For the transition period from _______________________ to __________________________
Commission File Number: 1-8422
COUNTRYWIDE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
|
DELAWARE (State or other jurisdiction of incorporation or organization |
13-2641992 (IRS Employer Identification No.) |
|
4500 Park Granada, Calabasas California (Address of principal executive offices) |
91302 (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 by check mark whether the registrant is an accelerated filer (as denifed in Rule 12b-2 of the Exchange Act).
| 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 Common Stock $.05 par value |
Outstanding at May 9, 2003 130,616,202 |
(Unaudited)
March 31, December 31,
2003 2002
-------------------------- ----------------------
A S S E T S
Cash $ 446,306 $ 697,457
Mortgage loans and mortgage-backed securities held for sale 27,392,295 15,025,617
Trading securities owned, at market value 4,389,899 5,983,841
Trading securities pledged as collateral, at market value 4,839,258 2,708,879
Securities purchased under agreements to resell 5,181,001 5,997,368
Mortgage servicing rights, net 5,345,675 5,384,933
Loans held for investment, net 7,774,844 6,070,426
Investments in other financial instruments 13,683,689 10,901,915
Property, equipment and leasehold improvements, net 628,737 576,688
Other assets 3,929,321 4,683,659
-------------------------- ----------------------
Total assets $ 73,611,025 $ 58,030,783
========================== ======================
Borrower and investor custodial accounts
(segregated in special accounts - excluded from corporate assets) $ 18,456,941 $ 16,859,667
========================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 21,629,187 $ 19,293,788
Securities sold under agreements to repurchase 30,539,695 22,634,839
Bank deposit liabilities 5,639,653 3,114,271
Accounts payable and accrued liabilities 7,517,337 5,342,442
Income taxes payable 2,115,080 1,984,310
-------------------------- ----------------------
Total liabilities 67,440,952 52,369,650
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities of
subsidiary trusts holding solely Company guaranteed related subordinated debt
500,000 500,000
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value; none issued and
outstanding - -
Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and
outstanding, 129,325,686 shares and 126,563,333 shares at
March 31, 2003 and December 31, 2002, respectively 6,466 6,330
Additional paid-in capital 1,787,953 1,657,144
Accumulated other comprehensive income 254,507 186,799
Retained earnings 3,621,147 3,310,860
-------------------------- ----------------------
Total shareholders' equity 5,670,073 5,161,133
-------------------------- ----------------------
-------------------------- ----------------------
Total liabilities and shareholders' equity $ 73,611,025 $ 58,030,783
========================== ======================
Borrower and investor custodial accounts $ 18,456,941 $ 16,859,667
========================== ======================
The accompanying notes are an integral part of these statements.
Quarter Ended March 31,
---------------------------------------
2003 2002
------------------ -------------------
Revenues
Gain on sale of loans and securities $ 1,444,004 $ 656,626
Interest income 642,122 514,922
Interest expense (414,129) (317,612)
------------------ -------------------
Net interest income 227,993 197,310
Loan servicing fees and other income from retained interests 603,259 468,912
Amortization of mortgage servicing rights (362,500) (257,731)
Impairment/recovery of retained interests (662,413) (13,672)
Servicing hedge gains (losses) 6,361 (330,435)
------------------ -------------------
Net loan servicing fees and other income from retained interests (415,293) (132,926)
Net insurance premiums earned 161,134 116,320
Commissions and other revenue 113,958 76,422
------------------ -------------------
Total revenues 1,531,796 913,752
Expenses
Compensation expenses 655,122 391,429
Occupancy and other office expenses 127,542 94,447
Insurance claim expenses 78,096 51,257
Marketing expenses 21,330 18,133
Other operating expenses 125,138 92,392
------------------ -------------------
Total expenses 1,007,228 647,658
------------------ -------------------
Earnings before income taxes 524,568 266,094
Provision for income taxes 198,277 98,535
------------------ -------------------
NET EARNINGS $ 326,291 $ 167,559
================== ===================
Earnings per share
Basic $ 2.55 $ 1.36
Diluted $ 2.44 $ 1.32
The accompanying notes are an integral part of these statements.
Accumulated Other
Additional Comprehensive Income
Number Common Paid-in- Retained
of Shares Stock Capital Earnings Total
---------------- ------------- -------------------- ---------------------- ----------------- ------------------
Balance at December 31, 2002 126,563,333 $ 6,330 $ 1,657,144 $ 186,799 $ 3,310,860 $5,161,133
Cash dividends paid - $0.12 per common
share - - - - (16,004) (16,004)
Stock options exercised 1,051,333 53 30,805 - - 30,858
Tax benefit of stock options exercised
9,636 9,636
Issuance of common stock 1,612,536 78 85,281 - - 85,359
Contribution of common stock to defined
contribution employee savings plan 98,484 5 5,087 - - 5,092
Other comprehensive income, net of tax - - - 67,708 - 67,708
Net earnings for the period - - - - 326,291 326,291
---------------- ------------- -------------------- ---------------------- ----------------- ------------------
Balance at March 31, 2003 129,325,686 $ 6,466 $ 1,787,953 $ 254,507 $ 3,621,147 $5,670,073
================ ============= ==================== ====================== ================= ==================
The accompanying notes are an integral part of these statements.
