UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to __________________
Commission File Number: 1-8422
------
COUNTRYWIDE CREDIT INDUSTRIES, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2641992
--------------------------------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4500 Park Granada, Calabasas, California 91302
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip
Code)
(818) 225-3000
-------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 13, 2000
----- -------------------------------
Common Stock $.05 par value 114,999,273
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
A S S E T S
<TABLE>
<S> <C> <C>
August 31, February 29,
2000 2000
------------------- -------------------
Cash $ 85,255 $ 59,890
Mortgage loans and mortgage-backed securities held for sale 1,399,375 2,653,183
Trading securities, at market value 3,324,807 1,984,031
Mortgage servicing rights, net 5,881,171 5,396,477
Investments in other financial instruments 4,894,414 3,562,458
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 409,288 410,899
Other assets 2,259,948 1,755,390
------------------- -------------------
Total assets $18,254,258 $15,822,328
=================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $ 4,205,872 $ 2,852,738
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $11,574,068 $ 9,782,625
Drafts payable issued in connection with mortgage loan closings 348,782 382,108
Accounts payable, accrued liabilities and other 1,310,927 997,405
Deferred income taxes 1,391,784 1,272,311
------------------- -------------------
Total liabilities 14,625,561 12,434,449
Commitments and contingencies -
-
Company-obligated mandatorily redeemable capital trust pass- through securities
of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 500,000
Shareholders' equity
Preferred stock - authorized, 2,500,000 shares of $0.05 par value;
issued and outstanding, none
- -
Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and
outstanding, 114,619,707 shares at
August 31, 2000 and 113,463,424 shares at February 29, 2000 5,731 5,673
Additional paid-in capital 1,200,794 1,171,238
Accumulated other comprehensive income (loss) 26,208 (33,234)
Retained earnings 1,895,964 1,744,202
------------------- -------------------
Total shareholders' equity 3,128,697 2,887,879
------------------- -------------------
Total liabilities and shareholders' equity $18,254,258 $15,822,328
=================== ===================
Borrower and investor custodial accounts $ 4,205,872 $ 2,852,738
=================== ===================
The accompanying notes are an integral part of these
statements.
</TABLE>
<TABLE>
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Three Months Six Months
Ended August 31, Ended August 31,
2000 1999 2000 1999
---------------- -- -------------- -------------- -- --------------
Revenues
Loan origination fees $ 89,928 $122,737 $174,222 $269,438
Gain on sale of loans, net of commitment fees 143,373 158,652 276,527 328,664
---------------- -------------- -------------- --------------
Loan production revenue 233,301 281,389 450,749 598,102
Interest earned 338,826 264,977 597,420 540,539
Interest charges (336,501) (231,808) (597,975) (477,842)
---------------- -------------- -------------- --------------
Net interest income 2,325 33,169 (555) 62,697
Loan servicing revenue 291,020 247,937 563,223 475,091
Amortization & impairment/recovery of mortgage
servicing rights, net of service
hedge (134,091) (129,435) (252,250) (276,280)
---------------- -------------- -------------- --------------
Net loan administration revenue 156,929 118,502 310,973 198,811
Net premiums earned 66,298 5,990 128,303 11,681
Commissions, fees and other revenues 53,448 52,024 97,397 112,650
---------------- -------------- -------------- --------------
Total revenues 512,301 491,074 986,867 983,941
Expenses
Salaries and related expenses 188,902 184,329 360,433 369,755
Occupancy and other office expenses 69,736 68,216 136,254 140,425
Marketing expenses 19,988 21,080 39,747 40,603
Insurance net losses 25,835 - 51,473 -
Other operating expenses 65,625 42,854 125,820 89,089
---------------- --------------
-------------- --------------
Total expenses 370,086 316,479 713,727 639,872
---------------- -------------- -------------- --------------
Earnings before income taxes 142,215 174,595 273,140 344,069
Provision for income taxes 51,180 68,092 98,646 134,187
---------------- -------------- -------------- --------------
NET EARNINGS $ 91,035 $106,503 $174,494 $209,882
================ ============== ============== ==============
Earnings per share
Basic $0.80 $0.94 $1.53 $1.86
Diluted $0.77 $0.91 $1.49 $1.79
</TABLE>
<TABLE>
The accompanying notes are an integral part of these
statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollar amounts in thousands)
<S> <C> <C>
Six Months
Ended August 31,
2000 1999
---------------- -----------------
Cash flows from operating activities:
Net earnings $ 174,494 $ 209,882
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sale of available-for-sale securities (13,595) (11,675)
Amortization and impairment/recovery of mortgage
servicing rights 247,838 39,309
Depreciation and other amortization 33,107 30,988
Deferred income taxes 98,646 134,187
Origination and purchase of loans held for sale (30,740,477) (42,818,201)
Principal repayments and sale of loans 31,994,285 43,552,302
---------------- -----------------
Decrease in mortgage loans and mortgage-
backed securities held for sale 1,253,808 734,101
Increase in other financial instruments (1,483,829) (874,965)
(Increase) decrease in trading securities (1,340,776) 36,745
(Increase) decrease in other assets (525,485) 204,106
Increase in accounts payable and accrued liabilities 313,522 18,759
---------------- -----------------
Net cash provided (used) by operating activities (1,242,270) 521,437
---------------- -----------------
Cash flows from investing activities:
Additions to mortgage servicing rights, net (732,532) (786,646)
Purchase of property, equipment and leasehold
improvements, net (21,501) (59,553)
Proceeds from sale of available-for-sale securities 260,401 59,269
---------------- -----------------
Net cash used by investing activities (493,632) (786,930)
---------------- -----------------
Cash flows from financing activities:
Net increase (decrease) in warehouse debt and other short-term
borrowings 622,180 (767,395)
Issuance of long-term debt 1,652,937 1,303,000
Repayment of long-term debt (517,000) (269,418)
Issuance of common stock 25,882 11,146
Cash dividends paid (22,732) (22,564)
---------------- -----------------
Net cash provided by financing activities 1,761,267 254,769
---------------- -----------------
Net increase (decrease) in cash 25,365 (10,724)
Cash at beginning of period 59,890 58,748
---------------- -----------------
Cash at end of period $ 85,255 $ 48,024
================ =================
Supplemental cash flow information:
Cash used to pay interest $ 584,369 $ 446,840
Cash used to pay income taxes $ 11,550 $ 173
Noncash investing activities:
Unrealized gain (loss) on available-for-sale securities,
net of tax $ 59,442 ($ 20,583)
The accompanying notes are an integral part of these
statements.
</TABLE>
<TABLE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Three Months Six Months
Ended August 31, Ended August 31,
2000 1999 2000 1999
--------------------------------- --------------------------------
NET EARNINGS $91,035 $106,503 $174,494 $209,882
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period, before tax 161,709 (38,472) 106,735 (22,069)
Income tax benefit (expense) (58,415) 15,005 (38,616) 8,608
---------------- --------------- --------------- ---------------
Unrealized holding gains (losses) arising
during the period, net of tax 103,294 (23,467) 68,119 (13,461)
Less: reclassification adjustment for gains
included in net earnings, before tax (13,660) (481) (13,595) (11,675)
Income tax expense 4,942 187 4,918 4,553
--------------- --------------- ---------------
----------------
Reclassification adjustment for gains
included in net earnings, net of tax (8,718) (294) (8,677) (7,122)
---------------
---------------- --------------- ---------------
Other comprehensive income (loss) 94,576 (23,761) 59,442 (20,583)
---------------- --------------- --------------- ---------------
COMPREHENSIVE INCOME $185,611 $ $233,936 $189,299
82,742
================ =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page 29
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six months ended August 31, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 28, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on Form
10-K for the fiscal year ended February 29, 2000 of Countrywide Credit
Industries, Inc. (the "Company").
Certain amounts reflected in the consolidated financial statements for the
six-month period ended August 31, 1999 have been reclassified to conform to the
presentation for the six-month period ended August 31, 2000.
NOTE B - MORTGAGE SERVICING RIGHTS
The activity in mortgage servicing rights was as follows.
<TABLE>
<S> <C>
------------------------------------------------ --------------------- -------------------------
Six Months Ended
(Dollar amounts in thousands) August 31, 2000
------------------------------------------------ --------------------- -------------------------
---------------------
Mortgage Servicing Rights
Balance at beginning of period $5,420,239
Additions 732,532
Scheduled amortization (224,262)
Hedge losses (gains) applied (23,106)
---------------------
Balance before valuation reserve
at end of period 5,905,403
---------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (23,762)
Reductions (additions) (470)
----------------------
Balance at end of period (24,232)
----------------------
Mortgage Servicing Rights, net $5,881,171
======================
----------------------------------------------- -- ---------------- -- ---------------------- --
</TABLE>
<TABLE>
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Page 7
NOTE C - INVESTMENTS IN OTHER FINANCIAL INSTRUMENTS
Investments in other financial instruments included the following.
