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 May 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 July 13, 2000
----- ---------------------------
Common Stock $.05 par value 114,178,909
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>
May 31, February 29,
2000 2000
------------------- -------------------
Cash $236,833 $ 59,890
Mortgage loans and mortgage-backed securities held for sale 2,517,167 2,653,183
Trading securities, at market value 2,144,249 1,984,031
Mortgage servicing rights, net 5,602,884 5,396,477
Investments in other financial instruments 5,152,439 3,562,458
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 408,661 410,899
Other assets 2,377,857 1,755,390
------------------- -------------------
Total assets $18,440,090 $15,822,328
=================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $3,825,752 $2,852,738
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $12,118,028 $ 9,782,625
Drafts payable issued in connection with mortgage loan closings 464,655 382,108
Accounts payable, accrued liabilities and other 1,121,247 997,405
Deferred income taxes 1,295,002 1,272,311
------------------- -------------------
Total liabilities 14,998,932 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, 114,146,330 shares at
May 31,2000 and 113,463,424 February 29, 2000 5,707 5,673
Additional paid-in capital 1,187,304 1,171,238
Accumulated other comprehensive loss (68,368) (33,234)
Retained earnings 1,816,515 1,744,202
------------------- -------------------
Total shareholders' equity 2,941,158 2,887,879
------------------- -------------------
Total liabilities and shareholders' equity $18,440,090 $15,822,328
=================== ===================
Borrower and investor custodial accounts $3,825,752 $2,852,738
=================== ===================
The accompanying notes are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
<S> <C> <C>
Three Months
Ended May 31,
2000 1999
-------------- --------------
Revenues
Loan origination fees $ 84,294 $146,701
Gain on sale of loans, net of commitment fees 133,154 170,012
-------------- --------------
Loan production revenue 217,448 316,713
Interest earned 258,594 275,562
Interest charges (261,474) (246,034)
-------------- --------------
Net interest income (2,880) 29,528
Loan servicing revenue 325,869 272,997
Amortization & impairment/recovery of mortgage
servicing rights, net of service hedge (118,159) (146,845)
-------------- --------------
Net loan administration revenue 207,710 126,152
Net premiums earned 62,005 5,691
Commissions, fees and other revenues 43,949 60,626
-------------- --------------
Total revenues 528,232 538,710
Expenses
Salaries and related expenses 171,531 185,426
Occupancy and other office expenses 66,518 72,208
Guarantee fees 53,666 45,843
Marketing expenses 19,759 19,523
Insurance net losses 25,638 -
Other operating expenses 60,195 46,236
--------------
--------------
Total expenses 397,307 369,236
-------------- --------------
Earnings before income taxes 130,925 169,474
Provision for income taxes 47,466 66,095
-------------- --------------
NET EARNINGS $ 83,459 $103,379
============== ==============
Earnings per share
Basic $0.73 $0.92
Diluted $0.72 $0.88
The accompanying notes are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
(Dollar amounts in thousands)
Three Months
Ended May 31,
2000 1999
---------------- -----------------
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash $83,459 $103,379
provided (used) by operating activities:
Gain on sale of available-for-sale securities - (11,194)
Amortization and impairment/recovery of mortgage
servicing rights 104,895 (24,491)
Depreciation and other amortization 20,049 15,752
Deferred income taxes 47,466 66,130
Origination and purchase of loans held for sale (14,546,038) (23,193,000)
Principal repayments and sale of loans 14,682,054 22,711,136
---------------- -----------------
Decrease (increase) in mortgage loans and mortgage-
Backed securities held for sale 136,016 (481,864)
Increase in other financial instruments (1,667,765) (289,922)
Increase in trading securities (160,218) (556,952)
(Increase) decrease in other assets (633,624) 21,235
Increase in accounts payable and accrued liabilities 123,842 157,417
---------------- -----------------
Net cash provided (used) by operating activities (1,945,880) (1,000,510)
---------------- -----------------
Cash flows from investing activities:
Additions to mortgage servicing rights, net (311,302) (432,368)
Purchase of property, equipment and leasehold
improvements, net (11,713) (27,043)
Proceeds from sale of available-for-sale securities 2,070 49,360
