UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2001
For the transition period from _______________________ to __________________________
Commission File Number: 1-8422
DELAWARE 13-2641992
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4500 Park Granada, Calabasas, California 91302
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(Address of principal executive offices) (Zip Code)
(818) 225-3000
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(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 October 11, 2001
----- -------------------------------
Common Stock $.05 par value 122,227,402
A S S E T S
August 31, February 28,
2001 2001
-------------------------- ---------------------------
Cash $ 333,771 $ 126,496
Mortgage loans and mortgage-backed securities held for sale 4,662,464 1,964,018
Trading securities, at market value ($196,946 pledged as collateral) 5,954,704 4,050,082
Mortgage servicing rights, net 6,081,322 5,767,748
Investments in other financial instruments 4,083,393 4,160,314
Securities purchased under agreements to resell 4,533,282 3,109,556
Property, equipment and leasehold improvements, net 429,826 396,943
Other assets 5,055,888 3,380,350
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Total assets $31,134,650 $22,955,507
========================== ===========================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $ 7,911,095 $ 5,553,143
========================== ===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $15,085,053 $11,402,791
Securities sold under agreements to repurchase 5,898,946 3,541,230
Drafts payable issued in connection with mortgage loan closings 1,100,325 932,931
Accounts payable, accrued liabilities and other 2,957,282 1,449,288
Deferred income taxes 1,696,264 1,570,003
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Total liabilities 26,737,870 18,896,243
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-
through securities of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 500,000
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $0.05 par
value; issued and outstanding, 122,123,346 shares at
August 31, 2001 and 117,732,249 shares at February 28, 2001 6,106 5,887
Additional paid-in capital 1,488,646 1,307,679
Accumulated other comprehensive income 79,535 173,249
Retained earnings 2,322,493 2,072,449
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Total shareholders' equity 3,896,780 3,559,264
-------------------------- ---------------------------
Total liabilities and shareholders' equity $31,134,650 $22,955,507
========================== ===========================
Borrower and investor custodial accounts $ 7,911,095 $ 5,553,143
========================== ===========================
The accompanying notes are an integral part of these statements.
Three Months Six Months
Ended August 31, Ended August 31,
2001 2000 2001 2000
---------------------- ------------------- -------------------- --------------------
Revenues
Loan origination fees $ 203,034 $ 89,928 $ 401,710 $ 174,222
Gain on sale of loans 250,587 143,373 508,196 276,527
---------------------- ------------------- -------------------- --------------------
Loan production revenue 453,621 233,301 909,906 450,749
Interest earned 573,172 338,826 1,078,846 597,420
Interest charges (479,951) (331,980) (923,716) (588,776)
---------------------- ------------------- -------------------- --------------------
Net interest income 93,221 6,846 155,130 8,644
Loan servicing revenue 373,837 291,020 725,781 563,223
Amortization & impairment/recovery of mortgage servicing rights,
net of hedge (331,667) (134,091) (639,866) (252,250)
---------------------- ------------------- -------------------- --------------------
Net loan administration revenue 42,170 156,929 85,915 310,973
Net premiums earned 91,542 66,298 179,166 128,303
Commissions, fees and other revenues 74,394 53,448 114,538 97,397
---------------------- ------------------- -------------------- --------------------
Total revenues 754,948 516,822 1,444,655 996,066
Expenses
Salaries and related expenses 282,063 188,902 543,529 360,433
Occupancy and other office expenses 94,404 69,736 184,634 136,254
Marketing expenses 15,614 19,988 31,168 39,747
Insurance net losses 36,325 25,835 70,991 51,473
Other operating expenses 87,633 70,146 179,017 135,019
-------------------- --------------------
---------------------- -------------------
Total expenses 516,039 374,607 1,009,339 722,926
---------------------- ------------------- -------------------- --------------------
Earnings before income taxes 238,909 142,215 435,316 273,140
Provision for income taxes 89,675 51,180 163,032 98,646
---------------------- ------------------- -------------------- --------------------
NET EARNINGS $ 149,234 $ 91,035 $ 272,284 $ 174,494
====================== =================== ==================== ====================
Earnings per share
Basic $1.25 $0.80 $2.29 $1.53
Diluted $1.20 $0.77 $2.20 $1.49
The accompanying notes are an integral part of these statements.
Ended August 31,
2001 2000
--------------------- -------------------
Cash flows from operating activities:
Net earnings $ 272,284 $ 174,494
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sale of available-for-sale securities (129,238) (13,595)
Amortization and impairment/recovery of mortgage servicing
rights 1,004,946 247,838
Depreciation and other amortization 33,620 33,107
Deferred income taxes 163,032 98,646
Origination and purchase of loans held for sale (33,523,674) (30,740,477)
Principal repayments and sale of loans 30,825,228 31,994,285
--------------------- -------------------
(Increase) decrease in mortgage loans and mortgage-
backed securities held for sale (2,698,446) 1,253,808
(Increase) decrease in other financial instruments 427,007 (504,870)
Increase in trading securities (1,904,622) (1,340,776)
Increase in securities purchased under agreements to resell (1,423,726) (903,418)
Increase in other assets (1,662,604) (525,485)
Increase in accounts payable and accrued liabilities 1,461,388 313,522
--------------------- -------------------
Net cash used by operating activities (4,456,359) (1,166,729)
--------------------- -------------------
Cash flows from investing activities:
Additions to mortgage servicing rights, net (1,318,520) (732,532)
Additions to available-for-sale securities (1,441,943) (75,541)
Purchase of property, equipment and leasehold
improvements, net (61,308) (21,501)
Proceeds from sale of available-for-sale securities 1,078,990 260,401
--------------------- -------------------
Net cash used by investing activities (1,742,781) (569,173)
--------------------- -------------------
Cash flows from financing activities:
Net increase in short-term borrowings 2,265,114 622,180
Issuance of long-term debt 5,835,800 1,652,937
Repayment of long-term debt (1,846,936) (517,000)
Issuance of common stock 174,677 25,882
Cash dividends paid (22,240) (22,732)
--------------------- -------------------
Net cash provided by financing activities 6,406,415 1,761,267
--------------------- -------------------
Net increase in cash 207,275 25,365
Cash at beginning of period 126,496 59,890
--------------------- -------------------
Cash at end of period $ 333,771 $ 85,255
===================== ===================
Supplemental cash flow information:
Cash used to pay interest $ 919,748 $ 584,369
Cash used to pay income taxes $ 1,176 $ 11,550
Noncash investing activities:
Unrealized (loss) gain on available-for-sale securities,
net of tax ($ 93,714) $ 59,442
The accompanying notes are an integral part of these statements.
Three Months Six Months
Ended August 31, Ended August 31,
2001 2000 2001 2000
--------------------- ------------------- ------------------- --------------------
NET EARNINGS $149,234 $ 91,035 $272,284 $174,494
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period, before tax 9,271 161,709 (128,262) 106,735
Income tax benefit (expense) (3,168) (58,415) 48,107 (38,616)
--------------------- ------------------- ------------------- --------------------
Unrealized holding gains (losses) arising
during the period, net of tax 6,103 103,294 (80,155) 68,119
Less: reclassification adjustment for (gains )
losses included in net earnings, before tax 42,748 (13,660) (21,697) (13,595)
Income tax expense (15,888) 4,942 8,138 4,918
------------------- ------------------- --------------------
---------------------
Reclassification adjustment for gains
included in net earnings, net of tax 26,860 (8,718) (13,559) (8,677)
--------------------
--------------------- ------------------- -------------------
Other comprehensive income (loss) 32,963 94,576 (93,714) 59,442
--------------------- --------------------
------------------- -------------------
COMPREHENSIVE INCOME (LOSS) $182,197 $185,611 $178,570 $233,936
===================== =================== =================== ====================
The accompanying notes are an integral part of these statements.
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 three months ended August 31, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 28, 2001 of Countrywide Credit Industries, Inc. (the "Company").
On March 1, 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting For Derivative Instruments And Hedging Activities," and FASB Statement No. 138, "Accounting For Certain Derivative Instruments And Certain Hedging Activities-An Amendment Of FASB Statement NO. 133" (collectively, "FAS 133"). Under FAS 133, all derivative instruments are recognized on the balance sheet at fair value. On the date the Company enters into a derivative contract the Company designates the derivative instrument as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge), a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge) or a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded in current period net income. For a cash flow hedge, changes in the fair value of the derivative to the extent that it is effective are recorded in other comprehensive income within stockholders' equity and subsequently reclassified to income in the same period (s) that the hedged transaction impacts net income. For free-standing derivative instruments, changes in the fair values are reported in current period net income.
The Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value hedges to specific assets and liabilities on the balance sheet. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether the derivative instruments used are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued.
The Company discontinues hedge accounting prospectively when (1) it determines that a derivative instrument is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) a derivative instrument expires or is sold, terminated, or exercised; (3) a derivative instrument is dedesignated as a hedge instrument because it is unlikely that a forecasted transaction will occur or (4) management determines that designation of a derivative instrument as a hedge instrument is no longer appropriate. When hedge accounting is discontinued the derivative instrument will continue to be carried on the balance sheet at its fair value; however, the previously hedged asset or liability will no longer be adjusted for changes in fair value. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative instrument will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. When hedge accounting is discontinued because the hedging instrument is sold or terminated the amount reported in other comprehensive income to the date of sale or termination will continue to be reported in other comprehensive income until the forecasted transaction impacts earnings. In all other situations in which hedge accounting is discontinued , the derivative instrument will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings.
The Company occasionally purchases or originates financial instruments that contain an embedded derivative instrument. At inception of the financial instrument, the Company assesses whether the economic characteristics of the embedded derivative instrument are clearly and closely related to the economic characteristics of the financial instrument (host contract), whether the financial instrument that embodies both the embedded derivative instrument and the host contract is currently measured at fair value with changes in fair value reported in earnings, and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.
If the embedded derivative instrument is determined not to be clearly and closely related to the host contract, is not currently measured at fair value with changes in fair value reported in earnings, and the embedded derivative instrument would qualify as a derivative instrument, the embedded derivative instrument is separated from the host contract and carried at fair value with changes recorded in current period earnings.
Certain amounts reflected in the consolidated financial statements for the six-month period ended August 31, 2000 have been reclassified to conform to the presentation for the six-month period ended August 31, 2001.
The activity in mortgage servicing rights was as follows:
------------------------------------------------------------------------- - -----------------------------------
Six Months Ended
(Dollar amounts in thousands) August 31, 2001
------------------------------------------------------------------------- - -----------------------------------
------------------------------
Mortgage Servicing Rights
Balance at beginning of period $5,876,121
Additions 1,318,520
Scheduled amortization (461,793)
Change in fair value attributable to hedged risk (152,780)
------------------------------
Balance before valuation reserve
at end of period 6,580,068
------------------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (108,373)
Reductions (additions) (390,373)
-----------------------------
Balance at end of period (498,746)
-----------------------------
Mortgage Servicing Rights, net $6,081,322
=============================
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Investments in other financial instruments included the following.
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August 31, February 28,
(Dollar amounts in thousands) 2001 2001
---------------------------------------------------------------- ------------------------- --- ----------------------- ----
Servicing hedge instruments $2,255,095 $2,407,799
Mortgage-backed securities retained in securitizations 1,181,746 1,202,093
Insurance company investment portfolio 646,552 550,422
------------------------- -----------------------
$4,083,393 $4,160,314
========================= =======================
---------------------------------------------------------------- ------------------------- --- ----------------------- ----
Amortized cost and fair value of available-for-sale securities were as follows.
---------------------------------------------- ---------------------- --- ------------------------------------------------- --- ---------------------- ----
August 31, 2001
---------------------- --- ------------------------------------------------- --- ---------------------- ----
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------------------- ---------------------- --- ---------------------- --- ---------------------- --- ---------------------- ----
Mortgage-backed
securities retained in
securitizations $1,134,594 $47,214 ($ 62) $1,181,746
Principal only securities 1,347,922 66,186 (6,118) 1,407,990
Insurance company investment
portfolio 558,699 21,856 (761) 579,794
---------------------- ---------------------- ---------------------- ----------------------
$3,041,215 $135,256 ($6,941) $3,169,530
====================== ====================== ====================== ======================
---------------------------------------------- ---------------------- --- ---------------------- --- ---------------------- --- ---------------------- ----
---------------------------------------------- ---------------------- --- ------------------------------------------------- --- ---------------------- ----
February 28, 2001
---------------------- --- ------------------------------------------------- --- ---------------------- ----
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------------------- ---------------------- --- ---------------------- --- ---------------------- --- ---------------------- ----
Mortgage-backed
securities retained in
securitizations $1,108,557 $107,627 ($14,091) $1,202,093
Principal only securities 1,190,281 159,318 (605) 1,348,994
Insurance company investment
portfolio 531,983 21,637 (3,198) 550,422
---------------------- ---------------------- ---------------------- ----------------------
$2,830,821 $288,582 ($17,894) $3,101,509
====================== ====================== ====================== ======================
---------------------------------------------- ---------------------- --- ---------------------- --- ---------------------- --- ---------------------- ----
Notes payable consisted of the following.
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August 31, February 28,
(Dollar amounts in thousands) 2001 2001
-------------------------------------------------------------- ------------------------- --- ----------------------- ----
Medium-term notes, various series, and Euro Notes $14,377,768 $10,435,510
Convertible debentures 503,345 500,717
Subordinated notes 200,000 200,000
Unsecured notes payable - 264,196
Other notes payable 3,940 2,368
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$15,085,053 $11,402,791
========================= =======================
-------------------------------------------------------------- ------------------------- --- ----------------------- ----
During the six months ended August 31, 2001, CHL, the Company's mortgage banking subsidiary, issued medium term notes under shelf registration statements or pursuant to its Euro medium-term note program as summarized below as follows.
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(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
------------------------------ -------------------------------------------------------------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
----------------------------------------------------------- --------------- -------------- ------------------ ------------------
Series I $742,000 $30,000 $772,000 4.20% 5.16% Mar. 2002 May 2002
Series J 1,085,000 3,835,000 4,920,000 3.75% 7.05% Jun. 2002 Aug. 2016
Euro Notes 52,700 91,100 143,800 4.24% 4.58% Apr. 2002 May 2002
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Total $1,879,700 $3,956,100 $5,835,800
===========================================================
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There were $143.8 million in foreign currency-denominated notes issued pursuant to the Euro medium-term notes program outstanding. Such notes are denominated in Japanese Yen. 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.
During the six months ended August 31, 2001, CHL redeemed $1.8 billion of maturing medium term notes.
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 Mortgage-Related Investments Segment with the Production Divisions, 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.
Derivative instruments that the Company uses as part of its interest rate risk management strategy include interest rate floors, MBS mandatory forward sale and purchase commitments, options to sell or by MBS, treasury futures and interest rate futures, interest rate caps, Capped Swaps, Swaptions, interest rate futures and interest rate swaps. In addition, the Company manages foreign currency exchange rate risk with foreign currency swaps.
As a result of using over-the-counter derivative instruments, the Company has potential exposure to credit loss in the event of nonperformance by the counterparties. The Company manages this credit risk by selecting only well established, financially strong counterparties, spreading the credit risk amongst many such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any one counterparty. The Company's exposure to credit risk in the event of default by a counterparty is the current cost of replacing the contracts net of any available margins retained by the Company, a custodian or the Mortgage-Backed Securities Clearing Corporation (the "MBSCC"), which is a clearing agent.
Relative to the application of FAS 133, certain industry specific issues remain unresolved and their ultimate resolution may have an impact on reported earnings.
In order to mitigate the effect on earnings of MSR impairment that may result from increased current and projected prepayment activity that generally occurs when interest rates decline, the Company maintains a portfolio of financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). The financial instruments that form the Servicing Hedge include interest rate floors, options on interest rate futures, interest rate swaps, interest rate caps, Swaptions, options on MBS, principal-only swaps and P/O securities. A portion of the Servicing Hedge is designed to qualify as a fair value hedge under FAS 133. For the six months ended August 31, 2001, the Company recognized a pre-tax loss of $20.5 million, which represents the ineffective portion of all such FAS 133 fair value hedges of MSRs. This amount is included in amortization and impairment/recovery of mortgage servicing rights, net of hedge, in the income statement. The remaining derivative instruments are free-standing derivatives. These derivatives are marked to fair value and recorded as a component of amortization and impairment/recovery of mortgage servicing rights, net of hedge, in the income statement.
In order to mitigate the risk that a change in interest rates will result in a decline in the value of the Company's Committed Pipeline or Inventory, the Company enters into hedging transactions. The Inventory is hedged with forward contracts for the sale of loans and net sales of MBS, including options to sell MBS where the Company can exercise the option on or prior to the anticipated settlement date of the MBS. Substantially all of the inventory hedge is designed to qualify as a fair value hedge under FAS 133. For the six months ended August 31, 2001, the Company recognized a pre-tax gain of $12.8 million, representing the ineffective portion of such fair value hedges of inventory. This amount is included in gain on sale of loans in the income statement.