<S> <C> <C>
------------------------------------------------------------ -----------------------------------------------------
August 31, February 29,
(Dollar amounts in thousands) 2000 2000
------------------------------------------------------------------- --- ----------------- --- ---------------- ---
Servicing hedge instruments $2,122,039 $1,784,315
Securities purchased under agreements to resell 1,339,011 435,593
Mortgage-backed securities retained in securitization 898,171 775,867
Insurance company investment portfolio 535,193 520,490
Equity securities, restricted and unrestricted - 46,193
----------------- ----------------
$4,894,414 $3,562,458
================= ================
------------------------------------------------------------------- --- ----------------- --- ---------------- ---
</TABLE>
Securities purchased under agreements to resell are classified as receivables.
It is the policy of the Company to take possession of securities purchased under
agreements to resell. The Company's agreements with third parties specify its
rights to request additional collateral. The Company monitors the fair value of
the underlying securities as compared with the related receivable, including
accrued interest, and requests additional collateral as necessary.
NOTE D - AVAILABLE FOR SALE SECURITIES
Amortized cost and fair value of available for sale securities were as
follows.
<TABLE>
---------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
August 31, 2000
<S> <C> <C> <C> <C>
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
securities retained in
securitization $ 913,654 $ 11,131 ($26,614) $ 898,171
Principal only securities 1,234,831 91,274 (37,135) 1,288,970
Insurance company
investment portfolio 532,814 5,782 (3,403) 535,193
---------------- ----------------- ---------------- ----------------
$2,681,299 $108,187 ($67,152) $2,722,334
================ ================= ================ ================
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
</TABLE>
<PAGE>
NOTE D - AVAILABLE FOR SALE SECURITIES (Continued)
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 29, 2000
---------------- - ------------------------------------ -- ---------------- ---
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
securities retained in
securitization $760,619 $39,411 ($24,163) $775,867
Principal only securities 1,002,496 2,372 (52,028) 952,840
Insurance company
investment portfolio 523,012 483 520,490
(3,005)
Equity securities 63,136 3,193 (20,136) 46,193
---------------- ----------------- ---------------- ----------------
$2,349,263 $45,459 ($99,332) $2,295,390
================ ================= ================ ================
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
</TABLE>
<TABLE>
NOTE E - NOTES PAYABLE
Notes payable consisted of the following.
<S> <C> <C>
------------------------------------------------------------ -----------------------------------------------------
August 31, February 29,
(Dollar amounts in thousands) 2000 2000
-------------------------------------------------------------------- -- --- ---------------- ---
----------------- ---
Commercial paper $ 1,982 $ 103,829
Medium-term notes, Series A, B, C, D, E, F, G, H, I
and Euro Notes 9,111,260 7,975,324
Securities sold under agreements to repurchase 2,258,383 1,501,409
Subordinated notes 200,000 200,000
Other notes payable 2,443 2,063
----------------- ----------------
$11,574,068 $9,782,625
================= ================
</TABLE>
-------------------------------------------------------------------- -- -----
Commercial Paper and Backup Credit Facilities
As of August 31, 2000, CHL, the Company's mortgage banking
subsidiary, had unsecured credit agreements (revolving
credit facilities) with consortiums of commercial banks
permitting CHL to borrow an aggregate maximum amount of $5.0
billion. The facilities included a $4.0 billion revolving
credit facility with forty-four commercial banks consisting
of: (i) a five-year facility of $3.0 billion, which expires
on September 24, 2002, and (ii) a one-year facility of $1.0
billion which was extended and increased to $1.2 billion on
September 19, 2000 to September 19, 2001. As consideration
for the facility, CHL pays annual commitment fees of $3.8
million. There is an additional one-year facility, which
expires on April 11, 2001, with a total commitment of $1.0
billion. As consideration for the facility, CHL pays annual
commitment fees of $0.8 million. The purpose of these credit
facilities is to provide liquidity backup for CHL's
commercial paper program. No amount was outstanding under
these revolving credit facilities at August 31, 2000. The
weighted average borrowing rate on commercial paper
borrowings for the six months ended August 31, 2000 was
6.46%. The weighted average borrowing rate on commercial
paper outstanding as of August 31, 2000 was 6.62%. In
addition, CHL has entered into a $1.1 billion asset backed
commercial paper conduit facility with four commercial
banks. This facility has a maturity date of November 21,
2000. As consideration for this facility, CHL pays annual commitment fees of
$1.4 million. Loans made under this facility are secured by conforming and
non-conforming mortgage loans. No amount was outstanding under this facility at
August 31, 2000. All of the facilities contain various financial covenants and
restrictions, certain of which limit the amount of dividends that can be paid by
the Company or CHL.
NOTE E - NOTES PAYABLE (Continued)
Medium-Term Notes
As of August 31, 2000, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission or
issued by CHL pursuant to its Euro medium-term note program were as follows.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
---------------------- ----------------------------
-------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- -------------- -------------
Series A - $96,500 $96,500 7.41% 8.79% Aug. 2001 Mar. 2002
Series B - 251,000 251,000 6.65% 6.98% Mar. 2003 Aug. 2005
Series C 105,000 127,000 232,000 5.88% 7.78% Mar. 2001 Mar. 2004
Series D - 385,000 385,000 6.05% 6.88% Mar. 2001 Sep. 2005
Series E - 655,000 655,000 6.94% 7.45% Sep. 2003 Oct. 2008
Series F 311,000 1,344,000 1,655,000 6.16% 7.36% Oct. 2000 May 2013
Series G 5,000 581,000 586,000 5.35% 7.23% Oct. 2000 Nov. 2018
Series H 611,500 2,049,000 2,660,500 6.25% 8.25% May 2001 Oct. 2019
Series I 238,000 187,000 425,000 7.15% 8.00% June 2001 Aug. 2015
Euro Notes 652,406 1,512,854 2,165,260 6.10% 8.11% Nov. 2000 Jan. 2009
-------------------------------------------
Total $1,922,906 $7,188,354 $9,111,260
===========================================
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of August 31, 2000, substantially all of the outstanding fixed-rate notes
had been effectively converted through interest rate swap agreements to
floating-rate notes. The weighted average borrowing rate on medium-term note
borrowings for the six-months ended August 31, 2000, including the effect of the
interest rate swap agreements, was 6.88%. As of August 31, 2000, there were
$1,511 million foreign currency denominated notes issued pursuant to the Euro
medium-term notes program outstanding. Such notes are denominated in Deutsche
Marks, French Francs, Portuguese Escudos, Japanese Yen and Euros. The Company
manages the associated foreign currency risk by entering into currency swaps.
The terms of the currency swaps effectively translate the foreign currency
denominated medium-term notes into U.S. dollars.
Securities Sold Under Agreements to Repurchase
The Company routinely enters into short-term financing arrangements to sell
MBS under agreements to repurchase. The weighted average borrowing rate for the
six-months ended August 31, 2000 was 6.44%. The weighted average borrowing rate
on repurchase agreements outstanding as of August 31, 2000, was 6.59%. The
repurchase agreements were collateralized by MBS. All MBS underlying repurchase
agreements are held in safekeeping by broker-dealers or banks. All agreements
are to repurchase the same or substantially identical MBS.
<PAGE>
NOTE E - NOTES PAYABLE (Continued)
Pre-Sale Funding Facilities
As of August 31, 2000, CHL had uncommitted revolving credit facilities with
the Federal National Mortgage Association ("Fannie Mae") and the Federal Home
Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by
conforming mortgage loans that are in the process of being pooled into MBS. As
of August 31, 2000, the Company had no outstanding borrowings under either of
these facilities.
NOTE F - FINANCIAL INSTRUMENTS
The following table summarizes the notional amounts of derivative contracts
included in the Servicing Hedge.