Proceeds from sale of securitized service fees 22,338 -
---------------- -----------------
Net cash used by investing activities (298,607) (410,051)
---------------- -----------------
Cash flows from financing activities:
Net increase in warehouse debt and other short-term borrowings 1,593,214 745,601
Issuance of long-term debt 934,736 717,000
Repayment of long-term debt (110,000) (75,315)
Issuance of common stock 14,626 8,632
Cash dividends paid (11,146) (11,268)
---------------- -----------------
Net cash provided by financing activities 2,421,430 1,384,650
---------------- -----------------
Net decrease in cash 176,943 (25,911)
Cash at beginning of period 59,890 58,748
---------------- -----------------
Cash at end of period $236,833 $32,837
================ =================
Supplemental cash flow information:
Cash used to pay interest $ 269,494 $ 246,724
Cash used to pay income taxes $ $ 7
5,262
Noncash investing activities:
Unrealized gain (loss) on available-for-sale securities,
net of tax $ (35,134) $ 3,178
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>
Three Months
Ended May 31,
2000 1999
--------------- ---------------
NET EARNINGS $83,459 $103,379
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period, before tax 16,403
(54,891)
Income tax benefit (expense) 19,799 (6,397)
--------------- ---------------
Unrealized holding (losses) gains arising
during the period, net of tax (35,092) 10,006
Less: reclassification adjustment for gains
(losses) included in net earnings, before tax (66) 11,194
Income tax benefit (expense) 24 (4,366)
--------------- ---------------
Reclassification adjustment for (losses)
gains included in net earnings, net (42) 6,828
of tax
--------------- ---------------
Other comprehensive (loss) income (35,134) 3,178
---------------- ---------------
COMPREHENSIVE INCOME $48,325 $106,557
================ ===============
</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 24
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 three months ended May 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
three-month period ended May 31, 1999 have been reclassified to conform to the
presentation for the three-month period ended May 31, 2000.
NOTE B - MORTGAGE SERVICING RIGHTS
The activity in mortgage servicing rights was as follows.
------------------------------------------------ ---------------------------
<TABLE>
<S> <C>
Three Months Ended
(Dollar amounts in thousands) May 31, 2000
------------------------------------------------ ---------------------
Mortgage Servicing Rights
Balance at beginning of period $5,420,239
Additions 311,302
Scheduled amortization (108,240)
Hedge losses (gains) applied 1,761
---------------------
Balance before valuation reserve
at end of period 5,625,062
---------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (23,762)
Reductions (additions) 1,584
----------------------
Balance at end of period (22,178)
----------------------
Mortgage Servicing Rights, net $5,602,884
======================
</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.
<TABLE>
<S> <C> <C>
------------------------------------------------------------ -----------------------------------------------------
May 31, February 29,
(Dollar amounts in thousands) 2000 2000
------------------------------------------------------------------- --- ----------------- --- ---------------- ---
Servicing hedge instruments $2,102,907 $1,784,315
Mortgage-backed securities retained in securitization 826,148 775,867
Insurance company investment portfolio 516,661 520,490
Securities purchased under agreements to resell 1,659,164 435,593
Equity securities, restricted and unrestricted 47,559 46,193
----------------- ----------------
$5,152,439 $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>
<S> <C> <C> <C> <C>
May 31, 2000
---------------- - ------------------------------------ -- ----------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
Securities retained in
Securitization $834,317 $30,767 ($38,936) $826,148
Principal only securities 1,383,930 2,497 (73,857) 1,312,570
Insurance company
investment portfolio 529,319 989 (13,647) 516,661
Equity securities 63,136 3,415 (18,992) 47,559
---------------- ----------------- ---------------- ----------------
$2,810,702 $37,668 ($145,432) $2,702,938
================ ================= ================ ================
</TABLE>
<TABLE>
NOTE D - AVAILABLE FOR SALE SECURITIES (Continued)
<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>
NOTE E - NOTES PAYABLE
<TABLE>
<S> <C> <C>
Notes payable consisted of the following.