The Committed Pipeline is hedged with a combination of options on MBS and treasury futures and MBS forward contracts. The underlying MBS to be delivered generally correspond with the composition of the Committed Pipeline.
The Committed Pipeline, which is comprised of interest rate lock commitments issued on residential mortgage loans to be held for sale, is considered a portfolio of derivative instruments. The Committed Pipeline and the associated free-standing derivative instruments are marked to fair value and recorded as a component of gain on sale of loans in the income statement.
The Company enters into interest rate swaps to convert a portion of its fixed-rate medium term notes to LIBOR-based floating-rate debt and to convert a portion of its foreign currency fixed-rate medium term notes to U.S. dollar LIBOR-based floating-rate debt. These transactions are designed as fair value hedges under FAS 133. For the six months ended August 31, 2001, the Company recognized a pre-tax gain of $3.5 million, representing the ineffective portion of such fair value hedges of medium-term notes. This amount is included in interest charges in the income statement. In addition the company enters into interest rate swaps to convert a portion of its floating rate medium term notes to fixed-rate debt and convert a portion of its foreign currency fixed-rate medium term notes to US fixed-rate debt. These transactions are designed as a cash flow hedge under FAS 133. There was no ineffective portion of such cash flow hedges during the six months ended August 31, 2001. As of August 31, 2001, the amount of deferred net gains or losses on derivative instruments included in other comprehensive income that is expected to be reclassified as earnings during the next twelve months is not expected to be material.
Countrywide Securities Corporation ("CSC") utilizes derivatives in connection with its trading activities to manage interest-rate risk. These instruments include MBS mandatory forward sale and purchase commitments as well as short sales of cash market U.S. Treasury securities. All such derivatives are considered free-standing and as such are marked to fair value and recorded as a component of gain on sale of loans in the income statement.
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.
Summarized financial information for Countrywide Credit Industries, Inc. and subsidiaries was as follows:
------- ------------------------------------------------- -------------- -------------------------------------------------------------------- ---------------------------------
August 31, 2001
-------------- -------------------------------------------------------------------- ---------------------------------
Countrywide Credit Countrywide Home
(Dollar amounts in thousands) Industries, Inc. Loans, Inc. Other Subsidiaries
Eliminations Consolidated
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $ - $ 4,662,464 $ - $ - $ 4,662,464
Mortgage servicing rights, net - 6,081,322 - - 6,081,322
Other assets 4,690,302 11,076,508 9,716,667 (5,092,613) 20,390,864
--------------------- ------------------- ------------------- ------------------ --------------------
Total assets $4,690,302 $21,820,294 $9,716,667 ($5,092,613) $31,134,650
===================== =================== =================== ================== ====================
Company-obligated mandatorily redeemable capital
trust pass-through securities
$ - $ - $ 500,000 $ - $ 500,000
Short- and long-term debt 739,258 15,610,464 6,023,651 (1,389,374) 20,983,999
Other liabilities 54,264 3,729,048 1,981,121 (10,562) 5,753,871
Equity 3,896,780 2,480,782 1,211,895 (3,692,677) 3,896,780
--------------------- ------------------- ------------------- ------------------ --------------------
Total liabilities and equity $4,690,302 $21,820,294 $9,716,667 ($5,092,613) $31,134,650
===================== =================== =================== ================== ====================
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
------- ------------------------------------------------- -------------- -------------------------------------------------------------------- ---------------------------------
Six months ended August 31, 2001
-------------- -------------------------------------------------------------------- ---------------------------------
Countrywide Credit Countrywide Home
(Dollar amounts in thousands) Industries, Inc. Loans, Inc. Other Subsidiaries
Eliminations Consolidated
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
Statements of Earnings:
Revenues $ 8,603 $905,499 $548,148 ($17,595) $1,444,655
Expenses 4,178 644,423 378,333 (17,595) 1,009,339
Provision for income taxes 1,670 98,956 62,406 - 163,032
Equity in net earnings of subsidiaries 269,529 - - (269,529) -
--------------------- ------------------- ------------------- ------------------ --------------------
Net earnings $272,284 $162,120 $107,409 ($269,529) $ 272,284
===================== =================== =================== ================== ====================
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
------- ------------------------------------------------- -------------- -------------------------------------------------------------------- ---------------------------------
February 28, 2001
-------------- -------------------------------------------------------------------- ---------------------------------
Countrywide Credit Countrywide Home
(Dollar amounts in thousands) Industries, Inc. Loans, Inc. Other Subsidiaries
Eliminations Consolidated
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $ - $ 1,964,018 $ - $ - $ 1,964,018
Mortgage servicing rights, net - 5,767,748 - - 5,767,748
Other assets 4,343,853 9,155,120 8,336,417 (6,611,649) 15,223,741
--------------------- ------------------- ------------------- ------------------ --------------------
Total assets $4,343,853 $16,886,886 $ 8,336,417 ($6,611,649) $22,955,507
===================== =================== =================== ================== ====================
Company-obligated mandatorily redeemable capital
trust pass-through securities
$ - $ - $ 500,000 $ $ 500,000
-
Short- and long-term debt 736,630 11,435,760 5,959,565 (3,187,934) 14,944,021
Other liabilities 47,959 3,068,888 835,658 (283) 3,952,222
Equity 3,559,264 2,382,238 1,041,194 (3,423,432) 3,559,264
--------------------- ------------------- ------------------- ------------------ --------------------
Total liabilities and equity $4,343,853 $16,886,886 $8,336,417 ($6,611,649) $22,955,507
===================== =================== =================== ================== ====================
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
------- ------------------------------------------------- -------------- -------------------------------------------------------------------- ---------------------------------
Six months ended August 31, 2000
-------------- -------------------------------------------------------------------- ---------------------------------
Countrywide Credit Countrywide Home
(Dollar amounts in thousands) Industries, Inc. Loans, Inc. Other Subsidiaries
Eliminations Consolidated
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
Statements of Earnings:
Revenues ($ 3,211) $629,454 $370,122 ($ 299) $996,066
Expenses 4,008 461,939 257,278 (299) 722,926
Provision for income taxes (2,635) 61,143 40,138 - 98,646
Equity in net earnings of subsidiaries 179,078 - - (179,078) -
--------------------- ------------------- ------------------- ------------------ --------------------
Net earnings $174,494 $106,372 $ 72,706 ($179,078) $174,494
===================== =================== =================== ================== ====================
--------------------------------------------------------- --------------------- -- ------------------- -- ------------------- --- ------------------ -- -------------------- --
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.
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" are the holding company activities, the activities of Treasury Bank (which was acquired on May 17, 2001) and certain reclassifications to conform management reporting to the consolidated financial statements.
