Utilities 38,348 41,234
Postage and courier service 27,941 27,568
Office supplies 17,047 21,963
co
Dues and subscriptions 12,552 15,088
Repairs and maintenance 9,572 14,546
Other 15,298 24,220
d.
Total occupancy and other office expenses $ 249,169 $ 269,017
au
During the quarter ended June 30, 2008, occupancy and other office expenses decreased by 7%, or
$19.8 million, reflecting the reductions in our workforce discussed previously in Compensation Expenses.
Fr
Insurance claim expenses were $366.5 million during the quarter ended June 30, 2008 as compared to
$154.8 million during the year-ago period. The increase in insurance claim expenses was primarily the
re
result of a $185.1 million increase in the provision for mortgage reinsurance claims arising from
66
su
increased loss expectations caused by the current elevated delinquencies and defaults inherent in our loan
clo
servicing portfolio.
Quarters Ended
June 30,
2008 2007
(in thousands)
Legal, consulting, accounting and auditing expenses $ 101,706 $ 47,261
op
m
67
co
Results of Operations Comparison—Six Months Ended June 30, 2008 and 2007
d.
Gain on Sale of Loans and Securities
au
Gain on sale of loans and securities is summarized below:
Fr
Six Months Ended June 30,
2008 2007
Gain on Sale Gain on Sale
Loans Sold Amount Margin Loans Sold Amount Margin
re
(dollar amounts in thousands)
Prime Mortgage Loans $ 117,511,650 $ 1,941,944 1.65 % $ 202,304,717 $ 2,017,227 1.00 %
Subprime Mortgage Loans 3,281 (173,161 ) N/M 13,054,123 149,386 1.14 %
$ 162,369 $ 2,727,562
w.
Gain on sale of Prime Mortgage Loans decreased by 4% in the six months ended June 30, 2008 as
compared to the six months ended June 30, 2007. The Company's adoption of SAB 109 contributed to the
ww
increase in the prime gain on sale in the six months ended June 30, 2008 by $216.0 million. The adoption
of this guidance results in revenue being recorded upon initial recognition of derivative interest rate lock
commitments. Prior to adoption, revenue was recorded when the loans were sold. In addition, our election
to account for the majority of our loans held for sale at estimated fair value effective January 1, 2008
positively impacted prime gain on sale margins. Because of this election, origination costs and fees are
recorded in earnings as incurred instead of being deferred, which resulted in increased prime gain on sale
m
margins of approximately $176 million. This amount is offset by higher production expenses. Increased
gain on sale margins on Prime Mortgage Loans also contributed to higher gain on sale of Prime Mortgage
Loans. These positive factors were partially offset by a 42% decline in the volume of loans sold.
co
Subprime Mortgage Loans
Loss on sale of Subprime Mortgage Loans increased in the six months ended June 30, 2008 as
d.
compared to the year-ago period due primarily to discontinuation of lending and sales of subprime
mortgage loans in late 2007. The loss in the six months ended June 30, 2008 consisted primarily of
valuation adjustments on subprime loans held for sale due to continuing declines in the value of these
au
68
Fr
loans. These loans included $1.3 billion of loans that have previously been securitized but which did not
qualify as sales in accordance with SFAS 140 as of June 30, 2008.
re
Prime Home Equity Loans
su
We recorded a small net loss on sale of Prime Home Equity Loans in the six months ended June 30,
2008 as compared to a gain on sale for the year-ago period due primarily to discontinuation of lending and
sales of Prime Home Equity loans in late 2007.
clo
Commercial Real Estate
During the six months ended June 30, 2008, commercial real estate gain on sale decreased due to
continuing illiquidity in the commercial mortgage securitization market along with our discontinuation of
re
commercial real estate lending and included $24.7 million in gains on credit default swaps.
During the six months ended June 30, 2008, both conduit and underwriting gain on sale decreased
compared to the year-ago period as a result of our exit from these activities due, in part, to lack of demand
in the mortgage marketplace for non-agency securities.
op
The negative results for gain on sale arising from securities trading and other activities compared to
St
the six months ended June 30, 2007, was primarily due to additional write-downs of trading securities at
depressed prices.
Hedge Allocation
w.
As discussed in Note 6—Derivative Financial Instruments, during the six months ended June 30, 2008
we managed in aggregate the risk of Market Spread changes in value of our mortgage banking assets, while
ww
maintaining separate portfolios of financial instruments to manage the interest rate risk inherent in our
production and servicing assets. Accordingly, changes in the value of mortgage banking assets and the
related hedge instruments (collectively the "Position") arising from changes in Market Spreads were
allocated between those arising from loan production activities and those arising from loan servicing
activities. In the six months ended June 30, 2008, Market Spread declines in the value of the Loan
Production Sector Position of $340.5 million were allocated to the Loan Servicing Sector.
m
Provision for Losses Related to Representations and Warranties
co
The expense applicable to our estimate of future representations and warranty claims increased to
$1,183.3 million in the six months ended June 30, 2008 from $90.4 million in the year-ago period.
Adjustments to the estimate made subsequent to sale during the current period were $1,053.6 million, and
are included in the adjustment to estimated liability for losses on representations and warranties line in the
d.
table above. The increase was primarily driven by increased levels of claims that we are currently
experiencing along with our expectations for elevated levels of claims in the near future. The level of
claims is due largely to worsening trends and expectations for delinquencies and home prices and the
au
related increase in the projection of future defaults to which representation and warranty claims are
correlated.
69
Fr
re
Net Interest (Expense) Income and Provision for Loan Losses
The increase in net interest income from investment loans and securities was attributable to growth in
average interest-earning assets partially offset by a decrease in the net interest margin. Average investment
loans and securities assets increased to $111.5 billion during the six months ended June 30, 2008, an
w.
increase of $26.6 billion, or 31%, over the year-ago period. Net interest margin attributable to investment
loans and securities declined to 2.17% during the six months ended June 30, 2008, from 2.29% during the
year-ago period primarily as a result of increasing levels of non accrual loans.
ww
The decrease in net interest income from mortgage banking-related loans and securities reflects a
decrease in the balance of average interest-earning assets resulting from lower mortgage loan production,
partially offset by an increase in net interest margin from the year-ago period. The mortgage banking-
related loan and securities inventory is financed in part with borrowings tied to short-term indices. During
the current period, the difference between long-term and short-term interest rates was more favorable than
in the year-ago period, causing the increase in net interest margin.
m
Interest income on custodial balances decreased from the year-ago period due to a reduction in the
earnings rate along with a reduction in average balances, partially offset by a decrease in interest expense
co
on paid-off loans resulting from a decrease in payoffs. Interest income on custodial balances is reduced by
the interest we are required to pass through to security holders on paid-off loans, which was $139.4 million
and $202.9 million during the six months ended June 30, 2008 and 2007, respectively.
d.
Net interest expense related to loan servicing activities decreased primarily due to increased interest
income on a larger mortgage loan investment portfolio resulting from transfers of mortgage loans held for
sale to held for investment and increased holdings of repurchased loans.
au
The increase in net interest income from the trading securities and securities purchased under
agreements to resell inventory is attributable to an increase in the net interest margin from 0.12% during the
six months ended June 30, 2007 to 0.69% during the six months ended June 30, 2008, partially offset by a
Fr
44% decrease in the average inventory of securities held. During the current period the yield curve
steepened, which resulted in a shift in trading revenues from gain on sale to interest income, which caused
the increase in the net interest margin earned on the securities portfolio.
re
The increase in the provision for loan losses was primarily due to increased losses inherent in the loan
portfolio, resulting from increased levels of mortgage delinquencies, defaults and loss severities, as well as
downward revisions in expectations of changes in home prices.
su
70
clo
Loan Servicing Fees and Other Income from MSRs and Retained Interests
re
Loan servicing fees and other income from MSRs and retained interests are summarized below:
Fo
Total loan servicing fees and income from MSRs and retained interests $ 2,744,258 $ 2,808,544
w.
(1)
Includes contractually specified servicing fees.
The increase in servicing fees, net of guarantee fees, was principally due to a 11% increase in the
ww
average servicing portfolio, partially offset by a decrease in the overall annualized net service fee earned
from 0.338% of the average portfolio balance during the six months ended June 30, 2007 to 0.322% during
the six months ended June 30, 2008.
The decrease in income from retained interests was due primarily to a 18% decrease in the average
investment in these assets from the six months ended June 30, 2007 to the current period, combined with a
m
reduction in the average yield on such instruments from 17% during the year-ago period to 15% during the
current period. Income from retained interests excludes any impairment charges or recoveries, which are
included in impairment of retained interests in the consolidated statements of operations.
co
Realization of Expected Cash Flows from Mortgage Servicing Rights
The realization of expected cash flows from MSRs resulted in a value reduction of $1,421.3 million
d.
and $1,657.0 million during the six months ended June 30, 2008 and 2007, respectively. This amount
declined because of a decrease in the prepayment rate of loans in our MSR portfolio due to a worsening
housing market and lesser credit availability in the mortgage market, which in turn, extends the expected
au
life of the existing asset.
Fr
We recorded an increase in the fair value of the MSRs from changes in market factors in the six
months ended June 30, 2008 and 2007, of $435.3 million, and $1,231.5 million, respectively, primarily as a
result of increasing mortgage rates, which increased expected future cash flows from our current servicing
re
portfolio.
71
su
(Impairment) Recovery of Retained Interests
clo
Balance at Balance at
Impairment Period End Impairment Period End
(in thousands)
Credit-sensitive retained interests $ (505,638 ) $ 288,807 $ (782,226 ) $ 1,523,016
Non credit-sensitive retained interests (200,102 ) 1,221,772 84,508 1,212,497
op
In the six months ended June 30, 2008, we recognized impairment of credit-sensitive retained interests
St
of $505.6 million, including $330.0 million related to subordinated interests on Prime Home Equity
securitizations and $141.0 million related to Subprime and related residual interests. The impairment on
Prime Home Equity securitizations consists of impairment of retained interests of $274.0 million and
impairment losses of $56.0 million related to estimated future draw obligations on the securitizations that
w.
have entered or are probable to enter rapid amortization status. These impairment charges were primarily
the result of the effect of increased estimates for future losses on the loans underlying the credit sensitive
retained interests driven by weakening housing market conditions and significant tightening of available
ww
credit. The loss estimate, as measured by gross undiscounted losses embedded in the valuation of
subordinated interests as a percentage of the unpaid principal balance of the loans underlying such interests,
increased from 11.0% to 15.6% during the six months ended June 30, 2008.
In the six months ended June 30, 2007, impairment of credit-sensitive subordinated and residual
interests retained in prime home equity and subprime securitizations was due to increased estimates for
m
future losses on the loans underlying these securities as well as to the effect of increased market yield
requirements for the subprime securities.
co
In the six months ended June 30, 2008, impairment of the non credit-sensitive retained interests was
related primarily to senior and mezzanine securities that we began retaining as a result of the market
disruption during 2007 resulting from higher investor yield requirements for such securities partially offset
by an increase in the value of interest-only securities caused by decreased prepayment speeds as a result of
d.
increasing mortgage interest rates.