<TABLE>
<S> <C> <C> <C> <C>
-------------------------------------- -------------------- -------------------- ------------------ ---------------------
(Dollar amounts in millions) Balance, Dispositions/ Balance,
February 29, 2000 Additions Expirations August 31,
2000
-------------------------------------- -------------------- -------------------- ------------------ ---------------------
Interest Rate Floors $50,500 1,000 (5,000) $46,500
Long Call Options on
Interest Rate Futures $15,000 6,550 (20,000) $1,550
Long Put Options on
Interest Rate Futures $1,750 3,500 - $5,250
Long Call Options on MBS $8,561 - (4,000) $4,561
Capped Swaps $1,000 - - $1,000
Interest Rate Swaps $1,500 - - $1,500
Interest Rate Cap $2,500 1,500 (1,500) $2,500
Swaptions $36,250 17,000 (1,000) $52,250
Principal - Only Swaps - 125 - $125
-------------------------------------- -------------------- -------------------- ------------------ ---------------------
</TABLE>
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of August 31, 2000 and February 29, 2000 is made by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<PAGE>
NOTE F- FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<S> <C> <C> <C> <C>
---- ------------------------------------------------ ---------------------------------- --- ----------------------------
August 31, 2000 February 29, 2000
(Dollar amounts in thousands) Carrying Estimated Carrying Estimated
Amount fair value amount fair value
Assets:
Mortgage loans and mortgage-backed securities
held for sale $1,399,375 $1,399,375 $2,653,183 $2,653,183
Trading securities 3,324,807 3,324,807 1,984,031 1,984,031
Items included in investments in other financial instruments:
Principal only securities purchased 1,288,970 1,288,970 952,840 952,840
Mortgage-backed securities retained in
securitizations 898,171 898,171 775,867 775,867
Insurance Company investment
portfolio 535,193 535,193 520,490 520,490
Securities purchased with agreements to rese1,339,011 1,339,011 435,593 435,593
Equity Securities - restricted
and - - 46,193 46,193
unrestricted
Items included in other assets:
Rewarehoused FHA and VA loans 249,726 249,726 336,273 336,273
Loans held for investment 229,259 229,259 177,330 177,330
Receivables related to broker-dealer activitie399,441 399,441 22,612 22,612
Liabilities:
Notes payable 11,574,068 11,136,874 9,782,625 9,459,011
Securities sold not yet purchased 241,367 241,367 181,903 181,903
Company-obligated mandatorily redeemable Capital trust pass-through
securities of subsidiary trusts holding solely Company
guaranteed related subordinat500,000 472,863 500,000 489,744
debt
Derivatives:
Interest rate floors 380,441 260,980 411,278 180,360
Forward contracts on MBS 3,421 (30,002) (11,080) (13,511)
Options on MBS 67,329 37,751 75,950 32,415
Options on interest rate futures 15,982 3,162 8,921 6,032
Interest rate caps 20,576 8,672 47,348 39,088
Capped Swaps (2,668) (4,031) (5,619) (8,040)
Swaptions 388,755 136,578 341,039 76,254
Interest rate swaps (22,060) (469,855) (23,228) (457,051)
Principal - only swaps 1,791 1,791 - -
Short-term commitments to extend credit - 72,900 - 52,500
---- ------------------------------------------------ --------------- -- ------------- -- ------------- --- -------------
</TABLE>
The fair value estimates as of August 31, 2000 and February 29, 2000 are
based on pertinent information that was available to management as of the
respective dates. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
those dates and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
NOTE G - LEGAL PROCEEDINGS
Legal Proceedings
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. Although
it is difficult to predict the ultimate outcome of these proceedings, management
believes, based on discussions with counsel, that any ultimate liability will
not materially affect the consolidated financial position or results of
operations of the Company and its subsidiaries.
NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
<TABLE>
Summarized financial information for Countrywide Home Loans, Inc. was as
follows.
<S> <C> <C>
---- ----------------------------------------- ---- -------------------------------------------------
August 31, February 29,
(Dollar amounts in thousands) 2000 2000
---- ---------------------------------------------- ------- -------------- ----------- --------------
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $ 1,399,375 $ 2,653,183
Mortgage servicing rights, net 5,881,171 5,396,477
Other assets 7,573,508 5,240,247
-------------- --------------
Total assets $14,854,054 $13,289,907
============== ==============
Short- and long-term debt $10,199,401 $ 9,224,956
Other liabilities 2,052,856 1,632,106
Equity 2,601,797 2,432,845
-------------- --------------
Total liabilities and equity $14,854,054 $13,289,907
============== ==============
</TABLE>
---- ---------------------------------------------- ------- -------------- -
<TABLE>
----- ----------------------------------------- --- ---------------------------
<S> <C> <C>
Six Months Ended August 31,
(Dollar amounts in thousands) 2000 1999
----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
--------------- ---------- --------------- ---------
Statements of Earnings:
Revenues $620,255 $783,355
Expenses 452,740 509,314
Provision for income taxes 61,143 106,876
--------------- ---------------
Net earnings $106,372 $167,165
=============== ===============
----- --------------------------------------------- ------- --------------- -
</TABLE>
NOTE I - SEGMENTS AND RELATED INFORMATION
The Company has six major segments that are grouped into Consumer and
Institutional businesses. Consumer Businesses include Mortgage Originations,
Mortgage-Related Investments and Business to Consumer ("B2C") Insurance.
Institutional Businesses include Processing and Technology, Capital Markets and
Business to Business ("B2B") Insurance.
The Mortgage Originations segment originates mortgage loans through the
Company's retail branch network (Consumer Markets Division and Full Spectrum
Lending, Inc.) and the Wholesale Division. This segment also provides other
complementary services offered as part of the origination process through
LandSafe, Inc., including title, escrow, appraisal, credit reporting and flood
determination services. The Mortgage-Related Investments segment consists of
investments in assets retained in the mortgage securitization process, including
MSRs and residual interests. The B2C Insurance Segment, through Countrywide
Insurance Services, Inc., acts as an agent in the sale of insurance, including
homeowners, fire, flood, earthquake, life and disability insurance, primarily to
the Company's mortgage customers.
NOTE I - SEGMENTS AND RELATED INFORMATION (Continued)
The Processing and Technology segment activities include mortgage servicing,
as well as mortgage subservicing and subprocessing for other domestic financial
institutions and foreign financial institutions (through Global Home Loans,
Limited). The Capital Markets segment purchases mortgage loans through the
Correspondent Lending Division, acts as a broker/dealer specializing in
mortgages and mortgage-related securities through Countrywide Securities
Corporation ("CSC"), and as an agent, facilitates the purchase and sale of bulk
servicing rights through Countrywide Servicing Exchange, Inc. ("CSE"). The B2B
Insurance Segment includes the activities of Balboa Life and Casualty
("Balboa"), an insurance carrier that offers property and casualty insurance
(specializing in creditor-placed insurance), and life and disability insurance,
along with Second Charter, Inc., a mortgage reinsurance company. Included in the
tables below labeled "Other" is the holding company activities and certain
reclassifications to conform management reporting to the consolidated financial
statements.
-------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the six months ended August 31, 2000
Consumer Businesses Institutional Businesses
---------- ---------- --------- ----------- ---------- --------- --------- ----------
Mortgage-Related Processing
Mortgage InvestmentsB2C and Capital B2B
(Dollars in thousandOriginations Insurance Total Technology Markets Insurance Total Other Total
------------------- ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ---------
External revenues $435,904 $252,544 $19,156 $707,604 $ 16,844 $116,347 $142,231 $275,422 $3,841 $986,867
Intersegment revenues - (131,651) - (131,651) 131,651 - - 131,651 - -
---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ---------
Total revenues $435,904 $120,893 $19,156 $575,953 $148,495 $116,347 $142,231 $407,073 $3,841 $986,867
========== ========== ========= =========== ========== ========= ========= ========== ======== ========
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
------------------- ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- --------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
For the six months ended August 31, 1999
Consumer Businesses Institutional Businesses
---------- ---------- --------- ----------- ---------- --------- --------- ----------
Mortgage-Related Processing
Mortgage InvestmentsB2C and Capital B2B
(Dollars in thousandOriginations Insurance Total Technology Markets Insurance Total Other Total
------------------- ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- --------
External revenues $619,463 $184,385 $15,242 $819,090 $ 13,113 $130,101 $12,225 $155,439 $9,412 $983,941
Intersegment revenues - (111,191) - (111,191) 111,191 - - 111,191 - -
---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ---------
Total revenues $619,463 $ 73,194 $15,242 $707,899 $124,304 $130,101 $12,225 $266,630 $9,412 $983,941
========== ========== ========= =========== ========== ========= ========= ========== ======== ========
Segment earnings
(pre-tax) $193,950 $61,232 $2,207 $257,389 $17,352 $57,949 $12,099 $87,400 ($720) $344,069
Segment assets $3,700,124 $8,111,368 $32,735 $11,844,227 $118,072 $4,054,130$40,855 $4,213,057 $174,161 $16,231,445
------------------- ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ---------
</TABLE>
NOTE J - SUBSEQUENT EVENTS
On September 19, 2000, CHL renewed the $1.0 billion one-year portion of the $4.0
billion revolving credit facility. This renewal raised the facility to $1.2
billion and will expire on September 19, 2001.