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For the three months ended August 31, 2001
Consumer Businesses Institutional Businesses
-------------- --------------- ------------- -------------- -------------- ------------- ------------- --------------
Mortgage-Related Processing
Mortgage Investments B2C and Capital B2B
(Dollars in thousands) Originations Insurance Total Technology Markets Insurance Total Other Total
------------------------- -------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
External revenues $462,864 $ 12,208 $11,300 $486,372 $ 36,028 $130,585 $101,974 $268,587 ($11) $754,948
Intersegment revenues - (76,213) - (76,213) 76,213 - - 76,213 - -
-------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
Total revenues $462,864 ($64,005) $11,300 $410,159 $112,241 $130,585 $101,974 $344,800 ($11) $754,948
============== =============== ============= ============== ============== ============= ============= ============== ============ ================
Segment earnings $199,790 ($72,325) $1,139 $128,604 $18,186 $74,409 $22,128 $114,723 ($4,418) $238,909
(pre-tax)
Segment assets $3,929,841 $11,430,647 $91,457 $15,451,945 $212,203 $13,587,343 $1,055,467 $14,855,013 $827,692 $31,134,650
------------------------- -------------- --------------- ------------- -------------- --- -------------- ------------- ------------- -------------- --- ------------ ----------------
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For the three months ended August 31, 2000
Consumer Businesses Institutional Businesses
-------------- --------------- ------------- -------------- -------------- ------------- ------------- --------------
Mortgage-Related Processing
Mortgage Investments B2C and Capital B2B
(Dollars in thousands) Originations Insurance Total Technology Markets Insurance Total Other Total
------------------------- -------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
External revenues $225,351 $129,703 $9,755 $364,809 $10,177 $63,368 $73,862 $147,407 $4,606 $516,822
Intersegment revenues - (68,244) - (68,244) 68,244 - - 68,244 - -
-------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
Total revenues $225,351 $61,459 $9,755 $296,565 $78,421 $63,368 $73,862 $215,651 $4,606 $516,822
============== =============== ============= ============== ============== ============= ============= ============== ============ ================
Segment earnings $32,800 $55,212 $889 $88,901 $14,174 $21,588 $15,754 $51,516 $1,798 $142,215
(pre-tax)
Segment assets $1,491,224 $9,202,073 $58,290 $10,751,587 $164,802 $6,412,999 $865,441 $7,443,242 $59,429 $18,254,258
------------------------- -------------- --------------- ------------- -------------- --- -------------- ------------- ------------- -------------- --- ------------ ----------------
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For the six months ended August 31, 2001
Consumer Businesses Institutional Businesses
-------------- --------------- ------------- -------------- -------------- ------------- ------------- --------------
Mortgage-Related Processing
Mortgage Investments B2C and Capital B2B
(Dollars in thousands) Originations Insurance Total Technology Markets Insurance Total Other Total
------------------------- -------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
External revenues $917,286 $ 2,138 $22,251 $941,675 $58,496 $244,073 $199,817 $502,386 $594 $1,444,655
Intersegment revenues - (150,000) - (150,000) 150,000 - - 150,000 - -
-------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
Total revenues $917,286 ($147,862) $22,251 $791,675 $208,496 $244,073 $199,817 $652,386 $594 $1,444,655
============== =============== ============= ============== ============== ============= ============= ============== ============ ================
Segment earnings
(pre-tax) $387,136 ($163,157) $2,407 $226,386 $37,512 $134,524 $42,554 $214,590 ($5,660) $435,316
Segment assets $3,929,841 $11,430,647 $91,457 $15,451,945 $212,203 $13,587,343 $1,055,467 $14,855,013 $827,692 $31,134,650
------------------------- -------------- --------------- ------------- -------------- --- -------------- ------------- ------------- -------------- --- ------------ ----------------
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For the six months ended August 31, 2000
Consumer Businesses Institutional Businesses
-------------- --------------- ------------- -------------- -------------- ------------- ------------- --------------
Mortgage-Related Processing
Mortgage Investments B2C and Capital B2B
(Dollars in thousands) Originations Insurance Total Technology Markets Insurance Total Other Total
------------------------- -------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
External revenues $435,904 $261,743 $19,156 $716,803 $ 16,844 $116,347 $142,231 $275,422 $3,841 $996,066
Intersegment revenues - (131,651) - (131,651) 131,651 - - 131,651 - -
-------------- --------------- ------------- -------------- -------------- ------------- ------------- -------------- ------------ ----------------
Total revenues $435,904 $130,092 $19,156 $585,152 $148,495 $116,347 $142,231 $407,073 $3,841 $996,066
============== =============== ============= ============== ============== ============= ============= ============== ============ ================
Segment earnings
(pre-tax) $60,354 $117,378 $1,949 $179,681 $24,679 $38,489 $30,002 $93,170 $289 $273,140
Segment assets $1,491,224 $9,202,073 $58,290 $10,751,587 $164,802 $6,412,999 $865,441 $7,443,242 $59,429 $18,254,258
------------------------- -------------- --------------- ------------- -------------- --- -------------- ------------- ------------- -------------- --- ------------ ----------------
The Company adopted FAS 133 on March 1, 2001. At the date of adoption, the Company recorded certain transition adjustments as required by FAS 133. There was no impact on net income as a result of such transition adjustments. However, such adjustments resulted in the following impact on the Company's balance sheet (in millions).
Decrease in fair value of derivatives classified as assets ($93.7)
Increase in fair value of derivatives classified as liabilities ($107.2)
Decrease in book value of hedged borrowings $107.2
Increase in book value of MSRs $81.7
Increase in book value of inventory and other assets $12.0
In November 1999, the Emerging Issues Task Force ("EITF") released Issue No. 99-20, titled "Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Asstes." EITF 99-20 is effective for quarters beginning after March 15, 2001. Under the guidelines of EITF 99-20, the accounting treatment of interest income and impairment of beneficial interests in securitization transactions is modified such that beneficial interests which are determined to have an other-than temporary impairment are required to be written down to fair value. The Company adopted EITF 99-20 for the fiscal quarter ended August 31, 2001 and there was no material impact on the Company's financial statements.
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 were included in the February 28, 2001 financial statements. All other provisions of this Statement were adopted on April 1, 2001, as required by the statement. The adoption of this statement did not have a material impact on the Company's financial statements.
In June 2001, the FASB issued Statement No. 141 (FAS 141), titled "Business Combinations." FAS 141 addresses financial accounting and reporting for business combinations and supercedes previously issued authoritative literature on the topic, including APB 16. FAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. The use of the pooling-of-interests method will no longer be allowed. FAS 141 also provides guidance as to how the purchase method is to be applied. Implementation of FAS 141 is not expected to have a material impact on the Company's financial statements.
In June 2001, the FASB issued Statement No. 142 (FAS 142), titled "Goodwill and Other Intangibles." Effective January 1, 2002, FAS 142 eliminates the amortization of goodwill and certain other intangible assets. These assets will be reviewed at least annually and assessed for impairment. Implementation of FAS 142 is not expected to have a material impact on the Company's financial statements.
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 six months ended August 31, 2001 and 2000.
-------------------------------- --- --- ------- -------------------------------------------------- --- ------- ------
Three Months Ended August 31,
--- --- ------- -------------------------------------------------- --- ------- ------
2001 2000
------------- ------------- ------------ ------------- ------------ -------------
(Amounts in thousands, except Per-Share Per-Share
per share data) Net Amount Net Amount
Earnings Shares Earnings Shares
-------------------------------- ------------- ------------ ------------ -------------
------------- -------------
Net earnings $149,234 $91,035
============= =============
Basic EPS
Net earnings available to
common shareholders $149,234 119,480 $1.25 $91,035 114,302 $0.80
Effect of dilutive stock
options - 4,603 - 3,842
------------- ------------- ------------- ------------
Diluted EPS
Net earnings available to
common shareholders $149,234 124,083 $1.20 $91,035 118,144 $0.77
============= ============= ============= ============
-------------------------------- ------------- ------------- ------------ --- ------------- ------------ -------------
-------------------------------- --- --- ------- -------------------------------------------------- --- ------- ------
Six Months Ended August 31,
--- --- ------- -------------------------------------------------- --- ------- ------
2001 2000
------------- ------------- ------------ ------------- ------------ -------------
(Amounts in thousands, except Per-Share Per-Share
per share data) Net Amount Net Amount
Earnings Shares Earnings Shares
-------------------------------- ------------- ------------ ------------ -------------
------------- -------------
Net earnings $272,284 $174,494
============= =============
Basic EPS
Net earnings available to
common shareholders $272,284 118,975 $2.29 $174,494 114,047 $1.53
Effect of dilutive stock
options - 4,625 - 3,180
------------- ------------- ------------- ------------
Diluted EPS
Net earnings available to
common shareholders $272,284 123,600 $2.20 $174,494 117,227 $1.49
============= ============= ============= ============
-------------------------------- ------------- ------------- ------------ --- ------------- ------------ -------------
On September 25, 2001, the Company declared a cash dividend of $.10 per common share payable October 31, 2001 to shareholders of record on October 15, 2001.
Effective January 1, 2002, the Company will begin reporting its financial results on a calendar year basis with a December 31 year end. Within 90 days following that date, the Company will issue a 10-K for the 10-month period ending December 31, 2001. In the interim, the Company will report results for its upcoming third fiscal quarter shortly after that quarter ends on November 30, 2001.
This Quarterly Report on Form 10-Q may contain forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results or those anticipated due to a number of factors such as the direction and level of interest rates, competitive and general economic conditions in each of our business sectors, expense and loss levels in our mortgage, insurance and other business sectors, general economic conditions in the United States and abroad and in the domestic and international areas in which we do business, the legal, regulatory and legislative environments in the markets in which the company operates, changes in accounting and financial reporting standards, decisions by the company to change its business mix, and other risks detailed in documents filed by the company with the Securities and Exchange Commission from time to time. Words like "believe", "expect", "should", "may", "could", "anticipated", "promising" and other expressions which indicate future events and trends identify forward-looking statements. The Company undertakes no obligation to publicly updated or revise any forward-looking statements.
The Company's pre-tax earnings by Segment are summarized below.