During the six months ended June 30, 2007, recovery of non credit-sensitive retained interests was due
au
primarily to an increase in the value of interest-only securities.
Fr
The values of the derivatives and securities that are the primary components of the Servicing Hedge
are tied to long-term mortgage, swap and Treasury rates. Overall, these rates decreased for much of the
period and volatility of these rates increased during the six months ended June 30, 2008 and as a result, the
re
Servicing Hedge produced a loss of $619.9 million, including $943.1 million of hedge cost.
During the six months ended June 30, 2007, rates increased. In addition, we supplemented the
su
Servicing Hedge with credit default swaps to moderate the negative impact on earnings caused by credit
spread-driven declines in fair value of our retained interests during the early part of 2007. During this
period, credit spreads widened, resulting in a gain related to the credit default swaps.
clo
72
re
During the six months ended June 30, 2007, the Servicing Hedge incurred a loss of $1,486.8 million,
including $238.9 million of hedge cost and a $57.2 million gain related to credit default swaps.
Fo
The $287.0 million increase in net insurance premiums earned was primarily attributable to growth in
lender-placed business.
op
Other Revenue
St
m
Total other revenue $ 424,337 $ 331,384
co
Realized Loss on Available for Sale Investment Securities
During the six months ended June 30, 2008, we recognized other-than temporary impairment totaling
d.
$491.9 million in our portfolio of investment securities classified as available-for-sale. This loss was
recognized primarily because, based on the loss estimates embedded in the value of certain non-agency
securities held in our investment portfolio, we no longer believed that it was reasonably assured that the
decline in value would be recovered. This amount compares to a loss totaling $3.9 million during the six
au
months ended June 30, 2007.
Compensation Expenses
Fr
Compensation expenses decreased $133.6 million, or 6%, during the six months ended June 30, 2008
as compared to the year-ago period as summarized below:
re
Six Months Ended
su June 30,
2008 2007
(in thousands)
Base salaries $ 1,119,157 $ 1,198,486
Incentive bonus and commissions 607,498 922,884
clo
Payroll taxes and other benefits(1) 365,995 419,189
Deferral of loan origination costs (41,817 ) (356,135 )
Total compensation expenses $ 2,050,833 $ 2,184,424
re
(1)
Includes restructuring charges of $3.3 million during the six months ended June 30, 2008.
Fo
Our average workforce declined from 56,856 during the six months ended June 30, 2007 to 50,386 for
the six months ended June 30, 2008. The reduction was centered in our mortgage origination operations
and reflects the dramatic decline of the mortgage markets which began in the third quarter
op
73
St
of 2007. This reduction in headcount, along with reductions in the profitability of the Company's activities,
upon which incentive compensation is based caused an 18% reduction in compensation expenses before
w.
Effective January 1, 2008, we adopted SFAS 159 and have elected to account for most of our
ww
mortgage loans originated or purchased for sale at their estimated fair value. Because of this election, fees
and costs are recorded in earnings as incurred instead of being deferred. Accordingly, the deferral of loan
origination costs declined by 88% from the prior period.
Occupancy and Other Office Expenses
m
Occupancy and other office expenses are summarized below:
co
Six Months Ended
June 30,
2008 2007
(in thousands)
d.
Office and equipment rentals $ 131,929 $ 131,619
Depreciation 109,509 116,488
Utilities 76,575 81,847
au
Postage and courier service 54,746 52,719
Office supplies 35,735 41,912
Dues and subscriptions 25,488 30,188
Repairs and maintenance 21,304 30,850
Fr
Other(1) 36,662 47,607
Total occupancy and other office expenses $ 491,948 $ 533,230
re
(1)
Includes restructuring charges of $10.6 million during the six months ended June 30, 2008.
su
During the six months ended June 30, 2008, occupancy and other office expenses decreased by 8%, or
$41.3 million, reflecting the reductions in our workforce discussed in Compensation Expenses, preceding.
clo
Insurance Claim Expenses
Insurance claim expenses were $722.1 million during the six months ended June 30, 2008 as
compared to $212.1 million during the year-ago period. The increase in insurance claim expenses was
re
primarily the result of a $480.9 million increase in comparison to the year-ago period in the provision for
mortgage reinsurance claims arising from an increase in the projection for future claims payments caused
by a worsening housing market and resulting higher actual and projected default rates. The year-ago period
included a $74.0 million reversal of the liability for claims losses related to the 2003 books of business, on
Fo
which negligible remaining loss exposure was deemed to exist in the six months ended June 30, 2007.
74
op
(in thousands)
Legal, consulting, accounting and auditing expenses $ 154,940 $ 85,786
Operations of foreclosed real estate 146,272 35,656
Losses on servicing-related advances 136,641 32,388
Insurance commission expense 90,919 93,577
Insurance 52,437 34,602
m
Mortgage insurance 49,794 43,332
Taxes and licenses 42,018 35,508
Software amortization and impairment 39,228 36,800
co
Travel and entertainment 34,850 48,857
Other 216,896 118,350
Deferral of loan origination costs (3,695 ) (55,461 )
d.
Total other operating expenses $ 960,300 $ 509,395
au
Losses on servicing-related advances increased $104.3 million due to increases in the level of
defaulted loans in the servicing portfolio.
Fr
Our short-term financing needs arise primarily from our holding of mortgage loans pending sale, the
trading activities of our broker-dealer and our warehouse lending business. Our long-term financing needs
re
arise primarily from our investments in our mortgage loan portfolio, MSRs and retained interests and the
financial instruments acquired to manage the interest rate risk associated with those investments. The
structure and mix of our debt and equity capital are driven by our strategic objectives and those of our
parent, regulatory and credit rating agency requirements and capital markets conditions. These factors
su
affect the type of financing we are able to obtain and the size of our operations.
Our primary sources of debt include deposits taken by our Bank, FHLB advances, the public corporate
debt markets, unsecured bank lines and loans, repurchase agreements and the secondary mortgage market.
clo
Our primary source of equity capital is retained earnings. From time to time, we have issued common or
preferred stock, subordinated debt or other securities that receive equity-like treatment by the credit rating
agencies as a means of increasing our capital base and supporting our operations. To this end, in the third
quarter of 2007 we issued 20,000 shares of 7.25% Series B non-voting convertible preferred stock for an
re
aggregate price of $2.0 billion. The preferred stock ranked senior to our common stock with respect to
payment of dividends and distribution upon liquidation. The Series B non-voting convertible preferred
stock was cancelled on July 2, 2008, upon completion of the acquisition of Countrywide by Bank of
America. We also have $2.2 billion outstanding in junior subordinated debentures that receive varying
Fo
degrees of "equity treatment" from rating agencies, bank lenders and regulators.
In response to the disruptions in the secondary mortgage markets, we have evolved our funding
structure such that it more closely resembles that of a thrift holding company rather than that of a finance
op
During the six months ended June 30, 2008, Standard & Poor's, Moody's Investor Services and Fitch
took negative ratings actions on Countrywide. As a result, certain of our debt ratings dropped
St
75
w.
ww
below investment grade. On July 1, 2008, following the announcement that Bank of America had
completed their acquisition of Countrywide, Standard and Poor's Ratings Service (S&P) upgraded its rating
of CFC and CHL from BB+ to AA, an investment grade rating. S&P also upgraded its rating of the Bank
from BBB to AA+. The Rating Outlook for all three entities was changed from Credit Watch Developing to
Negative. On July 1, 2008, Moody's upgraded its rating of CFC and CHL from Baa3 to Aa2. Moody's also
upgraded its rating of the Bank from Baa1 to Aaa. Our Fitch rating remains unchanged.
m
Following are our credit ratings as determined by the nationally recognized statistical rating
organizations ("credit rating agencies") as of July 1, 2008:
co
Countrywide Financial
Corporation Countrywide Home Loans Countrywide Bank
d.
Short- Long- Rating Short- Long- Rating Short- Long- Rating
Credit Rating Agency Term Term Outlook Term Term Outlook Term Term Outlook
Standard & Poor's A-1+ AA Negative A-1+ AA Negative A-1+ AA+ Negative
au
Moody's Investors Service P1 Aa2 Negative P1 Aa2 Negative P1 Aaa Negative
Fitch F3 BBB- Rating Watch F3 BBB- Rating Watch F3 BBB- Rating Watch
Evolving Evolving Evolving
Fr
As noted in the preceding paragraphs, during the period of 2008 leading up to the acquisition of
Countrywide by Bank of America, the rating agencies took negative actions on our debt ratings. These
actions, along with the effect of developing perceptions in the media and financial marketplace regarding
re
our prospects, affected our ability to retain and obtain financing and make securities and derivatives
transactions with other institutions.
•
The MBS Gestation conduit ($5 billion of committed liquidity available to CHL) matured and was
re
not renewed
•
A $2.5 billion committed repurchase facility available to CHL and the Bank matured and was not
Fo
renewed
•
The FHLB decreased its advance rates and increased its required level of over-collateralization for
op
•
CFC accessed two new sources of funding during the quarter—the Term Secured Lending Facility
St
and the Primary Dealer Credit Facility—both of which were established by the Federal Reserve to
provide increased liquidity to the financial markets. These programs were available to the Bank
and CSC during the quarter. However, amounts borrowed by CSC were repaid on July 2, 2008,
and these facilities are no longer available to CSC. The facilities remain available to the Bank.
w.
76
ww
Because of these developments, CFC's available committed liquidity declined by $18.1 billion during
the second quarter of 2008.
Following the acquisition by Bank of America of Countrywide, we sold or assigned certain assets to
various other Bank of America subsidiaries in exchange for demand notes and cash. These transactions
m
included:
co
Sale of all of the partnership interests in Countrywide Home Loans Servicing, LP for
approximately $19.7 billion, (Servicing LP's primary assets were approximately $15.3 billion of
MSRs and $4.4 billion of reimbursable servicing advances)
d.
•
Sale of certain loans held by CHL and Countrywide Commercial Real Estate for approximately
$9.5 billion
au
•
Assignment of our position in a portfolio of derivative instruments held by us for approximately
$1.5 billion
Fr
•
Sale of certain securities held by CSC for approximately $0.1 billion.
re
Proceeds from these transactions were used to terminate and repay our unsecured revolving lines of
credit and bank loans with maturities through 2011 for approximately $11.5 billion and to increase the
capital of our Bank subsidiary by $5.5 billion. Repayment of the lines and bank loans upon completion of
su
Bank of America's acquisition of Countrywide was required because the borrowing agreements did not
allow for continued borrowings in the event of a change in control of Countrywide.