<PAGE>
NOTE K - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize the
fair value of all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. This statement will become effective in the fiscal year
ended February 28, 2002. The Company has not yet determined the impact on the
Consolidated Financial Statements upon the adoption of this standard.
NOTE L - EARNINGS PER SHARE
Basic earnings per share is determined using net income divided by the
weighted average shares outstanding during the period. Diluted EPS is computed
by dividing net income by the weighted average shares outstanding, assuming all
dilutive potential common shares were issued.
The following table presents basic and diluted EPS for the three and six
months ended August 31, 2000 and 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
------------------------ -- -- ----- ------------------------------------ -- ----- ----
Three Months Ended August
31,
-- -- ----- ------------------------------------ -- ----- ----
2000 1999
--------- --------- --------- ---------- --------- ---------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
------------------------ --------- --------- --------- ---------
--------- ----------
Net earnings $91,035 $106,503
========= ==========
Basic EPS
Net earnings available
to common shareholders $91,035 114,302 $0.80 $106,503 112,991 $0.94
Effect of dilutive
stock options - 3,842 - 4,355
--------- --------- ---------- ---------
Diluted EPS
Net earnings available
to common shareholders $91,035 118,144 $0.77 $106,503 117,346 $0.91
========= ========= ========== =========
------------------------ --------- --------- --------- - ---------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
------------------------ -- -- ----- ------------------------------------ -- ----- ----
Six Months Ended August 31,
-- -- ----- ------------------------------------ -- ----- ----
2000 1999
--------- --------- --------- ---------- --------- ---------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
------------------------ --------- --------- --------- ---------
--------- ----------
Net earnings $174,494 $209,882
========= ==========
Basic EPS
Net earnings available
to common shareholders $174,494 114,047 $1.53 $209,882 112,871 $1.86
Effect of dilutive
stock options - 3,180 - 4,568
--------- --------- ---------- ---------
Diluted EPS
Net earnings available
to common shareholders $174,494 117,227 $1.49 $209,882 117,439 $1.79
========= ========= ========== =========
</TABLE>
------------------------ --------- --------- ----
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Page 15
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements
that reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those identified below, which could cause
actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate," "intend," "estimate,"
"should" and other expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors could cause actual results to differ
materially from historical results or those anticipated: (1) the level of demand
for mortgage credit, which is affected by such external factors as the level of
interest rates, the strength of the various segments of the economy and
demographics of the Company's lending markets; (2) the direction of interest
rates; (3) the relationship between mortgage interest rates and the cost of
funds; (4) federal and state regulation of the Company's mortgage origination,
mortgage servicing, capital markets and insurance operations; and (5)
competition within the mortgage banking, capital markets and insurance
industries.
Quarter Ended August 31, 2000 Compared to Quarter Ended August 31, 1999
OPERATING SEGMENT RESULTS
The Company's pre-tax earnings by segment is summarized below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
Three Months Ended
(Dollar amounts in thousands) August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- --------------
Consumer Businesses:
Mortgage Originations $32,800 $81,800
Mortgage-Related Investments 55,212 45,212
B2C Insurance 889 1,015
------------- --------------
Total Consumer Business 88,901 128,027
Institutional Businesses:
Processing and Technology 14,174 10,851
Capital Markets 21,588 29,904
B2B Insurance 15,754 6,216
--------------
-------------
Total Institutional Business 51,516 46,971
Other 1,798 (403)
------------- --------------
Pre-tax Earnings $142,215 $174,595
============= ==============
</TABLE>
------------------------------------------------------------------------
Mortgage Originations Segment
The Mortgage Originations segment activities include loan origination
through the Company's retail branch network (Consumer Markets Division and Full
Spectrum Lending, Inc.) and the Wholesale Division, the warehousing and sales of
such loans and loan closing services.
Total Consumer Mortgage loan production by Division is summarized below.
<TABLE>
<S> <C> <C>
-------------------------------------------- ---------------------------
(Dollar amounts in millions) Loan Production
Three Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
Consumer Mortgages:
Consumer Markets Division $4,386 $ 6,054
Wholesale Lending Division 4,356 5,458
Full Spectrum Lending, Inc. 402 379
------------- ----------------
Total $9,144 $11,891
============= ================
---------------------------------------------------------------------------------------------
</TABLE>
The decline in pre-tax earnings of $49.0 million in the quarter ended August
31, 2000 as compared to the quarter ended August 31, 1999 was primarily
attributable to lower prime credit quality first mortgage loan production and
reduced margins on prime credit quality first mortgages driven by a significant
reduction in refinances. These declines were partially offset by increased
margins on sub-prime loans and a reduction in expenses.
Mortgage-Related Investments Segment
Mortgage-Related Investment segment activities include investments in assets
retained in the mortgage securitization process, including mortgage servicing
rights, residual interests in asset-backed securities and other mortgage-related
assets.
The increase in pre-tax earnings of $10.0 million in the quarter ended
August 31, 2000 as compared to the quarter ended August 31, 1999 was primarily
due to an increase in servicing revenues resulting from servicing portfolio
growth and improved performance of the residual investments. As of August 31,
2000, the Company serviced $270.5 billion of loans (including $5.9 billion of
loans subserviced for others), up from $236.7 billion (including $4.3 billion of
loans subserviced for others) as of August 31, 1999, a 14% increase. These
positive factors were partially offset by increased interest expense related to
financing the mortgage-related investments, increased impairment of MSRs and
higher servicing expenses driven by the growth in the servicing portfolio,
including the subservicing fee paid to the Processing and Technology sector. The
growth in the Company's servicing portfolio since August 31, 1999 was the result
of loan production volume and the acquisition of bulk servicing rights. This was
partially offset by prepayments, partial prepayments and scheduled amortization.
During the quarter ended August 31, 2000, the annual prepayment rate of the
Company's servicing portfolio was 10%, compared to 15% for the quarter ended
August 31, 1999. In general, the prepayment rate is affected by the level of
refinance activity, which in turn is driven by the relative level of mortgage
interest rates, and activity in the housing market. The weighted average
interest rate of the mortgage loans in the Company's servicing portfolio as of
August 31, 2000 was 7.8% compared to 7.4% as of August 31, 1999.
B2C Insurance Segment
B2C Insurance segment activities include the operations of Countrywide
Insurance Services ("CIS"), an insurance agency that provides homeowners, life,
disability and automobile as well as other forms of insurance, primarily to the
Company's mortgage customers. The decrease in pre-tax earnings of $0.1 million
in the quarter ended August 31, 2000 as compared to the quarter ended August 31,
1999 was primarily due to a slight decline in new policies sold.
<PAGE>
Processing and Technology Segment
Processing and Technology segment activities include mortgage servicing, as
well as mortgage subservicing and subprocessing for other domestic and foreign
financial institutions. The increase in pre-tax earnings of $3.3 million in the
quarter ended August 31, 2000 as compared to the quarter ended August 31, 1999
was primarily due to growth in the servicing portfolio and subprocessing for
foreign financial institutions.
Capital Markets Segment
Capital Markets segment activities include primarily the operations of
Countrywide Securities Corporation ("CSC"), a registered broker-dealer
specializing in the secondary mortgage market, and the Correspondent Lending
Division ("CLD"), through which the Company purchases closed loans from mortgage
bankers, commercial banks and other financial institutions. The decrease in
pre-tax earnings of $8.3 million in the quarter ended August 31, 2000 as
compared to the quarter ended August 31, 1999 was primarily due to CLD's
decreased production volume attributable primarily to the decline in refinance
activity. This decline was partially offset by increased profitability of CSC,
driven by higher trading volumes.
B2B Insurance Segment
B2B Insurance segment includes the activities of Balboa, an insurance
carrier that offers property and casualty insurance (specializing in creditor
placed insurance), and life and disability insurance together with the
activities of Second Charter Reinsurance Company, a mortgage reinsurance
company. The increase in pre-tax earnings of $9.5 million in the quarter ended
August 31, 2000 as compared to the quarter ended August 31, 1999 was due to the
acquisition of Balboa (on November 30, 1999) and increased mortgage reinsurance
premium volume.
Other
The increase in pre-tax earnings in the quarter ended August 31, 2000 is a
result of the Company selling it's investment in equity securities which
resulted in a pre-tax gain of $4.9 million.