------------------------------------------------------------ ----------------------------------------------------- -----------
Three Months Ended
(Dollar amounts in thousands) August 31,
------------------------------------------------------------ ----------------------------------------------------- -----------
2001 2000
------------------ -------------------
Consumer Businesses:
Mortgage Originations $199,790 $32,800
Mortgage-Related Investments (72,325) 55,212
B2C Insurance 1,139 889
------------------ -------------------
Total Consumer Businesses 128,604 88,901
Institutional Businesses:
Processing and Technology 18,186 14,174
Capital Markets 74,409 21,588
B2B Insurance 22,128 15,754
-------------------
------------------
Total Institutional Businesses 114,723 51,516
Other (4,418) 1,798
------------------ -------------------
Pre-tax Earnings $238,909 $142,215
================== ===================
------------------------------------------------------------------------------------------------------------------------------
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 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
August 31,
---------------------------------------------- ----------------------------------------------------- -----------
2001 2000
------------------ ----------------------
Consumer Mortgages:
Consumer Markets Division $ 9,783 $ 4,386
Wholesale Lending Division 10,850 4,356
Full Spectrum Lending, Inc. 510 402
------------------ ----------------------
Total $21,143 $9,144
================== ======================
----------------------------------------------------------------------------------------------------------------
The increase in pre-tax earnings of $167.0 million in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 was primarily attributable to higher prime credit quality first mortgage loan production and margins combined with improved net interest earned from the mortgage inventory. These increases were partially offset by reduced sales of high-margin home equity loans and higher expenses as a result of the increased production.
Mortgage-Related Investments Segment
The Mortgage-Related Investments 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 $127.5 million in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 was primarily due to increased amortization and impairment of the MSRs, net of the servicing hedge, and higher servicing expenses, driven by the growth in the servicing portfolio, including the subservicing fee paid to the Processing and Technology Segment. In addition, impairment charges relating to residuals and other retained interests contributed to the decline in pre-tax earnings. These factors were partially offset by an increase in revenues generated from a larger servicing portfolio. As of August 31, 2001, the Company serviced $314.1 billion of loans (including $9.1 billion of loans subserviced for others), up from $270.5 billion (including $5.9 billion of loans subserviced for others) as of August 31, 2000, a 16% increase. The growth in the Company's servicing portfolio since August 31, 2000 was the result of loan production volume and the acquisition of bulk servicing rights. The growth in the servicing portfolio was partially offset by prepayments, partial prepayments and scheduled amortization.
During the quarter ended August 31, 2001, the annual prepayment rate of the Company's servicing portfolio was 27%, compared to 10% for the quarter ended August 31, 2000. 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 August 31, 2001 was 7.6% compared to 7.8% as of August 31, 2000.
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 increase in pre-tax earnings of $0.3 million in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 was primarily due to an increase in policies-in-force.
Processing and Technology Segment
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 and foreign financial institutions. The increase in pre-tax earnings of $4.0 million in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 was primarily due to growth in the servicing portfolio and subprocessing for foreign financial institutions (through Global Home Loans Limited). During the quarter ended August 31, 2001, Global Home Loans Limited processed 33,479 mortgage loans for others. As of August 31, 2001, Global Home Loans Limited subserviced approximately $45 billion of mortgage loans.
The Capital Markets Segment activities primarily include 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 $52.8 million in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 was primarily due to increased prime credit quality loan production and margins in CLD combined with CSC's higher trading volumes.
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 $6.4 million in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 was due to increased net written premiums and increased mortgage reinsurance premium volume.
The decrease in pre-tax earnings in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 is the result of a gain on sale of $4.9 million recognized in the August 31, 2000 quarter related to the disposition of the Company's investment in equity securities.
Revenues for the quarter ended August 31, 2001 increased 46% to $754.9 million, up from $516.8 million for the quarter ended August 31, 2000. Net earnings increased 64% to $149.2 million for the quarter ended August 31, 2001, up from $91.0 million for the quarter ended August 31, 2000. The increase in revenues and net earnings for the quarter ended August 31, 2001 compared to the quarter ended August 31, 2000 was primarily attributable to increased earnings in the Consumer Mortgage Originations Segment due to increased loan production and improved margins and to improved earnings in the Capital Markets Segment and the Processing and Technology Segment. The increase was partially offset by a decline in earnings from the Mortgage-related Investments Segment due to increased amortization and impairment of the MSRs net of servicing hedge and reduced earnings from other retained interests.
The total volume of loans produced by the Company increased 107% to $33.5 billion for the quarter ended August 31, 2001, up from $16.2 billion for the quarter ended August 31, 2000. The increase in loan production was driven largely by an increase in refinance activity.
Total loan production by purpose and by interest rate type is summarized below.
--------------------------------------------------------------------------------------------------- -----------
(Dollar amounts in millions) Loan Production
Three Months Ended
August 31,
--------------------------------------------------------------------------------------------------- -----------
2001 2000
------------------ ----------------------
Purchase $17,062 $13,405
Refinance 16,462 2,789
------------------ ----------------------
Total 33,524 $16,194
================== ======================
------------------ ----------------------
Fixed Rate $28,598 $13,725
Adjustable Rate 4,926 2,469
------------------ ----------------------
Total $33,524 $16,194
================== ======================
---------------------------------------------------------------------------------------------------------------
Total loan production by Segment is summarized below.
------------------------------------------------------------------------------------------------- -----------
(Dollar amounts in millions) Loan Production
Three Months Ended
August 31,
------------------------------------------------------------------------------------------------- -----------
2001 2000
------------------ ----------------------
------------------ ----------------------
Consumer Mortgages $21,143 $ 9,144
Capital Markets 12,381 7,050
------------------ ----------------------
Total $33,524 $16,194
================== ======================
-------------------------------------------------------------------------------------------------------------
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
August 31,
------------------------------------------- ----------------------------------------------------- -----------
2001 2000
------------------ ----------------------
Sub-prime $1,718 $1,392
Home Equity 1,786 1,139
------------------ ----------------------
Total $3,504 $2,531
================== ======================
-------------------------------------------------------------------------------------------------------------
Loan production revenue increased in the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 due to increased loan production and improved margins on prime credit quality, first lien mortgages combined with increased trading activity in the Capital Markets Segment, partially offset by reduced sales of high-margin, home equity production and lower margins on sub-prime production. Sub-prime loans contributed $59.9 million to the gain on sale of loans in the quarter ended August 31, 2001 and $62.2 million in the quarter ended August 31, 2000. The sale of home equity loans contributed $10.0 million and $28.4 million to gain on sale of loans in the quarter ended August 31, 2001 and the quarter ended August 31, 2000, respectively. In general, loan production revenue is affected by numerous factors including the volume and mix of loans produced and sold, channel mix, loan pricing decisions, and changes in interest rates.
Net interest income (interest earned net of interest charges) of $93.2 million for the quarter ended August 31, 2001 was up from net interest income of $6.8 million for the quarter ended August 31, 2000. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($64.0 million and $31.2 million for the quarter ended August 31, 2001 and the quarter ended August 31, 2000, respectively); (ii) interest expense related to the Company's mortgage-related investments ($63.1 million and $105.1 million for the quarters ended August 31, 2001 and August 31, 2000, respectively); (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($47.6 million and $61.0 million for the quarters ended August 31, 2001 and August 31, 2000, respectively); and (iv) net interest earned on CSC's net trading portfolio ($28.3 million and $4.8 million for the quarters ended August 31, 2001 and August 31,2000, respectively).
The increase in net interest income from the mortgage loan inventory was primarily attributable to higher inventory levels combined with an increased net earnings rate during the quarter ended August 31, 2001. The decrease in interest expense related to mortgage-related investments resulted primarily from a decline in short-term rates. The increase in net interest earned on CSC's net trading portfolio is due to increased trading activity in the quarter ended August 31, 2001.
The Company recorded MSR amortization for the quarter ended August 31, 2001 totaling $234.3 million compared to $116.0 million for the quarter ended August 31, 2000. The Company recorded impairment of $651.4 million for the quarter ended August 31, 2001 compared to impairment of $26.9 million for the quarter ended August 31, 2000. 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"). The Company recognized net gains of $554.1 million and $8.9 million from the Servicing Hedge for the quarters ended August 31, 2001 and August 31, 2000, respectively.
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 and interest rate caps. 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 contracts entered into by the Company as of August 31, 2001, the Company estimates that its maximum exposure to loss over the contractual terms is $670 million.
Salaries and related expenses are summarized below for the quarters ended August 31, 2001 and 2000.
