-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JVyNehBvA/vWiFlCk7CWQ1yu0hP9x/yVM9oh5+SwSr78KYODEhkPbZeaLJuFIXUv T8L0XvNPJHGFEUK8F6NEhA== 0000025191-01-000005.txt : 20010123 0000025191-01-000005.hdr.sgml : 20010123 ACCESSION NUMBER: 0000025191-01-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 1509249 BUSINESS ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8182253000 MAIL ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 10-Q 1 0001.txt 10-Q Page 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to ____________________ Commission File Number: 1-8422 ------ COUNTRYWIDE CREDIT INDUSTRIES, INC. ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-2641992 - ------------------------------------------------------- ----------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4500 Park Granada, Calabasas, California 91302 - -------------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (818) 225-3000 ----------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at January 12, 2001 ----- ------------------------------- Common Stock $.05 par value 116,407,362 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollar amounts in thousands, except per share data) A S S E T S November 30, February 29, 2000 2000 ------------------- ------------------- Cash $ 121,858 $ 59,890 Mortgage loans and mortgage-backed securities held for sale 2,286,408 2,653,183 Trading securities, at market value 3,370,227 1,984,031 Mortgage servicing rights, net 6,060,169 5,396,477 Investments in other financial instruments 5,834,595 3,562,458 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 401,756 410,899 Other assets 2,724,454 1,755,390 ------------------- ------------------- Total assets $20,799,467 $15,822,328 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $ 4,240,962 $ 2,852,738 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $13,889,922 $ 9,782,625 Drafts payable issued in connection with mortgage loan closings 445,449 382,108 Accounts payable, accrued liabilities and other 1,321,633 997,405 Deferred income taxes 1,433,661 1,272,311 ------------------- ------------------- Total liabilities 17,090,665 12,434,449 Commitments and contingencies - - Company-obligated mandatorily redeemable capital trust pass- through securities of subsidiary trusts holding solely Company guaranteed related subordinated debt 500,000 500,000 Shareholders' equity Preferred stock - authorized, 2,500,000 shares of $0.05 par value; issued and outstanding, none - - Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and outstanding, 115,202,329 shares at November 30, 2000 and 113,463,424 shares at February 29, 2000 5,760 5,673 Additional paid-in capital 1,215,130 1,171,238 Accumulated other comprehensive income (loss) 7,955 (33,234) Retained earnings 1,979,957 1,744,202 ------------------- ------------------- Total shareholders' equity 3,208,802 2,887,879 ------------------- ------------------- Total liabilities and shareholders' equity $20,799,467 $15,822,328 =================== =================== Borrower and investor custodial accounts $ 4,240,962 $ 2,852,738 =================== =================== The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands, except per share data) Three Months Nine Months Ended November 30, Ended November 30, 2000 1999 2000 1999 ---------------- -- -------------- -------------- -- -------------- Revenues Loan origination fees $ 99,647 $ 74,598 $273,869 $344,036 Gain on sale of loans, net of commitment fees 156,740 115,954 433,267 444,618 ---------------- -------------- -------------- -------------- Loan production revenue 256,387 190,552 707,136 788,654 Interest earned 367,312 232,185 964,732 772,724 Interest charges (369,591) (218,090) (967,566) (695,932) ---------------- -------------- -------------- -------------- Net interest (expense) income (2,279) 14,095 (2,834) 76,792 Loan servicing revenue 307,238 262,704 870,461 737,795 Amortization & impairment/recovery of mortgage servicing rights, net of hedge (161,600) (75,984) (413,850) (352,264) ---------------- -------------- -------------- -------------- Net loan administration revenue 145,638 186,720 456,611 385,531 Net premiums earned 71,264 5,776 199,567 17,457 Commissions, fees and other revenues 49,610 41,494 147,007 154,144 Gain on sale of subsidiary - 4,424 - 4,424 ---------------- -------------- -------------- -------------- Total revenues 520,620 443,061 1,507,487 1,427,002 Expenses Salaries and related expenses 196,932 159,075 557,365 528,830 Occupancy and other office expenses 67,730 66,468 203,984 206,893 Marketing expenses 17,563 15,851 57,310 56,454 Insurance net losses 26,788 - 78,261 - Other operating expenses 61,980 36,927 187,800 126,016 ---------------- -------------- -------------- -------------- Total expenses 370,993 278,321 1,084,720 918,193 ---------------- -------------- -------------- -------------- Earnings before income taxes 149,627 164,740 422,767 508,809 Provision for income taxes 54,214 64,176 152,860 198,363 ---------------- -------------- -------------- -------------- NET EARNINGS $ 95,413 $100,564 $ 269,907 $ 310,446 ================ ============== ============== ============== Earnings per share Basic $0.83 $0.89 $2.36 $2.75 Diluted $0.80 $0.87 $2.29 $2.65 The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Nine Months Ended November 30, 2000 1999 ---------------- ----------------- Cash flows from operating activities: Net earnings $269,907 $ 310,446 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Gain on sale of available-for-sale securities (37,066) (11,914) Amortization and impairment/recovery of mortgage servicing rights 513,312 90,514 Depreciation and other amortization 52,921 45,939 Deferred income taxes 152,860 198,363 Origination and purchase of loans held for sale (48,452,386) (55,533,204) Principal repayments and sale of loans 48,819,161 58,208,152 ---------------- ----------------- Decrease in mortgage loans and mortgage- backed securities held for sale 366,775 2,674,948 Increase in other financial instruments (3,030,366) (1,045,669) (Increase) decrease in trading securities (1,386,196) 228,447 Increase in other assets (992,969) (36,806) Increase in accounts payable and accrued liabilities 324,228 85,861 ---------------- ----------------- Net cash provided (used) by operating activities (3,766,594) 2,540,129 ---------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (1,177,004) (1,075,699) Proceeds from securitized sales of service fees - 134,480 Acquisition of insurance company - (425,000) Purchase of property, equipment and leasehold improvements, net (30,805) (77,958) Proceeds from sale of available-for-sale securities 861,883 93,529 Proceeds from sale of subsidiary - 21,053 ---------------- ----------------- ---------------- ----------------- Net cash used by investing activities (345,926) (1,329,595) ---------------- ----------------- Cash flows from financing activities: Net increase (decrease) in warehouse debt and other short-term borrowings 2,225,452 (1,723,786) Issuance of long-term debt 2,902,236 1,462,355 Repayment of long-term debt (957,050) (818,418) Issuance of common stock 38,002 15,952 Cash dividends paid (34,152) (33,882) ---------------- ----------------- Net cash provided (used) by financing activities 4,174,488 (1,097,779) ---------------- ----------------- Net increase in cash 61,968 112,755 Cash at beginning of period 59,890 58,748 ---------------- ----------------- Cash at end of period $ 121,858 $ 171,503 ================ ================= Supplemental cash flow information: Cash used to pay interest $ 956,513 $ 671,340 Cash used to pay income taxes $ 11,731 $ 1,270 Noncash investing activities: Unrealized gain (loss) on available-for-sale securities, net of tax $ 41,189 $ (28,429) The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollar amounts in thousands) Three Months Nine Months Ended November 30, Ended November 30, 2000 1999 2000 1999 --------------------------------- -------------------------------- NET EARNINGS $95,413 $100,564 $269,907 $310,446 Other comprehensive income, net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period, before tax (5,211) (12,621) 101,524 (34,690) Income tax benefit (expense) 1,965 4,921 (36,651) 13,529 ---------------- --------------- --------------- --------------- Unrealized holding gains (losses) arising during the period, net of tax (3,246) (7,700) 64,873 (21,161) Less: reclassification adjustment for gains included in net earnings, before tax (23,470) (240) (37,066) (11,914) Income tax expense 8,463 94 13,382 4,646 --------------- --------------- --------------- ---------------- Reclassification adjustment for gains included in net earnings, net of tax (15,007) (146) (23,684) (7,268) --------------- ---------------- --------------- --------------- Other comprehensive income (loss) (18,253) (7,846) 41,189 (28,429) ---------------- --------------- --------------- --------------- COMPREHENSIVE INCOME $77,160 $ 92,718 $311,096 $282,017 ================ =============== =============== =============== The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Page 28 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended November 30, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 29, 2000 of Countrywide Credit Industries, Inc. (the "Company"). Certain amounts reflected in the consolidated financial statements for the three- and nine-month periods ended November 30, 1999 have been reclassified to conform to the presentation for the three- and nine-month periods ended November 30, 2000. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows: ------------------------------------------------ --------------------- ------------------------- Nine Months Ended (Dollar amounts in thousands) November 30, 2000 ------------------------------------------------ --------------------- ------------------------- --------------------- Mortgage Servicing Rights Balance at beginning of period $5,420,239 Additions 1,177,004 Scheduled amortization (356,790) Hedge losses (gains) applied (146,050) --------------------- Balance before valuation reserve at end of period 6,094,403 --------------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (23,762) Reductions (additions) (10,472) ---------------------- Balance at end of period (34,234) ---------------------- Mortgage Servicing Rights, net $6,060,169 ====================== ----------------------------------------------- -- ---------------- -- ---------------------- --