Quarter Ended March 31,
------------------------------------------
2003 2002
-------------------- ---------------------
Cash flows from operating activities:
Net earnings $ 326,291 $ 167,559
Adjustments to reconcile net earnings to net cash provided by operating
activities:
(Gain) loss on sale of available-for-sale securities (7,530) 9,971
Amortization and impairment/recovery of mortgage servicing rights 965,442 245,976
Impairment of other retained interests 59,471 25,427
Contribution of common stock to 401(k) 5,092 2,926
Depreciation and other amortization 25,862 19,622
Deferred income taxes payable 99,777 71,013
Origination and purchase of loans held for sale (100,699,029) (43,902,930)
Principal repayments and sale of loans 88,302,351 40,759,832
-------------------- ---------------------
(Increase) decrease in mortgage loans and mortgage-backed securities held
for sale (12,366,678) 3,143,098
(Increase) decrease in trading securities (536,437) 115,196
Decrease in securities purchased under agreements to resell 816,367 27,370
Decrease (increase) in other financial instruments 1,634,707 (388,885)
(Increase) decrease in other assets 746,981 (529,978)
Increase in accounts payable and accrued liabilities 2,174,895 1,993,989
-------------------- ---------------------
Net cash provided (used) by operating activities (6,055,760) 4,903,284
-------------------- ---------------------
Cash flows from investing activities:
Additions to mortgage servicing rights (1,260,177) (796,100)
Additions to available-for-sale securities (4,471,589) (7,543,032)
Proceeds from sale of available-for-sale securities 133,729 2,164,199
Proceeds from the sale of securitized mortgage servicing rights 311,768 -
Addition to loans held for investment (1,704,418) (564,703)
Purchase of property, equipment and leasehold improvements, net (70,554) (25,420)
-------------------- ---------------------
Net cash used by investing activities (7,061,241) (6,765,056)
-------------------- ---------------------
Cash flows from financing activities:
Net increase in short-term borrowings 9,395,469 1,267,122
Issuance of long-term debt 2,118,786 1,850,000
Repayment of long-term debt (1,274,000) (1,192,500)
Net increase in bank deposit liabilities 2,525,382 1,556,269
Issuance of common stock 116,217 11,347
Payment of dividends (16,004) (12,939)
-------------------- ---------------------
Net cash provided by financing activities 12,865,850 3,479,299
-------------------- ---------------------
Net increase (decrease) in cash (251,151) 1,617,527
Cash at beginning of period 697,457 495,414
-------------------- ---------------------
Cash at end of period $ 446,306 $ 2,112,941
==================== =====================
Supplemental cash flow information:
Cash used to pay interest $ 343,639 $ 286,873
Cash used to pay income taxes $ 97,302 $ 230,095
Non-cash investing and financing activities:
Unrealized gain (loss) on available-for-sale securities, net of tax $ 67,708 $ (54,184)
Contribution of common stock to 401(k) plan $ 5,092 $ 2,926
The accompanying notes are an integral part of these statements.
Quarter Ended March 31,
---------------------------------------
2003 2002
------------------ ------------------
NET EARNINGS $ 326,291 $ 167,559
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-
sale securities:
Unrealized holding gains (losses) arising
during the period, before tax 75,354 (121,802)
Income tax benefit (expense) (28,410) 45,416
------------------ ------------------
Unrealized holding gains (losses) arising
during the period, net of tax 46,944 (76,386)
Less: reclassification adjustment for (gains)
losses included in net earnings, before tax
33,330 35,402
Income tax benefit (expense) (12,566) (13,200)
------------------ ------------------
Reclassification adjustment for (gains) losses
included in net earnings, net of tax 20,764 22,202
------------------ ------------------
Other comprehensive income (loss) 67,708 (54,184)
------------------ ------------------
COMPREHENSIVE INCOME $ 393,999 $ 113,375
================== ==================
The accompanying notes are an integral part of these statements.
NOTE 1 –
BASIS OF PRESENTATION
The accompanying
consolidated financial statements have been prepared in conformity 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 notes 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 quarter ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. For further information, refer to the consolidated financial statements
and notes thereto included in the Form 10-K for the year ended December 31, 2002
of Countrywide Financial Corporation (the “Company”).
Certain amounts reflected in the consolidated financial statements for the three month period ended March 31, 2002 have been reclassified to conform to the presentation for the quarter ended March 31, 2003.
NOTE 2 –
EARNINGS PER SHARE
Basic earnings per share is
determined using net earnings divided by the weighted-average shares outstanding
during the period. Diluted earnings per share is computed by dividing net
earnings by the weighted-average shares outstanding, assuming all potential
dilutive common shares were issued.
The following table summarizes the basic and diluted earnings per share calculations for the quarter ended March 31, 2003 and 2002:
- --------------------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
--------------------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------------- ---------------------------------------------------
(Amounts in thousands, except per Per-Share Per-Share
share data) Net Earnings Shares Amount Net Earnings Shares Amount
---------------- --------------- ---------------- ---------------
- ---------------------------------------- --------------- ----------------
Net earnings $ 326,291 $ 167,559
=============== ================
Basic EPS
Net earnings available to common
shareholders $ 326,291 127,751 $ 2.55 $ 167,559 122,839 $1.36
Effect of dilutive stock options - 5,760 - 3,802
--------------- ---------------- ---------------- ----------------
Diluted EPS
Net earnings available to common
shareholders $ 326,291 133,511 $ 2.44 $ 167,559 126,641 $1.32
=============== ================ ================ ================
- --------------------------------------------------------------------------------------------------------------------------------------------------
Stock-Based Compensation
The Company generally grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company recognizes compensation expenses related to its stock option plans only to the extent that the fair value of the shares at the grant date exceeds the exercise price.