------------------------------------------------------------ -----------------------------------------------------
May 31, February 29,
(Dollar amounts in thousands) 2000 2000
-------------------------------------------------------------------- -- --- ---------------- ---
----------------- ---
Commercial paper $ 526,795 $ 103,829
Medium-term notes, Series A, B, C, D, E, F, G, H
and Euro Notes 8,800,060 7,975,324
Securities sold under agreements to repurchase 2,554,879 1,501,409
Unsecured notes payable 35,000 -
Subordinated notes 200,000 200,000
Other notes payable 1,294 2,063
----------------- ----------------
$12,118,028 $9,782,625
================= ================
</TABLE>
Commercial Paper and Backup Credit Facilities
As of May 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 expires on September 20, 2000. 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 May 31, 2000. The
weighted average borrowing rate on commercial paper borrowings for the three
months ended May 31, 2000 was 6.10%. The weighted average borrowing rate on
commercial paper outstanding as of May 31, 2000 was 6.89%. 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. 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 May 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>
---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding Balance Interest Rate Maturity Date
---------------------- ----------------------------
-------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- -------------- -------------
Series A - $143,500 $143,500 7.29% 8.79% Aug. 2000 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% 7.75% Mar. 2001 Mar. 2004
Series D 75,000 385,000 460,000 6.05% 7.15% Aug. 2000 Sep. 2005
Series E 210,000 655,000 865,000 6.83% 7.45% Aug. 2000 Oct. 2008
Series F 311,000 1,344,000 1,655,000 6.16% 7.39% Oct. 2000 May 2013
Series G 5,000 581,000 586,000 5.35% 7.00% Oct. 2000 Nov. 2018
Series H 467,000 2,049,000 2,516,000 6.25% 8.25% May 2001 Oct. 2019
Euro Notes 679,600 1,411,960 2,091,560 6.10% 8.08% Jul. 2000 Jan. 2009
-------------------------------------------
Total $1,852,600 $6,947,460 $8,800,060
</TABLE>
===========================================
As of May 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 three-months ended May 31, 2000, including the effect of the
interest rate swap agreements, was 6.58%. As of May 31, 2000, there were $1,362
million foreign currency denominated fixed-rate 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
three-months ended May 31, 2000 was 6.02%. The weighted average borrowing rate
on repurchase agreements outstanding as of May 31, 2000, was 6.57%. 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 May 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 May 31, 2000, the Company had no outstanding borrowings under any 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 May 31,
2000
-------------------------------------- -------------------- -------------------- ------------------ ---------------------
Interest Rate Floors $50,500 - (2,000) $48,500
Long Call Options on
Interest Rate Futures $15,000 5,000 - $20,000
Long Put Options on
Interest Rate Futures $1,750 3,500 - $5,250
Long Call Options on MBS $8,561 - - $8,561
Capped Swaps $1,000 - - $1,000
Interest Rate Swaps $1,500 - - $1,500
Interest Rate Cap $2,500 - (1,000) $1,500
Swaptions $36,250 6,000 - $42,250
-------------------------------------- -------------------- -------------------- ------------------ ---------------------
</TABLE>
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of May 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>
<TABLE>
NOTE F- FINANCIAL INSTRUMENTS (Continued)
<S> <C> <C> <C> <C>
May 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 $2,517,167 $2,517,167 $2,653,183 $2,653,183
Trading securities 2,144,249 2,144,249 1,984,031 1,984,031
Items included in investments in other financial instruments:
Principal only securities purchased 1,312,570 1,312,570 952,840 952,840
Mortgage-backed securities retained in
securitizations 826,148 826,148 775,867 775,867
Insurance Company investment
portfolio 516,661 516,661 520,490 520,490
Securities purchased with agreements to rese1,659,164 1,659,164 435,593 435,593
Equity Securities - restricted
and 47,559 47,559 46,193 46,193
unrestricted
Items included in other assets:
Rewarehoused FHA and VA loans 279,371 279,371 336,273 336,273
Loans held for investment 184,724 184,724 177,330 177,330
Receivables related to broker-dealer activitie463,479 463,479 22,612 22,612
Liabilities:
Notes payable 12,118,028 11,685,252 9,782,625 9,459,011
Securities sold not yet purchased 296,213 296,213 181,903 181,903
Derivatives:
Interest rate floors 372,299 149,095 411,278 180,360
Forward contracts on MBS (11,425) 37,805 (11,080) (13,511)
Options on MBS 79,671 34,084 75,950 32,415
Options on interest rate futures 18,169 9,803 8,921 6,032
Interest rate caps 30,405 21,514 47,348 39,088
Capped Swaps (8,031) (8,926) (5,619) (8,040)
Swaptions 348,580 60,133 341,039 76,254
Interest rate swaps (8,814) (508,394) (23,228) (457,051)
Short-term commitments to extend credit - 65,100 - 52,500
---- ------------------------------------------------ --------------- -- ------------- -- ------------- --- -------------
</TABLE>
The fair value estimates as of May 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
Summarized financial information for Countrywide Home Loans, Inc. was as
follows.