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (UNAUDITED) Page 7 NOTE C - INVESTMENTS IN OTHER FINANCIAL INSTRUMENTS Investments in other financial instruments included the following. ------------------------------------------------------------ ----------------------------------------------------- November 30, February 29, (Dollar amounts in thousands) 2000 2000 ------------------------------------------------------------------- --- ----------------- --- ---------------- --- Securities purchased under agreements to resell $2,597,369 $ 435,593 Servicing hedge instruments 1,672,191 1,784,315 Mortgage-backed securities retained in securitization 1,016,487 775,867 Insurance company investment portfolio 548,548 520,490 Equity securities, restricted and unrestricted - 46,193 ----------------- ---------------- $5,834,595 $3,562,458 ================= ================ ------------------------------------------------------------------- --- ----------------- --- ---------------- ---
Securities purchased under agreements to resell are classified as receivables. It is the policy of the Company to take possession of securities purchased under agreements to resell. The Company's agreements with third parties specify its rights to request additional collateral. The Company monitors the fair value of the underlying securities as compared with the related receivable, including accrued interest, and requests additional collateral as necessary. NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows. ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- November 30, 2000 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $1,064,156 $38,411 ($86,080) $1,016,487 Principal only securities 675,243 56,861 (3,508) 728,596 Insurance company investment portfolio 541,998 8,839 (2,289) 548,548 ---------------- ----------------- ---------------- ---------------- $2,281,397 $104,111 ($91,877) $2,293,631 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE D - AVAILABLE FOR SALE SECURITIES (Continued) ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 29, 2000 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $760,619 $39,411 ($24,163) $775,867 Principal only securities 1,002,496 2,372 (52,028) 952,840 Insurance company investment portfolio 523,012 483 (3,005) 520,490 Equity securities 63,136 3,193 (20,136) 46,193 ---------------- ----------------- ---------------- ---------------- $2,349,263 $45,459 ($99,332) $2,295,390 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE E - NOTES PAYABLE Notes payable consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- November 30, February 29, (Dollar amounts in thousands) 2000 2000 -------------------------------------------------------------------- -- --- ---------------- --- ----------------- --- Commercial paper $ - $ 103,829 Medium-term notes, Series A, B, C, D, E, F, G, H, I and Euro Notes 9,920,510 7,975,324 Securities sold under agreements to repurchase 3,721,200 1,501,409 Subordinated notes 200,000 200,000 Unsecured notes payable 46,000 - Other notes payable 2,212 2,063 ----------------- ---------------- $13,889,922 $9,782,625 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Commercial Paper and Backup Credit Facilities As of November 30, 2000, CHL, the Company's mortgage banking subsidiary, had unsecured credit agreements (revolving credit facilities) with consortiums of commercial banks permitting CHL to borrow an aggregate maximum amount of $5.2 billion. The facilities included a $4.2 billion revolving credit facility with forty-four commercial banks consisting of: (i) a five-year facility of $3.0 billion, which expires on September 24, 2002, and (ii) a one-year facility of $1.2 billion which expires on September 19, 2001. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. There is an additional one-year facility, which expires on April 11, 2001, with a total commitment of $1.0 billion. As consideration for the facility, CHL pays annual commitment fees of $0.8 million. The purpose of these credit facilities is to provide liquidity backup for CHL's commercial paper program. No amount was outstanding under these revolving credit facilities at November 30, 2000. The weighted average borrowing rate on commercial paper borrowings for the nine months ended November 30, 2000 was 6.49%. No commercial paper was outstanding as of November 30, 2000. In addition, CHL has entered into a $1.1 billion asset backed commercial paper conduit facility with four commercial banks. This facility has a maturity date of January 21, 2001. As consideration for this facility, CHL pays annual commitment fees of $1.4 million. Loans made under this facility are secured by conforming and non-conforming mortgage loans. No amount was outstanding under this facility at November 30, 2000. All of the facilities contain various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. NOTE E - NOTES PAYABLE (Continued) Medium-Term Notes As of November 30, 2000, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission or issued by CHL pursuant to its Euro medium-term note program were as follows. - --------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ---------------------- ---------------------------- ------------------------------------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- -------------- ------------- Series A $ - $96,500 $96,500 7.41% 8.79% Aug. 2001 Mar. 2002 Series B - 251,000 251,000 6.65% 6.98% Mar. 2003 Aug. 2005 Series C 105,000 127,000 232,000 5.85% 7.75% Mar. 2001 Mar. 2004 Series D - 385,000 385,000 6.05% 6.88% Mar. 2001 Sep. 2005 Series E - 655,000 655,000 6.94% 7.45% Sep. 2003 Oct. 2008 Series F 311,000 1,244,000 1,555,000 6.16% 7.27% Sep. 2001 May 2013 Series G - 271,000 271,000 6.90% 7.00% Aug. 2018 Nov. 2018 Series H 611,500 2,049,000 2,660,500 6.25% 8.25% May 2001 Oct. 2019 Series I 1,107,300 566,950 1,674,250 6.71% 8.00% June 2001 Aug. 2015 Euro Notes 627,406 1,512,854 2,140,260 6.10% 8.01% Mar. 2001 Jan. 2009 ------------------------------------------- Total $2,762,206 $7,158,304 $9,920,510 ===========================================
- ------------------------------------------------------------------------------- As of November 30, 2000, substantially all of the outstanding fixed-rate notes had been effectively converted through interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the nine-months ended November 30, 2000, including the effect of the interest rate swap agreements, was 6.96%. As of November 30, 2000, there were $1,511 million foreign currency denominated notes issued pursuant to the Euro medium-term notes program outstanding. Such notes are denominated in Deutsche Marks, French Francs, Portuguese Escudos, Japanese Yen and Euros. The Company manages the associated foreign currency risk by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars. NOTE E - NOTES PAYABLE (Continued) Securities Sold Under Agreements to Repurchase The Company routinely enters into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the nine-months ended November 30, 2000 was 6.43%. The weighted average borrowing rate on repurchase agreements outstanding as of November 30, 2000, was 6.55%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to repurchase the same or substantially identical MBS. Pre-Sale Funding Facilities As of November 30, 2000, CHL had uncommitted revolving credit facilities with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by conforming mortgage loans that are in the process of being pooled into MBS. As of November 30, 2000, the Company had no outstanding borrowings under either of these facilities. NOTE F - FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge. - -------------------------------------- -------------------- -------------------- ------------------ --------------------- (Dollar amounts in millions) Balance, Dispositions/ Balance, February 29, 2000 Additions Expirations November 30, 2000 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- Interest Rate Floors $50,500 5,000 (8,500) $47,000 Long Call Options on Interest Rate Futures $15,000 10,000 (25,000) $ - Long Put Options on Interest Rate Futures $1,750 3,500 - $ 5,250 Long Call Options on MBS $8,561 1,000 (4,000) $ 5,561 Capped Swaps $1,000 - - $ 1,000 Interest Rate Swaps $1,500 - - $ 1,500 Interest Rate Cap $2,500 1,500 (1,500) $ 2,500 Swaptions $36,250 25,000 (8,000) $53,250 Principal - Only Swaps - 1,250 (800) $ 450 - -------------------------------------- -------------------- -------------------- ------------------ ---------------------
Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of November 30, 2000 and February 29, 2000 is made by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. NOTE F- FINANCIAL INSTRUMENTS (Continued) ---- ------------------------------------------------ ---------------------------------- --- ---------------------------- November 30, 2000 February 29, 2000 (Dollar amounts in thousands) Carrying Estimated Carrying Estimated Amount fair value amount fair value Assets: Mortgage loans and mortgage-backed securities held for sale $2,286,408 $2,286,408 $2,653,183 $2,653,183 Trading securities 3,370,227 3,370,227 1,984,031 1,984,031 Items included in investments in other financial instruments: Principal only securities purchased 728,596 728,596 952,840 952,840 Mortgage-backed securities retained in securitizations 1,016,487 1,016,487 775,867 775,867 Insurance Company investment portfolio 548,548 548,548 520,490 520,490 Securities purchased under agreements to resell 2,597,369 2,597,369 435,593 435,593 Equity Securitiesr-estricted and unrestricted - - 46,193 46,193 Items included in other assets: Rewarehoused FHA and VA loans 328,561 328,561 336,273 336,273 Loans held for investment 240,834 240,834 177,330 177,330 Receivables related to broker-dealer activities224,807 224,807 22,612 22,612 Liabilities: Notes payable 13,889,922 13,559,611 9,782,625 9,459,011 Securities sold not yet purchased 405,618 405,618 181,903 181,903 Company-obligated mandatorily redeemable Capital trust pass-through securities of subsidiary trusts holding solely Company guaranteed related subordinated debt 500,000 498,374 500,000 489,744 Derivatives: Interest rate floors 401,756 332,076 411,278 180,360 Forward contracts on MBS (8,056) (57,392) (11,080) (13,511) Options on MBS 64,199 41,293 75,950 32,415 Options on interest rate futures 7,598 42 8,921 6,032 Interest rate caps 17,896 4,347 47,348 39,088 Capped Swaps (1,108) (1,655) (5,619) (8,040) Swaptions 474,186 286,418 341,039 76,254 Interest rate swaps (10,505) (362,551) (23,228) (457,051) Principal - only swaps 10,580 10,580 - - Short-term commitments to extend credit - 91,000 - 52,500 ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of November 30, 2000 and February 29, 2000 are based on pertinent information that was available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. NOTE G - LEGAL PROCEEDINGS Legal Proceedings The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Home Loans, Inc. was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- --------- November 30, February 29, (Dollar amounts in thousands) 2000 2000 ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $ 2,286,408 $ 2,653,183 Mortgage servicing rights, net 6,060,169 5,396,477 Other assets 7,330,855 5,240,247 -------------- -------------- Total assets $15,677,432 $13,289,907 ============== ============== Short- and long-term debt $11,149,298 $ 9,224,956 Other liabilities 1,894,885 1,632,106 Equity 2,633,249 2,432,845 -------------- -------------- Total liabilities and equity $15,677,432 $13,289,907 ============== ============== ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- ----- ----------------------------------------- --- --------------------------------------------------- -------- Nine Months Ended November 30, (Dollar amounts in thousands) 2000 1999 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $942,213 $1,125,735 Expenses 687,421 722,762 Provision for income taxes 92,999 156,837 --------------- --------------- Net earnings $161,793 $ 246,136 =============== =============== ----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE I - SEGMENTS AND RELATED INFORMATION The Company has six major segments that are grouped into Consumer and Institutional businesses. Consumer Businesses include Mortgage Originations, Mortgage-Related Investments and Business to Consumer ("B2C") Insurance. Institutional Businesses include Processing and Technology, Capital Markets and Business to Business ("B2B") Insurance. The Mortgage Originations Segment originates mortgage loans through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division. This segment also provides other complementary services offered as part of the origination process through LandSafe, Inc., including title, escrow, appraisal, credit reporting and flood determination services. The Mortgage-Related Investments segment consists of investments in assets retained in the mortgage securitization process, including MSRs and residual interests. The B2C Insurance Segment, through Countrywide Insurance Services, Inc., acts as an agent in the sale of insurance, including homeowners, fire, flood, earthquake, life and disability insurance, primarily to the Company's mortgage customers. NOTE I - SEGMENTS AND RELATED INFORMATION (Continued) The Processing and Technology Segment activities include internal sub-servicing of the Company's portfolio, as well as mortgage subservicing and subprocessing for other domestic financial institutions and foreign financial institutions (through Global Home Loans, Limited). The Capital Markets Segment purchases mortgage loans through the Correspondent Lending Division, acts as a broker/dealer specializing in mortgages and mortgage-related securities through Countrywide Securities Corporation ("CSC"), and as an agent, facilitates the purchase and sale of bulk servicing rights through Countrywide Servicing Exchange, Inc. ("CSE"). The B2B Insurance Segment includes the activities of Balboa Life and Casualty ("Balboa"), an insurance carrier that offers property and casualty insurance (specializing in creditor-placed insurance), and life and disability insurance, along with Second Charter, Inc., a mortgage reinsurance company. Included in the tables below labeled "Other" is the holding company activities and certain reclassifications to conform management reporting to the consolidated financial statements. - -------------------------------------------------------------------------------- For the three months ended November 30, 2000 Consumer Businesses Institutional Businesses ---------- ---------- --------- ----------- ---------- --------- --------- ---------- Mortgage-Related Processing Mortgage InvestmentsB2C and Capital B2B (Dollars in thousandOriginations Insurance Total Technology Markets Insurance Total Other Total - ------------------- ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- External revenues $237,900 $116,429 $9,423 $363,752 $16,103 $63,605 $78,845 $158,553 ($1,685) $520,620 Intersegment revenues - (66,546) - (66,546) 66,546 - - 66,546 - - ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- Total revenues $237,900 $49,883 $9,423 $297,206 $82,649 $63,605 $78,845 $225,099 ($1,685) $520,620 ========== ========== ========= =========== ========== ========= ========= ========== ======== =========== Segment earnings (pre-tax) $45,852 $48,174 $825 $94,851 $16,356 $20,773 $19,236 $56,365 ($1,589) $149,627 Segment assets $2,197,966 $9,366,198 $65,155 $11,629,319 $169,774 $8,013,040$898,850 $9,081,664 $88,484 $20,799,467 - ------------------- ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ----------- - ------------------------------------------------------------------------------------------------------------------------------------ For the three months ended November 30, 1999 Consumer Businesses Institutional Businesses ---------- ---------- --------- ----------- ---------- --------- --------- ---------- Mortgage-Related Processing Mortgage InvestmentsB2C and Capital B2B (Dollars in thousandOriginations Insurance Total Technology Markets Insurance Total Other Total - ------------------- ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- External revenues $196,012 $164,602 $8,038 $368,652 $10,675 $49,611 $6,148 $66,434 $7,975 $443,061 Intersegment revenues - (53,033) - (53,033) 53,033 - - 53,033 - - ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- Total revenues $196,012 $111,569 $8,038 $315,619 $63,708 $49,611 $6,148 $119,467 $7,975 $443,061 ========== ========== ========= =========== ========== ========= ========= ========== ======== =========== Segment earnings (pre-tax) $21,413 $109,585 $1,103 $132,101 $9,566 $12,602 $6,093 $28,261 $4,378 $164,740 Segment assets $2,480,393 $8,566,526 $39,292 $11,086,211 $119,162 $3,284,077$945,676 $4,348,915 $135,329 $15,570,455 - ------------------- ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ----------- NOTE I - SEGMENTS AND RELATED INFORMATION (Continued) - ------------------------------------------------------------------------------------------------------------------------------------ For the nine months ended November 30, 2000 Consumer Businesses Institutional Businesses ---------- ---------- --------- ----------- ---------- --------- --------- ---------- Mortgage-Related Processing Mortgage InvestmentsB2C and Capital B2B (Dollars in thousandOriginations Insurance Total Technology Markets Insurance Total Other Total - ------------------- ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- External revenues $673,804 $361,224 $28,579 $1,063,607 $40,696 $179,952 $221,076 $441,724 $2,156 $1,507,487 Intersegment revenues - (190,448) - (190,448) 190,448 - - 190,448 - - ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- Total revenues $673,804 $170,776 $28,579 $873,159 $231,144 $179,952 $221,076 $632,172 $2,156 $1,507,487 ========== ========== ========= =========== ========== ========= ========= ========== ======== =========== Segment earnings (pre-tax) $106,206 $165,552 $2,774 $274,532 $41,035 $59,262 $49,238 $149,535 ($1,300) $422,767 Segment assets $2,197,966 $9,366,198 $65,155 $11,629,319 $169,774 $8,013,040$898,850 $9,081,664 $88,484 $20,799,467 - ------------------- ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ----------- - ------------------------------------------------------------------------------------------------------------------------------------ For the nine months ended November 30, 1999 Consumer Businesses Institutional Businesses ---------- ---------- --------- ----------- ---------- --------- --------- ---------- Mortgage-Related Processing Mortgage InvestmentsB2C and Capital B2B (Dollars in thousandOriginations Insurance Total Technology Markets Insurance Total Other Total - ------------------- ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- External revenues $815,475 $334,548 $23,280 $1,173,303 $ 38,227 $179,712 $18,373 $236,312 $17,387 $1,427,002 Intersegment revenues - (149,785) - (149,785) 149,785 - - 149,785 - - ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ----------- Total revenues $815,475 $184,763 $23,280 $1,023,518 $188,012 $179,712 $18,373 $386,097 $17,387 $1,427,002 ========== ========== ========= =========== ========== ========= ========= ========== ======== =========== Segment earnings (pre-tax) $215,363 $170,817 $3,310 $389,490 $26,918 $70,551 $18,192 $115,661 $3,658 $508,809 Segment assets $2,480,393 $8,566,526 $39,292 $11,086,211 $119,162 $3,284,077$945,676 $4,348,915 $135,329 $15,570,455 - ------------------- ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- -----------