----- -------------------------------------- --- --- -------- -------------------------------------------------------------------- ------- --- ------ ------
(Dollar amounts in thousands) Quarter Ended August 31, 2001
--- -------- -------------------------------------------------------------------- ------- --- ------ ------
----- -------------------------------------- ---
Consumer Businesses Institutional Corporate
Businesses Administration Total
----- -------------------------------------- --- ----------------------- --- ----------------------- --- ----------------------- --- -----------------------
Base Salaries $ 56,019 $57,474 $34,601 $148,094
Incentive Bonus 79,163 20,744 6,967 106,874
Payroll Taxes and Benefits 13,290 7,804 6,001 27,095
----------------------- ----------------------- ----------------------- -----------------------
Total Salaries and Related
Expenses $148,472 $86,022 $47,569 $282,063
======================= ======================= ======================= =======================
Average Number of Employees 7,089 5,577 2,040 14,706
----- -------------------------------------- --- ----------------------- --- ----------------------- --- ----------------------- --- -----------------------
----- -------------------------------------- --- --- -------- -------------------------------------------------------------------- ------- --- ------ ------
(Dollar amounts in thousands) Quarter Ended August 31, 2000
--- -------- -------------------------------------------------------------------- ------- --- ------ ------
----- -------------------------------------- ---
Consumer Businesses Institutional Corporate
Businesses Administration Total
----- -------------------------------------- --- ----------------------- --- ----------------------- --- ----------------------- --- -----------------------
Base Salaries $64,862 $36,531 $26,568 $127,961
Incentive Bonus 26,991 10,129 4,633 41,753
Payroll Taxes and Benefits 10,339 5,319 3,530 19,188
----------------------- ----------------------- ----------------------- -----------------------
Total Salaries and Related
Expenses $102,192 $51,979 $34,731 $188,902
======================= ======================= ======================= =======================
Average Number of Employees 6,238 3,786 1,694 11,718
----- -------------------------------------- --- ----------------------- --- ----------------------- --- ----------------------- --- -----------------------
The amount of salaries increased during the quarter ended August 31, 2001 as compared to the quarter ended August 31, 2000 primarily due to an increase within the consumer businesses due to an increase in production volume and institutional businesses due to a larger servicing portfolio, partially offset by an increase in cost deferrals due to reduced sales of home equity production. Incentive bonuses earned during the quarter ended August 31, 2001 increased primarily due to an increase in production volume, additional commissioned sales personnel in the Consumer Origination Segment and increased trading activity in the Capital Markets Segment.
Occupancy and other office expenses for the quarter ended August 31, 2001 increased to $94.4 million from $69.7 million for the quarter ended August 31, 2000. This was primarily due to higher loan production combined with the growth in the Company's non-mortgage banking activities.
Marketing expenses for the quarter ended August 31, 2001 decreased 22% to $15.6 million as compared to $20.0 million for the quarter ended August 31, 2000, the bulk of the reduction coming from the Consumer Mortgage Originations Segment.
Insurance net losses are attributable to insurance claims in the B2B Insurance Segment. Insurance losses were $36.3 million, 36% of B2B Insurance revenues, for the quarter ended August 31, 2001 as compared to $25.8 million, 35% of B2B Insurance revenues, for the quarter ended August 31, 2000. The level of losses recognized in a period is dependent on many factors, a primary driver being the occurrence of natural disasters.
Other operating expenses were $87.6 million for the quarter ended August 31, 2001 as compared to $70.1 million for the quarter ended August 31, 2000. This increase was primarily due to higher loan production and a larger servicing portfolio combined with growth in the B2B Insurance Segment.
The Company's pre-tax earnings by segment is summarized below.
--------------------------------------------------------------------------------------------------- -----------
Six Months Ended
(Dollar amounts in thousands) August 31,
--------------------------------------------------------------------------------------------------- -----------
2001 2000
------------------ -------------------
Consumer Businesses:
Mortgage Originations $ 387,136 $ 60,354
Mortgage-Related Investments (163,157) 117,378
B2C Insurance 2,407 1,949
------------------ -------------------
Total Consumer Businesses 226,386 179,681
Institutional Businesses:
Processing and Technology 37,512 24,679
Capital Markets 134,524 38,489
B2B Insurance 42,554 30,002
-------------------
------------------
Total Institutional Businesses 214,590 93,170
Other (5,660) 289
------------------ -------------------
Pre-tax Earnings $435,316 $273,140
================== ===================
---------------------------------------------------------------------------------------------------------------
The Mortgage Originations segment activities include loan origination through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and 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
Six Months Ended
August 31,
------------------------------------------------------------------------------------------------- -----------
2001 2000
------------------ ----------------------
Consumer Mortgages:
Consumer Markets Division $19,067 $ 8,428
Wholesale Lending Division 20,747 8,418
Full Spectrum Lending, Inc. 974 823
------------------ ----------------------
Total $40,788 $17,669
================== ======================
-------------------------------------------------------------------------------------------------------------
The increase in pre-tax earnings of $326.8 million in the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 was primarily attributable to higher prime credit quality first mortgage loan production and margins partially offset by higher expenses as a result of increased production.
The Mortgage-Related Investments 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 $280.5 million in the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 was primarily due to increased amortization and impairment of the MSRs net of the servicing hedge, and higher servicing expenses driven by the growth in the servicing portfolio, including the subservicing fee paid to the Processing and Technology Segment. In addition, impairment charges relating to residuals and other retained interests contributed to the decline in pre-tax earnings. These factors were partially offset by an increase in revenues generated from a larger servicing portfolio. As of August 31, 2001, the Company serviced $314.1 billion of loans (including $9.1 billion of loans subserviced for others), up from $270.5 billion (including $5.9 billion of loans subserviced for others) as of August 31, 2000, a 16% increase. The growth in the Company's servicing portfolio since August 31, 2000 was the result of loan production volume and the acquisition of bulk servicing rights. The growth in the servicing portfolio was partially offset by prepayments, partial prepayments and scheduled amortization.
During the six months ended August 31, 2001, the annual prepayment rate of the Company's servicing portfolio was 28%, compared to 10% for the six months ended August 31, 2000. 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 August 31, 2001 was 7.6% compared to 7.8% as of August 31, 2000.
The 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 increase in pre-tax earnings of $0.5 million in the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 was primarily due to an increase in policies-in-force.
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 and foreign financial institutions. The increase in pre-tax earnings of $12.8 million in the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 was primarily due to growth in the servicing portfolio and subprocessing for foreign financial institutions.
The Capital Markets Segment activities primarily include 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 $96.0 million in the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 was primarily due to increased prime credit quality loan production and margins in CLD combined with CSC's higher trading volumes.
The 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 $12.6 million in the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 was due to increased net written premiums and increased mortgage reinsurance premium volume.
Revenues for the six months ended August 31, 2001 increased 45% to $1,444.7 million, up from $996.1 million for the six months ended August 31, 2000. Net earnings increased 56% to $272.3 million for the six months ended August 31, 2001, up from $174.5 million for the six months ended August 31, 2000. The increase in revenues and net earnings for the six months ended August 31, 2001 compared to the six months ended August 31, 2000 was primarily attributable to increased earnings in the Consumer Mortgage Originations Segment due to increased loan production and improved margins and to improved earnings in the Capital Markets Segment and the Processing and Technology Segment. The increase was partially offset by a decline in earnings from the Mortgage-related Investments Segment due to increased amortization and impairment of the MSRs net of servicing hedge and reduced earnings from other retained interests.
The total volume of loans produced by the Company increased 109% to $64.1 billion for the six months ended August 31, 2001, up from $30.7 billion for the six months ended August 31, 2000. The increase in loan production was driven largely by an increase in refinance activity.
Total loan production by purpose and by interest rate type is summarized below.
------------------------------------------------ ----------------------------------------------------- -----------
(Dollar amounts in millions) Loan Production
Six Months Ended
August 31,
------------------------------------------------ ----------------------------------------------------- -----------
2001 2000
------------------ ----------------------
Purchase $30,246 $25,000
Refinance 33,897 5,740
------------------ ----------------------
Total $64,143 $30,740
================== ======================
------------------ ----------------------
Fixed Rate $56,380 $24,870
Adjustable Rate 7,763 5,870
------------------ ----------------------
Total $64,143 $30,740
================== ======================
------------------------------------------------------------------------------------------------------------------
Total loan production by Segment is summarized below.
--------------------------------------------- ----------------------------------------------------- -----------
(Dollar amounts in millions) Loan Production
Six Months Ended
August 31,
--------------------------------------------- ----------------------------------------------------- -----------
2001 2000
------------------ ----------------------
------------------ ----------------------
Consumer Mortgages $40,788 $17,669
Capital Markets 23,355 13,071
------------------ ----------------------
Total $64,143 $30,740
================== ======================
---------------------------------------------------------------------------------------------------------------
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
Six Months Ended
August 31,
-------------------------------------------- ----------------------------------------------------- -----------
2001 2000
------------------ ----------------------
Sub-prime $3,058 $2,832
Home Equity 3,089 2,270
------------------ ----------------------
Total $6,147 $5,102
================== ======================
--------------------------------------------------------------------------------------------------------------
Loan production revenue increased in the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 due to increased loan production and improved margins on prime credit quality, first lien mortgages combined with increased trading activity in the Capital Markets Segment. Sub-prime loans contributed $124.1 million to the gain on sale of loans in the six months ended August 31, 2001 and $123.0 million in the six months ended August 31, 2000. The sale of home equity loans contributed $47.5 million and $50.1 million to gain on sale of loans in the six months ended August 31, 2001 and the six months ended August 31, 2000, respectively. In general, loan production revenue is affected by numerous factors including the volume and mix of loans produced and sold, channel mix, loan pricing decisions, and changes in interest rates.