CONSOLIDATED EARNINGS PERFORMANCE
Revenues for the quarter ended August 31, 2000 increased 4% to $512.3
million, up from $491.1 million for the quarter ended August 31, 1999. Net
earnings decreased 15% to $91.0 million for the quarter ended August 31, 2000,
down from $106.5 million for the quarter ended August 31, 1999. The increase in
revenues for the quarter ended August 31, 2000 compared to the quarter ended
August 31, 1999 was primarily due to the acquisition of Balboa Life and Casualty
("Balboa") on November 30, 1999. Revenues for the quarter ended August 31, 2000,
excluding Balboa, decreased 9% compared to the same quarter of the prior year.
The decline in revenues, excluding Balboa, and net earnings for the quarter
ended August 31, 2000 compared to the quarter ended August 31, 1999 was
primarily due to a decrease in prime, first lien, loan originations attributable
to a decline in loan refinancings. This was partially offset by increased net
earnings from mortgage-related investments and the B2B insurance segment,
together with increased production of non-traditional loan products (home equity
and sub-prime loans).
The total volume of loans produced by the Company decreased 17% to $16.2
billion for the quarter ended August 31, 2000, down from $19.6 billion for the
quarter ended August 31, 1999. The decrease in loan production was primarily due
to a decrease in the mortgage origination market and a decrease in market share
driven largely by a reduction in refinances.
<PAGE>
Total loan production by purpose and by interest rate type is summarized
below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
(Dollar amounts in millions) Loan Production
Three Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
Purchase $13,405 $13,712
Refinance 2,789 5,913
------------- ----------------
Total $16,194 $19,625
============= ================
------------- ----------------
Fixed Rate $13,725 $16,809
Adjustable Rate 2,469 2,816
------------- ----------------
Total $16,194 $19,625
============= ================
---------------------------------------------------------------------------------------------
</TABLE>
Total loan production by Segment is summarized below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
(Dollar amounts in millions) Loan Production
Three Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
------------- ----------------
Consumer Mortgages $9,144 $11,891
Correspondent Lending Division 7,050 7,734
------------- ----------------
Total $16,194 $19,625
============= ================
</TABLE>
-----------------------------------------------------------------------------
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.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
Non-Traditional
(Dollar amounts in millions) Loan Production
Three Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
Sub-prime $1,392 $1,318
Home Equity 1,139 1,154
------------- ----------------
Total $2,531 $2,472
============= ================
---------------------------------------------------------------------------------------------
</TABLE>
Loan production revenue decreased in the quarter ended August 31, 2000 as
compared to the quarter ended August 31, 1999 due to lower production and
reduced margins on prime credit quality, first lien, mortgages driven by a
significant reduction in refinances. In addition, a change in divisional mix
contributed to the decline. Consumer Mortgages (which, due to their cost
structures, charge higher fees per dollar loaned than the Correspondent
division) comprised a lower percentage of total production in the quarter ended
August 31, 2000 as compared to the quarter ended August 31, 1999. These declines
were partially offset by improved margins of sub-prime loans during the quarter
ended August 31, 2000. Sub-prime loans contributed $62.2 million to the gain on
sale of loans in the quarter ended August 31, 2000 and $48.2 million in the
quarter ended August 31, 1999. The sale of home equity loans contributed $28.4
million and $26.5 million to gain on sale of loans in the quarter ended August
31, 2000 and the quarter ended August 31, 1999, respectively. In general, loan
origination fees and gain on sale of loans are affected by numerous factors
including the volume and mix of loans produced and sold, loan pricing decisions,
and movements of interest rates.
Net interest income (interest earned net of interest charges) of $2.3
million for the quarter ended August 31, 2000, was down from net interest income
of $33.2 million for the quarter ended August 31, 1999. Net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan inventory ($31.2 million and $51.3 million for the quarter ended
August 31, 2000 and the quarter ended August 31, 1999, respectively); (ii)
interest expense related to the Company's mortgage-related investments ($100.9
million and $63.6 million for the quarters ended August 31, 2000 and August 31,
1999, respectively) and (iii) interest income earned from the custodial balances
associated with the Company's servicing portfolio ($61.0 million and $41.2
million for the quarters ended August 31, 2000 and August 31, 1999,
respectively.
The decrease in net interest income from the mortgage loan inventory was
primarily attributable to lower inventory levels combined with a lower net
earnings rate during the quarter ended August 31, 2000. The increase in interest
expense related to mortgage-related investments resulted primarily from an
increase in amounts financed coupled with an increase in short-term interest
rates. The increase in net interest income earned from the custodial balances
was primarily due to an increase in the earnings rate from the quarter ended
August 31, 1999 to the quarter ended August 31, 2000.
The Company recorded MSR amortization for the quarter ended August 31, 2000
totaling $116.0 million compared to $118.1 million for the quarter ended August
31, 1999. The Company recorded impairment of $26.9 million for the quarter ended
August 31, 2000 compared to recovery of previous impairment of $54.3 for the
quarter ended August 31, 1999. The primary factors affecting the amount of
amortization and impairment or impairment recovery of MSRs recorded in an
accounting period are the level of prepayments during the period and the change,
if any, in estimated future prepayments. To mitigate the effect on earnings of
MSR impairment that may result from increased current and projected future
prepayment activity, the Company acquires financial instruments, including
derivative contracts, that increase in aggregate value when interest rates
decline (the "Servicing Hedge").
In the quarter ended August 31, 2000, the Company recognized a net benefit
of $8.9 million from its Servicing Hedge. The net benefit included unrealized
net gains of $26.9 million and realized net expense of $18.0 million from the
sale of various financial instruments that comprise the Servicing Hedge net of
premium amortization. In the quarter ended August 31, 1999, the Company
recognized a net expense of $65.6 million from its Servicing Hedge. The net
expense included unrealized net losses of $37.1 million and realized net expense
of $28.5 million from the sale of various financial instruments that comprise
the Servicing Hedge net of premium amortization.
The financial instruments that comprised the Servicing Hedge included
interest rate floors, principal only securities (P/O Securities"), options on
interest rate swaps ("Swaptions"), options on MBS, options on interest rate
futures, interest rate swaps, interest rate swaps with the Company's maximum
payment capped ("Capped Swaps"), principal only swaps ("P/O Swaps") and interest
rate caps.
The Servicing Hedge is designed to protect the value of the MSRs from the
effects of increased prepayment activity that generally results from declining
interest rates. To the extent that interest rates increase, the value of the
MSRs increases while the value of the hedge instruments declines. With respect
to the floors, options on interest rate futures and MBS, caps, Swaptions and P/O
securities, the Company is not exposed to loss beyond its initial outlay to
acquire the hedge instruments plus any unrealized gains recognized to date. With
respect to the Interest Rate Swaps contracts entered into by the Company as of
August 31, 2000, the Company estimates that its maximum exposure to loss over
the contractual terms is $1 million. With respect to the Capped Swaps contracts
entered into by the Company as of August 31, 2000, the Company estimates that
its maximum exposure to loss over the contractual terms is $2 million. With
respect to the P/O Swaps contracts entered into by the Company as of August 31,
2000, the Company estimates that its maximum exposure to loss over the
contractual terms is $16 million.
<PAGE>
<TABLE>
Salaries and related expenses are summarized below for the quarters ended
August 31, 2000 and 1999.
<S> <C> <C> <C> <C>
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended August 31, 2000
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Consumer Institutional Corporate
Businesses 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 6,238 3,786 1,694 11,718
Employees
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
</TABLE>
<TABLE>
<PAGE>
<S> <C> <C> <C> <C>
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended August 31, 1999
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Consumer Institutional Corporate
Businesses Businesses Administration Total
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
Base Salaries $73,415 $23,711 $26,419 $119,126
Incentive Bonus 30,790 6,267 5,107 42,163
Payroll Taxes and Benefits 10,943 3,185 4,492 23,040
----------------- ---------------- ----------------- ------------------
Total Salaries and Related
Expenses $115,148 $33,163 $36,018 $184,329
================= ================ ================= ==================
Average Number of 6,780 2,628 1,855 11,263
Employees
</TABLE>
---- --------------------------- -- ----------------- -- ---------------- --
The amount of salaries increased during the quarter ended August 31, 2000 as
compared to the quarter ended August 31, 1999 primarily due to an increase in
staff in the institutional businesses due to a larger servicing portfolio and
the acquisition of Balboa on November 30, 1999. The overall increase was
partially offset by a decrease in consumer businesses due to a decline in
mortgage originations. Incentive bonuses earned during the quarter ended August
31, 2000 also decreased primarily due to the decline in mortgage originations.
Occupancy and other office expenses for the quarter ended August 31, 2000
increased to $69.7 million from $68.2 million for the quarter ended August 31,
1999. The increase was primarily due to the acquisition of Balboa partially
offset by the continued effort of reducing costs in the production areas as a
result of a decline in mortgage originations.