NOTE J - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. In July 1999, the FASB issued Statement No. 137, Deferral of the Effective Date of FASB Statement No. 133, which deferred the effective date of FAS 133 to no later than March 1, 2001 for the Company's financial statements. FAS 133 requires companies to record derivatives on their balance sheets at fair value. Changes in the fair values of those derivatives would be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value of assets or liabilities or cash flows from forecasted transactions. In June 2000, the FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to FASB Statement No. 133. The Company does not expect to implement FAS 133 and FAS 138 before March 1, 2001 and is in the process of completing the complex analysis required to determine the impact on its financial statements. Management believes that the Company's hedging activities are highly effective over the long term. However, the implementation of FAS 133 and FAS 138 could result in more volatility in quarterly reported earnings as a result of market conditions that temporarily impact the value of the derivatives while not reducing their long term hedge effect. Management does not expect that the transition adjustment required upon adoption of FAS 133 and FAS 138 will be material to the financial position of the Company; however, the potential magnitude of any transition adjustment is dependent upon market conditions at the time of the adoption. In September 2000, the FASB issued Statement No. 140 (FAS 140), Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces FAS 125 (of the same title). FAS 140 revises certain standards in the accounting for securitizations and other transfers of financial assets and collateral, and requires some disclosures relating to securitization transactions and collateral, but it carries over most of FAS 125's provisions. The collateral and disclosure provisions of FAS 140 are effective for fiscal years ending after December 15, 2000. The other provisions of this Statement are effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not expect that the adoption of this statement will have a material impact on the Company. NOTE K - EARNINGS PER SHARE Basic earnings per share is determined using net income divided by the weighted average shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The following table presents basic and diluted EPS for the three and nine months ended November 30, 2000 and 1999. - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Three Months Ended November 30, -- -- ----- ------------------------------------ -- ----- ---- 2000 1999 --------- --------- --------- ---------- --------- --------- (Amounts in thousands, Per-Share Per-Share except per share data) Net Amount Net Amount Earnings Shares Earnings Shares - ------------------------ -------- --------- --------- ----------- --------- --------- Net earnings $95,413 $100,564 ========= ========== Basic EPS Net earnings available to common shareholders $95,413 114,989 $0.83 $100,564 113,236 $0.89 Effect of dilutive stock options - 4,369 - 2,881 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $95,413 119,358 $0.80 $100,564 116,117 $0.87 ========= ========= ========== ========= - ------------------------ --------- --------- --------- - ---------- --------- --------- - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Nine Months Ended November 30, -- -- ----- ------------------------------------ -- ----- ---- 2000 1999 --------- --------- --------- ---------- --------- --------- (Amounts in thousands, Per-Share Per-Share except per share data) Net Amount Net Amount Earnings Shares Earnings Shares - ------------------------ --------- --------- --------- ---------- --------- --------- Net earnings $269,907 $310,446 ========= ========== Basic EPS Net earnings available to common shareholders $269,907 114,359 $2.36 $310,446 112,992 $2.75 Effect of dilutive stock options - 3,635 - 4,053 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $269,907 117,994 $2.29 $310,446 117,045 $2.65 ========= ========= ========== ========= - ------------------------ --------- --------- --------- - ---------- --------- ---------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 16 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," "intend," "estimate," "should" and other expressions which indicate future events and trends identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: (1) the level of demand for mortgage credit, which is affected by such external factors as the level of interest rates, the strength of the various segments of the economy and demographics of the Company's lending markets; (2) the direction of interest rates; (3) the relationship between mortgage interest rates and the cost of funds; (4) federal and state regulation of the Company's mortgage origination, mortgage servicing, capital markets and insurance operations; and (5) competition within the mortgage banking, capital markets and insurance industries. Quarter Ended November 30, 2000 Compared to Quarter Ended November 30, 1999 OPERATING SEGMENT RESULTS The Company's pre-tax earnings by segment is summarized below. - -------------------------------------------- --------------------------------------- -------- Three Months Ended (Dollar amounts in thousands) November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- -------------- Consumer Businesses: Mortgage Originations $ 45,852 $ 21,413 Mortgage-Related Investments 48,174 109,585 B2C Insurance 825 1,103 ------------- -------------- Total Consumer Businesses 94,851 132,101 Institutional Businesses: Processing and Technology 16,356 9,566 Capital Markets 20,773 12,602 B2B Insurance 19,236 6,093 -------------- ------------- Total Institutional Businesses 56,365 28,261 Other (1,589) 4,378 ------------- -------------- Pre-tax Earnings $149,627 $164,740 ============= ============== - ---------------------------------------------------------------------------------------------
Mortgage Originations Segment The Mortgage Originations segment activities include loan origination through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division, the warehousing and sales of such loans and loan closing services. Total Consumer Mortgage loan production by Division is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- Consumer Mortgages: Consumer Markets Division $ 4,645 $3,658 Wholesale Lending Division 5,218 3,530 Full Spectrum Lending, Inc. 393 352 ------------- ---------------- Total $10,256 $7,540 ============= ================ - ---------------------------------------------------------------------------------------------
The increase in pre-tax earnings of $24.4 million in the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 was primarily attributable to higher prime credit quality first mortgage loan production, increased margins on home equity and sub-prime loans and improved profitability of loan closing services. Mortgage-Related Investments Segment Mortgage-Related Investment Segment activities include investments in assets retained in the mortgage securitization process, including mortgage servicing rights ("MSRs"), residual interests in asset-backed securities and other mortgage-related assets. The decrease in pre-tax earnings of $61.4 million in the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 was primarily due to net impairment of the MSRs in the quarter ended November 30, 2000 compared to recovery of previous impairment in the quarter ended November 30, 1999, increased interest expense related to financing the mortgage-related investments and higher servicing expenses driven by the growth in the servicing portfolio, including the subservicing fee paid to the Processing and Technology Segment. These factors were partially offset by an increase in servicing revenues resulting from growth in the servicing portfolio and residual investments. As of November 30, 2000, the Company serviced $281.5 billion of loans (including $6.5 billion of loans subserviced for others), up from $244.3 billion (including $4.6 billion of loans subserviced for others) as of November 30, 1999, a 15% increase. The growth in the Company's servicing portfolio since November 30, 1999 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization. During the quarter ended November 30, 2000, the annual prepayment rate of the Company's servicing portfolio was 10%, compared to 9% for the quarter ended November 30, 1999. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven primarily by the relative level of mortgage interest rates. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of November 30, 2000 was 7.8% compared to 7.5% as of November 30, 1999. B2C Insurance Segment B2C Insurance Segment activities include the operations of Countrywide Insurance Services ("CIS"), an insurance agency that provides homeowners, life, disability and automobile as well as other forms of insurance, primarily to the Company's mortgage customers. The decrease in pre-tax earnings of $0.3 million in the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 was primarily due to a slight decline in new policies sold. Processing and Technology Segment Processing and Technology Segment activities include internal sub-servicing of the Company's portfolio, as well as mortgage subservicing and subprocessing for other domestic and foreign financial institutions. The increase in pre-tax earnings of $6.8 million in the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 was primarily due to growth in the servicing portfolio and subprocessing for foreign financial institutions. As of November 30, 2000, Global Home Loans subserviced $45 billion and during the quarter ended November 30, 2000 processed approximately $3.2 billion of originations for the Company's joint venture partner, Woolwich, plc. Capital Markets Segment Capital Markets Segment activities include primarily the operations of Countrywide Securities Corporation ("CSC"), a registered broker-dealer specializing in mortgage-related securities, and the Correspondent Lending Division ("CLD"), through which the Company purchases closed loans from mortgage bankers, commercial banks and other financial institutions. The increase in pre-tax earnings of $8.2 million in the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 was primarily due to increased production in CLD combined with CSC's increased profitability, driven by higher trading volumes. B2B Insurance Segment B2B Insurance Segment includes the activities of Balboa, an insurance carrier that offers property and casualty insurance (specializing in creditor placed insurance), and life and disability insurance together with the activities of Second Charter Reinsurance Company, a mortgage reinsurance company. The increase in pre-tax earnings of $13.1 million in the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 was due to the acquisition of Balboa (on November 30, 1999) and increased mortgage reinsurance premium volume. Other In the quarter ended November 30, 1999, the Company sold Countrywide Financial Services, Inc. which resulted in a $4.4 million pre-tax gain. CONSOLIDATED EARNINGS PERFORMANCE Revenues for the quarter ended November 30, 2000 increased 18% to $520.6 million, up from $443.1 million for the quarter ended November 30, 1999. The increase in revenues for the quarter ended November 30, 2000 compared to the quarter ended November 30, 1999 was primarily due to the acquisition of Balboa Life and Casualty ("Balboa") on November 30, 1999. Revenues for the quarter ended November 30, 2000, excluding Balboa, increased 2% compared to the same quarter of the prior year due mainly to increased production volume substantially offset by increased amortization and impairment of the MSRs. Net earnings decreased 5% to $95.4 million for the quarter ended November 30, 2000, down from $100.6 million for the quarter ended November 30, 1999. The decrease in net earnings for the quarter ended November 30, 2000 compared to the quarter ended November 30, 1999 was primarily due to decreased net earnings from mortgage-related investments, which resulted from increased amortization and impairment of MSRs partially offset by increased earnings in the mortgage originations sector due to increased production volume. The total volume of loans produced by the Company increased 39% to $17.7 billion for the quarter ended November 30, 2000, up from $12.7 billion for the quarter ended November 30, 1999. The increase in loan production was driven largely by an increase in market share. Total loan production by purpose and by interest rate type is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- Purchase $13,458 $ 9,696 Refinance 4,254 3,019 ------------- ---------------- Total $17,712 $12,715 ============= ================ ------------- ---------------- Fixed Rate $15,823 $10,374 Adjustable Rate 1,889 2,341 ------------- ---------------- Total $17,712 $12,715 ============= ================ - --------------------------------------------------------------------------------------------- Total loan production by Segment is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- ------------- ---------------- Consumer Mortgages $10,256 $7,540 Correspondent Lending Division 7,456 5,175 ------------- ---------------- Total $17,712 $12,715 ============= ================ - ---------------------------------------------------------------------------------------------