<TABLE>
<S> <C> <C>
---- ----------------------------------------- ---- -------------------------------------------------
May 31, February 29,
(Dollar amounts in thousands) 2000 2000
---- ---------------------------------------------- ------- -------------- ----------- --------------
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $2,517,167 $2,653,183
Mortgage servicing rights, net 5,602,884 5,396,477
Other assets 6,563,603 5,240,247
-------------- --------------
Total assets $14,683,654 $13,289,907
============== ==============
Short- and long-term debt $10,563,556 $9,224,956
Other liabilities 1,649,552 1,632,106
Equity 2,470,546 2,432,845
-------------- --------------
Total liabilities and equity $14,683,654 $13,289,907
============== ==============
</TABLE>
<TABLE>
---- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
<S> <C> <C>
----- ----------------------------------------- --- --------------------------------------------------- --------
Three Months Ended May 31,
(Dollar amounts in thousands) 2000 1999
----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
--------------- ---------- --------------- ---------
Statements of Earnings:
Revenues $356,945 $438,204
Expenses 271,790 305,021
Provision for income taxes 30,948 51,941
--------------- ---------------
Net earnings $ 54,207 $ 81,242
=============== ===============
</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.
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 (Countrywide Servicing Exchange, Inc.),
facilitates the purchase and sale of bulk servicing rights. 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.
NOTE I - SEGMENTS AND RELATED INFORMATION (Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended May 31, 2000
Consumer Businesses Institutional Businesses
---------- ---------- --------- ----------- ---------- --------- --------- ----------
Mortgage-Related Processing
Mortgage InvestmentsB2C and Capital B2B
(Dollars in thousanOriginations Insurance Total Technology Markets Insurance Total Other Total
------------------ ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------
External revenues $210,553 $181,028 $9,401 $400,982 $ 6,667 $52,979 $68,369 $128,015 ($765) $528,232
Intersegment revenues - (63,407) - (63,407) 63,407 - - 63,407 - -
---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------
Total revenues $210,553 $117,621 $9,401 $337,575 $70,074 $52,979 $68,369 $191,422 ($765) $528,232
========== ========== ========= =========== ========== ========= ========= ========== ======== ============
Segment earnings
(pre-tax) $27,554 $62,166 $1,060 $90,780 $10,505 $16,901 $14,248 $41,654 ($1,509) $130,925
Segment assets $2,073,776 $9,374,307 $50,691 $11,498,774 $159,483 $5,812,925$827,757 $6,800,165 $141,151 $18,440,090
------------------ ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ------------
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended May 31, 1999
Consumer Businesses Institutional Businesses
---------- ---------- --------- ----------- ---------- --------- --------- ----------
Mortgage-Related Processing
Mortgage InvestmentsB2C and Capital B2B
(Dollars in thousanOriginations Insurance Total Technology Markets Insurance Total Other Total
------------------ ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------
External revenues $327,468 $122,664 $7,426 $457,558 $ 6,126 $64,327 $5,940 $76,393 $4,759 $538,710
Intersegment revenues - (54,729) - (54,729) 54,729 - - 54,729 - -
---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------
Total revenues $327,468 $ 67,935 $7,426 $402,829 $60,855 $64,327 $5,940 $131,122 $4,759 $538,710
========== ========== ========= =========== ========== ========= ========= ========== ======== ============
Segment earnings
(pre-tax) $112,150 $16,020 $1,192 $129,362 $6,501 $28,045 $5,883 $40,429 ($317) $169,474
Segment assets $4,498,388 $7,299,581 $27,600 $11,825,569 $114,955 $5,183,810$33,924 $5,332,689 $206,349 $17,364,607
------------------ ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ------------
</TABLE>
NOTE J - SUBSEQUENT EVENTS
On June 21, 2000, the Company declared a cash dividend of $0.10 per common
share payable July 31, 2000 to shareholders of record on July 13, 2000.