Had the estimated fair value of the options granted during the period been included in compensation expense, the Company’s net earnings and earnings per share would have been as follows:
- ------------------------------------------------------- -----------------------------------------------------
Quarter Ended March 31,
-------------------------- --------------------------
(Dollar amounts in thousands except per share data) 2003 2002
- ------------------------------------------------------- -------------------------- --------------------------
Net Earnings
As reported $326,291 $167,559
Pro forma $321,358 $161,685
Basic Earnings Per Share
As reported $2.55 $1.36
Pro forma $2.52 $1.32
Diluted Earnings Per Share
As reported $2.44 $1.32
Pro forma $2.41 $1.28
- ------------------------------------------------------- -------------------------- --------------------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model that has been modified to consider cash dividends to be paid. The weighted-average assumptions used to value the option grants and the resulting average estimated values were as follows:
- ---------------------------------------------- -------------------------------------------------------
Quarter Ended March 31,
-------------------------- ----------------------------
2003 2002
- ---------------------------------------------- -------------------------- ----------------------------
Weighted Average Assumptions:
Dividend yield 0.90% 1.00%
Expected volatility 27% 33%
Risk-free interest rate 2.27% 4.05%
Annual expected life (in years) 4.16 4.16
Fair value of options $12.28 $12.30
- ---------------------------------------------- -------------------------- ----------------------------
NOTE 3 –
MORTGAGE SERVICING RIGHTS
The activity in mortgage
servicing rights (“MSRs”) for the quarter ended March 31, 2003 and
2002 is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- ----------------------------------------------------------------------- --------------------------- ----------------------------
Mortgage Servicing Rights
Balance at beginning of period $ 7,420,946 $ 7,051,562
Additions 1,260,177 796,100
Securitization of MSRs (333,993) -
Amortization (362,500) (257,731)
Application of valuation allowance to write down permanently
impaired MSRs (654,734) (225,768)
--------------------------- ----------------------------
Balance before valuation allowance at end of period 7,329,896 7,364,163
--------------------------- ----------------------------
Valuation Allowance for Impairment of Mortgage Servicing Rights
Balance at beginning of period (2,036,013) (935,480)
Reductions (additions) (602,942) 11,755
Application of valuation allowance to write down permanently
impaired MSRs 654,734 225,768
--------------------------- ----------------------------
Balance at end of period (1,984,221) (697,957)
--------------------------- ----------------------------
Mortgage Servicing Rights, net $ 5,345,675 $ 6,666,206
=========================== ============================
- ----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the Company’s estimate of amortization of the existing MSR asset for the five-year period ending March 31, 2008. This projection was developed using the assumptions made by management in its valuation of MSRs. The assumptions underlying the following estimate will change as market conditions and portfolio composition and behavior changes, causing both actual and projected amortization levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management.
- --------------------------------------------------------------------------------
(Dollar amounts in thousands)
Estimated MSR Amortization
Year ended March 31,
- -------------------------------------------- ----------------------------------
2004 $ 1,237,283
2005 1,008,715
2006 845,885
2007 715,334
2008 610,224
----------------------------------
Five-year total $ 4,417,441
==================================
- --------------------------------------------------------------------------------
NOTE 4 –
TRADING SECURITIES
Trading securities, which consist
of trading securities owned and trading securities pledged as collateral, at
March 31, 2003 and December 31, 2002 include the following:
- ----------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, 2003 December 31, 2002
- ----------------------------------------------- ---------------------------- ---------------------------
Mortgage pass-through securities:
Fixed-rate $ 7,441,690 $ 6,948,203
Adjustable-rate 364,329 446,770
7,806,019 7,394,973
Collateralized mortgage obligations 842,282 959,881
Agency debentures 444,401 266,699
Other 136,455 71,167
---------------------------- ---------------------------
$ 9,229,157 $ 8,692,720
============================ ===========================
- ----------------------------------------------------------------------------------------------------------
As of March 31, 2003, $8.5 billion of the Company’s trading securities had been pledged as collateral, of which the counterparty has the contractual right to sell or re-pledge $4.8 billion.
NOTE 5 –
LOANS HELD FOR INVESTMENT
Loans held for investment as
of March 31, 2003 and December 31, 2002 include the following:
- ----------------------------------------------------------------- --------------------- --- ---------------------
(Dollar amounts in thousands) March 31, 2003 December 31, 2002
- ----------------------------------------------------------------- --------------------- ---------------------
Mortgage loans $ 4,472,828 $ 2,245,419
Warehouse lending advances secured by mortgage loans 2,405,475 2,159,289
Defaulted FHA-insured and VA-guaranteed loans repurchased from
securities 940,512 1,707,767
--------------------- ---------------------
7,818,815 6,112,475
Allowance for loan losses (43,971) (42,049)
--------------------- ---------------------
$ 7,774,844 $ 6,070,426
===================== =====================
- ----------------------------------------------------------------- --------------------- --- ---------------------
At March 31, 2003, mortgage loans held for investment totaling $1.0 billion were pledged to secure securities sold under agreements to repurchase.
At March 31, 2003, the Company had accepted mortgage loan collateral with a fair value of $2.8 billion securing warehouse lending advances which it had the contractual ability to sell or re-pledge. As March 31, 2003, no such mortgage loan collateral had been re-pledged.