The factors which affect the relative volume of production among the Company's Segments include the price competitiveness of each Segment's various product offerings, the level of mortgage lending activity in each Segment's market and the success of each segment's sales and marketing efforts. Non-traditional loan production (which is included in the Company's total volume of loans produced) is summarized below. - -------------------------------------------- --------------------------------------- -------- Non-Traditional (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- Sub-prime $1,122 $ 969 Home Equity 1,243 886 ------------- ---------------- Total $2,365 $1,855 ============= ================ - ---------------------------------------------------------------------------------------------
Loan production revenue increased in the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 due to increased production, improved margins on home equity and sub-prime loan production partially offset by reduced margins on prime credit quality, first lien, mortgages. Sub-prime loans contributed $59.6 million to the gain on sale of loans in the quarter ended November 30, 2000 and $44.1 million in the quarter ended November 30, 1999. The sale of home equity loans contributed $38.4 million and $23.2 million to gain on sale of loans in the quarter ended November 30, 2000 and the quarter ended November 30, 1999, respectively. In general, loan production revenue is affected by numerous factors including the volume and mix of loans produced and sold, loan pricing decisions, and changes in interest rates. Net interest expense (interest earned net of interest charges) of $2.3 million for the quarter ended November 30, 2000 was down from net interest income of $14.1 million for the quarter ended November 30, 1999. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($16.5 million and $34.6 million for the quarter ended November 30, 2000 and the quarter ended November 30, 1999, respectively); (ii) interest expense related to the Company's mortgage-related investments ($96.5 million and $68.3 million for the quarters ended November 30, 2000 and November 30, 1999, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($64.5 million and $43.1 million for the quarters ended November 30, 2000 and November 30, 1999, respectively). The decrease in net interest income from the mortgage loan inventory was primarily attributable to lower inventory levels combined with a lower net earnings rate during the quarter ended November 30, 2000. The increase in interest expense related to mortgage-related investments resulted primarily from an increase in amounts financed coupled with an increase in short-term interest rates. The increase in net interest income earned from the custodial balances was primarily due to higher escrow balances as a result of a larger servicing portfolio, combined with an increase in the earnings rate from the quarter ended November 30, 1999 to the quarter ended November 30, 2000. The Company recorded MSR amortization for the quarter ended November 30, 2000 totaling $132.5 million compared to $109.2 million for the quarter ended November 30, 1999. The Company recorded impairment of $132.9 million for the quarter ended November 30, 2000 compared to recovery of previous impairment of $57.9 million for the quarter ended November 30, 1999. The primary factors affecting the amount of amortization and impairment or impairment recovery of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). In the quarter ended November 30, 2000, the Company recognized a net benefit of $103.9 million from its Servicing Hedge. The net benefit included unrealized net gains of $111.4 million and realized net expense of $7.5 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In the quarter ended November 30, 1999, the Company recognized a net expense of $24.7 million from its Servicing Hedge. The net expense included unrealized net losses of $11.9 million and realized net expense of $12.8 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. The financial instruments that comprised the Servicing Hedge included interest rate floors, principal only securities (P/O Securities"), options on interest rate swaps ("Swaptions"), options on MBS, options on interest rate futures, interest rate swaps, interest rate swaps with the Company's maximum payment capped ("Capped Swaps"), principal only swaps ("P/O Swaps") and interest rate caps. The Servicing Hedge is designed to protect the value of the MSRs from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the MSRs increases while the value of the hedge instruments declines. With respect to the floors, options on interest rate futures and MBS, caps, and Swaptions, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. With respect to the Interest Rate Swaps, Capped Swaps and P/O Swaps contracts entered into by the Company as of November 30, 2000, the Company estimates that its maximum exposure to loss over the contractual terms is $66 million. Salaries and related expenses are summarized below for the quarters ended November 30, 2000 and 1999. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 2000 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Consumer Institutional Corporate Businesses Businesses Administration Total ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ Base Salaries $64,858 $39,269 $27,619 $131,746 Incentive Bonus 30,697 10,231 4,682 45,610 Payroll Taxes and Benefits 9,433 5,884 4,259 19,576 ----------------- ---------------- ----------------- ------------------ Total Salaries and Related Expenses $104,988 $55,384 $36,560 $196,932 ================= ================ ================= ================== Average Number of Employees 6,269 4,115 1,700 12,084 ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Consumer Institutional Corporate Businesses Businesses Administration Total ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ Base Salaries $63,228 $24,147 $25,881 $113,256 Incentive Bonus 18,260 6,306 4,866 29,432 Payroll Taxes and Benefits 8,509 3,524 4,354 16,387 ----------------- ---------------- ----------------- ------------------ Total Salaries and Related Expenses $89,997 $33,977 $35,101 $159,075 ================= ================ ================= ================== Average Number of Employees 5,902 2,738 1,790 10,430 ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
The amount of salaries increased during the quarter ended November 30, 2000 as compared to the quarter ended November 30, 1999 primarily due to an increase in staff in the institutional businesses due to a larger servicing portfolio and the acquisition of Balboa on November 30, 1999. Incentive bonuses earned during the quarter ended November 30, 2000 increased primarily due to an increase in production volume and increased activity in the Capital Markets Sector. Occupancy and other office expenses for the quarter ended November 30, 2000 increased to $67.7 million from $66.5 million for the quarter ended November 30, 1999. The increase was primarily due to the acquisition of Balboa. Marketing expenses for the quarter ended November 30, 2000 increased 11% to $17.6 million as compared to $15.9 million for the quarter ended November 30, 1999. Insurance net losses are attributable to insurance claims in the B2B Insurance Segment. Insurance losses were $26.8 million for the quarter ended November 30, 2000. These losses will increase or decrease during a period depending primarily on the volume of claims caused by natural disasters. Other operating expenses were $62.0 million for the quarter ended November 30, 2000 as compared to $36.9 million for the quarter ended November 30, 1999. The increase was primarily due to the acquisition of Balboa on November 30, 1999. Nine Months Ended November 30, 2000 Compared to Nine Months Ended November 30,1999 OPERATING SEGMENT RESULTS The Company's pre-tax earnings by segment is summarized below. - -------------------------------------------- --------------------------------------- -------- Nine months ended (Dollar amounts in thousands) November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- -------------- Consumer Businesses: Mortgage Originations $106,206 $215,363 Mortgage-Related Investments 165,552 170,817 B2C Insurance 2,774 3,310 ------------- -------------- Total Consumer Businesses 274,532 389,490 Institutional Businesses: Processing and Technology 41,035 26,918 Capital Markets 59,262 70,551 B2B Insurance 49,238 18,192 -------------- ------------- Total Institutional Businesses 149,535 115,661 Other (1,300) 3,658 ------------- -------------- Pre-tax Earnings $422,767 $508,809 ============= ============== - --------------------------------------------------------------------------------------------- Mortgage Originations Segment The Mortgage Originations Segment activities include loan origination through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division, the warehousing and sales of such loans and loan closing services. Total consumer mortgage loan production by Division is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- Consumer Mortgages: Consumer Markets Division $13,073 $16,747 Wholesale Lending Division 13,636 16,110 Full Spectrum Lending, Inc. 1,216 1,055 ------------- ---------------- Total $27,925 $33,912 ============= ================ - ---------------------------------------------------------------------------------------------