On June 27, 2000, the Company filed a $3.0 billion shelf registration with
the Securities and Exchange Commission ("SEC") covering Series I Medium-Term
Notes. The Company intends to use the proceeds from the sale of the medium-term
notes for general corporate purposes, which may include retirement of
indebtedness of the Company and investment in servicing rights through the
current production of loans and the bulk acquisition of contracts to service
loans.
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.
<PAGE>
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 months
ended May 31, 2000 and 1999.
------------------------ -- -- ----- ------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended May 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 $83,459 $103,379
========= ==========
Basic EPS
Net earnings available
to common shareholders $83,459 113,792 $0.73 $103,379 112,751 $0.92
Effect of dilutive
stock options - 2,316 - 4,762
--------- --------- ---------- ---------
Diluted EPS
Net earnings available
to common shareholders $83,459 116,108 $0.72 $103,379 117,513 $0.88
========= ========= ========== =========
</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 29
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.
RESULTS OF OPERATIONS
Quarter Ended May 31, 2000 Compared to Quarter Ended May 31, 1999
Revenues for the quarter ended May 31, 2000 decreased 2% to $528.2 million,
down from $538.7 million for the quarter ended May 31, 1999. Net earnings
decreased 19% to $83.5 million for the quarter ended May 31, 2000, down from
$103.4 million for the quarter ended May 31, 1999. The decrease in revenues and
net earnings for the quarter ended May 31, 2000 compared to the quarter ended
May 31, 1999 was primarily due to a decline in prime loan originations
attributable to a decline in loan refinancings. The decline was partially offset
by increased revenue 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 37% to $14.5
billion for the quarter ended May 31, 2000, down from $23.2 billion for the
quarter ended May 31, 1999. The decrease in loan production was primarily due to
a decrease in the mortgage origination 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
Three Months Ended
May 31,
-------------------------------------------- ---------------------------------------
2000 1999
------------- ----------------
Purchase $11,595 $11,722
Refinance 2,951 11,471
------------- ----------------
Total $14,546 $23,193
============= ================
------------- ----------------
Fixed Rate $11,145 $21,611
Adjustable Rate 3,401 1,582
------------- ----------------
Total $14,546 $23,193
============= ================
</TABLE>
<PAGE>
<TABLE>
Total loan production by Division is summarized below.
-------------------------------------------- ----------------------------------
<S> <C> <C>
(Dollar amounts in millions) Loan Production
Three Months Ended
May 31,
-------------------------------------------- ---------------------------------
2000 1999
------------- -----------
Consumer Markets Division $4,042 $ 7,035
Wholesale Lending Division 4,062 7,122
Correspondent Lending Division 6,021 8,712
Full Spectrum Lending, Inc. 421 324
------------- ----------
Total $14,546 $23,193
============= ========
</TABLE>
---------------------------------------------------------------------------
The factors which affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's various
product offerings, the level of mortgage lending activity in each Division's
market and the success of each Division'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
May 31,
-------------------------------------------- ---------------------------------
2000 1999
------------- ---------
Sub-prime $1,440 $769
Home Equity Loans 1,131 717
------------- ----------
Total $2,571 $1,486
============= ==========
</TABLE>
--------------------------------------------------------------------------------
Loan origination fees decreased in the quarter ended May 31, 2000 as
compared to the quarter ended May 31, 1999 primarily due to lower production and
a change in the Divisional mix. The Consumer Markets and Wholesale Lending
Divisions (which, due to their cost structures, charge higher origination fees
per dollar loaned than the Correspondent Division), comprised a lower percentage
of total production in the quarter ended May 31, 2000 than in the quarter ended
May 31, 1999. Gain on sale of loans also decreased in the quarter ended May 31,
2000 as compared to the quarter ended May 31, 1999 primarily due to decreased
production and reduced margins on prime credit quality mortgages. These declines
were partially offset by increased sales during the quarter ended May 31, 2000
of higher margin home equity and sub-prime loans. The sale of home equity loans
contributed $21.6 million and $20.3 million to gain on sale of loans in the
quarter ended May 31, 2000 and the quarter ended May 31, 1999, respectively.
Sub-prime loans contributed $60.7 million to the gain on sale of loans in the
quarter ended May 31, 2000 and $35.5 million in the quarter ended May 31, 1999.