NOTE 6 –
INVESTMENTS IN OTHER FINANCIAL INSTRUMENTS
Investments in other
financial instruments at March 31, 2003 and December 31, 2002 include the
following:
- --------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, 2003 December 31, 2002
- --------------------------------------------------------------- ---------------------------- ---------------------------
Prime home equity line of credit senior securities $ 5,089,282 $ 3,470,858
Servicing hedge instruments:
Derivative instruments 1,243,713 1,592,550
Principal-only securities 785,450 779,125
---------------------------- ---------------------------
Total servicing hedge instruments 2,029,163 2,371,675
Other interests retained in securitization:
Subprime AAA interest-only securities 568,848 607,526
Prime home equity line of credit residuals 478,196 437,060
Prime home equity line of credit transferor's
interest 233,137 233,658
Nonconforming interest-only and principal-only
securities 151,717 150,967
Subprime residual securities 122,899 71,251
Prime home equity line of credit AAA interest-only
securities 20,875 24,897
Other 69,484 78,241
---------------------------- ---------------------------
Total other interests retained in securitization 1,645,156 1,603,600
Insurance and banking investment portfolios:
Mortgage-backed securities 4,684,357 3,204,737
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies 232,827 247,470
Corporate securities 2,581 3,171
Other 323 404
---------------------------- ---------------------------
Investments in other financial instruments $ 13,683,689 $ 10,901,915
============================ ===========================
- --------------------------------------------------------------------------------------------------------------------------
All of the securities listed above are classified as available-for-sale, with the exception of the derivative instruments.
At March 31, 2003, the Company had pledged $4.9 billion of prime home equity line of credit senior securities to secure securities sold under agreements to repurchase, and $2.1 billion of mortgage-backed securities pledged to secure Federal Home Loan Bank advances.
Amortized cost and fair value of available-for-sale securities at March 31, 2003 and December 31, 2002 are as follows:
- -------------------------------------------------------------------------------------------------------------------------------------------
March 31, 2003
-------------------------------------------------------------------------------------
(Dollar amounts in thousands) Amortized Gross Gross Fair
Unrealized Unrealized
Cost Gains Losses Value
- ---------------------------------------------------- -------------------- ------------------- -------------------- --------------------
Prime home equity line of credit senior securities $ 4,922,232 $ 167,050 $ - $ 5,089,282
Other interests retained in securitization 1,458,220 186,936 - 1,645,156
Principal-only securities 756,763 30,787 (2,100) 785,450
Mortgage-backed securities 4,653,158 34,494 (3,295) 4,684,357
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies 221,945 10,882 - 232,827
Corporate securities 1,453 1,128 - 2,581
Other 316 7 - 323
-------------------- ------------------- -------------------- --------------------
$ 12,014,087 $ 431,284 $ (5,395) $ 12,439,976
==================== =================== ==================== ====================
- -------------------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
-------------------------------------------------------------------------------------
(Dollar amounts in thousands) Amortized Gross Gross Fair
Unrealized Unrealized
Cost Gains Losses Value
- ---------------------------------------------------- -------------------- ------------------- -------------------- --------------------
Prime home equity line of credit senior securities $ 3,366,477 $ 104,381 $ - $ 3,470,858
Other interests retained in securitization 1,452,467 151,133 - 1,603,600
Principal-only securities 746,479 34,212 (1,566) 779,125
Mortgage-backed securities 3,179,332 25,414 (9) 3,204,737
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies 237,076 10,394 - 247,470
Corporate securities 1,873 1,439 (141) 3,171
Other 394 10 - 404
-------------------- ------------------- -------------------- --------------------
$ 8,984,098 $ 326,983 $ (1,716) $ 9,309,365
==================== =================== ==================== ====================
- -------------------------------------------------------------------------------------------------------------------------------------------
Gross gains and losses realized on the sales of available-for-sale securities are as follows:
- -------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- -------------------------------------------------------------- --------------------------- ----------------------------
Prime home equity line of credit senior security:
Gross realized gains $ - $ 24,939
Gross realized losses - -
--------------------------- ----------------------------
Net - 24,939
--------------------------- ----------------------------
Principal-only securities:
Gross realized gains 6,046 -
Gross realized losses - (35,369)
--------------------------- ----------------------------
Net 6,046 (35,369)
--------------------------- ----------------------------
Mortgage-backed securities:
Gross realized gains 361 1,245
Gross realized losses - (244)
--------------------------- ----------------------------
Net 361 1,001
--------------------------- ----------------------------
Corporate securities:
Gross realized gains - 350
Gross realized losses - (885)
--------------------------- ----------------------------
Net - (535)
--------------------------- ----------------------------
U.S. Treasury securities and obligations of U.S Government
corporations and agencies:
Gross realized gains 1,123 970
Gross realized losses - (1,605)
--------------------------- ----------------------------
Net 1,123 (635)
--------------------------- ----------------------------
Total gains and losses on available-for-sale securities:
Gross realized gains 7,530 27,504
Gross realized losses - (38,103)
--------------------------- ----------------------------
Net $ 7,530 $ (10,599)
=========================== ============================
- -------------------------------------------------------------------------------------------------------------------------
NOTE 7 –
OTHER ASSETS
Other assets as of March
31, 2003 and December 31, 2002 include the following:
- --------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, 2003 December 31, 2002
- --------------------------------------------------------------- ---------------------------- ---------------------------
Securities broker-dealer receivables $ 1,204,068 $ 544,296
Reimbursable servicing advances 602,832 647,284
Receivables from sale of securities 433,339 1,452,513
Derivative margin accounts 273,311 919,749
Interest receivable 163,551 141,148
Capitalized software, net 195,401 188,435
Prepaid expenses 173,340 168,678
Investment in Federal Reserve Bank and Federal Home Loan Bank
stock 134,820 67,820
Other assets 748,659 553,736
---------------------------- ---------------------------
$ 3,929,321 $ 4,683,659
============================ ===========================
- --------------------------------------------------------------------------------------------------------------------------
NOTE 8 – NOTES
PAYABLE
Notes payable consist of the following:
- ----------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, 2003 December 31, 2002
- ------------------------------------------ ---------------------------- ---------------------------
Medium-term notes, various series:
Fixed-rate $ 12,794,552 $ 13,065,268
Floating-rate 3,711,125 3,695,624
---------------------------- ---------------------------
16,505,677 16,760,892
Federal Home Loan Bank advances 2,100,000 1,000,000
Commercial paper 1,722,300 123,207
Convertible debentures 511,358 510,084
Unsecured notes payable 465,000 -
Secured overnight borrowings 300,014 -
Secured notes payable 24,838 21,553
Secured revolving credit facility - 878,052
---------------------------- ---------------------------
$ 21,629,187 $ 19,293,788
============================ ===========================
- ----------------------------------------------------------------------------------------------------
Medium-Term
Notes
During the quarter ended
March 31, 2003, Countrywide Home Loans, Inc. (“CHL”), the
Company’s principal mortgage banking subsidiary, issued medium-term notes
under shelf registration statements or pursuant to its Euro medium-term note
program as follows:
- -----------------------------------------------------------------------------------------------------------------------------------------------
Outstanding Balance Interest Rate Maturity Date
--------------------------------------------------- --------------------------- ------------------------------------
(Dollar amounts in Floating Fixed
thousands) Rate Rate Total From To From To
- --------------------- ----------------- --------------- --------------- ------------ ------------- ------------------ ----------------
Euro Notes $85,543 - $85,543 1.53% 1.53% March 2004 March 2004
Series K $880,000 $30,000 $910,000 1.63% 6.00% January 2004 January 2018
- -----------------------------------------------------------------------------------------------------------------------------------------------
As of March 31, 2003, $833.9 million of foreign currency-denominated medium-term notes were outstanding. Such notes are denominated in yen, deutsche marks, French francs, Portuguese escudos, and euros. The Company has executed currency swap transactions that effectively translate the foreign currency-denominated medium-term notes into borrowings denominated in United States dollars.