Net interest income (interest earned net of interest charges) of $155.1 million for the six months ended August 31, 2001 was up from net interest income of $8.6 million for the six months ended August 31, 2000. Net interest income is principally a function of: (i) net interest income earned from the Company’s mortgage loan inventory ($120.9 million and $51.8 million for the six months ended August 31, 2001 and the six months ended August 31, 2000, respectively); (ii) interest expense related to the Company’s mortgage-related investments ($134.6 million and $180.8 million for the six months ended August 31, 2001 and August 31, 2000, respectively); (iii) interest income earned from the custodial balances associated with the Company’s servicing portfolio ($100.0 million and $112.8 million for the six months ended August 31, 2001 and August 31, 2000, respectively); (iv) net interest earned on CSC’s net trading portfolio ($44.6 million and $10.8 million for the six months ended August 31, 2001 and August 31,2000, respectively) and (v) interest earned on warehouse lending advances ($7.1 million and $0.7 million for the six months ended August 31, 2001 and August 31, 2000, respectively).
The increase in net interest income from the mortgage loan inventory was primarily attributable to higher inventory levels combined with an increased net earnings rate during the six months ended August 31, 2001. The decrease in interest expense related to mortgage-related investments resulted primarily from a decline in short-term rates partially offset by an increase in servicing related investments. Interest income earned from the custodial balance decreased due to a decrease in short term interest rates during the six months ended August 31, 2001, which more than offset the increase in balances resulting from the larger servicing portfolio. The increase in net interest earned on CSC's net trading portfolio is due to increased trading activity in the six months ended August 31, 2001.
The Company recorded MSR amortization for the six months ended August 31, 2001 totaling $461.8 million compared to $224.2 million for the six months ended August 31, 2000. The Company recorded impairment of $624.9 million for the six months ended August 31, 2001 compared to impairment of $23.6 million for the six months ended August 31, 2000. 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"). The Company recognized a net gain of $446.8 million and a net loss of $4.4 million from the Servicing Hedge for the six month periods ended August 31, 2001 and August 31, 2000, respectively.
Salaries and related expenses are summarized below for the six months ended August 31, 2001 and 2000.
----- --------------------------------- -------- -------------------------------------------------------------------- ------- --- ------ ------
(Dollar amounts in thousands) Six Months Ended August 31, 2001
-- -------- -------------------------------------------------------------------- ------- --- ------ ------
----- -------------------------------
Consumer Businesses Institutional Corporate
Businesses Administration Total
----- ----------------------------------------------------- --- ----------------------- --- ----------------------- --- -----------------------
Base Salaries $113,282 $103,960 $68,367 $285,609
Incentive Bonus 149,842 38,126 14,433 202,401
Payroll Taxes and Benefits 26,520 15,487 13,512 55,519
---------------------- ----------------------- ----------------------- -----------------------
Total Salaries and Related
Expenses $289,644 $157,573 $96,312 $543,529
====================== ======================= ======================= =======================
Average Number of Employees 6,696 5,038 1,980 13,714
----- ----------------------------------------------------- --- ----------------------- --- ----------------------- --- -----------------------
----- ---------------------------------------------------------------------------------------------------- ------- --- ------ ------
(Dollar amounts in thousands) Six Months Ended August 31, 2000
--- -------- -------------------------------------------------------------------- ------- --- ------ ------
----- --------------------------------
Consumer Businesses Institutional Corporate
Businesses Administration Total
----- ------------------------------------------------------- --- ----------------------- --- ----------------------- --- -----------------------
Base Salaries $124,660 $69,450 $51,576 $245,686
Incentive Bonus 48,499 18,289 9,087 75,875
Payroll Taxes and Benefits 20,362 10,447 8,063 38,872
----------------------- ----------------------- ----------------------- -----------------------
Total Salaries and Related
Expenses $193,521 $98,186 $68,726 $360,433
======================= ======================= ======================= =======================
Average Number of Employees 6,024 3,671 1,670 11,365
----- ------------------------------------------------------- --- ----------------------- --- ----------------------- --- -----------------------
The amount of salaries increased during the six months ended August 31, 2001 as compared to the six months ended August 31, 2000 primarily due to an increase within the institutional businesses due to a larger servicing portfolio. Salaries decreased in Consumer Businesses due to a change in the mix of employees toward commissioned sales personnel, combined with an increase in the deferral of costs as the result of fewer sales of home equity products. Incentive bonuses earned during the six months ended August 31, 2001 increased primarily due to an increase in production volume, additional commissioned sales personnel in the Consumer Origination Segment and increased trading activity in the Capital Markets Segment.
Occupancy and other office expenses for the six months ended August 31, 2001 increased to $184.6 million from $136.3 million for the six months ended August 31, 2000. This was primarily due to higher loan production combined with the growth in the Company's non-mortgage banking activities.
Marketing expenses for the six months ended August 31, 2001 decreased 22% to $31.2 million as compared to $39.7 million for the six months ended August 31, 2000, the bulk of the reduction coming from the Consumer Mortgage Originations Segment.
Insurance net losses are attributable to insurance claims in the B2B Insurance Segment. Insurance losses were $71.0 million, 36% of B2B Insurance revenues, for the six months ended August 31, 2001 as compared to $51.5 million, 36.0% of B2B Insurance revenues, for the six months ended August 31, 2000. The level of losses recognized in a period is dependent on many factors, a primary driver being the occurrence of natural disasters.
Other operating expenses were $179.0 million for the six months ended August 31, 2001 as compared to $135.0 million for the six months ended August 31, 2000. The increase was primarily due to the higher loan production and a larger servicing portfolio combined with growth in the B2B insurance segment.
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.
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 and non-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 August 31, 2001, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $1.94 million after-tax loss related to its other financial instruments and MSRs and there would be no loss related to its trading securities. As of August 31, 2001, the Company estimates that this after-tax loss of $1.94 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. 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 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.
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.
The Company's principal financing needs related to its mortgage banking operations are the financing of its mortgage loan inventory, investment in MSRs and available-for-sale securities. To meet these needs, the Company currently utilizes commercial paper supported by revolving credit facilities, medium-term notes, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, redeemable capital trust pass-through securities, convertible debentures, 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 CCI and CHL contain various provisions that may affect the ability of CCI 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 CCI and CHL to pay dividends.
The principal financing needs of CCM consist of the financing of its inventory of securities and mortgage loans and its underwriting activities. Its securities inventory is financed primarily through repurchase agreements. CCM 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 (i.e., 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 partial liquidation of its investment portfolio from time to time.
The Company continues to investigate and pursue alternative and supplementary methods to finance its operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the 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.
Operating Activities. In the six months ended August 31, 2001, the Company's operating activities used cash of approximately $4.5 billion on a short-term basis primarily to support an increase in mortgage loan inventory, trading securities and securities purchased under agreements to resale. In the six months ended August 31, 2000, operating activities used cash of approximately $1.2 billion.
Investing Activities. The primary investing activities for which cash was used by the Company were the investment in MSRs and investments in available-for-sale securities. Net cash used by investing activities was $1.7 billion for the six months ended August 31, 2001 and $0.6 billion for the six months ended August 31, 2000.
Financing Activities. Net cash provided by financing activities amounted to $6.4 billion for the six months ended August 31, 2001 and $1.8 billion for the six months ended August 31, 2000. The increase in cash flow from financing activities was primarily used to fund the change in the Company’s trading securities, increase in mortgage loan inventory, investment in MSRs and investments in available-for-sale securities.
For the month ended September 30, 2001, the Company received new loan applications at an average daily rate of $888 million. As of September 30, 2001, the Company's pipeline of loans in process was $21.3 billion. This compares to a daily application rate for the month ended September 30, 2000 of $404 million and a pipeline of loans in process as of September 30, 2000 of $9.6 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 September 30, 2001 was $3.5 billion and as of September 30, 2000 was $3.1 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.
Loan production increased 107% from the quarter ended August 31, 2000 to the quarter ended August 31, 2001. This increase was primarily due to two factors. First, mortgage interest rates were lower in the quarter ended August 31, 2001, resulting in a strong refinance mortgage market. Second, home purchase activity was stronger in the quarter ended August 31, 2001, than in the quarter ended August 31, 2000.