Countrywide Bank is regulated by the Office of Thrift Supervision ("OTS") and is therefore subject to
clo
OTS capital requirements. At June 30, 2008, the Bank's regulatory capital ratios and amounts and minimum
required capital ratios for the Bank to maintain a "well capitalized" status are as follows based both on its
actual balances and proforma balances giving effect to the $5.5 billion capital contribution made by Bank
of America on July 2, 2008:
re
Fo
(1)
Minimum required to qualify as "well capitalized."
(2)
w.
The proforma capital ratios reflect the cash contributed to the Bank. These ratios will decrease as
we reinvest the proceeds of the capital contribution into interest earning assets with higher risk
weightings.
ww
Countrywide Bank is required by OTS regulations to maintain tangible capital of at least 1.5% of
assets. However, the Bank is also required to maintain a tangible equity ratio of at least 2% to avoid being
classified as "critically undercapitalized." Critically undercapitalized institutions are subject to the prompt
corrective action provisions of the Financial Institution Reform Recovery and Enforcement Act of 1989.
The Bank's tangible capital ratio was 6.9% and 8.0% at June 30, 2008 and December 31, 2007,
m
respectively.
The OTS has prescribed that the Company and its affiliates are not authorized to receive, and the Bank
co
is not authorized to pay the Company or its affiliates, capital distributions without receipt of prior written
OTS non-objection.
77
d.
au
The Company is also subject to U.S. Department of Housing and Urban Development, Fannie Mae,
Freddie Mac and Government National Mortgage Association ("Ginnie Mae") net worth requirements.
Management believes the Company is in compliance with those requirements.
Fr
Cash Flow
Cash provided by operating activities was $15.3 billion for the six months ended June 30, 2008,
re
compared to cash used by operating activities of $4.4 billion for the year-ago period. Cash provided by
operating activities includes the proceeds from the sales and principal repayments of mortgage loans held
for sale and the cash used for the origination and purchase of mortgage loans held for sale. We generally
su
retain servicing rights and may retain other interests when these loans are sold. The recognition of the
amounts retained is a non-cash investing activity. See Note 18—Supplemental Cash Flow Information in
the financial statement section of this Report. In the six months ended June 30, 2008, funds used to
originate and purchase mortgage loans exceeded proceeds from the sales of mortgage loans by $2.4 billion.
clo
In the year-ago period, funds used to originate and purchase mortgage loans exceeded proceeds from the
sales and principal repayments of mortgage loans by $5.9 billion. Cash provided by operations was
primarily due to a decrease in trading securities of $20.2 billion, partially offset by an increase in trading
securities sold, not yet purchased.
re
Net cash provided by investing activities was $5.3 billion for the six months ended June 30, 2008,
compared to cash used by investing activities of $10.0 billion for the year-ago period. The increase in net
cash provided by investing activities was attributable to a $20.6 billion increase in net proceeds from
Fo
investments in other financial instruments combined with a $2.1 billion decrease in securities purchased
under agreements to resell, securities borrowed, and federal funds sold, partially offset by an increase of
$3.8 billion in loans held for investment compared to a decrease of $5.2 billion in the year-ago period.
op
Net cash used by financing activities for the six months ended June 30, 2008 totaled $22.7 billion,
compared to net cash provided by financing activities of $14.2 billion for the year-ago period. In the six
months ended June 30, 2008, there was a $25.1 billion decrease in cash provided by short-term borrowings,
including securities sold under agreements to repurchase. During the six months ended June 30, 2008, long-
St
term debt decreased $7.6 billion compared to an increase in long-term debt of $2.7 billion in the six months
ended June 30, 2007.
w.
A significant risk for the Company is credit risk, which is the risk that a counterparty will not perform
ww
in accordance with the contractual terms of our agreement with them. Our primary credit counterparties are
our loan borrowers and counterparties in securities transactions. We balance the level of credit risk against
our expected returns in determining the level of credit risk we accept in our operations.
Lending Activities
m
Our lending activities include the origination and purchase of loans for investment purposes
(investment portfolio loans) and the origination and purchase of loans for sale to investors (mortgage
banking).
co
78
d.
The following table summarizes our portfolio of loans held for investment:
au
June 30, 2008
Mortgage Total Unpaid
Fr
Investment Banking Principal
Activities Activities Balance
(in thousands)
Mortgage loans:
re
Prime
Pay option and payment advantage $ 25,419,072 $ 990,263 $ 26,409,335
Other su 27,439,262 2,632,521 30,071,783
52,858,334 3,622,784 56,481,118
Prime home equity 32,354,051 510,526 32,864,577
Subprime 719,602 1,734,940 2,454,542
clo
85,931,987 5,868,250 91,800,237
Commercial real estate 181,390 — 181,390
Total mortgage loans $ 86,113,377 $ 5,868,250 $ 91,981,627
re
Our investment in loans held for investment generally includes mortgage loans originated or
purchased for investment purposes, previously salable mortgage loans transferred from our held for sale
portfolio as a result of the market disruption that began in the third quarter of 2007 and mortgage loan
warehouse lending advances. Loans transferred from our held for sale portfolio are transferred at the lower
op
Our loans held for investment relating to our mortgage banking activities include mortgage loans
repurchased due to breaches of representations and warranties; government-guaranteed or insured loans
St
repurchased from Ginnie Mae securitizations in place of continuing to advance delinquent principal and
interest installments to security holders; and loans with identified defects that make them non-salable.
w.
At the time of all transfers from mortgage loans held for sale to mortgage loans held for investment,
management made the decision to hold those loans for the foreseeable future, which has been defined as the
next twelve months from the time of transfer, and made an assessment that the Company had the ability to
hold them for that time. This decision and assessment was made individually with respect to each transfer
ww
from mortgage loans held for sale to mortgage loans held for investment, including such transfers made in
the fourth quarter of 2007. Management intends to maintain the same decision and assessment process with
respect to future transfers from mortgage loans held for sale to mortgage loans held for investment.
Mortgage Loans Held for Investment in Investment Activities
m
Our portfolio of mortgage loans held for investment in our investment activities consists primarily of
Prime Mortgage and Prime Home Equity Loans, with unpaid principal balances that amounted to
$85.9 billion at June 30, 2008.
co
We have taken steps in recent years to reduce the credit risk in our investment loan portfolio by
acquiring supplemental mortgage insurance coverage. As of June 30, 2008, $20.8 billion of our investment
portfolio's residential loan portfolio was covered by supplemental mortgage insurance purchased on
d.
specified pools of loans, of which $14.2 billion represents first loss coverage. The maximum loss coverage
available under these policies on a combined basis is $1.4 billion. While these policies generally provide
for first loss coverage, some policies require premium adjustments if claims
au
79
Fr
exceed specified levels. Furthermore, coverage limits vary by policy, with some policies having limits at
re
the pool level, and others at the loan level. The effect of this insurance on our estimate of credit losses is to
reduce our provision for loan losses for the six months ended June 30, 2008 by $340.1 million through the
recognition of amounts recoverable from pool mortgage insurance. Our estimate of the effect of mortgage
su
insurance on the loan loss provision contemplates the effect of claim disputes and considers the insurer's
ability to pay as discussed below.
In the past, we purchased credit enhancement from those mortgage insurance providers that had an
clo
AA- rating or equivalent from the credit rating agencies. Currently, these mortgage insurance providers
have no less than an A rating. This requirement is consistent with the eligibility requirements of the
government-sponsored enterprises for mortgage insurers. We continue to monitor the respective capital
positions of our mortgage insurance providers to assess their claims paying ability. While the mortgage
insurance industry has experienced recent adverse financial results resulting in ratings downgrades with the
re
likelihood of further deterioration over the near term, we have concluded that claims paying ability of our
mortgage insurance providers is not impaired. If we conclude that this capacity is impaired in the future, we
will adjust our provisions for loan losses and the mortgage insurance recoverable asset.
Fo
Following is a summary of our investment loan portfolio's residential mortgage loans, together with
applicable mortgage insurance, by original combined loan-to-value ratio at June 30, 2008:
op
m
(1)
Excludes commercial real estate loans.
co
(2)
These amounts may include loans with borrower paid mortgage insurance.
d.
While new originations of these products have virtually ceased by June 30, 2008, Banking Operations
holds a substantial investment in pay option ARM and payment advantage ARM loans (collectively "pay
option loans").
au
•
Pay-option ARM loans—have interest rates that adjust monthly and minimum required payments
that adjust annually (subject to recast of the loan if minimum payments are made and deferred
Fr
interest limits are reached). Annual payment adjustments are subject to a 71/2% maximum change.
To ensure that contractual loan payments are adequate to repay a loan, the fully amortizing loan
payment amount is re-established after either five or ten years and again every five years
thereafter. These payment adjustments are not subject to the 71/2% payment limit and may be
re
substantial due to changes in interest rates and the addition of unpaid interest to the loans'
balances.
su
80
clo
•
Payment advantage ARM loans—have interest rates that are fixed for an initial period of five
years. Payments are subject to recast of the loan if minimum payments are made and deferred
interest limits are reached. If interest deferrals cause the loan's principal balance to reach a certain
maximum level within the first ten years of these loans, the payment is reset to the interest-only
re
payment; then at the 10-year point, the fully amortizing payment is required.
The difference between the frequency of changes in the loans' interest rates and payments along with a
limitation on changes in the minimum monthly payments to 71/2% per year can result in payments that are
Fo
not sufficient to pay all of the monthly interest charges. Unpaid interest charges are added to the loan
balance until the loan's balance increases to a specified limit, which is no more than 115% of the original
loan amount, at which time a new monthly payment amount adequate to repay the loan over its remaining
contractual life is established.
op
Following is a summary of pay option loans held for investment by Banking Operations:
St
m
Average original FICO score 715 717
Average refreshed FICO score 680 —
Loans underwritten with low or no stated income documentation 83 % 81 %
co
Borrowers electing to make less than full interest payments(4) 72 % 81 %
Loans delinquent 90 days or more(3) 12.40 % 5.36 %
d.
(1)
The ratio of the amount of the loan that is secured by the property to the lower of the original
appraised value or purchase price of the property.
au
(2)
Estimated based upon April 2008 home value indices developed by the Mortgage Risk
Assessment Corporation.
Fr
(3)
Based upon unpaid principal balance.
re
(4)
The ratio is calculated based on borrowers who made a payment during the last month of the
reporting period and made less than a full interest payment.
su
The Company routinely forecasts its exposure to payment recast on negatively amortizing loans. The
following assumptions were used to forecast this exposure as of June 30, 2008:
clo
1)
18% Constant Prepayment Rate
2)
Use of forward interest rate curves to estimate interest rates in future periods
re
3)
Loans that do not pay off completely are assumed to negatively amortize 100% of the time.
Fo
81
op
Using these assumptions as of June 30, 2008, pay option loans that are expected to reset are shown in
the following table:
St
Projected
Balance at
w.