During the quarter ended March 31, 2003, CHL redeemed $1.3 billion of maturing medium-term notes.
The fixed-rate medium-term notes issued by the Company during the quarter ended March 31, 2003, were effectively converted to floating-rate borrowings using interest rate swap contracts.
NOTE 9 –
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
As of March 31, 2003, the Company
had accepted collateral with a fair value of $5.5 billion for which it had the
contractual ability to sell or re-pledge. As of March 31, 2003, the Company had
re-pledged $5.2 billion of such collateral for financing purposes.
As of December 31, 2002, the Company had accepted collateral with a fair value of $5.9 billion for which it had the contractual ability to sell or re-pledge. As of December 31, 2002, the Company had re-pledged $5.7 billion of such collateral for financing purposes.
NOTE 10 –
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company routinely
enters short-term financing arrangements to sell securities under agreements to
repurchase. All securities underlying repurchase agreements are held in
safekeeping by broker-dealers or banks. All agreements are to repurchase the
same, or substantially identical, securities. At March 31, 2003, repurchase
agreements were secured by $11.3 billion of loans and MBS held for sale, $8.1
billion of trading securities, $6.9 billion of available-for-sale securities,
$4.6 billion of securities purchased under agreements to resell, and $1.0
billion of loans held for investment.
NOTE 11 –
DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The primary market risk
facing the Company is interest rate risk. From an enterprise perspective, the
Company manages this risk through the natural counterbalance of its loan
production and servicing businesses. In addition, the Company utilizes various
financial instruments, including derivatives, to manage the interest rate risk
related specifically to its committed pipeline, mortgage loan inventory and MBS
held for sale, MSRs, trading securities and other retained interests, as well as
a portion of its debt. The overall objective of the Company’s interest rate
risk management activities is to reduce the variability of reported earnings
caused by changes in interest rates.
The Company uses a variety of derivative financial instruments to manage interest rate risk. These instruments include MBS mandatory forward sale and purchase commitments, options to sell or buy MBS, Treasury and Eurodollar rate futures and options thereon, interest rate floors, interest rate caps, capped swaps, swaptions, and interest rate swaps. These instruments involve, to varying degrees, elements of interest rate and credit risk. The Company manages foreign currency exchange rate risk, which arises from the issuance of foreign currency-denominated debt, with foreign currency swaps.
Risk Management Activities Related to Mortgage Loan Inventory and Committed Pipeline
The Company has interest rate risk relative to its Mortgage Loan Inventory and its Committed Pipeline.
The Company’s loan production consists primarily of fixed-rate mortgages. Fixed-rate mortgages, like other fixed-rate debt instruments, are subject to a loss in value when market interest rates rise. The Company is exposed to such losses from the time an interest rate lock commitment (“IRLC”) is made to an applicant (or financial intermediary) to the time the related mortgage loan is sold. To manage this risk of loss, the Company utilizes derivatives, primarily forward sales of MBS and options to buy and sell MBS, as well as options on Treasury futures contracts.
In general, the risk management activities connected with 95% or more of the fixed-rate Mortgage Loan Inventory has qualified as a “fair value” hedge under SFAS 133. The Company recognized pre-tax gains of $15.4 million and $5.6 million, representing the ineffective portion of such fair value hedges of Mortgage Inventory, for the quarters ended March 31, 2003 and 2002, respectively. These amounts along with the change in the fair value of the derivative instruments that were not designated as hedge instruments under SFAS 133 are included in gain on sale of loans in the statement of earnings.
IRLCs are derivative instruments as defined by SFAS 133. As such, IRLCs are recorded at fair value with changes in fair value recognized in current period earnings (as a component of gain on sale of loans.) Because IRLCs are derivatives under SFAS 133, the risk management activities related to the Committed Pipeline do not qualify for hedge accounting under SFAS 133. The “freestanding” derivative instruments that are used to manage the interest rate risk in the Committed Pipeline are marked to fair value and recorded as a component of gain on sale of loans in the statement of earnings.