Marketing expenses for the quarter ended August 31, 2000 decreased 5% to
$20.0 million as compared to $21.1 million for the quarter ended August 31,
1999. This was primarily due to the initiation of cost reduction measures in the
production areas as a result of a decline in mortgage originations.
Insurance net losses are attributable to insurance claims in the B2B
Insurance segment. Insurance losses were $25.8 million for the quarter ended
August 31, 2000. These losses will increase or decrease during a period
depending primarily on the volume of claims caused by natural disasters.
Other operating expenses were $65.6 million for the quarter ended August 31,
2000 as compared to $42.9 million for the quarter ended August 31, 1999. The
increase was primarily due to the acquisition of Balboa on November 30, 1999.
<PAGE>
Six Months Ended August 31, 2000 Compared to Six Months Ended August 31, 1999
OPERATING SEGMENT RESULTS
The Company's pre-tax earnings by segment is summarized below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
Six months ended
(Dollar amounts in thousands) August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- --------------
Consumer Businesses:
Mortgage Originations $60,354 $193,950
Mortgage-Related Investments 117,378 61,232
B2C Insurance 1,949 2,207
------------- --------------
Total Consumer Business 179,681 257,389
Institutional Businesses:
Processing and Technology 24,679 17,352
Capital Markets 38,489 57,949
B2B Insurance 30,002 12,099
--------------
-------------
Total Institutional Business 93,170 87,400
Other 289 (720)
------------- --------------
Pre-tax Earnings $273,140 $344,069
============= ==============
</TABLE>
------------------------------------------------------------
Mortgage Originations Segment
The Mortgage Originations segment activities include loan origination
through the Company's retail branch network (Consumer Markets Division and Full
Spectrum Lending, Inc.) and the Wholesale Division, the warehousing and sales of
such loans and loan closing services.
Total consumer mortgage loan production by Division is summarized below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
(Dollar amounts in millions) Loan Production
Six Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
Consumer Mortgages:
Consumer Markets Division $8,428 $ 13,089
Wholesale Lending Division 8,418 12,580
Full Spectrum Lending, Inc. 823 703
------------- ----------------
Total $17,669 $26,372
============= ================
</TABLE>
--------------------------------------------------------------
The decline in pre-tax earnings of $133.6 million in the six months ended
August 31, 2000 as compared to the six months ended August 31, 1999 was
primarily attributable to lower prime credit quality first mortgage loan
production and reduced margins on prime credit quality first mortgages driven by
a significant reduction in refinances. These declines were partially offset by
increased loan production and sales of higher margin home equity and sub-prime
loans and a reduction in expenses.
<PAGE>
Mortgage-Related Investments Segment
Mortgage-Related Investment segment activities include investments in assets
retained in the mortgage securitization process, including mortgage servicing
rights, residual interests in asset-backed securities and other mortgage-related
assets.
The increase in pre-tax earnings of $56.1 million in the six months ended
August 31, 2000 as compared to the six months ended August 31, 1999 was
primarily due to an increase in servicing revenues resulting from servicing
portfolio growth, a reduction in MSR amortization attributable to rising
mortgage rates and improved performance of the residual investments. These
positive factors were partially offset by increased interest expense related to
financing the mortgage-related investments and higher servicing expenses driven
by the growth in the servicing portfolio, including the subservicing fee paid to
the processing and technology sector. The growth in the Company's servicing
portfolio since August 31, 1999 was the result of loan production volume and the
acquisition of bulk servicing rights. This was partially offset by prepayments,
partial prepayments and scheduled amortization.
During the six months ended August 31, 2000, the annual prepayment rate of
the Company's servicing portfolio was 10%, compared to 18% for the six months
ended August 31, 1999. In general, the prepayment rate is affected by the level
of refinance activity, which in turn is driven by the relative level of mortgage
interest rates, and activity in the housing market.
B2C Insurance Segment
B2C Insurance segment activities include the operations of an insurance
agency, Countrywide Insurance Services ("CIS"), an insurance agency that
provides homeowners, life, disability and automobile as well as other forms of
insurance, primarily to the Company's mortgage customers. The decrease in
pre-tax earnings of $0.3 in the six months ended August 31, 2000 as compared to
the six months ended August 31, 1999 was primarily due to a slight decline in
new policies sold.
Processing and Technology Segment
Processing and Technology segment activities include mortgage servicing, as
well as mortgage subservicing and subprocessing for other domestic and foreign
financial institutions. The increase in pre-tax earnings of $7.3 million in the
six months ended August 31, 2000 as compared to the six months ended August 31,
1999 was primarily due to growth in the servicing portfolio and subprocessing.
Capital Markets Segment
Capital Markets segment activities include primarily the operations of
Countrywide Securities Corporation ("CSC"), a registered broker-dealer
specializing in the secondary mortgage market, and the Correspondent Lending
Division ("CLD"), through which the Company purchases closed loans from mortgage
bankers, commercial banks and other financial institutions. The decrease in
pre-tax earnings of $19.5 million in the six months ended August 31, 2000 as
compared to the six months ended August 31, 1999 was primarily due to CLD's
decreased production volume attributable primarily to the decline in refinance
activity.
B2B Insurance Segment
B2B Insurance segment includes the activities of Balboa, an insurance
carrier that offers property and casualty insurance (specializing in creditor
placed insurance), and life and disability insurance together with the
activities of Second Charter Reinsurance Company, a mortgage reinsurance
company. The increase in pre-tax earnings of $17.9 million in the six months
ended August 31, 2000 as compared to the six months ended August 31, 1999 was
due to the acquisition of Balboa and increased mortgage reinsurance premium
volume.
<PAGE>
CONSOLIDATED EARNINGS PERFORMANCE
Revenues for the six months ended August 31, 2000 increased to $986.9
million, up from $983.9 million for the six months ended August 31, 1999. Net
earnings decreased 17% to $174.5 million for the six months ended August 31,
2000, down from $209.9 million for the six months ended August 31, 1999. The
increase in revenues for the six months ended August 31, 2000 compared to the
six months ended August 31, 1999 was primarily due to acquisition of Balboa on
November 30, 1999. Revenues for the six months ended August 31, 2000, excluding
Balboa, decreased 13% compared to the six months ended August 31, 1999. The
decline in revenues, excluding Balboa, and net earnings for the six months ended
August 31, 2000 compared to the six months ended August 31, 1999 was primarily
due to a decline in prime, first line, loan originations attributable to a
decline in loan refinancings. The decline was partially offset by increased net
earnings from the mortgage-related investments and the B2B insurance segment,
combined with increased production and sales of non-traditional loan products
(home equity and sub-prime loans).
The total volume of loans produced by the Company decreased 28% to $30.7
billion for the six months ended August 31, 2000, down from $42.8 billion for
the six months ended August 31, 1999. The decrease in loan production was
primarily due to a decrease in the mortgage market, driven largely by a
reduction in refinances.
Total loan production by purpose and by interest rate type is summarized
below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
(Dollar amounts in millions) Loan Production
Six Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
Purchase $25,000 $25,434
Refinance 5,740 17,384
------------- ----------------
Total $30,740 $42,818
============= ================
------------- ----------------
Fixed Rate $24,870 $38,420
Adjustable Rate 5,870 4,398
------------- ----------------
Total $30,740 $42,818
============= ================
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Total loan production by Segment is summarized below.
-------------------------------------------- --------------------------------------- --------
(Dollar amounts in millions) Loan Production
Six Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
------------- ----------------
Consumer Mortgages $17,669 $26,372
Correspondent Lending Division 13,071 16,446
------------- ----------------
Total $30,740 $42,818
============= ================
</TABLE>
--------------------------------------------------------------------
The factors which affect the relative volume of production among the
Company's Segments include the price competitiveness of each Segment's product
offerings, the level of mortgage lending activity in each Segment's market and
the success of each Segment's sales and marketing efforts.
<PAGE>
Non-traditional loan production (which is included in the Company's total
volume of loans produced) is summarized below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------------- --------
Non-Traditional
(Dollar amounts in millions) Loan Production
Six Months Ended
August 31,
-------------------------------------------- --------------------------------------- --------
2000 1999
------------- ----------------
Sub-prime $2,832 $2,087
Home Equity 2,270 1,871
------------- ----------------
Total $5,102 $3,958
============= ================
</TABLE>
---------------------------------------------------------------------
Loan production revenues decreased in the six months ended August 31, 2000
as compared to the six months ended August 31, 1999 due to lower production and
reduced margins on prime credit quality first mortgages driven by a significant
reduction in refinances. These declines were partially offset by increased
production and sales during the six months ended August 31, 2000 of higher
margin home equity and sub-prime loans.