2011 6,955,560
Thereafter 2,463,522
Loans assumed to repay before recast 9,572,824
22,974,778
Loans serviced by others(1) 3,117,303
m
$ 26,092,081
co
(1)
We do not maintain the loan level detail necessary to project payoff dates and balances for loans
serviced by others.
d.
The information in the table above is limited in that it was performed at a particular point in time and
is subject to the accuracy of various assumptions used, including prepayment speeds, interest rates and the
au
percentage of loans that negatively amortize.
Our primary credit risk management tool for our portfolio of loans held for investment is the
origination and purchase of loans underwritten to balance our assessment of the borrower's credit risk
Fr
against the expected return on the loan. We assess a loan by considering the borrower's credit profile and
the value of collateral securing the loan. Where a proposed first mortgage loan's loan-to-value ratio is
higher than a specified level, which is usually 80% for conventional loans, we generally require the
borrower to supplement the collateral with primary mortgage insurance.
re
To minimize credit losses we actively monitor our portfolio of loans held for investment and work
with borrowers who contact us or who become delinquent on their loans. Our portfolio monitoring
su
activities may provide us with information that allows us to take actions to limit our loss exposure such as
suspending borrowers' access to their home equity lines of credit when their loans or related senior liens
reach a specified delinquency status or when their property values decline below a specified threshold.
clo
We use several tools to establish communication with and assist borrowers in curing defaults on our
loans, including frequent outreach efforts throughout the collection process using tools such as brochures,
housing fairs, counseling letters and DVD mailings. Our objective in the loss mitigation process is to
develop payment plans or workout options that have both the highest probability of successful resolution
and minimal risk of loss to Countrywide. We have also developed loan modification programs designed to
re
assist borrowers with refinancing their ARM and pay option ARM loans before their loans reset.
82
Fo
Our investment portfolio's nonperforming assets (comprised of non-accrual loans and foreclosed
op
assets) and troubled debt restructurings, the allowances for credit losses and charge-offs are summarized as
follows:
St
Portfolio Portfolio
Amount Loans Amount Loans
(dollar amounts in thousands)
Nonperforming assets:
ww
Nonaccrual loans:
With third party credit enhancements(1) $ 2,086,725 1.96 % $ 1,272,116 1.12 %
Without third party credit enhancements 3,263,833 3.06 % 1,611,951 1.43 %
5,350,558 5.02 % 2,884,067 2.55 %
m
Foreclosed residential real estate 661,566 0.62 % 394,859 0.35 %
Total nonperforming assets $ 6,012,124 5.64 % $ 3,278,926 2.90 %
co
Troubled debt restructuring on accrual status (2) $ 1,068,179 1.00 % $ 6,320 0.01 %
d.
% of % of
Nonaccrual Nonaccrual
au
Amount Loans Amount Loans
Allowances for credit losses:
Allowance for loan losses $ 4,524,466 $ 2,141,247
Liability for losses on unfunded loan
Fr
commitments 57,606 37,516
Estimated amounts recoverable from pool
mortgage insurance (895,925 ) (555,803 )
re
Allowances for credit losses, net of estimated pool
mortgage insurance $ 3,686,147 68.89 % $ 1,622,960 56.27 %
(1)
su
Third party credit enhancements include borrower-paid mortgage insurance and pool insurance
acquired by Banking Operations.
clo
(2)
During the quarter ended March 31, 2008, we changed our accrual policy for troubled debt
restructurings to take into account the borrower's recent payment performance and prospects for
repayment under the modified terms when determining the loan's accrual status on the date of
re
modification.
Fo
83
w.
The following table shows investment loan charge-offs, net of recoveries, by product:
ww
m
Prime Home Equity $ 779,715 $ 103,059
Prime Mortgage:
Pay option and payment advantage 371,850 26,381
co
Other 129,031 12,684
Subprime 8,614 —
Total net charge-offs $ 1,289,210 $ 142,124
d.
The increase in our nonperforming assets and charge-offs from the year-ago period was driven by the
au
effects that declining real estate collateral values and significant tightening of available credit resulting
from the market disruption that began in the third quarter of 2007 had on delinquency and default trends as
well as portfolio seasoning. We expect the level of nonperforming assets and credit losses to increase, both
in absolute terms and as a percentage of our loan portfolio, as current weakness in the housing market
Fr
develops and as our loan portfolio continues to season.
re
The following table shows the unpaid balance of loans held for investment arising from our mortgage
banking activities:
su June 30, December 31,
2008 2007
(in thousands)
clo
Prime $ 3,622,784 $ 1,768,448
Subprime 1,734,940 2,045,875
Prime Home Equity 510,526 435,695
5,868,250 4,250,018
re
Our portfolio of loans held for investment arising from our mortgage banking activities includes loans
that are nonsalable due to an identified defect or that we have repurchased—either to remedy a violation of
op
a representation or warranty made in a loan sale, to minimize the cost of servicing a severely delinquent
loan insured or partially guaranteed by the FHA or VA or in connection with a clean-up call (a clean-up
call represents the repurchase of mortgage loans when the remaining outstanding balance of the mortgage
loans falls to a level where the cost of servicing the loans becomes burdensome in relation to the benefits of
St
servicing).
when we record the sale of loans and we adjust our estimates for losses quarterly. We record repurchased
loans at their estimated fair value when they are repurchased and any resulting loss is charged against the
liability.
ww
We may determine that a portion of the loans that we originate or purchase for sale will not be sold
because of a defect, which may include a document deficiency or deterioration of the credit status of the
loan during the period it is held for sale. Such loans are transferred to our portfolio of loans
84
m
held for investment at the lower of cost or estimated fair value on an individual loan basis and any loss is
co
recorded as a component of gain on sale of loans and securities in current period earnings. Subsequent
losses that may result from deteriorations in the credit quality of the loans that have been transferred to the
investment portfolio are included in our provision for loan losses.
d.
Mortgage Warehouse Lending Advances
au
We hold a portfolio of commercial loans made to other mortgage lenders to finance their inventories
pending sale to Countrywide and other lenders. Our portfolio of mortgage loan warehouse advances totaled
$0.9 billion and the average loan balance was $8.3 million at June 30, 2008. These loans are underwritten
by assessing the creditworthiness of the warehouse lending borrowers. This includes reviewing both
Fr
borrower-provided financial information and publicly available credit rating information and press
coverage, as well as understanding the borrowers' operational controls and product risk and assessments of
collateral.
re
We monitor the length of time that advances are outstanding against specific residential loans and may
require the borrower to pay off aged advances. We also monitor the fair value of our collateral to ensure
that the level of collateral posted is adequate to repay our advance in the event of default by our borrower
su
and we require our warehouse lending borrowers to post specified levels of cash collateral to supplement
the mortgage loan collateral. We also regularly review updated financial information of borrowers,
including pipeline and hedging positions. We recorded $2.2 million of charge-offs related to this activity
during the six months ended June 30, 2008 and no charge-offs in the year-ago period. Our advance rates
clo
and the collateral we advance funds against are limited to that which we can sell into the presently
disrupted secondary market.
Our portfolio of mortgage banking-related nonperforming assets and troubled debt restructurings
includes mortgage warehouse lending advances because we engage in warehouse lending activities
re
primarily to support our mortgage banking activities. Loans held for investment and foreclosed assets from
our mortgage banking activities and the related allowance for credit losses are summarized as follows:
Fo
Nonperforming assets:
Nonaccrual loans(1)(2):
Residential
St
Commercial(4) 105 —
Total foreclosed assets 290,763 412,984
Total nonperforming assets $ 1,103,517 $ 1,017,614
m
Troubled debt restructurings on accrual status $ 51,957 $ —
85
co
d.
au
% of % of
Nonaccrual Nonaccrual
Amount Loans Amount Loans
Allowances for credit losses:
Fr
Allowance for loan losses(5):
Residential $ 502,524 64.10 % $ 247,106 43.55 %
Commercial(4) 8,661 30.10 % 11,138 29.88 %
re
511,185 62.90 % 258,244 42.71 %
Liability for losses on unfunded loan commitments 6,048 868
Total allowances for credit losses
su $ 517,233 63.64 % $ 259,112 42.85 %
clo
Annualized Annualized
Net Charge-offs Net Charge-offs
as % of Average as % of Average
Amount Investment Loans Amount Investment Loans
(dollar amounts in thousands)
Fo
(1)
Excludes $3,022.2 million and $2,171.1 million, at June 30, 2008 and December 31, 2007,
op
respectively, of loans that we have the option (but not the obligation) to repurchase and we have
not exercised such option. These loans are required to be reflected in our balance sheet regardless
of our intention to exercise the option to repurchase the loans.
St
(2)
Excludes government-guaranteed mortgage loans held for investment totaling $376.4 million and
$397.6 million at June 30, 2008 and December 31, 2007, respectively.
w.
(3)
Generally these loans have been repurchased and recorded at fair value or transferred to loans held
for investment at the lower of cost or estimated fair value. Fair value estimates incorporate the
ww
impaired status at the date of repurchase of the loans. Losses related to subsequent deterioration in
the credit quality of the loans are recorded in the allowance for loan losses.
(4)
Comprised of warehouse lending advances secured by mortgage loans.
(5)
The allowance for loan losses excludes any reduction to the cost basis of loans recorded to reflect
m
estimated fair value at repurchase or transfer to held for investment.
The increase in our nonperforming assets and charge-offs from June 30, 2007 was driven by the
co
impact that the weakening housing market and significant tightening of available credit had on
delinquencies and default trends as well as portfolio seasoning.
86
d.
au
Allowance for Loan Losses
Following is a summary of our consolidated allowance for loan losses by activity for the periods
Fr
presented:
re
Six months ended June 30, 2008
Investment Portfolio
Mortgage Commercial Warehouse Mortgage
Lending Real Estate
su Lending Banking Total
(dollar amounts in thousands)
Balance, beginning of period $ 2,140,536 $ 711 $ 11,138 $ 247,106 $ 2,399,491
Provision for loan losses 3,326,787 5,215 — 500,275 3,832,277
Change in estimate of amounts
clo
recoverable from pool mortgage
insurance 340,122 — — — 340,122
Charge-offs (1,310,759 ) — (2,172 ) (258,692 ) (1,571,623 )
Recoveries 21,549 — — 13,835 35,384
re
m
Ending allowance as a percentage
of loans receivable 0.9 % 0.1 % 0.6 % 2.2 % 0.9 %
co
The increase in the allowance and provision for loan losses is due to increased losses inherent in the
loan portfolio resulting from increased level of mortgage delinquencies, defaults and loss severities, as well
as downward revisions in expectations of changes in home prices.
d.