Risk Management Activities Related to Mortgage Servicing Rights (MSRs) and Other Retained Interests
MSRs and other retained interests, specifically interest-only securities and residual securities, are generally subject to a loss in value, or impairment, when mortgage interest rates decline. To moderate the effect on earnings of impairment, the Company maintains a portfolio of financial instruments, including derivatives, which increase in aggregate value when interest rates decline. This portfolio of financial instruments is collectively referred to herein as the “Servicing Hedge.” During the quarters ended March 31, 2003 and 2002, none of the derivative instruments included in the Servicing Hedge was designated as a hedge under SFAS 133. The change in fair value of these derivative instruments was recorded in current period earnings as a component of Servicing Hedge gains and losses.
The financial instruments that comprise the Servicing Hedge include options on interest rate futures and MBS, interest rate swaptions, interest rate floors, interest rate caps, interest rate swaps, and principal-only securities. With respect to the interest rate floors, options on interest rate futures and MBS, interest rate 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 swap contracts outstanding as of March 31, 2003, the Company estimates that its maximum exposure to loss over the various contractual terms is $769 million. The Company derives its estimates of loss exposure based upon observed volatilities in the interest rate options market. Using the currently observed volatilities, management estimates, to a 95% confidence level, the maximum potential rate changes over a one year time horizon. Management then estimates its exposure to loss based on the estimated maximum adverse rate change as of the measurement date.
Risk Management Activities Related to Issuance of Long-Term Debt
The Company enters into interest rate swap contracts which enable it to convert a portion of its fixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt and to enable the Company to convert a portion of its foreign currency-denominated fixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt. These transactions are designed as “fair value” hedges under SFAS 133. For the quarters ended March 31, 2003 and 2002, the Company recognized pre-tax gains of $0.1 million and $2.6 million, respectively, representing the ineffective portion of such fair value hedges of debt. These amounts are included in interest charges in the statement of earnings.
In addition, the Company enters into interest rate swap contracts which enable it to convert a portion of its floating-rate, long-term debt to fixed-rate, long-term debt and to convert a portion of its foreign currency-denominated, fixed-rate, long-term debt to U.S. dollar fixed-rate debt. These transactions are designed as “cash flow” hedges under SFAS 133. For each of the quarters ended March 31, 2003 and 2002, the Company recognized pre-tax losses of $0.1 million, representing the ineffective portion of such cash flow hedges. As of March 31, 2003, deferred net gains or losses on derivative instruments included in other comprehensive income that are expected to be reclassified as earnings during the next 12 months are not material.
Risk Management Activities Related to the Broker-Dealer Securities Trading Portfolio
In connection with its broker-dealer activities, the Company maintains a trading portfolio of fixed income securities, primarily MBS. The Company is exposed to price changes in its trading portfolio arising from interest rate changes during the period it holds the securities. To manage this risk, the Company utilizes derivative financial instruments. These instruments include MBS mandatory forward sale and purchase commitments as well as short sales of cash market U. S. Treasury securities, futures contracts, interest rate swap contracts, and swaptions. All such derivatives are accounted for as “free-standing” and as such are carried at fair value with changes in fair value recorded in current period earnings as a component of gain on sale of loans and securities.
NOTE 12 –
SEGMENTS AND RELATED INFORMATION
The Company has five business segments. They include Mortgage Banking, Insurance, Capital Markets, Global Operations, and Banking.
The Mortgage Banking segment is comprised of three distinct sectors: Loan Production, Loan Servicing, and Loan Closing Services.
The Loan Production sector of the Mortgage Banking segment originates prime and subprime mortgage loans through a variety of channels on a national scale. Through the Company’s retail branch network, which consists of the Consumer Markets Division and Full Spectrum Lending, Inc., the Company sources mortgage loans directly from consumers, as well as through real estate agents and home builders. The Wholesale Lending Division sources mortgage loans primarily from mortgage brokers. The Correspondent Lending Division acquires mortgage loans from other financial institutions. The Loan Servicing sector of the Mortgage Banking segment includes investments in MSRs and other retained interests, as well as the underlying servicing operations and subservicing for other domestic financial institutions. The Closing Services sector of the Mortgage Banking segment is comprised of the LandSafe companies, which provide credit reports, appraisals, title reports and flood determinations to the Company’s Loan Production sector, as well as to third parties.
The Insurance segment activities include Balboa Life and Casualty Group, a national provider of property, life, and liability insurance; Balboa Reinsurance Company, a primary mortgage reinsurance company; and Countrywide Insurance Services, Inc., a national insurance agency offering a specialized menu of insurance products directly to consumers.
The Capital Markets segment primarily includes the operations of Countrywide Securities Corporation, a registered broker-dealer specializing in the mortgage securities market. In addition, it includes the operations of Countrywide Asset Management Corporation, Countrywide Servicing Exchange and CCM International Ltd.
The Global segment operations include those of Global Home Loans Limited, a provider of loan origination processing and servicing in the United Kingdom; UKValuation Limited, a provider of property valuation services in the UK; Countrywide International Consulting Services, LLC, an international provider of mortgage services-related analytic and advisory services; and Countrywide International Technology Holdings Limited, a licensor of loan origination processing, servicing, and residential real estate value assessment technology.
The Banking segment’s operations are primarily comprised of Treasury Bank, National Association (“Treasury Bank” or the “Bank”), and of Countrywide Warehouse Lending. Treasury Bank invests primarily in mortgage loans sourced from the Loan Production sector. Countrywide Warehouse Lending provides mortgage inventory financing on a secured basis to third-party mortgage bankers.