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 expense (interest earned net of interest charges) of $2.9
million for the quarter ended May 31, 2000, is down from net income of $29.5
million for the quarter ended May 31, 1999. Net interest income (expense) is
principally a function of: (i) net interest income earned from the Company's
mortgage loan inventory ($20.6 million and $47.2 million for the quarter ended
May 31, 2000 and the quarter ended May 31, 1999, respectively); (ii) interest
expense related to the Company's mortgage-related investments ($86.8 million and
$66.8 million for the quarters ended May 31, 2000 and May 31, 1999,
respectively) and (iii) interest income earned from the custodial balances
associated with the Company's servicing portfolio ($51.8 million and $43.1
million for the quarters ended May 31, 2000 and May 31, 1999, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its inventory.
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 May 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 May
31, 2000 to the quarter ended May 31, 1999.
During the quarter ended May 31, 2000, loan servicing revenue before
amortization increased primarily due to growth of the loan servicing portfolio
and improved performance of the residual investments. As of May 31, 2000, the
Company serviced $261.9 billion of loans (including $6.8 billion of loans
subserviced for others), up from $226.0 billion (including $2.3 billion of loans
subserviced for others) as of May 31, 1999, a 16% increase. The growth in the
Company's servicing portfolio since May 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 May 31, 2000, the annual prepayment rate of the
Company's servicing portfolio was 9%, compared to 21% for the quarter ended May
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 May 31, 2000 was
7.7% compared to 7.4% as of May 31, 1999.
The Company recorded MSR amortization for the quarter ended May 31, 2000
totaling $108.2 compared to $127.0 for the quarter ended May 31, 1999. The
Company recorded recovery of previous impairment of $3.3 million for the quarter
ended May 31, 2000 compared to $151.5 for the quarter ended May 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 quarter ended May 31, 2000, the Company recognized a net expense of
$13.3 million from its Servicing Hedge. The net expense included unrealized net
losses of $6.7 million and realized net expense of $6.6 million from the sale of
various financial instruments that comprise the Servicing Hedge net of premium
amortization. In the quarter ended May 31, 1999, the Company recognized a net
expense of $171.4 million from its Servicing Hedge. The net expense included
unrealized net losses of $182.8 million and net realized gains of $11.4 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") 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
May 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 May 31, 2000, the Company estimates that its
maximum exposure to loss over the contractual terms is $2 million.
Salaries and related expenses are summarized below for the quarters ended
May 31, 2000 and 1999.
<TABLE>
<S> <C> <C> <C> <C>
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended May 31, 2000
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Consumer Institutional Corporate
Businesses Businesses Administration Total
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
Base Salaries $59,799 $32,919 $25,007 $117,725
Incentive Bonus 21,508 8,160 4,454 34,122
Payroll Taxes and Benefits 10,023 5,128 4,533 19,684
----------------- ---------------- ----------------- ------------------
Total Salaries and Related
Expenses $91,330 $46,207 $33,994 $171,531
================= ================ ================= ==================
Average Number of 5,810 3,557 1,648 11,015
Employees
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended May 31, 1999
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
---- --------------------------- --
Consumer Institutional Corporate
Businesses Businesses Administration Total
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
Base Salaries $72,117 $22,770 $24,881 $119,768
Incentive Bonus 33,172 6,707 5,905 45,784
Payroll Taxes and Benefits 12,241 3,611 4,022 19,874
----------------- ---------------- ----------------- ------------------
Total Salaries and Related
Expenses $117,530 $33,088 $34,808 $185,426
================= ================ ================= ==================
Average Number of 7,095 2,597 1,804 11,496
Employees
---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
</TABLE>
The amount of salaries decreased during the quarter ended May 31, 2000 as
compared to the quarter ended May 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 quarter ended May 31, 2000
decreased primarily due to the decline in production volume.
Occupancy and other office expenses for the quarter ended May 31, 2000
decreased to $66.5 million from $72.2 million for the quarter ended May 31,
1999. This was primarily due to the initiation of cost reduction measures in the
production areas as a result of a decline in production.
Guarantee fees represent fees paid to Fannie Mae and Ginnie Mae ("GSEs") to
guarantee timely and full payment of principal and interest in the Company's
agency MBS and to transfer the credit risk of the loans in the servicing
portfolio sold to these entities. For the quarter ended May 31, 2000, guarantee
fees increased 17% to $53.7 million, up from $45.8 million for the quarter ended
May 31, 1999. The increase resulted from an increase in the servicing portfolio,
changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated
at the time of loan sales.