Lending Activities—Sale of Loans
A significant portion of the mortgage loans that we originate or purchase are sold into the secondary
au
mortgage markets primarily in the form of securities, and to a lesser extent as whole loans. When we sell or
securitize our loans we retain varying degrees of credit risk from the representations and warranties or
corporate guarantees issued or the continuing investments and/or obligations we
Fr
87
re
retain, either in the form of credit-enhancing subordinated interests or through the structure of certain of our
securitizations. su
Our Prime Mortgage Loans generally are sold on a non-recourse basis, while Prime Home Equity and
Subprime Mortgage Loans generally were sold with limited recourse for credit losses. Regardless of
whether our loans are sold with recourse, almost all of our loan sale transactions retain credit risk in the
clo
form of the representations and warranties we provide and that are customary for loan sales transactions.
When we sell a loan, we make various representations and warranties relating to, among other things,
the following:
Fo
•
our ownership of the loan
•
the validity of the lien securing the loan
op
•
the absence of delinquent taxes or liens against the property securing the loan
St
•
the effectiveness of title insurance on the property securing the loan
w.
•
the process used in selecting the loans for inclusion in a transaction
•
ww
the loan's compliance with any applicable loan criteria (e.g., loan balance limits, property type,
delinquency status) established by the buyer
•
the condition of the property securing the loan
m
•
the existence of hazard insurance
co
•
the loan's compliance with applicable local, state and federal laws
d.
the absence of fraud in the loan.
The specific representations and warranties made by us depend on the nature of the transaction and the
au
requirements of the buyer. Market conditions and credit-rating agency requirements may also affect
representations and warranties and the other provisions we may agree to in loan sales.
In the event of a breach of our representations and warranties, we may be required to either repurchase
Fr
the mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, we bear
any subsequent credit loss on the mortgage loans. Our representations and warranties are generally not
subject to stated limits. However, our contractual liability arises only when the representations and
warranties are breached and generally only when a loss results from the breach. We attempt to limit our risk
re
of incurring these losses by structuring our operations to ensure consistent production of quality mortgages
and servicing those mortgages at levels that meet secondary mortgage market standards. We make
significant investments in personnel and technology to ensure the quality of our mortgage loan production.
su
We estimate our liability for representations and warranties when we sell loans and update our
estimate quarterly. Our provision for estimated losses arising from loan sales is recorded as an
clo
88
re
adjustment to gain on sale of loans and securities. Following is a summary of the activity in our liability for
representations and warranties for the periods presented:
Fo
2008 2007
(in thousands)
Balance, beginning of period $ 639,637 $ 390,111
Provisions for losses 1,183,527 90,435
St
Corporate Guarantees
Our corporate guarantees are contracts written to protect purchasers of our loans from credit losses up
ww
to a specified amount. We estimate the losses to be absorbed by the guarantees when we sell loans with
guarantees and update our estimates every quarter. We record our provision for losses arising from the
guarantees as a component of gain on sale of loans and securities. Following is a summary of the activity in
our liability for corporate guarantees for the periods presented:
Six Months Ended
m
June 30,
2008 2007
(in thousands)
co
Balance, beginning of period $ 46,202 $ 45,425
Provisions for losses 30,339 13,318
Charge-offs (2,553 ) (2,727 )
Balance, end of period $ 73,988 $ 56,016
d.
Corporate guarantees in excess of recorded liability, end of period $ 463,416 $ 506,286
au
Subordinated Interests
Our exposure to credit losses related to subordinated interests is limited to the assets' carrying values
plus the value of additional draws we may be required to subordinate if a rapid amortization event occurs in
Fr
a securitization. We carry subordinated interests at their estimated fair values. The carrying values of our
subordinated interests are as follows:
re
June 30, December 31,
2008 2007
(1)
re
89
Fo
op
June 30,
2008 2007
(in thousands)
Prime home equity retained interests $ 1,468,730 $ 194,177
w.
We estimate our liability for impairment losses related to our future draw obligations and update our
estimate quarterly. Our provision for estimated losses arising from future draw obligations is recorded as a
component of impairment of retained interests. The accrued liability for impairment related to future
expected funding obligations under a rapid amortization event was $637.5 million as of June 30, 2008.
m
Following is a summary of changes in the liability:
co
Six Months Ended
June 30,
2008 2007
d.
(in thousands)
Beginning balance $ 704,097 $—
Provision 55,967 —
au
Charge-offs (122,571 ) —
Ending balance $ 637,493 $—
Fr
Mortgage Loans Held for Sale
At June 30, 2008, mortgage loans held for sale amounted to $11.8 billion. While loans are in
re
inventory, we bear credit risk after taking into consideration primary mortgage insurance (which is
generally required for conventional first mortgage loans with a loan-to-value ratio greater than 80%), FHA
insurance or VA guarantees. su
Loans held for sale that have been placed on nonaccrual status include loans whose credit quality has
deteriorated during the time that they have been held for sale. Nonaccrual loans held for sale totaled
$288.5 million and $206.7 million at June 30, 2008 and December 31, 2007, respectively.
clo
Effective for loan originations beginning on January 1, 2008, most of our new loan production is
carried at the loans' estimated fair values which take into account marketplace perceptions of the loan's
credit risk. The remaining mortgage loans held for sale are carried at the lower of cost or estimated fair
value in the aggregate, which takes into account a reduction in value for impaired loans.
re
Mortgage Reinsurance
Fo
We provide mortgage reinsurance on certain mortgage loans included in our servicing portfolio
through contracts with several primary mortgage insurance companies. Under these contracts, we provide
aggregate excess loss coverage in a mezzanine layer in exchange for a portion of the pool's mortgage
insurance premium. As of June 30, 2008, approximately $137.8 billion of mortgage loans in our servicing
op
portfolio are covered by such mortgage reinsurance contracts. The reinsurance contracts place limits on our
maximum exposure to losses. At June 30, 2008, the maximum aggregate losses under the reinsurance
contracts were limited to $1,264.9 million. We are required to pledge securities
St
90
w.
to cover this potential liability. The accumulated liability recorded for estimated reinsurance claims totaled
$585.8 million and $148.8 million at June 30, 2008 and December 31, 2007, respectively. As of June 30,
2008, the liability for reinsurance claims includes case reserves totaling $332.6 million relating to certain of
ww
m
interest rate risk management activities. We manage this credit risk by selecting only counterparties we
believe to be financially strong, spreading the credit risk among many such counterparties, by placing
contractual limits on the amount of unsecured credit extended to any single counterparty and by entering
co
into netting agreements with the counterparties, as appropriate.
The aggregate amount of counterparty credit exposure after consideration of relevant netting
agreements, before and after collateral held by us, are as follows:
d.
June 30, December 31,
au
2008 2007
(in millions)
Aggregate credit exposure before collateral held $ 4,107 $ 6,135
Less: collateral held (1,760 ) (3,873 )
Fr
Net aggregate unsecured credit exposure $ 2,347 $ 2,262
re
For the six months ended June 30, 2008 and 2007 we incurred no credit losses due to non-performance
of any of our counterparties.
Loan Servicing su
The following table sets forth certain information regarding our servicing portfolio of single-family
mortgage loans, including loans held for sale, loans held for investment and loans serviced under
clo
subservicing agreements, for the periods indicated:
2008 2007
(in millions)
Beginning owned servicing portfolio $ 1,451,990 $ 1,280,119
Fo
(1)
Excludes purchases from third parties in which servicing rights were not acquired.
ww
91
m
June 30,
2008 2007
(dollar amounts in millions)
co
Composition of owned servicing portfolio at period end:
Conventional mortgage $ 1,236,048 $ 1,173,002
Subprime Mortgage 98,862 123,438
d.
Prime Home Equity 37,687 44,707
Government:
au
FHA-insured mortgage 71,066 42,781
VA-guaranteed mortgage 18,598 15,281
Total owned portfolio $ 1,462,261 $ 1,399,209
Fr
Delinquent mortgage loans(1):
30 days 3.23 % 2.73 %
60 days 1.39 % 1.01 %
re
90 days or more 2.92 % 1.24 %
Total delinquent mortgage loans 7.54 % 4.98 %
Loans pending foreclosure(1)
su 1.72 % 0.74 %
Delinquent mortgage loans(1):
Conventional 4.89 % 2.64 %
clo
Subprime Mortgage 28.92 % 20.15 %
Prime Home Equity 7.18 % 3.70 %
Government 12.25 % 12.37 %
re
(1)
Expressed as a percentage of the total number of loans serviced, excluding subserviced loans and
St
We attribute the overall increase in delinquencies in our servicing portfolio from June 30, 2007 to
June 30, 2008 to increased production of loans in recent years with higher loan-to-value ratios and reduced
w.
documentation requirements, combined with a weakening housing market and significant tightening of
available credit and to portfolio seasoning. We believe the delinquency rates in our servicing portfolio are
consistent with rates for similar mortgage loan portfolios in the industry.
ww
m
description of our consolidation policy.) Such transactions are structured to manage our interest rate, credit
or liquidity risks, to diversify funding sources or to optimize our capital.
co
Most of our off-balance sheet arrangements relate to the securitization of mortgage loans. Our
mortgage loan securitizations are normally structured as sales and involve the transfer of mortgage loans to
qualifying special-purpose entities that are not subject to consolidation. In a securitization, an
d.
92
au
entity transferring the assets is able to sell those assets for cash. Special-purpose entities used in such
Fr
securitizations obtain cash by issuing securities representing beneficial interests in the transferred assets to
investors. In a securitization, we customarily provide representations and warranties with respect to, and we
generally retain the right to service, the transferred mortgage loans.
re
We also generally have the right to repurchase mortgage loans from the special-purpose entity
pursuant to a clean-up call, which is exercised when the costs exceed the benefits of servicing the
remaining loans. su
Our Prime Mortgage Loans generally are securitized on a non-recourse basis, while Prime Home
Equity and Subprime Mortgage Loans generally were securitized with limited recourse for credit losses.
During the six months ended June 30, 2008, we did not securitize any Subprime Mortgage or Prime Home
clo
Equity Loans. Our exposure to credit losses related to our limited recourse securitization activities is
limited to the carrying value of our subordinated interests, to losses that may arise from rapid amortization
events that cause subsequent draws that we are contractually required to advance to be subordinated to all
other interests in these securitizations and to the contractual limit of reimbursable losses under our
corporate guarantees less the recorded liability for such guarantees.
re
Under the terms of our HELOC securitizations, we make advances to borrowers when they make a
subsequent draw on their line of credit and we are reimbursed for those advances from the cash flows in the
Fo
securitization. This reimbursement normally occurs within a short period after the advance. However, in the
event that loan losses requiring draws on monoline insurer's policies (which protect the bondholders in the
securitization) exceed a specified threshold or duration, reimbursement of our advances for subsequent
draws occurs only after other parties in the securitization (including the senior bondholders and the
op
monoline insurer) have received all of the cash flows to which they are entitled. This status, known as a
rapid amortization event, has the effect of extending the time period for which our advances are
outstanding, and may result in Countrywide not receiving reimbursement for all of the funds advanced. We
evaluate all of our HELOC securitizations for their potential to experience a rapid amortization event by
St
estimating the amount and timing of future losses on the underlying loans and the excess spread available
to cover such losses and by evaluating any estimated shortfalls in relation to contractually defined triggers.