The decline in pre-tax earnings of $109.2 million in the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 was primarily attributable to lower prime credit quality first mortgage loan production and margins driven by a significant reduction in refinances. These declines were partially offset by increased loan production and increased sales of higher margin home equity and sub-prime loans. Mortgage-Related Investments Segment Mortgage-Related Investment Segment activities include investments in assets retained in the mortgage securitization process, including mortgage servicing rights, residual interests in asset-backed securities and other mortgage-related assets. The decrease in pre-tax earnings of $5.3 million in the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 was primarily due to increased amortization and impairment of the MSRs, increased interest expense related to financing the mortgage-related investments and higher servicing expenses driven by the growth in the servicing portfolio, including the subservicing fee paid to the processing and technology sector. These factors offset an increase in revenues generated from a larger servicing portfolio and improved performance of the residual investments. The growth in the Company's servicing portfolio since November 30, 1999 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization. During the nine months ended November 30, 2000, the annual prepayment rate of the Company's servicing portfolio was 10%, compared to 15% for the nine months ended November 30, 1999. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven primarily by the relative level of mortgage interest rates. B2C Insurance Segment B2C Insurance Segment activities include the operations of an insurance agency, Countrywide Insurance Services ("CIS"), an insurance agency that provides homeowners, life, disability and automobile as well as other forms of insurance, primarily to the Company's mortgage customers. The decrease in pre-tax earnings of $0.5 in the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 was primarily due to a decline in new policies sold. Processing and Technology Segment Processing and Technology Segment activities include internal sub-servicing of the Company's portfolio, as well as mortgage subservicing and subprocessing for other domestic and foreign financial institutions. The increase in pre-tax earnings of $14.1 million in the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 was primarily due to growth in the servicing portfolio and subprocessing. Capital Markets Segment Capital Markets Segment activities include primarily the operations of Countrywide Securities Corporation ("CSC"), a registered broker-dealer specializing in mortgage-related securities, and the Correspondent Lending Division ("CLD"), through which the Company purchases closed loans from mortgage bankers, commercial banks and other financial institutions. The decrease in pre-tax earnings of $11.3 million in the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 was primarily due to CLD's decreased production volume and reduced margins on prime credit quality first mortgages driven primarily by the decline in refinance activity. This decline was partially offset by increased profitability of CSC due to higher trading volumes. B2B Insurance Segment B2B Insurance Segment includes the activities of Balboa, an insurance carrier that offers property and casualty insurance (specializing in creditor placed insurance), and life and disability insurance together with the activities of Second Charter Reinsurance Company, a mortgage reinsurance company. The increase in pre-tax earnings of $31.0 million in the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 was due to the acquisition of Balboa and increased mortgage reinsurance premium volume. CONSOLIDATED EARNINGS PERFORMANCE Revenues for the nine months ended November 30, 2000 increased to $1.5 billion, up from $1.43 billion for the nine months ended November 30, 1999. Net earnings decreased 13% to $269.9 million for the nine months ended November 30, 2000, down from $310.4 million for the nine months ended November 30, 1999. The increase in revenues for the nine months ended November 30, 2000 compared to the nine months ended November 30, 1999 was primarily due to the acquisition of Balboa on November 30, 1999. Revenues for the nine months ended November 30, 2000, excluding Balboa, decreased 8% compared to the nine months ended November 30, 1999. The decline in revenues, excluding Balboa, and net earnings for the nine months ended November 30, 2000 compared to the nine months ended November 30, 1999 was primarily due to a decline in prime, first lien loan originations attributable to a decline in loan refinancings. The decline was partially offset by increased net earnings from the B2B insurance segment, combined with increased production and sales of home equity and sub-prime loans. The total volume of loans produced by the Company decreased 13% to $48.5 billion for the nine months ended November 30, 2000, down from $55.5 billion for the nine months ended November 30, 1999. The decrease in loan production was primarily due to a decrease in the mortgage market, driven largely by a reduction in refinances. Total loan production by purpose and by interest rate type is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- Purchase $38,458 $35,131 Refinance 9,994 20,402 ------------- ---------------- Total $48,452 $55,533 ============= ================ ------------- ---------------- Fixed Rate $40,693 $48,794 Adjustable Rate 7,759 6,739 ------------- ---------------- Total $48,452 $55,533 ============= ================ - --------------------------------------------------------------------------------------------- Total loan production by Segment is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- ------------- ---------------- Consumer Mortgages $27,925 $33,912 Correspondent Lending Division 20,527 21,621 ------------- ---------------- Total $48,452 $55,533 ============= ================ - ---------------------------------------------------------------------------------------------
The factors which affect the relative volume of production among the Company's Segments include the price competitiveness of each Segment's product offerings, the level of mortgage lending activity in each Segment's market and the success of each Segment's sales and marketing efforts. Non-traditional loan production (which is included in the Company's total volume of loans produced) is summarized below. - -------------------------------------------- --------------------------------------- -------- Non-Traditional (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 2000 1999 ------------- ---------------- Sub-prime $3,954 $3,056 Home Equity 3,513 2,757 ------------- ---------------- Total $7,467 $5,813 ============= ================ - ---------------------------------------------------------------------------------------------
Loan production revenues decreased in the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 due to lower production and reduced margins on prime credit quality first mortgages driven by a significant reduction in refinances. These declines were partially offset by increased production and sales during the nine months ended November 30, 2000 of higher margin home equity and sub-prime loans. Net interest expense (interest earned net of interest charges) of $2.8 million for the nine months ended November 30, 2000, was down from net interest income of $76.8 million for the nine months ended November 30, 1999. Net interest income (expense) is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($68.3 million and $133.0 million for the nine months ended November 30, 2000 and the nine months ended November 30, 1999, respectively); (ii) interest expense related to the Company's mortgage-related investments ($284.2 million and $198.7 million for the nine months ended November 30, 2000 and November 30, 1999, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($177.3 million and $127.3 million for the nine months ended November 30, 2000 and November 30, 1999, respectively). The decrease in net interest income from the mortgage loan inventory was primarily attributable to lower inventory levels combined with a lower net earnings rate during the nine months ended November 30, 2000 which resulted from an increase in short term rates. The increase in interest expense related to mortgage-related investments resulted primarily from an increase in amounts financed coupled with an increase in short-term interest rates. The increase in net interest income earned from the custodial balances was primarily due to an increase in the earnings rate and an increase in the average custodial balances. The Company recorded MSR amortization for the nine months ended November 30, 2000 totaling $356.8 million compared to $354.2 million for the nine months ended November 30, 1999. The Company recorded impairment of $156.5 million for the nine months ended November 30, 2000 compared to recovery of previous impairment of $263.7 million for the six months ended November 30, 1999. The primary factors affecting the amount of amortization and impairment recovery of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). In the nine months ended November 30, 2000, the Company recognized a net benefit of $99.5 million from the Servicing Hedge. The net benefit included unrealized net gains of $132.5 million and realized net expense of $33.0 million from the sale of various financial instruments that comprise the Servicing Hedge, net of premium amortization. In the nine months ended November 30, 1999, the Company recognized a net expense of $261.8 million from its Servicing Hedge. The net expense included unrealized net losses of $231.8 million and net realized expenses of $30.0 million from the sale of various financial instruments that comprise the Servicing Hedge, net of premium amortization. Salaries and related expenses are summarized below for the nine months ended November 30, 2000 and 1999. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Nine Months Ended November 30, 2000 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Consumer Institutional Corporate Businesses Businesses Administration Total ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ Base Salaries $189,518 $108,720 $79,194 $377,432 Incentive Bonus 79,197 28,520 13,767 121,484 Payroll Taxes and Benefits 29,795 16,330 12,324 58,449 ----------------- ---------------- ----------------- ------------------ Total Salaries and Related Expenses $298,510 $153,570 $105,285 $557,365 ================= ================ ================= ================== Average Number of Employees 6,106 3,819 1,680 11,605 ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Nine Months Ended November 30, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Consumer Institutional Corporate Businesses Businesses Administration Total ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ Base Salaries $208,760 $70,627 $77,181 $356,568 Incentive Bonus 82,221 19,281 15,878 117,380 Payroll Taxes and Benefits 31,694 10,320 12,868 54,882 ----------------- ---------------- ----------------- ------------------ Total Salaries and Related Expenses $322,675 $100,228 $105,927 $528,830 ================= ================ ================= ================== Average Number of Employees 6,592 2,655 1,816 11,063 ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