Included in the tables below labeled “Other” are the holding company activities and certain reclassifications required to conform management reporting to the consolidated financial statements:
- ----------------------------------------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2003
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Mortgage Banking Diversified Businesses
----------------------------------------------- -----------------------------------------------------------------------
(Dollars Loan Loan Closing Capital Global Grand
in thousands) Production Servicing Services Total Insurance Markets Operations Banking Other Total Total
- -------------------------------------------------------------- ----------------------------------------------------------------------- -------------
Revenues
External $1,508,820 $(437,849) $ 51,650 $1,122,621 $ 183,796 $ 131,599 $ 46,354 $ 65,838 $(18,412) $ 409,175 $1,531,796
Inter-segment (38,607) 11,028 - (27,579) - 31,030 - 4,543 (7,994) 27,579 -
----------------------------------------------- ----------------------------------------------------------------------- -------------
Total
Revenues $1,470,213 $(426,821) $ 51,650 $1,095,042 $ 183,796 $ 162,629 $ 46,354 $70,381 $(26,406) $ 436,754 $1,531,796
=============================================== ======================================================================= =============
Segment
Earnings
(pre-tax) $ 882,449 $(554,182) $ 25,983 $ 354,250 $ 24,758 $ 96,112 $ 5,827 $ 43,333 $ 288 $ 170,318 $524,568
=============================================== ======================================================================= =============
Segment
Assets
$31,348,479 $10,746,383 $ 71,850 $42,166,712 $1,473,828 $18,585,504 $ 161,844 $11,208,306 $ 14,831 $31,444,313 $73,611,025
=============================================== ======================================================================= =============
- ----------------------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------------------------
Mortgage Banking Diversified Businesses
------------------------------------------------ ------------------------------------------------------------------------
(Dollars Loan Loan Closing Capital Global Grand
in thousands) Production Servicing Services Total Insurance Markets Operations Banking Other Total Total
- --------------------------------------------------------------- ------------------------------------------------------------------------ ------------
Revenues
External $ 790,171 $(159,460) $ 35,091 $ 665,802 $ 137,370 $ 73,456 $ 20,165 $ 17,414 $ (455) $ 247,950 $ 913,752
Inter-segment (7,354) 104 - (7,250) - 11,173 - (1,224) (2,699) 7,250 -
------------------------------------------------ ------------------------------------------------------------------------ -------------
Total
Revenues $ 782,817 $(159,356) $ 35,091 $ 658,552 $ 137,370 $ 84,629 $ 20,165 $ 16,190 $ (3,154) $ 255,200 $ 913,752
================================================ ======================================================================== =============
Segment
Earnings
(pre-tax) $ 444,741 $(267,613) $ 14,398 $ 191,526 $ 23,833 $ 39,533 $ (501) $ 10,221 $ 1,482 $ 74,568 $ 266,094
================================================ ======================================================================== =============
Segment
Assets $13,810,876 $11,871,411 $ 54,000 $25,736,287 $1,208,451 $11,345,920 $ 100,465 $3,882,943 $ 340,336 $16,878,115 $42,614,402
================================================ ======================================================================== =============
- ------------------------------------------------------------------------------------------------------------------------------------------------------
NOTE 13 –
REGULATORY AND AGENCY CAPITAL REQUIREMENTS
In connection with the
acquisition of Treasury Bank, CFC became a financial holding company. As a
result, the Company is subject to regulatory capital requirements imposed by the
Board of Governors of the Federal Reserve System (“FRB”). The Company
is also subject to U.S. Department of Housing and Urban Development, Fannie Mae,
and Freddie Mac net worth requirements.
Regulatory capital is assessed for adequacy by three measures: Tier 1 Leverage Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital. Tier 1 Leverage Capital includes common shareholders’ equity and preferred stock and securities that meet certain guidelines detailed in the capital regulations, less goodwill, the portion of MSRs not includable in regulatory capital (generally, the carrying value of MSRs in excess of Tier 1 Capital, net of associated deferred taxes) and other adjustments. Tier 1 Leverage Capital is measured with respect to average assets during the quarter. The Company is required to have a Tier 1 Leverage Capital ratio of 4.0% to be considered adequately capitalized and 5.0% to be considered well capitalized.
The Tier 1 Risk-Based Capital ratio is calculated as a percent of risk-weighted assets at the end of the quarter. The Company is required to have a Tier 1 Risk-Based Capital ratio of 4.0% to be considered adequately capitalized and 6.0% to be considered well capitalized.
Total Risk-Based Capital includes preferred stock and securities excluded from Tier 1 Capital, mandatory convertible debt, and subordinated debt that meets certain regulatory criteria. The Total Risk-Based Capital ratio is calculated as a percent of risk-weighted assets at the end of the quarter. The Company is required to have a Total Risk-Based Capital ratio of 8.0% to be considered adequately capitalized and 10.0% to be considered well capitalized.
The following table presents the actual capital ratios and amounts and minimum required capital ratios for the Company to maintain a “well-capitalized” status by the FRB at March 31, 2003 and at December 31, 2002:
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002
----------------------------- -----------------------------
(Dollar amounts in thousands) Minimum Ratio Amount Ratio Amount
Required(1)
- -------------------------------- --------------- ------------ --------------- ----------- ----------------
Tier 1 Leverage Capital 5.0% 7.6% $5,156,996 7.6% $4,703,839
Risk-Based Capital
Tier 1 6.0% 11.1% $5,156,996 12.2% $4,703,839
Total 10.0% 12.1% $5,622,745 13.6% $5,230,840
- ---------------------------------------------------------------------------------------------------------------------
NOTE 14 - LEGAL PROCEEDINGS
The Company and certain subsidiaries are defendants in, or parties to, a number of pending and threatened legal actions and proceedings
involving matters that are generally incidental to their business. These matters include actions and proceedings involving alleged breaches of
contract, violations of consumer protection and other laws and regulations, and other disputes arising out of the Company's operations.