During the fourth quarter of 2007, our off-balance sheet obligations relating to rapid amortization
w.
events contained in our home equity line-of-credit securitizations were triggered as a result of actual and
probable future losses relating to loans underlying these securitizations exceeding specified thresholds or
durations. Normally, a rapid amortization event is not expected to occur and is deemed remote. However,
sudden deterioration in the housing market experienced in late 2007 resulted in it becoming probable that a
ww
rapid amortization event would occur. Because of these events, we recorded impairment losses of
$704.1 million in 2007 related to estimated future draw obligations on the home equity securitizations that
have entered or are probable to enter rapid amortization status. During the six months ended June 30, 2008,
we recorded impairment losses of $56.0 million.
As of June 30, 2008, 18 of 57 outstanding HELOC securitizations, representing 62.2% of the unpaid
principal balance of our HELOC securitizations, were subject to rapid amortization events. We have
m
identified seven additional HELOC securitizations, representing 14.2% of the unpaid principal balance of
our HELOC securitizations, were probable to become subject to rapid amortization events.
co
The available credit lines for the securitizations subject to or probable to be subject to a rapid
amortization event are approximately $1.7 billion at June 30, 2008. Substantially all of the remaining
borrower draw periods for such securitizations ranged from 18 months to 47 months with a weighted
average remaining borrower draw period of 35 months.
d.
Due to the borrower's ability to pay down and redraw balances in HELOC loans, a maximum funding
obligation related to rapid amortization events cannot be defined. The charges we will
au
93
Fr
ultimately record as a result of the rapid amortization events are dependent on the performance of the loans
re
in the securitizations that are in rapid amortization; the amount of subsequent draws made by borrowers on
such loans; and the timing of such losses, borrower draws, principal repayments and other cash flows
related to the securitizations. su
To mitigate the amount of additional draws we are required to fund as the result of rapid amortization
and, more broadly, as the result of the credit performance of all the HELOC loans we service, we are taking
actions that are provided for in the borrowers' line of credit agreements, including suspending borrowers'
clo
access to existing lines of credit when their loans or related senior liens reach a specified delinquency status
or when their property values decline below a specified threshold; and not extending the draw period under
existing lines of credit. Where appropriate, we are also modifying and repurchasing certain loans and
soliciting certain borrowers to refinance their loans.
re
For a further discussion of our exposure to credit risk, see the section in this Report entitled
Management's Discussion and Analysis of Financial Condition and Results of Operations—Credit Risk
Management.
Fo
We do not believe there are any other off-balance sheet arrangements that have had, or are reasonably
likely to have, a current or future material effect on our financial condition, results of operations, liquidity,
capital expenditures or capital resources.
op
Our material contractual obligations were summarized and included in our 2007 Annual Report. There
have been no material changes outside the ordinary course of our business in the contractual obligations as
summarized in our 2007 Annual Report during the six months ended June 30, 2008.
St
Prospective Trends
w.
Outlook
We believe the current environment will provide significant continuing challenges for the financial
services sector, including Countrywide. Specifically, in the near term, we have experienced and are likely
ww
to continue to experience:
•
Continued declines in housing values
•
Increasing delinquencies and foreclosures
m
•
Continued disruptions in the secondary mortgage and debt capital markets and
co
•
More restrictive legislative and regulatory environments.
d.
As a result of these conditions, we are experiencing, among other things, the following:
au
Lower loan production volumes
•
Higher credit losses, impairment of subordinated interests and higher claims under representations
Fr
and warranties
•
Reduced access to secondary mortgage and debt capital markets
re
•
Increased cost of debt su
•
Reduction of availability of credit enhancements for the loans and securities we sell and invest in.
clo
Our outlook is subject to risks and uncertainties as discussed in the section "Factors That May Affect
Our Future Results."
94
re
Fo
Housing Values
Housing values affect us in several ways. Declines in housing values affect us by negatively impacting
the demand for mortgage financing, increasing risk of default by mortgagors and increasing risk of loss on
op
defaulted loans. These factors are somewhat offset by reduced prepayments in our loan servicing portfolio.
Recently, we have seen broad-based declines in housing values. We expect housing values to continue
to decrease during the near term which may increase our credit loss experience and which has affected our
St
willingness to offer certain mortgage loan products. Both of these factors have and may continue to impact
our results of operations.
w.
Changes in investor demand for mortgage loans can have a significant impact on our ability to access
the secondary mortgage market as a competitive outlet. In the second quarter of 2008, we saw a
ww
continuation of the illiquidity in the secondary mortgage market and a continuation of downgrades by
certain credit rating agencies of large numbers of mortgage-backed securities. These factors have combined
to severely decrease demand for and profitability of a large portion of the products we have historically
produced. In response to these developments we have tightened our underwriting and program guidelines
and substantially limited our production of non agency-eligible loans to our investment portfolio.
m
Impact of Declines in Credit Performance
co
With the current contraction in the U.S. housing market and the resulting declining housing prices,
along with broad-based worsening of lenders' portfolio performances, we expect elevated credit losses in
the near term. Since 2007, we have observed a marked decline in credit performance (as adjusted for age)
for recent vintages, especially those loans with higher risk characteristics, including reduced
d.
documentation, higher loan-to-value ratios or low credit scores. Deterioration in the credit performance of
these loans has resulted in materially increased credit losses, impairment of our related credit-subordinated
interests, recognition of losses from rapid amortization events, higher claims under our representations and
au
warranties and elimination of demand for our mortgage-backed securities and the availability of credit
enhancements for the loans and securities we sell and invest in. We expect these factors to continue and to
be reflected in future results of operations.
Fr
Regulatory Trends
The regulatory environments in which we operate have an impact on the activities in which we may
re
engage, how the activities may be carried out and the profitability of those activities. Therefore, changes to
laws, regulations or regulatory policies can affect whether and to what extent we are able to operate
profitably.
su
On February 13, 2008, the Economic Stimulus Act of 2008 was signed into law. The law provides for,
among other things, temporary increases in the loan limits for the FHA's Single-Family Program and the
conforming loan limits for loans eligible for purchase by Fannie Mae and Freddie Mac. The limits are
clo
raised to as high as $729,750 from the current $362,790 for the FHA Single Family program and $417,000
for Fannie Mae and Freddie Mac. The temporary increase applies to loans originated between July 1, 2007
and December 31, 2008.
With rising delinquency and foreclosure rates in the mortgage market, policymakers at the state and
re
federal level are increasingly looking to enact measures to delay or halt the foreclosure process and require
servicers to mitigate the impact of foreclosures on local communities. Congress is considering several
pieces of legislation to stem rising foreclosures. One of the major items under consideration is a
Fo
95
op
change to the bankruptcy law to allow borrowers to declare bankruptcy in order to have their loan balances
reduced and other terms renegotiated (a so-called "cramdown"). In addition, federal legislation targeting
St
mortgage servicing practices and the foreclosure process has been introduced and could be approved in
2009. At the state level, dozens of legislatures have already enacted or are preparing to enact legislation to
slow the foreclosure process, up to and including consideration of foreclosure moratoria. Local
governments are enacting ordinances that require servicers to better maintain real estate owned properties
w.
and that impose "impact fees" on servicers' real estate owned inventory. While providing some relief to
mortgage borrowers, these measures could increase servicing costs and also could be construed as
undermining legal certainty for investors, and could therefore have long term consequences for investments
ww
On July 30, 2008, the Housing and Economic Recovery Act of 2008 was signed into law. In part, the
act provides for permanent increases in the loan limits for the FHA's Single-Family Program and the
conforming loan limits for loans eligible for purchase by Fannie Mae and Freddie Mac to no more than
$625,000. The act also creates a new, temporary, voluntary program within FHA to provide FHA-insured
m
mortgages to distressed borrowers. FHA-approved lenders for these refinancings will have to accept a
discount on the original loan's principal, and borrowers will have to share the new equity and any future
appreciation with the FHA should they sell or refinance the property. The FHA is authorized to insure up to
co
$300 billion in mortgages under this program, which is to begin on October 1, 2008 and end on
September 30, 2011. The act contains a number of provisions reforming regulatory oversight of Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks (collectively "GSEs") and modernizing elements of
the FHA. The act also contains provisions to stimulate housing demand through tax credits and
d.
enhancements to revenue bond programs. Because new regulations will have to be promulgated to
implement the new refinancing program, the potential impacts of new regulatory oversight of the GSEs are
unknown and the reactions of the market to all of these changes are uncertain, we are unable to determine
au
to what extent these changes may affect our operations.
The Federal Reserve has finalized new rules under the Truth-in-Lending Act and Home Ownership
Equity Protection Act to strengthen disclosures and prohibit certain origination and servicing practices
Fr
deemed unfair or deceptive. The new rules will take effect in 2008 and 2009. HUD unveiled in March 2008
a proposed revision to the RESPA rules to improve up front disclosures of mortgage costs, however it is not
clear whether a final rule will be issued in 2008. After addressing foreclosure-related concerns, Congress
and the states are expected to return their focus to matters intended to address the lending and underwriting
re
practices that are perceived as causing the current market conditions, including:
• su
Substantially tightening restrictions on subprime and prime lending terms and features
•
Imposing certain underwriting standards, up to and including suitability-style regulation of lenders
clo
and brokers
•
Licensing and/or registering mortgage brokers and loan originators
re
•
Increasing responsibilities of lenders and purchasers of mortgages on the secondary market.
Fo
The legislative and regulatory risks facing the mortgage industry should remain intense throughout
2008 and into 2009.
Accounting Developments
op
In December of 2007, The American Securitization Forum ("ASF") issued the Streamlined
Foreclosure and Loss Avoidance Framework for Securitized Adjustable Rate Mortgage Loans (the "ASF
Framework"). The ASF Framework was developed to address large numbers of subprime loans that are at
St
risk of default when the loans reset from their initial fixed interest rates to variable rates during the
96
w.
ww
coming 18 months. The objective of the framework is to provide uniform guidelines for evaluating large
numbers of loans for refinancing in an efficient manner while complying with the relevant tax regulations
and off-balance sheet accounting standards for loan securitizations. The ASF Framework was developed
with the participation of representatives of the mortgage securitization industry and the U.S. Government to
provide streamlined borrower evaluation procedures in the evaluation of loan modification options for
borrowers with subprime adjustable-rate loans meeting certain criteria. Specifically, the ASF Framework
m
targets loans:
co
originated between January 1, 2005 and July 31, 2007
•
with initial fixed interest rate periods of 36 months or less and
d.