The amount of salaries increased during the nine months ended November 30, 2000 as compared to the nine months ended November 30, 1999 primarily due to an increase in staff in the institutional businesses due to a larger servicing portfolio and the acquisition of Balboa on November 30, 1999. The increase was partially offset by a decline in consumer businesses as a result of a decline in mortgage originations. Incentive bonuses earned during the nine months ended November 30, 2000 increased primarily due to increased activity in Capital Markets partially offset by the decline in mortgage originations. Occupancy and other office expenses for the nine months ended November 30, 2000 decreased to $204.0 million from $206.9 million for the nine months ended November 30, 1999. The decrease was primarily due to reducing costs in consumer and institutional mortgage areas as a result of the decline in production partially offset by growth in the institutional businesses due to a larger servicing portfolio and the acquisition of Balboa. Insurance net losses are attributable to insurance claims in the B2B Insurance segment. Insurance losses were $78.3 million for the nine months ended November 30, 2000. These losses will increase or decrease during a period depending primarily on the volume of claims caused by natural disasters. Other operating expenses were $187.8 million for the nine months ended November 30, 2000 as compared to $126.0 million for the nine months ended November 30, 1999. The increase was primarily due to the acquisition of Balboa on November 30, 1999 and growth due to the larger servicing portfolio, partially offset by reducing costs in the consumer and institutional mortgage areas as a result of the decline in production. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination (consumer and institutional) operations and mortgage-related investments, which are counter cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory and MBS held for sale, MSRs, mortgage-backed securities retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk. As part of its interest rate risk management process, the Company performs various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses incorporate scenarios including selected hypothetical (instantaneous) parallel shifts in the yield curve. Various modeling techniques are employed to value the financial instruments. For mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread ("OAS") model is used. The primary assumptions used in this model are the implied market volatility of interest rates and prepayment speeds. For options and interest rate floors, an option-pricing model is used. The primary assumption used in this model is implied market volatility of interest rates. MSRs and residual interests are valued using discounted cash flow models. The primary assumptions used in these models are prepayment rates, discount rates and credit losses. Utilizing the sensitivity analyses described above, as of November 30, 2000, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $0.4 million after-tax loss related to its trading securities and there would be no loss related to its other financial instruments. As of November 30, 2000, the Company estimates that this combined after-tax loss of $0.4 million is the largest such loss that would occur within the range of reasonably possible interest rate changes. These sensitivity analyses are limited by the fact that they are performed at a particular point in time, are subject to the accuracy of various assumptions used including prepayment forecasts, and do not incorporate other factors that would impact the Company's overall financial performance in such a scenario. Consequently, the preceding estimates should not be viewed as a forecast. An additional, albeit less significant, market risk facing the Company is foreign currency risk. The Company has issued foreign currency-denominated medium-term notes (See Note E). The Company manages the foreign currency risk associated with such medium-term notes by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars, thereby eliminating the associated foreign currency risk (subject to the performance of the various counterparties to the currency swaps). As a result, potential changes in the exchange rates of foreign currencies denominating such medium-term notes would not have a net financial impact on future earnings, fair values or cash flows. Inflation Inflation affects the Company most significantly in the areas of Mortgage Originations, Mortgage-Related Investments and Capital Markets. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production decreases, particularly from loan refinancings. Although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, mortgage-related investment earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio and reducing amortization and impairment of the MSRs, and because the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the prevailing mortgage rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its mortgage related investment earnings primarily due to increased amortization and impairment of the MSRs, and decreased earnings from residual investments. The Servicing Hedge is designed to mitigate the impact of changing interest rates on mortgage related investment earnings. Seasonality The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in mortgage rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. Liquidity and Capital Resources The Company's principal financing needs are the financing of its mortgage loan inventory, investment in MSRs, the trading activities of its broker-dealer subsidiary (CSC) and the activities of the B2B insurance segment. To meet these needs, the Company currently utilizes commercial paper supported by revolving credit facilities, medium-term notes, senior debt, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, redeemable capital trust pass-through securities, securitization of servicing fee income and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from revolving credit facilities and public offerings of common and preferred stock. The Company strives to maintain sufficient liquidity in the form of unused, committed lines of credit to meet anticipated short-term cash requirements as well as to provide for potential sudden increases in business activity driven by changes in the market environment. Certain of the debt obligations of the Company and Countrywide Home Loans, Inc. ("CHL") contain various provisions that may affect the ability of the Company and CHL to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CHL to pay dividends. The principal financing needs of CSC consist of the financing of its inventory of securities and underwriting activities. Its securities inventory is financed primarily through repurchase agreements. CSC also has access to a $200 million secured bank loan facility and a secured lending facility with CHL. The primary cash needs for the B2B insurance segment are to meet short-term and long-term obligations to policyholders (payment of policy benefits), costs of acquiring new business (principally commissions) and the purchases of new investments. To meet these needs, Balboa currently utilizes cash flow provided from operations as well as through liquidation of its investment portfolio. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the additional securitization of servicing income cash flows. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells the mortgage loans it originates and purchases to investors but generally retains the right to service the loans, thereby increasing the Company's investment in MSRs. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities. In the nine months ended November 30, 2000, the Company's operating activities used cash of approximately $3.8 billion on a short-term basis primarily to support an increase in trading securities and other financial instruments, primarily securities purchased under agreements to resale. In the nine months ended November 30, 1999, operating activities provided cash of approximately $2.5 billion. Investing Activities. The primary investing activity for which cash was used by the Company was the investment in MSRs. Net cash used by investing activities was $0.3 billion for the nine months ended November 30, 2000 and $1.3 billion for the nine months ended November 30, 1999. Financing Activities. Net cash provided by financing activities amounted to $4.2 billion for the nine months ended November 30, 2000 and net cash used by financing activities amounted to $1.1 billion for the nine months ended November 30, 1999. The increase in cash flow from financing activities was primarily used to fund the change in the Company's trading securities, other financial instruments and investment in MSRs. Prospective Trends Applications and Pipeline of Loans in Process For the month ended December 31, 2000, the Company received new loan applications at an average daily rate of $422 million. As of December 31, 2000, the Company's pipeline of loans in process was $9.9 billion. This compares to a daily application rate for the month ended December 31, 1999 of $247 million and a pipeline of loans in process as of December 31, 1999 of $7.0 billion. The size of the pipeline is generally an indication of the level of near-term future fundings, as historically 43% to 77% of the pipeline of loans in process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline as of December 31, 2000 was $2.2 billion and as of December 31, 1999 was $1.6 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage loans, the level of competition in the market, the direction of mortgage rates, seasonal factors and general economic conditions. Market Factors Loan production increased 39% from the quarter ended November 30, 1999 to the quarter ended November 30, 2000. This increase was primarily due to an increase in loan purchase production of 39% to $13.5 billion during the same period driven by a strong purchase market and an increase in the Company's market share. The prepayment rate in the servicing portfolio increased from 9% for the quarter ended November 30, 1999 to 10% for the quarter ended November 30, 2000. The Company's California mortgage loan production (as measured by principal balance) constituted 23% and 20% of its total production during the quarters ended November 30, 2000 and November 30, 1999, respectively. Some regions in which the Company operates have experienced slower economic growth, and real estate financing activity in these regions has been impacted negatively. The Company has striven to diversify its mortgage banking activities geographically to mitigate such effects. The delinquency rate in the Company's servicing portfolio, excluding sub-servicing, increased to 4.58% at November 30, 2000 from 3.97% as of November 30, 1999. This increase was primarily the result of changes in portfolio mix and aging. Sub-prime loans (which tend to experience higher delinquency rates than prime loans) represented approximately 5% of the total portfolio as of November 30, 2000, up from 3% as of November 30, 1999. In addition, the weighted average age of the FHA and VA loans in the portfolio increased to 34 months at November 30, 2000 from 33 months in November 30, 1999. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. Related late charge income has historically been sufficient to offset incremental servicing expenses resulting from increased loan delinquencies. The percentage of loans in the Company's servicing portfolio, excluding sub-servicing, that are in foreclosure increased to 0.43% as of November 30, 2000 from 0.33% as of November 30, 1999. Because the Company services substantially all conventional loans on a non-recourse basis, related credit losses are generally the responsibility of the investor or insurer and not the Company. While the Company does not generally retain credit risk with respect to the prime credit quality first mortgage loans it sells, it does have potential liability under representations and warranties made to purchasers and insurers of the loans. In the event of a breach of these representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent loss on the mortgage loan may be borne by the Company. Similarly, government loans serviced by the Company (23% of the Company's servicing portfolio as of November 30, 2000) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Administration. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Administration is inadequate to cover the total credit losses incurred. The Company retains credit risk on the home equity and sub-prime loans it securitizes, through retention of a subordinated interest or through a corporate guarantee of losses up to negotiated maximum amount. As of November 30, 2000, the Company had investments in such subordinated interests amounting to $667.8 million and had reserves amounting to $50.7 million related to the corporate guarantees. Servicing Hedge As previously discussed, the Company's Servicing Hedge is designed to protect the value of its investment in MSRs from the effects of increased prepayment activity that generally results from declining interest rates. In periods of increasing interest rates, the value of the Servicing Hedge generally declines and the value of MSRs generally increases. The historical correlation of the Servicing Hedge and the MSRs has been very high. However, given the complexity and uncertainty inherent in hedging MSRs, there can be no assurance that future results will match the historical performance of the Servicing Hedge. Implementation of New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. In July 1999, the FASB issued Statement No. 137, Deferral of the Effective Date of FASB Statement No. 133, which deferred the effective date of FAS 133 to no later than March 1, 2001 for the Company's financial statements. FAS 133 requires companies to record derivatives on their balance sheets at fair value. Changes in the fair values of those derivatives would be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value of assets or liabilities or cash flows from forecasted transactions. In June 2000, the FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to FASB Statement No. 133. The Company does not expect to implement FAS 133 and FAS 138 before March 1, 2001 and is in the process of completing the complex analysis required to determine the impact on its financial statements. Management believes that the Company's hedging activities are highly effective over the long term. However, the implementation of FAS 133 and FAS 138 could result in more volatility in quarterly reported earnings as a result of market conditions that temporarily impact the value of the derivatives while not reducing their long term hedge effect. Management does not expect that the transition adjustment required upon adoption of FAS 133 and FAS 138 will be material to the financial position of the Company; however, the potential magnitude of any transition adjustment is dependent upon market conditions at the time of the adoption. In September 2000, the FASB issued Statement No. 140 (FAS 140), Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces FAS 125 (of the same title). FAS 140 revises certain standards in the accounting for securitizations and other transfers of financial assets and collateral, and requires some disclosures relating to securitization transactions and collateral, but it carries over most of FAS 125's provisions. The collateral and disclosure provisions of FAS 140 are effective for fiscal years ending after December 15, 2000. The other provisions of this Statement are effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not expect that the adoption of this statement will have a material impact on the Company. Page 32 PART II. OTHER INFORMATION Item 6. Exhibits (a) Exhibits 11.1 Statement Regarding Computation of Per Share Earnings 12.1 Computation of the Ratio of Earnings to Fixed Charges 27 Financial Data Schedules (included only in the electronic filing with the SEC). Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COUNTRYWIDE CREDIT INDUSTRIES, INC. (Registrant) DATE: January 12, 2001 /s/ Stanford L. Kurland -------------------------- Executive Managing Director and Chief Operating Officer DATE: January 12, 2001 /s/ Carlos M. Garcia ------------------------- Senior Managing Director; Finance, Chief Financial Officer (Principal Financial Officer) EX-11 2 0002.txt COMPUTATION OF EPS Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Nine Months Ended November 30, 2000 1999 ----------------- -- ---------------- (Amounts in thousands, except per share data) Basic Net earnings applicable to common stock $269,907 $310,446 ================ ================= Average shares outstanding 114,359 112,992 ================ ================= Per share amount $2.36 $2.75 ================ ================= Diluted Net earnings applicable to common stock $269,907 $310,446 ================ ================= Average shares outstanding 114,359 112,992 Net effect of dilutive stock options -- based on the treasury stock method using the average market price. 3,635 4,053 ---------------- ----------------- Total average shares 117,994 117,045 ================ ================= Per share amount $2.29 $2.65 ================ =================
EX-12 3 0003.txt RATIO OF EARNINGS TO FIXED CHARGES COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the nine months ended November 30, 2000 and for the five fiscal years ended February 29, 2000 computed by dividing net fixed charges (interest expense on all debt plus the interest element (one-third) of operating leases) into earnings (income before income taxes and fixed charges). Nine months ended November 30, Fiscal Years Ended February 29(28), -------------------------- ------------------------------------------------------------------ 2000 1999 2000 1999 1998 1997 1996 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Net earnings $269,907 $310,446 $410,243 $385,401 $344,983 $257,358 $195,720 Income tax expense 152,860 198,363 220,955 246,404 220,563 164,540 130,480 Interest charges 967,566 695,932 922,225 977,326 564,640 418,682 333,140 Interest portion of rental Expense 13,118 14,180 19,080 14,898 10,055 7,420 6,803 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Earnings available to cover fixed charges $1,403,451 $1,218,921 $1,572,503 $1,624,029 $1,140,241 $848,000 $666,143 ============ ============= ============ ============= ============ ============ ============= Fixed charges Interest charges $967,566 $695,932 $922,225 $977,326 $564,640 $418,682 $333,140 Interest portion of rental Expense 13,118 14,180 19,080 14,898 10,055 7,420 6,803 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Total fixed charges $980,684 $710,112 $941,305 $992,224 $574,695 $426,102 $339,943 ============ ============= ============ ============= ============ ============ ============= Ratio of earnings to fixed Charges 1.43 1.72 1.67 1.64 1.98 1.99 1.96 ============ ============= ============ ============= ============ ============ =============
EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 0000025191 Countrywide Credit Industries 1,000 1.00 9-MOS FEB-29-2000 MAR-01-2000 Nov-30-2000 1.00 121,858 0 0 0 0 0 660,532 251,244 20,799,467 17,090,665 0 0 0 5,760 3,203,042 20,799,467 0 1,507,487 0 1,084,720 0 0 0 422,767 152,860 269,907 0 0 0 269,907 2.36 2.29
-----END PRIVACY-ENHANCED MESSAGE-----