Marketing expenses for the quarter ended May 31, 2000 increased 1% to $19.8
million as compared to $19.5 million for the quarter ended May 31, 1999.
Other operating expenses were $60.2 million for the quarter ended May 31,
2000 as compared to $46.2 million May 31, 1999. The increase was primarily due
to the acquisition of Balboa on November 30, 1999.
OPERATING SEGMENTS
The Company's business strategy is primarily focused on six areas that are
grouped into Consumer and Institutional businesses. Consumer Businesses include
Mortgage Originations, Mortgage-Related Investments and Business to Consumer
("B2C") Insurance. Institutional Businesses include Processing and Technology,
Capital Markets and Business to Business ("B2B") Insurance.
The Mortgage Originations segment originates mortgage loans through the
Company's retail branch network (Consumer Markets Division and Full Spectrum
Lending, Inc.) and the Wholesale Division. This segment also provides other
complementary services offered as part of the origination process through
LandSafe, Inc., including title, escrow, appraisal, credit reporting and flood
determination services. The Mortgage-Related Investments segment consists of
investments in assets retained in the mortgage securitization process, including
MSRs and residual interests. The B2C Insurance Segment, through Countrywide
Insurance Services, Inc., acts as an agent in the sale of insurance, including
homeowners, fire, flood, earthquake, life and disability insurance, primarily to
the Company's mortgage customers.
The Processing and Technology segment activities include mortgage servicing,
as well as mortgage subservicing and subprocessing for other domestic financial
institutions and foreign financial institutions (through Global Home Loans,
LTD.). 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 (Countrywide Servicing Exchange, Inc.),
facilitates the purchase and sale of bulk servicing rights. 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.
The Company's pre-tax earnings by segment is summarized below.
<TABLE>
<S> <C> <C>
-------------------------------------------- --------------------------------
Three months ended
(Dollar amounts in millions) May 31,
-------------------------------------------- ----------------------------------
2000 1999
------------- -----------
Consumer Businesses:
Mortgage Originations $27,554 $112,150
Mortgage-Related Investments 62,166 16,020
B2C Insurance 1,060 1,192
------------- ------------
Total Consumer Business $90,780 $129,362
Institutional Businesses:
Processing and Technology $10,505 $6,501
Capital Markets 16,901 28,045
B2B Insurance 14,248 5,883
--------------
-------------
Total Institutional Business $41,654 $40,429
Other (1,509) (317)
------------- --------------
Pre-tax Earnings $130,925 $169,474
============= ==============
---------------------------------------------------------------------------------------------
</TABLE>
Profitability of 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.
The decline in pre-tax earnings of $84.6 million in the quarter ended May
31, 2000 as compared to the quarter ended May 31, 1999 was primarily
attributable to lower production and reduced margins on prime credit quality
mortgages driven by a significant reduction in refinances. These factors were
partially offset by increased production and sales of higher margin home equity
and sub-prime loans.
Profitability of 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 $46.1 million in the quarter ended
May 31, 2000 as compared to the quarter ended May 31, 1999 was primarily due to
an increase in servicing revenues resulting from servicing portfolio growth, a
reduction in MSR amortization attributable to the decline in refinance activity
and improved performance of the residual investments. These positive factors
were partially offset by higher servicing expenses driven by the growth in the
servicing portfolio, including the subservicing fee paid to the processing and
technology sector.
Profitability of 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 $0.1 in the quarter ended May 31, 2000 as compared to the
quarter ended May 31, 1999 was primarily due to a slight decline in new policies
sold.
Profitability of 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 $4.0 million in the
quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 was
primarily due to growth in the servicing portfolio.
Profitability of 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 $11.1 million in the quarter ended May 31, 2000 as compared
to the quarter ended May 31, 1999 was primarily due to CLD's decreased
production volume attributable primarily to the decline in refinance activity.
Profitability of 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 a mortgage reinsurance company. The increase in pre-tax earnings
of $8.4 million in the quarter ended May 31, 2000 as compared to the quarter
ended May 31, 1999 was due to the acquisition of Balboa (on November 30, 1999)
and increased mortgage reinsurance premium volume.