•
that are scheduled for their first interest rate reset between January 1, 2008 and July 31, 2010.
au
The ASF Framework requires the loan servicer to categorize the targeted loans into one of three
segments and address the borrowers according to the assigned segment:
Fr
•
Segment 1 loans: the borrower is likely to be able to refinance into any available mortgage
product—the borrowers should refinance their loans into the available products if they are
re
unwilling or unable to meet the reset payment
•
Segment 2 loans: the loan is current but the borrower is unlikely to be able to refinance into any
su
readily available mortgage industry product—these borrowers should be evaluated for streamlined
(or "fast track") evaluation and modification
•
clo
Segment 3 loans: the loan is not current—the servicer should determine the appropriate loss
mitigation strategy—other than a streamlined modification—that maximizes the recoveries to the
securitization trust that holds the loan. Loss mitigation strategies may include loan modification,
forbearance, short sale or foreclosure.
re
The ASF Framework specifies criteria that borrowers who are evaluated for streamlined modification
must meet to qualify for a fast track modification, including property occupancy, credit score and an
expected payment change threshold when the interest rate resets. Segment 2 borrowers who meet the
Fo
On January 8, 2008, the SEC's Office of the Chief Accountant issued a letter addressing the
accounting issues relating to the ASF Framework. The letter concluded that the SEC would not object to
op
continuing off-balance sheet accounting treatment for Segment 2 loans modified pursuant to the ASF
Framework. The SEC's Office of the Chief Accountant also asked the FASB to address the issues related to
the sales accounting guidance in the applicable accounting literature.
St
For those current loans that are accounted for off-balance sheet that are modified, but not as part of the
ASF Framework above, the servicer must perform on an individual basis, an analysis of the borrower and
the loan to demonstrate it is probable that the borrower will not meet the repayment obligation in the near
w.
term. Such analysis shall provide sufficient evidence to demonstrate that the loan is in imminent or
reasonably foreseeable default. The SEC's Office of the Chief Accountant issued a letter in July 2007
stating that it would not object to continuing off-balance sheet accounting treatment for these loans.
ww
The Company began fast-track evaluation for loan modifications under Segment 2 of the ASF
framework in June 2008 and the off-balance sheet accounting treatment of QSPEs that hold those loans was
not affected. Other workout activities relating to subprime ARM loans include repayment plans and
modifications of loans evaluated on an individual basis.
As of June 30, 2008, the principal balance of beneficial interests issued by the QSPEs that hold
subprime ARM loans totaled $57.8 billion. The fair value of beneficial interests related to those QSPEs
m
held by CFC totaled $54.0 million as of June 30, 2008. Following is a summary of loans in QSPEs that
97
co
d.
hold subprime ARM loans as of June 30, 2008 as well as workout and payoff activity for the subprime
loans by ASF categorization for the six months then-ended:
au
Activity during the six months ended June 30, 2008(1)
Balance at Other
Fr
June 30, Workout
2008 Payoffs Fast-track Activities Foreclosures
(in millions)
Subprime ARM loans:
re
Segment 1 $ 5,865.1 $ 940.2 $ — $ 219.4 $ 0.6
Segment 2 6,450.4 304.5 411.5 750.5 —
Segment 3 10,054.7 su 59.4 — 3,056.4 1,358.3
Total subprime ARM loans 22,370.2 $ 1,304.1 $ 411.5 $ 4,026.3 $ 1,358.9
Other loans 32,039.2
clo
Foreclosed real estate 3,343.7
$ 57,753.1
(1)
re
On July 1, 2008, Countrywide completed its Merger with Red Oak Merger Corporation, pursuant to
the terms of the previously announced merger agreement. Upon consummation of the Merger, Red Oak
Merger Corporation was renamed "Countrywide Financial Corporation." As a result of the Merger, actual
op
We make forward-looking statements in this Report and in other reports we file with the SEC and in
press releases. Our management may make forward-looking statements orally in a public forum to analysts,
St
•
Projections of our revenues, income, earnings per share, capital structure or other financial items
w.
•
Descriptions of our plans or objectives for future operations, products or services
ww
•
Forecasts of our future economic performance, interest rates, profit margins and our share of
future markets
•
Descriptions of assumptions underlying or relating to any of the foregoing.
m
Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking
statements speak only as of the date they are made. We do not undertake to update them to reflect changes
co
that occur after the date they are made.
Forward-looking statements give management's expectation about the future and are not guarantees.
Words like "believe," "expect," "anticipate," "promise," "plan" and other expressions or words of similar
d.
meanings, as well as future or conditional verbs such as "will," "would," "should," "could" or "may" are
generally intended to identify forward-looking statements. There are a number of factors, many of which
are beyond our control, that could cause actual results to differ significantly from historical results or those
au
anticipated include, but are not limited to the following:
•
Changes in the Company's management, strategies, operations and business plans that occur as a
Fr
result of its acquisition by Bank of America.
Other risk factors are described in other reports and documents that we file with or furnish to the SEC
re
including the 2007 Annual Report. Other factors that could also cause results to differ from our
98
su
clo
expectations may not be described in any such report or document. Each of these factors could by itself, or
together with one or more other factors, adversely affect our business, results of operations and/or financial
condition.
re
Our management has conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
op
"Exchange Act")), as of the end of the period covered by this Report as required by paragraph (b) of
Rules 13a-15 and 15d-15 under the Exchange Act. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this Report.
St
There has been no change in our internal control over financial reporting during the quarter ended
June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ww
99
PART II. OTHER INFORMATION
m
Item 1. Legal Proceedings
co
See Note 26—Legal Proceedings to the consolidated financial statements for litigation and regulatory
disclosures.
d.
Item 6. Exhibits
au
(a)
Exhibits
Fr
100
re
su
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
clo
authorized.
Anne D. McCallion
Chief Financial Officer
St
101
w.
INDEX OF EXHIBITS
Exhibit No. Description
3.3* Certificate of Incorporation of Countrywide Financial Corporation (the "Company")
m
(incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed
with the SEC on July 8, 2008).
co
3.4* Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Current
Report on Form 8-K, filed with the SEC on July 8, 2008).
4.63* First Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation, the
d.
Company and The Bank of New York Mellon, as trustee, to the Subordinated Indenture
between the Company, and The Bank of New York Mellon, as trustee, dated as of May 16,
2006 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K,
au
filed with the SEC on July 8, 2008).
4.64* First Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation, the
Company, Countrywide Home Loans, Inc. ("CHL"), and The Bank of New York Mellon, as
Fr
trustee, to the Indenture between the Company, CHL, and The Bank of New York, as trustee,
dated as of February 1, 2005 (incorporated by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K, filed with the SEC on July 8, 2008).
re
4.65* Second Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation,
CHL, the Company, and The Bank of New York Mellon, as trustee, to the Indenture between
Countrywide Funding Corporation, Countrywide Credit Industries, Inc., and The Bank of New
su
York, as trustee dated as of January 1, 1992, as supplemented by First Supplemental
Indenture, dated as of June 15, 1995, among CHL (formerly Countrywide Funding
Corporation), the Company (formerly Countrywide Credit Industries, Inc.), and The Bank of
New York, as trustee (incorporated by reference to Exhibit 4.3 to the Company's Current
clo
Report on Form 8-K, filed with the SEC on July 8, 2008).
4.66* First Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation, CHL,
the Company, and The Bank of New York Mellon, as trustee, to the Indenture between CHL,
re
Countrywide Credit Industries, Inc., and The Bank of New York, as trustee dated as of
December 1, 2001 (incorporated by reference to Exhibit 4.4 to the Company's Current Report
on Form 8-K, filed with the SEC on July 8, 2008).
Fo
4.67* First Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation, the
Company, CHL, Bank of America Corporation, and The Bank of New York Mellon, as
trustee, to the Indenture between the Company, CHL, and The Bank of New York, as trustee,
dated as of May 22, 2007 (incorporated by reference to Exhibit 4.5 to the Company's Current
op
102
St
4.68* Second Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation, the
Company, CHL, and The Bank of New York Mellon, as trustee, to the Subordinated Indenture
between the Company, CHL, and The Bank of New York, as trustee, dated as of April 11,
2003, as supplemented by the First Supplemental Indenture, dated as of April 11, 2003, among
ww
the Company, CHL, and The Bank of New York, as trustee (incorporated by reference to
Exhibit 4.6 to the Company's Current Report on Form 8-K, filed with the SEC on July 8,
2008).
4.69* Second Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation, the
m
Company, and The Bank of New York Mellon, as trustee, to the Junior Subordinated
Indenture between the Company, and The Bank of New York, as trustee, dated as of
November 8, 2006, as supplemented by the Supplemental Indenture, dated as of November 8,
co
2006, between the Company and The Bank of New York, as trustee (incorporated by reference
to Exhibit 4.7 to the Company's Current Report on Form 8-K, filed with the SEC on July 8,
2008).
d.
4.70* First Supplemental Indenture, dated July 1, 2008, among Red Oak Merger Corporation, CHL,
the Company, and The Bank of New York Mellon, as trustee, to the Indenture among CHL,
Countrywide Credit Industries, Inc. and The Bank of New York, as trustee, dated as of June 4,
au
1997 (incorporated by reference to Exhibit 4.8 to the Company's Current Report on Form 8-K,
filed with the SEC on July 8, 2008).
4.71* Second Supplemental Trust Deed, dated July 1, 2008, among Red Oak Merger Corporation, the
Fr
Company, CHL, and Deutsche Trustee Company Limited, as trustee, to the Trust Deed among
the Company, CHL, and Deutsche Trustee Company Limited, as trustee, dated as of
August 15, 2005, as supplemented and restated by First Supplemental Trust Deed, dated as of
August 31, 2006, among CHL, the Company, and Deutsche Trustee Company Limited, as
re
trustee (incorporated by reference to Exhibit 4.9 to the Company's Current Report on Form 8-
K, filed with the SEC on July 8, 2008).
su
4.72* Fifth Supplemental Trust Deed, dated July 1, 2008, among Red Oak merger Corporation, CHL,
the Company, and Deutsche Trustee Company Limited, as trustee, to the Trust Deed among
CHL, the Company (formerly Countrywide Credit Industries, Inc.), and Bankers Trustee
Company Limited, as trustee, dated as of May 1, 1998, as supplemented and restated by
clo
Fourth Supplemental Trust Deed, dated as of January 29, 2002, among CHL, the Company
(formerly Countrywide Credit Industries, Inc.), and Deutsche Trustee Company Limited, as
trustee (incorporated by reference to Exhibit 4.10 to the Company's Current Report on Form 8-
K, filed with the SEC on July 8, 2008).
re
4.73* First Supplemental Note Deed Poll, dated July 1, 2008, between Red Oak Merger Corporation
and the Company to the Note Deed Poll by the Company, dated as of April 29, 2005
(incorporated by reference to Exhibit 4.11 to the Company's Current Report on Form 8-K,
Fo
+10.118 The Company's Change in Control Severance Plan (As Amended and Restated June 24, 2008).
op
+10.119 First Amendment dated June 18, 2008 to the Company's 401(k) Savings and Investment Plan,
as amended and restated effective January 1, 2007.
103
w.
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
m
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
co
*
Incorporated by reference
d.