Net interest expense (interest earned net of interest charges) of $0.6
million for the six months ended August 31, 2000, was down from net interest
income of $62.7 million for the six months ended August 31, 1999. Net interest
income (expense) is principally a function of: (i) net interest income earned
from the Company's mortgage loan inventory ($51.8 million and $98.5 million for
the six months ended August 31, 2000 and the six months ended August 31, 1999,
respectively); (ii) interest expense related to the Company's mortgage-related
investments ($187.7 million and $130.4 million for the six months ended August
31, 2000 and August 31, 1999, respectively) and (iii) interest income earned
from the custodial balances associated with the Company's servicing portfolio
($112.8 million and $84.3 million for the six months ended August 31, 2000 and
August 31, 1999, respectively).
The decrease in net interest income from the mortgage loan inventory was
primarily attributable to lower inventory levels combined with a lower net
earnings rate during the six months ended August 31, 2000. The increase in
interest expense related to mortgage-related investments resulted primarily from
an increase in amounts financed coupled with an increase in short-term interest
rates. The increase in net interest income earned from the custodial balances
was primarily due to an increase in the earnings rate and an increase in the
average custodial balances.
The Company recorded MSR amortization for the six months ended August 31,
2000 totaling $224.2 million compared to $245.1 million for the six months ended
August 31, 1999. The Company recorded impairment of $23.6 million for the six
months ended August 31, 2000 compared to recovery of previous impairment of
$205.8 million for the six months ended August 31, 1999. The primary factors
affecting the amount of amortization and impairment recovery of MSRs recorded in
an accounting period are the level of prepayments during the period and the
change, if any, in estimated future prepayments. To mitigate the effect on
earnings of MSR impairment that may result from increased current and projected
future prepayment activity, the Company acquires financial instruments,
including derivative contracts, that increase in aggregate value when interest
rates decline (the "Servicing Hedge").
In the six months ended August 31, 2000, the Company recognized a net
expense of $4.4 million from its Servicing Hedge. The net expense included
unrealized net gains of $20.2 million and realized net expense of $24.6 million
from the sale of various financial instruments that comprise the Servicing Hedge
net of premium amortization. In the six months ended August 31, 1999, the
Company recognized a net expense of $237.0 million from its Servicing Hedge. The
net expense included unrealized net losses of $219.9 million and net realized
expenses of $17.1 million from the sale of various financial instruments that
comprise the Servicing Hedge net of premium amortization.
<PAGE>
Salaries and related expenses are summarized below for the six months ended
August 31, 2000 and 1999.
<TABLE>
<S> <C> <C> <C> <C>
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Six Months Ended August 31, 2000
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Consumer Institutional Corporate
Businesses 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 6,024 3,671 1,670 11,365
Employees
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
</TABLE>
<TABLE>
<PAGE>
<S> <C> <C> <C> <C>
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Six Months Ended August 31, 1999
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Consumer Institutional Corporate
Businesses Businesses Administration Total
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
Base Salaries $145,532 $46,480 $51,301 $243,313
Incentive Bonus 63,962 12,974 11,012 87,948
Payroll Taxes and Benefits 23,184 6,796 8,514 38,494
----------------- ---------------- ----------------- ------------------
Total Salaries and Related
Expenses $232,678 $66,250 $70,827 $369,755
================= ================ ================= ==================
Average Number of 6,937 2,613 1,830 11,380
Employees
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
</TABLE>
The amount of salaries decreased during the six months ended August 31, 2000
as compared to the six months ended August 31, 1999 primarily due to a reduction
in staff in the consumer businesses due to the decline in mortgage originations.
The decline was partially offset by an increase in institutional businesses as a
result of a larger servicing portfolio and the acquisition of Balboa on November
30, 1999. Incentive bonuses earned during the six months ended August 31, 2000
decreased primarily due to the decline in loan originations.
Occupancy and other office expenses for the six months ended August 31, 2000
decreased to $136.3 million from $140.4 million for the six months ended August
31, 1999. The increase was primarily due to the acquisition of Balboa partially
offset by the continued effort of reducing costs in the production areas as a
result of a decline in production.
Insurance net losses are attributable to insurance claims in the B2B
Insurance segment. Insurance losses were $51.5 million for the six months ended
August 31, 2000. These losses will increase or decrease during a period
depending primarily on the volume of claims caused by natural disasters.
Other operating expenses were $125.8 million for the six months ended August
31, 2000 as compared to $89.1 million for the six months ended August 31, 1999.
The increase was primarily due to the acquisition of Balboa on November 30,
1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are counter
cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its committed pipeline, mortgage loan inventory and MBS
held for sale, MSRs, mortgage-backed securities retained in securitizations,
trading securities and debt securities. The overall objective of the Company's
interest rate risk management policies is to offset changes in the values of
these items resulting from changes in interest rates. The Company does not
speculate on the direction of interest rates in its management of interest rate
risk.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that quantify the net financial impact of changes
in interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses incorporate scenarios including selected
hypothetical (instantaneous) parallel shifts in the yield curve. Various
modeling techniques are employed to value the financial instruments. For
mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread
("OAS") model is used. The primary assumptions used in this model are the
implied market volatility of interest rates and prepayment speeds. For options
and interest rate floors, an option-pricing model is used. The primary
assumption used in this model is implied market volatility of interest rates.
MSRs and residual interests are valued using discounted cash flow models. The
primary assumptions used in these models are prepayment rates, discount rates
and credit losses.
Utilizing the sensitivity analyses described above, as of August 31, 2000,
the Company estimates that a permanent 0.50% reduction in interest rates, all
else being constant, would result in a $0.08 million after-tax loss related to
its trading securities and there would be no gain or loss related to its other
financial instruments. As of August 31, 2000, the Company estimates that this
combined after-tax loss of $0.08 million is the largest such loss that would
occur within the range of reasonably possible interest rate changes. These
sensitivity analyses are limited by the fact that they are performed at a
particular point in time, are subject to the accuracy of various assumptions
used including prepayment forecasts, and do not incorporate other factors that
would impact the Company's overall financial performance in such a scenario.
Consequently, the preceding estimates should not be viewed as a forecast.
An additional, albeit less significant, market risk facing the Company is
foreign currency risk. The Company has issued foreign currency-denominated
medium-term notes (See Note E). The Company manages the foreign currency risk
associated with such medium-term notes by entering into currency swaps. The
terms of the currency swaps effectively translate the foreign currency
denominated medium-term notes into U.S. dollars, thereby eliminating the
associated foreign currency risk (subject to the performance of the various
counterparties to the currency swaps). As a result, potential changes in the
exchange rates of foreign currencies denominating such medium-term notes would
not have a net financial impact on future earnings, fair values or cash flows.
<PAGE>
Inflation
Inflation affects the Company most significantly in the areas of Mortgage
Originations, Mortgage-Related Investments and Capital Markets. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Historically, as interest rates increase, loan production
decreases, particularly from loan refinancings. Although in an environment of
gradual interest rate increases, purchase activity may actually be stimulated by
an improving economy or the anticipation of increasing real estate values. In
such periods of reduced loan production, production margins may decline due to
increased competition resulting from overcapacity in the market. In a higher
interest rate environment, mortgage-related investment earnings are enhanced
because prepayment rates tend to slow down thereby extending the average life of
the Company's servicing portfolio and reducing amortization and impairment of
the MSRs, and because the rate of interest earned from the custodial balances
tends to increase. Conversely, as interest rates decline, loan production,
particularly from loan refinancings, increases. However, during such periods,
prepayment rates tend to accelerate (principally on the portion of the portfolio
having a note rate higher than the prevailing mortgage rates), thereby
decreasing the average life of the Company's servicing portfolio and adversely
impacting its mortgage related investment earnings primarily due to increased
amortization and impairment of the MSRs, and decreased earnings from residual
investments. The Servicing Hedge is designed to mitigate the impact of changing
interest rates on mortgage related investment earnings.
Seasonality
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in mortgage rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of its mortgage
loan inventory, investment in MSRs and the trading activities of its
broker-dealer subsidiary (CSC). To meet these needs, the Company currently
utilizes commercial paper supported by revolving credit facilities, medium-term
notes, senior debt, MBS repurchase agreements, subordinated notes, pre-sale
funding facilities, redeemable capital trust pass-through securities,
securitization of servicing fee income and cash flow from operations. In
addition, in the past the Company has utilized whole loan repurchase agreements,
servicing-secured bank facilities, private placements of unsecured notes and
other financings, direct borrowings from revolving credit facilities and public
offerings of common and preferred stock. The Company strives to maintain
sufficient liquidity in the form of unused, committed lines of credit, to meet
anticipated short-term cash requirements as well as to provide for potential
sudden increases in business activity driven by changes in the market
environment.