The prepayment rate in the servicing portfolio increased from 10% for the quarter ended August 31, 2000 to 27% for the quarter ended August 31, 2001.
The Company's California mortgage loan production (as measured by principal balance) constituted 25% and 21% of its total production during the quarters ended August 31, 2001 and August 31, 2000, 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 subserviced loans for other clients and GNMA rewarehouse loans sold into a third party-owned conduit, increased to 4.44% at August 31, 2001 from 4.11% as of August 31, 2000. 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 6% of the total portfolio as of August 31, 2001, up from 5% as of August 31, 2000. In addition, the weighted average age of the FHA and VA loans in the portfolio increased to 37 months at August 31, 2001 from 33 months in August 31, 2000. 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 subserviced loans for other clients and GNMA rewarehouse loans sold into a third party-owned conduit, that are in foreclosure increased to 0.48% as of August 31, 2001 from 0.42% as of August 31, 2000. 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 (20% of the Company's servicing portfolio as of August 31, 2001) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Affairs. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Affairs is inadequate to cover the total credit losses incurred. For the six months ended August 31, 2001, the Company experienced losses in excess of the VA guaranty of approximately $1.9 million. 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 a negotiated maximum amount. As of August 31, 2001, the Company had investments in such subordinated interests amounting to $597.3 million, net of imbedded credit loss reserves, and had additional reserves amounting to $97.2 million related to the corporate guarantees.
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.
The Company adopted FAS 133 on March 1, 2001. At the date of adoption, the Company recorded certain transition adjustments as required by FAS 133. There was no impact on net income as a result of such transition adjustments. However, such adjustments resulted in the following impact on the Company's balance sheet (in millions).
Decrease in fair value of derivatives classified as assets ($93.7)
Increase in fair value of derivatives classified as liabilities ($107.2)
Decrease in book value of hedged borrowings $107.2
Increase in book value of MSRs $81.7
Increase in book value of inventory and other assets $12.0
In November 1999, the Emerging Issues Task Force ("EITF") released Issue No. 99-20, titled "Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Asstes." EITF 99-20 is effective for quarters beginning after March 15, 2001. Under the guidelines of EITF 99-20, the accounting treatment of interest income and impairment of beneficial interests in securitization transactions is modified such that beneficial interests which are determined to have an other-than temporary impairment are required to be written down to fair value. The Company adopted EITF 99-20 for the fiscal quarter ended August 31, 2001 and there was no material impact on the Company's financial statements.
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 were included in the February 28, 2001 financial statements. All other provisions of this Statement were adopted on April 1, 2001, as required by the statement. The adoption of this statement did not have a material impact on the Company's financial statements.
In June 2001, the FASB issued Statement No. 141 (FAS 141), titled “Business Combinations.” FAS 141 addresses financial accounting and reporting for business combinations and supercedes previously issued authoritative literature on the topic, including APB 16. FAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. The use of the pooling-of-interests method will no longer be allowed. FAS 141 also provides guidance as to how the purchase method is to be applied. Implementation of FAS 141 is not expected to have a material impact on the Company’s financial statements.
In June 2001, the FASB issued Statement No. 142 (FAS 142), titled "Goodwill and Other Intangibles." Effective January 1, 2002, FAS 142 eliminates the amortization of goodwill and certain other intangible assets. These assets will be reviewed at least annually and assessed for impairment. Implementation of FAS 142 is not expected to have a material impact on the Company’s financial statements.
(a) Exhibits
+10.3.5* Employment Agreement by and between the Company and Angelo R. Mozilo effective
March 1, 2001 (incorporated by reference to Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q dated May 31, 2001).
+10.22* Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1996).
+10.22.7* First Amendment to the 2000 Stock Option Plan of the Company (incorporated by reference to
Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q dated May 31, 2001).
+10.22.8 Second Amendment to the 2000 Stock Option Plan of the Company.
+10.22.9 Third Amendment to the 2000 Stock Option Plan of the Company.
+10.26.1 First Amendment to the Company's Annual Incentive Plan.
+10.28* Summary of the Termination of Director Emeritus Plan (incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form
10-Q dated August 31, 2000).
+10.28.1* Form of Director Emeritus Agreement adopted by the Board of Directors of the Company on
May 10, 2001 (incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q dated May 31, 2001).
10.35 (Removed).
12.1 Computation of the Ratio of Earnings to Fixed Charges
* Incorporated by reference.
+ Constitutes a management contract or compensatory plan or arrangement.
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.
| DATE: October 12, 2001 | /s/ Stanford L. Kurland |
| Executive Managing Director and | |
| Chief Operating Officer | |
| DATE: October 12, 2001 | /s/ Thomas K. McLaughlin |
| Managing Director and | |
| Chief Financial Officer | |
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to amend its 2000 Stock Option Plan (the "Plan") to increase the number of Shares that may be made the subject of Options granted;
NOW, THEREFORE, the Plan is amended to read as follows effective July 12, 2001:
| “The aggregate number of shares of the Company’s common stock, par value $.05 per share (“Shares”), that may be made the subject of Options granted under this Plan is 10,500,000. The maximum number of shares subject to the Plan shall be adjusted as provided in Section 8 of the Plan upon a change in the capital structure of the Company. The Company shall reserve for the purpose of this Plan, out of its authorized but unissued Shares or out of Shares held in the Company’s treasury, or partly out of each, such number of Shares as shall be determined by the Board.” |
IN WITNESS WHEREOF, the Company has caused this Amendment Two to be executed by its duly authorized officer this twelfth day of July, 2001.
| Countrywide Credit Industries, Inc. | |
| By: | |
| Anne McCallion | |
| Managing Director, | |
| Chief Administrative Officer | |
| Attest: | |
| Jordan Dorchuck | |
| Assistant Secretary | |
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") established the Countrywide Credit Industries, Inc. 2000 Stock Option Plan (the "Plan") effective July 12, 2000; and
WHEREAS, the Company desires to amend the Plan to provide for the grant of stock options to non-employee directors of affiliated companies of the Company;
NOW THEREFORE, the Plan shall be amended as follows effective June 19, 2001:
IN WITNESS WHEREOF, the Company has caused this Second Amendment to be executed by its duly authorized officer this 19th day of June 2001.
| Countrywide Credit Industries, Inc. | |
| By: | |
| Anne McCallion | |
| Managing Director, | |
| Chief Administrative Officer | |
| Attest: | |
| Jordan Dorchuck | |
| Assistant Secretary | |
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to amend its Annual Incentive Plan (the "Plan") to increase the maximum award payable to a participant for any plan year;
NOW, THEREFORE, the Plan is amended to read as follows effective July 12, 2001:
IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed by its duly authorized officer as of this twelfth day of July, 2001.
| Countrywide Credit Industries, Inc. | |
| By: | |
| Anne McCallion | |
| Managing Director, | |
| Chief Administrative Officer | |
| Attest: | |
| Susan E. Bow | |
| Executive Vice President and | |
| Deputy General Counsel | |
The following table sets forth the ratio of earnings to fixed charges of the Company for the six months ended August 31, 2001 and for the five fiscal years ended February 28, 2001 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).
Six months ended
August 31, Fiscal Years Ended February 28(29),
-------------------------- -------------------------------------------------------------------
2001 2000 2001 2000 1999 1998 1997
------------ ------------- ------------ ------------- ------------- ------------ ------------
Net earnings $272,284 $174,494 $374,153 $410,243 $385,401 $344,983 $257,358
Income tax expense 163,032 98,646 211,882 220,955 246,404 220,563 164,540
Interest charges 923,716 588,776 1,348,242 922,225 977,326 564,640 418,682
Interest portion of rental
Expense 9,180 8,806 17,745 19,080 14,898 10,055 7,420
------------ ------------- -------------------------- ------------- ------------ ------------
Earnings available to cover
fixed charges $1,368,212 $870,722 $1,952,022 $1,572,503 $1,624,029 $1,140,241 $848,000
============ ============= ============ ============= ============= ============ ============
Fixed charges
Interest charges $923,716 $588,776 $1,348,242 $922,225 $977,326 $564,640 $418,682
Interest portion of rental
Expense 9,180 8,806 17,745 19,080 14,898 10,055 7,420
------------ ------------- ------------ ------------- ------------- ------------ ------------
Total fixed charges $932,896 $597,582 $1,365,987 $941,305 $992,224 $574,695 $426,102
============ ============= ============ ============= ============= ============ ============
Ratio of earnings to fixed
Charges 1.47 1.46 1.43 1.67 1.64 1.98 1.99
============ ============= ============ ============= ============= ============ ============