+
Constitutes a management contract or compensatory plan or arrangement
au
104
Fr
re
QuickLinks
COUNTRYWIDE FINANCIAL CORPORATION FORM 10-Q June 30, 2008 TABLE OF CONTENTS
su
PART I. FINANCIAL INFORMATION
Financial Statements
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE
SHEETS
clo
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF OPERATIONS
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED
re
Note 9—Securities Purchased Under Agreements to Resell, Securities Borrowed and Federal
Funds Sold
Note 10—Loans Held for Investment, Net
Note 11—Investments in Other Financial Instruments, at Estimated Fair Value
w.
m
Note 21—Pension Plans
Note 22—Segments and Related Information
Note 23—Summarized Financial Information
co
Note 24—Borrower and Investor Custodial Accounts
Note 25—Loan Commitments
Note 26—Legal Proceedings
Note 27—Recently Issued Accounting Pronouncements
d.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Credit Risk Management
Item 4. Controls and Procedures
au
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
SIGNATURES
Fr
re
su
clo
re
Fo
op
St
w.
ww
EX-4.49 19 dex449.htm 1ST SUPP. NOTE DEED POLL GUAR. IND., 11/7/8, TO THE
DEED POLL GUAR. IND. 4/29/05
m
Exhibit 4.49
co
First Supplemental Deed Poll Guarantee and Indemnity
relating to the Deed Poll Guarantee and Indemnity dated 29 April 2005 (as amended and supplemented
d.
from time to time)
au
Bank of America Corporation (“Corporation”)
Fr
Level 50
Bourke Place
600 Bourke Street
re
Melbourne Vic 3000
Australia
T +61 3 9643 4000 begin_of_the_skype_highlighting +61 3 9643
4000 end_of_the_skype_highlighting su
F +61 3 9643 5999
DX 101 Melbourne
clo
1 Assumption 2
Fo
Noteholders bound 3
Direction to hold this First Supplemental Deed Poll Guarantee and Indemnity 3
2 Miscellaneous 3
St
m
(i)
co
First Supplemental Deed Poll Guarantee and Indemnity
d.
Date: 7 November 2008
au
By: COUNTRYWIDE HOME LOANS, INC., a company incorporated with limited
liability in the State of New York (“CHL”)
Fr
liability in the State of Delaware (“Corporation”)
In favour of: Each person who is from time to time a Noteholder (as defined in the Note Deed Poll
(defined below)).
re
Recitals:
A.
su
Countrywide Financial Corporation (formerly known as Red Oak Merger Corporation)
(“CFC”) assumed, pursuant to a First Supplemental Note Deed Poll dated 1 July 2008,
certain obligations of the Issuer under the Note Deed Poll dated 29 April 2005 (as so
supplemented on 1 July 2008, the “Note Deed Poll”), in connection with a A$3,500,000,000
clo
Medium Term Note Programme (the “Programme”).
B. The Corporation has subsequently assumed under a Second Supplemental Note Deed Poll
(the “Second Supplemental Note Deed Poll”) certain obligations of CFC under the Note
Deed Poll.
re
C. CHL has provided a guarantee in respect of the Notes pursuant to a Deed Poll Guarantee and
Indemnity dated 29 April 2005 in relation to the Programme (as amended and supplemented,
the “Guarantee”).
Fo
D. The Corporation and CHL entered into an Asset Purchase Agreement dated 7 November
2008, pursuant to which CHL will sell to the Corporation substantially all of CHL’s assets
(the “Asset Purchase”).
E. The Asset Purchase is expected to be consummated on 7 November 2008.
op
F. Condition 4.6 of the Notes provides that in the case of a transfer of CHL’s property and
assets substantially as an entirety, the person which acquires by transfer the properties and
assets shall expressly assume by supplemental deed poll all the obligations of CHL under the
St
1
ww
H. CHL and the Corporation are of the opinion that this First Supplemental Deed Poll Guarantee
and Indemnity is not materially prejudicial to the interests of the Noteholders.
I. CHL has delivered to the Programme Manager (as defined in the Note Deed Poll) a
m
certificate signed by two of its directors and an opinion of counsel acceptable to the
Programme Manager, stating that the Asset Purchase and this First Supplemental Deed Poll
Guarantee and Indemnity comply with the Conditions (as defined in the Note Deed Poll) and
all conditions precedent provided for in the Conditions (as defined in the Note Deed Poll)
co
relating to the Asset Purchase have been complied with in accordance with Condition 4.6 of
the Notes.
J. All things necessary to make this First Supplemental Deed Poll Guarantee and Indemnity a
d.
valid deed poll and agreement according to its terms has been done.
Operative provisions:
au
1 Assumption
Assumption of the Notes
Fr
1.1 The Corporation hereby represents and warrants that:
(a) it is a corporation organized and existing under the laws of the State of Delaware; and
re
(b) the execution, delivery and performance of this First Supplemental Deed Poll Guarantee
and Indemnity has been duly authorized by the board of directors of the Corporation.
su
1.2 The Corporation hereby expressly assumes the punctual performance of all the obligations,
and the observance of every covenant of CHL under the Guarantee and each other
Transaction Document and, in accordance with Condition 4.7 of the Note Deed
Poll, the Corporation succeeds to, and is substituted for, and may exercise every right and
clo
power of, CHL under the Transaction Documents with the same effect as if the Corporation
had been named as the Guarantor therein, and following such succession CHL is relieved of
all obligations and covenants under the Transaction Documents.
Name
re
1.3 With effect from the Guarantee Effective Time specified in clause 2.1 below, the name of the
Guarantor, under the Guarantee, shall be “Bank of America Corporation”.
Fo
2
St
Poll Guarantee and Indemnity against the Corporation even though it is not a party to, or is
w.
not in existence at the time of execution and delivery of, this First Supplemental Deed Poll
Guarantee and Indemnity.
Rights independent
ww
1.5 Each Noteholder may enforce its rights under this First Supplemental Deed Poll Guarantee
and Indemnity independently from each other Noteholder.
Noteholders bound
m
1.6 Each Noteholder and any person claiming through or under a Noteholder is bound by this
First Supplemental Deed Poll Guarantee and Indemnity.
Direction to hold this First Supplemental Deed Poll Guarantee and Indemnity
co
1.7 Each Noteholder is taken to have irrevocably nominated and authorised the Registrar to hold
this deed poll in New South Wales (or such other place as the Corporation and the Registrar
agree) on its behalf. The Corporation acknowledges the right of every Noteholder to the
d.
production of this First Supplemental Deed Poll Guarantee and Indemnity.
2 Miscellaneous
au
Effect of this First Supplemental Deed Poll Guarantee and Indemnity
2.1 Upon:
Fr
(a) the execution and delivery of this First Supplemental Deed Poll Guarantee and Indemnity
by CHL and the Corporation; and
(b) the Effective Time (as defined in the Second Supplemental Note Deed Poll) having
re
occurred,
(the satisfaction of paragraphs (a) and (b) being the “Guarantee Effective Time”) the
su
Guarantee shall be supplemented in accordance with this First Supplemental Deed Poll
Guarantee and Indemnity, and this First Supplemental Deed Poll Guarantee and
Indemnity shall form a part of the Guarantee for all purposes, and every Noteholder
shall be bound thereby.
clo
Guarantee Remains in Full Force and Effect
2.2 Except as supplemented hereby, all provisions in the Guarantee shall remain in full force and
effect.
re
Guarantee and First Supplemental Deed Polls Guarantee and Indemnity Construed Together
2.3 This First Supplemental Deed Poll Guarantee and Indemnity is supplemental to the
Fo
Guarantee, and the Guarantee and this First Supplemental Deed Poll Guarantee and
Indemnity shall be read and construed together.
3
op
2.4 The Guarantee as supplemented by this First Supplemental Deed Poll Guarantee and
Indemnity is in all other respects confirmed and preserved.
w.
Severability
2.5 In case any provision in this First Supplemental Deed Poll Guarantee and Indemnity shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining
ww
provisions shall not in any way be affected or impaired by this First Supplemental Deed Poll
Guarantee and Indemnity.
m
Addresses for Notices to the Corporation.
2.7 Any notice or demand which by any provisions of this First Supplemental Deed Poll
co
Guarantee and Indemnity or the Guarantee is required or permitted to be given or served on
the Corporation may be given in accordance with the Guarantee or served by postage prepaid
first class mail addressed (until another address is notified by the Corporation in accordance
with the Conditions (as defined in the Note Deed Poll) as follows:
d.
Bank of America Corporation
Bank of America Corporate Center
au
100 North Tryon Street
NC1-007-07-13 Corporate Treasury Division
Charlotte, North Carolina 28255
Telephone: (980) 387-3776 begin_of_the_skype_highlighting (980) 387-
Fr
3776 end_of_the_skype_highlighting
Facsimile: (980) 387-8794
Attention: B. Kenneth Burton, Jr.
re
together with a copy to:
Bank of America Corporation
Legal Department su
NC1-002-29-01
101 South Tryon Street
Charlotte, North Carolina 28255
Telephone: (704) 386-4238 begin_of_the_skype_highlighting (704) 386-
clo
4238 end_of_the_skype_highlighting
Facsimile: (704) 386-1670
Attention: Teresa M. Brenner, Esq.
Headings
re
2.8 The headings of this First Supplemental Deed Poll Guarantee and Indemnity have been
inserted for convenience of reference only, are not to be considered part of this First
Supplemental Deed Poll Guarantee and Indemnity and shall in no way modify or restrict any
Fo
2.9 Nothing in this First Supplemental Deed Poll Guarantee and Indemnity or the Guarantee,
express or implied, shall give to any person, other than the parties to this First Supplemental
Deed Poll Guarantee and Indemnity and their successors and the Noteholders, any benefit of
w.
any legal or equitable right, remedy or claim under the Guarantee or this First Supplemental
Deed Poll Guarantee and Indemnity.
Counterparts
ww
2.10 The parties may sign any number of copies of this First Supplemental Deed Poll Guarantee
and Indemnity. Each signed copy shall be an original, but all of them together represent the
same instrument.
Governing law.
m
2.11 This First Supplemental Deed Poll Guarantee and Indemnity is governed by the law in force
in New South Wales.
2.12 Clauses 16.2, 16.3 and 16.4 of the Guarantee apply to this First Supplemental Deed Poll
co
Guarantee and Indemnity in the same manner as they apply to the Guarantee.
d.
5
au
Execution page
Fr
Corporation
re
EXECUTED AS A DEED POLL by )
)
BANK OF AMERICA CORPORATION acting ) su
under the authority of that company in the presence )
of: )
)
)
clo
)
)
Signature of witness ) By executing this deed the authorised signatory
) states that it has received no notice of revocation
re
CHL
op
of: )
)
)
w.
)
)
Signature of witness ) By executing this deed the authorised signatory
ww
clo
su
re
Fr
au
d.
co
m