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