<PAGE>
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 May 31, 2000, the
Company estimates that a permanent 0.50% reduction in interest rates, all else
being constant, would result in a $0.04 million after-tax loss related to its
trading securities and there would be a $13.4 million loss related to its other
financial instruments. As of May 31, 2000, the Company estimates that this
combined after-tax loss of $13.4 million is the largest such loss that would
occur within the range of reasonably possible interest rate changes. These
sensitivity analyses are limited by the fact that they are performed at a
particular point in time, are subject to the accuracy of various assumptions
used including prepayment forecasts, and do not incorporate other factors that
would impact the Company's overall financial performance in such a scenario.
Consequently, the preceding estimates should not be viewed as a forecast.
An additional, albeit less significant, market risk facing the Company is
foreign currency risk. The Company has issued foreign currency-denominated
medium-term notes (See Note E). The Company manages the foreign currency risk
associated with such medium-term notes by entering into currency swaps. The
terms of the currency swaps effectively translate the foreign currency
denominated medium-term notes into U.S. dollars, thereby eliminating the
associated foreign currency risk (subject to the performance of the various
counterparties to the currency swaps). As a result, hypothetical 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 securities of its
broker-dealer subsidiary (CSC). To meet these needs, the Company currently
utilizes commercial paper supported by the 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 mortgage loans. Its securities inventory is financed
primarily through repurchase agreements. CSC also has access to a $200 million
secured bank loan facility and a 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 maturities and sales of invested assets.
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 quarter ended May 31, 2000, the Company's
operating activities used cash of approximately $1.9 billion on a short-term
basis primarily to support an increase in other financial instruments, primarily
securities purchased under agreements to resale. In the quarter ended May 31,
1999, operating activities used cash of approximately $1.0 billion on a
short-term basis primarily to support the increase in its mortgage loans and MBS
held for sale.
Investing Activities The primary investing activity for which cash was used
by the Company was the investment in MSRs. Net cash used by investing activities
was $0.3 billion for the quarter ended May 31, 2000 and $0.4 billion for the
quarter ended May 31, 1999.
Financing Activities Net cash provided by financing activities amounted to
$2.4 billion for the quarter ended May 31, 2000 and $1.4 billion for the quarter
ended May 31, 1999. The increase in cash flow from financing activities was
primarily used to fund the change in the Company's mortgage loan inventory,
other financial instruments and investment in MSRs.
Prospective Trends
Applications and Pipeline of Loans in Process
For the month ended June 30, 2000, the Company received new loan
applications at an average daily rate of $361 million. As of June 30, 2000, the
Company's pipeline of loans in process was $9.5 billion. This compares to a
daily application rate for the month ended June 30, 1999 of $490 million and a
pipeline of loans in process as of June 30, 1999 of $14.7 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 June 30, 2000
was $3.5 billion and as of June 30, 1999 was $3.5 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 37% from the quarter ended May 31, 1999 to the
quarter ended May 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 21% for the
quarter ended May 31, 1999 to 9% for the quarter ended May 31, 2000. This was
due primarily to a decrease in refinances.
The Company's California mortgage loan production (as measured by principal
balance) constituted 20% of its total production during the quarter ended May
31, 2000 and 23% during the quarter ended May 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 4.12% at May 31, 2000 from 3.00% as of May 31, 1999.
The Company believes that 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 May 31, 2000, up from 1% as of May 31, 1999. In addition, the
weighted average age of the FHA and VA loans in the portfolio increased to 32
months at May 31, 2000 from 27 months in May 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 0.35% as of May 31, 2000
from 0.27% as of May 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 May 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 May 31, 2000, the Company had investments in such subordinated interests
amounting to $647.5 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 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.73 Deferred Compensation Plan Amended and Restated Effective March 1, 2000.
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 reports on Form 8-K:
(1) June 1, 2000 under Item 5, containing Countrywide Securities
Corporation's financial statements and report of independent
certified public accountants for the period beginning March 1, 1999
and ending February 29, 2000.
(2) June 27, 2000 under Item 5, containing the Selling Agency Agreement
and form of notes used in connection with Countrywide Home Loans
Medium-Term Notes Program Series I.
(b)
<PAGE>
27
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: July 13, 2000 /s/STANFORD L. KURLAND
--------------------------------------
Executive Managing Director and
Chief Operating Officer
DATE: July 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>
CONFIDENTIAL
DRAFT OF FEBRUARY 1, 1996
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