Certain of the debt obligations of the Company and Countrywide Home Loans,
Inc. ("CHL") contain various provisions that may affect the ability of the
Company and CHL to pay dividends and remain in compliance with such obligations.
These provisions include requirements concerning net worth and other financial
covenants. These provisions have not had, and are not expected to have, an
adverse impact on the ability of the Company and CHL to pay dividends.
The principal financing needs of CSC consist of the financing of its
inventory of securities and underwriting activities. Its securities inventory is
financed primarily through repurchase agreements. CSC also has access to a $200
million secured bank loan facility and a secured lending facility with CHL
The primary cash needs for the B2B insurance segment are to meet short-term
and long-term obligations to policyholders (payment of policy benefits), costs
of acquiring new business (principally commissions) and the purchases of new
investments. To meet these needs, Balboa currently utilizes cash flow provided
from operations as well as through liquidation of it's investment portfolio.
<PAGE>
The Company continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the additional securitization of servicing income cash
flows.
In connection with its derivative contracts, the Company may be required to
deposit cash or certain government securities or obtain letters of credit to
meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells the mortgage loans it originates and purchases to investors but generally
retains the right to service the loans, thereby increasing the Company's
investment in MSRs. The Company views the sale of loans on a servicing-retained
basis in part as an investment vehicle. Significant unanticipated prepayments in
the Company's servicing portfolio could have a material adverse effect on the
Company's future operating results and liquidity.
Cash Flows
Operating Activities. In the six months ended August 31, 2000, the Company's
operating activities used cash of approximately $1.2 billion on a short-term
basis primarily to support an increase in trading securities and other financial
instruments, primarily securities purchased under agreements to resale. In the
six months ended August 31, 1999, operating activities provided cash of
approximately $0.5 billion.
Investing Activities. The primary investing activity for which cash was used
by the Company was the investment in MSRs. Net cash used by investing activities
was $0.5 billion for the six months ended August 31, 2000 and $0.8 billion for
the six months ended August 31, 1999.
Financing Activities. Net cash provided by financing activities amounted to
$1.8 billion for the six months ended August 31, 2000 and $0.3 billion for the
six months ended August 31, 1999. The increase in cash flow from financing
activities was primarily used to fund the change in the Company's trading
securities, other financial instruments and investment in MSRs.
Prospective Trends
Applications and Pipeline of Loans in Process
For the month ended September 30, 2000, the Company received new loan
applications at an average daily rate of $404 million. As of September 30, 2000,
the Company's pipeline of loans in process was $9.6 billion. This compares to a
daily application rate for the month ended September 30, 1999 of $314 million
and a pipeline of loans in process as of September 30, 1999 of $9.8 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,
2000 was $3.1 billion and as of September 30, 1999 was $2.3 billion. Future
application levels and loan fundings are dependent on numerous factors,
including the level of demand for mortgage loans, the level of competition in
the market, the direction of mortgage rates, seasonal factors and general
economic conditions.
Market Factors
Loan production decreased 17% from the quarter ended August 31, 1999 to
the quarter ended August 31, 2000. This decrease was primarily due to a smaller
mortgage origination market, driven by reduced refinances. Home purchase related
loan production was essentially unchanged during the same period.
The prepayment rate in the servicing portfolio decreased from 15% for the
quarter ended August 31, 1999 to 10% for the quarter ended August 31, 2000. This
was due primarily to a decrease in refinances.
The Company's California mortgage loan production (as measured by principal
balance) constituted 21% of its total production during the quarters ended
August 31, 2000 and August 31, 1999. Some regions in which the Company operates
have experienced slower economic growth, and real estate financing activity in
these regions has been impacted negatively. The Company has striven to diversify
its mortgage banking activities geographically to mitigate such effects.
The delinquency rate in the Company's servicing portfolio, excluding
sub-servicing, increased to 4.11% at August 31, 2000 from 3.36% as of August 31,
1999. This increase was primarily the result of changes in portfolio mix and
aging. Sub-prime loans (which tend to experience higher delinquency rates than
prime loans) represented approximately 5% of the total portfolio as of August
31, 2000, up from 3% as of August 31, 1999. In addition, the weighted average
age of the FHA and VA loans in the portfolio increased to 33 months at August
31, 2000 from 28 months in August 31, 1999. Delinquency rates tend to increase
as loans age, reaching a peak at three to five years of age. Related late charge
income has historically been sufficient to offset incremental servicing expenses
resulting from increased loan delinquencies.
The percentage of loans in the Company's servicing portfolio, excluding
sub-servicing, that are in foreclosure increased to 0.42% as of August 31, 2000
from 0.28% as of August 31, 1999. Because the Company services substantially all
conventional loans on a non-recourse basis, related credit losses are generally
the responsibility of the investor or insurer and not the Company. While the
Company does not generally retain credit risk with respect to the prime credit
quality first mortgage loans it sells, it does have potential liability under
representations and warranties made to purchasers and insurers of the loans. In
the event of a breach of these representations and warranties, the Company may
be required to repurchase a mortgage loan and any subsequent loss on the
mortgage loan may be borne by the Company. Similarly, government loans serviced
by the Company (23% of the Company's servicing portfolio as of August 31, 2000)
are insured by the Federal Housing Administration or partially guaranteed
against loss by the Department of Veterans Administration. The Company is
exposed to credit losses to the extent that the partial guarantee provided by
the Department of Veterans Administration is inadequate to cover the total
credit losses incurred. The Company retains credit risk on the home equity and
sub-prime loans it securitizes, through retention of a subordinated interest. As
of August 31, 2000, the Company had investments in such subordinated interests
amounting to $712.2 million.
Servicing Hedge
As previously discussed, the Company's Servicing Hedge is designed to
protect the value of its investment in MSRs from the effects of increased
prepayment activity that generally results from declining interest rates. In
periods of increasing interest rates, the value of the Servicing Hedge generally
declines and the value of MSRs generally increases. The historical correlation
of the Servicing Hedge and the MSRs has been very high. However, given the
complexity and uncertainty inherent in hedging MSRs, there can be no assurance
that future results will match the historical performance of the Servicing
Hedge.
Implementation of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize the
fair value of all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. This statement will become effective in the fiscal year
ended February 28, 2002. The Company has not yet determined the impact upon
adoption of this standard on the Consolidated Financial Statements.
<PAGE>
Page 31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.3.4 Amendment to Bylaws of Countrywide Credit Industries,
Inc. dated September 28, 2000
10.3.4 Fourth Restated Employment Agreement by and between
the Company and Angelo R. Mozilo.
10.4.2 First Restated Employment Agreement by and between
the Company and Stanford L. Kurland
10.4.3 First Restated Employment Agreement by and between
the Company and Kevin W. Bartlett
10.4.4 First Restated Employment Agreement by and between
the Company and Thomas H. Boone
10.4.5 First Restated Employment Agreement by and between
the Company and Carlos M. Garcia
10.4.6 First Restated Employment Agreement by and between
the Company and David Sambol
10.4.7 First Restated Employment Agreement by and between
the Company and Sandor E. Samuels
10.4.8 Fiscal Year 2001 Bonus Plan for Certain Executive
Officers
10.8.8 Short Term Facility Extension Amendment dated as of the 20th day of
September 2000 by and among CHL, the Short Term Lenders under the
Revolving Credit Agreement dated as of September 24, 1997 and Bankers
Trust Company as Credit Agent
10.27.2 Countrywide Credit Industries, Inc. Change in Control Severance
Plan as Amended and Restated September
11, 2000
10.28 Summary of the Termination of Director Emeritus Plan
11.1 Statement Regarding Computation of Per Share Earnings
12.1 Computation of the Ratio of Earnings to Fixed Charges
27 Financial Data Schedules (included only in the electronic
filing with the SEC).
(b) The Company filed the following report on Form 8-K:
(1) July 20, 2000 under Item 5, containing the 1999 Corporate Report of
Balboa Life and Casualty for the period beginning January 1, 1999 and
ending December 31, 1999, including the unaudited combined financial
information at December 31, 1999 of Balboa Life Insurance Company,
Balboa Insurance Company, Meritplan Insurance Company and Newport
Insurance Company.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: October 13, 2000 /s/ Stanford L. Kurland
--------------------------------------
Executive Managing Director and
Chief Operating Officer
DATE: October 13, 2000 /s/ Carlos M. Garcia
--------------------------------------
Senior Managing Director; Finance,
Chief Financial Officer and Chief
Accounting Officer (Principal Financial
Officer and Principal Accounting Officer)
<PAGE>