Certain of these matters involve claims for substantial monetary damages, and others purport to be class actions.
Based on its current knowledge, management does not believe that liabilities, if any, arising from any single pending action or proceeding will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company and its subsidiaries. The Company is not, however, able to predict with certainty the outcome or timing of the resolution of any of these actions or proceedings or the ultimate impact on the Company or its results of operations in a particular future period.
NOTE 15 - SUBSEQUENT EVENTS
In April 2003, Countrywide Capital IV, a subsidiary trust of the Company, issued $500 million of 6.75% preferred securities, which are fully
and unconditionally guaranteed by the Company and CHL (the "6.75% Securities"). In connection with the issuance by Countrywide Capital IV of
the 6.75% Securities, the Company will issue to Countrywide Capital IV $500 million of its 6.75% Junior Subordinated Debentures, which are
fully and unconditionally guaranteed by CHL (the "Subordinated Debentures"). Countrywide Capital IV exists for the sole purpose of issuing the
6.75% Securities and investing the proceeds in the Subordinated Debentures. The Subordinated Debentures are due on April 1, 2033, with
interest payable quarterly on January 1, April 1, July 1 and October 1 of each year. The Company has the right to redeem at 100% of their
principal amount, plus accrued and unpaid interest to the date of redemption, the 6.75% Securities at any time on or after April 11, 2008
In relation to Countrywide Capital IV, the Company has the right to defer payment of interest on the Subordinated Debentures for up to 20 consecutive quarterly periods by extending the payment period. If interest payments on the Subordinated Debentures are so deferred, the Company may not, among other things, declare or pay dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock.
In April 2003, the Company formed a wholly-owned special purpose entity for the purpose of issuing short term secured liquidity notes ("SLNs") to finance certain of its Mortgage Loan Inventory. As of April 30, 2003, SLNs in the aggregate principal amount of $6.0 billion were outstanding. The maximum facility size is $10 billion.
On April 29, 2003, the Company's Board of Directors declared a dividend of $0.13 per common share, payable June 2, 2003, to shareholders of record on May 14, 2003.
NOTE 16 - SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for Countrywide Financial Corporation and subsidiaries is as follows:
- --------------------------------------------------------------------------------------------------------------------------------------------
March 31, 2003
------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Countrywide Countrywide Home Other Eliminations Consolidated
Financial
Corporation Loans, Inc. Subsidiaries
- ------------------------------------- ------------------- ------------------- ------------------ ------------------- ------------------
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $ - $ 27,368,467 $ 23,828 $ - $ 27,392,295
Mortgage servicing rights, net - 5,345,675 - - 5,345,675
Other assets 6,504,952 10,218,356 52,012,764 (27,863,017) 40,873,055
------------------- ------------------- ------------------ ------------------- ------------------
Total assets $ 6,504,952 $ 42,932,498 $ 52,036,592 $ (27,863,017) $ 73,611,025
=================== =================== ================== =================== ==================
Company-obligated mandatorily
redeemable capital trust
pass-through securities $ - $ - $ 500,000 $ - $ 500,000
Deposit liabilities - - 5,639,653 - 5,639,653
Indebtedness 747,271 33,889,749 40,020,551 (22,488,689) 52,168,882
Other liabilities 87,608 6,701,626 2,896,110 (52,927) 9,632,417
Equity 5,670,073 2,341,123 2,980,278 (5,321,401) 5,670,073
------------------- ------------------- ------------------ ------------------- ------------------
Total liabilities and equity $ 6,504,952 $ 42,932,498 $ 52,036,592 $ (27,863,017) $ 73,611,025
=================== =================== ================== =================== ==================
- --------------------------------------------------------------------------------------------------------------------------------------------
In April 2003, Countrywide Capital IV, a subsidiary trust of the Company, issued trust preferred securities guaranteed by the Company and CHL. (See Note 15 – Subsequent Events.) As of March 31, 2003, Countrywide Capital IV was nominally capitalized and, therefore, it has been excluded from the preceding table.
- -------------------------------------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2003
------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Countrywide Countrywide Home Other Eliminations Consolidated
Financial
Corporation Loans, Inc. Subsidiaries
- ------------------------------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Statements of Earnings:
Revenues $ 9,708 $ 832,168 $ 734,469 $ (44,549) $ 1,531,796
Expenses 1,914 648,308 401,295 (44,289) 1,007,228
Provision for income taxes 2,962 69,867 125,547 (99) 198,277
Equity in net earnings of subsidiaries 321,459 - - (321,459) -
------------------ ------------------- ------------------ ------------------- ------------------
Net earnings $ 326,291 $ 113,993 $ 207,627 $ (321,620) $ 326,291
================== =================== ================== =================== ==================
- -------------------------------------------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------- ------------- ------------------------------------------------------------------- --------------
December 31, 2002
------------- ------------------------------------------------------------------- --------------
Countrywide Countrywide Home Other Eliminations Consolidated
Financial
(Dollar amounts in thousands) Corporation Loans, Inc. Subsidiaries
- ------------------------------------------------ ----------------- -- ------------------ - ---------------- - ---------------- -- ---------------
Balance Sheets:
Mortgage loans and mortgage-backed $
securities held for sale $ - $14,055,045 $ 970,572 - $15,025,617
Mortgage servicing rights, net - 5,384,933 - - 5,384,933
Other assets 5,985,027 12,011,287 38,946,813 (19,322,894) 37,620,233
----------------- ------------------ ---------------- ---------------- ---------------
Total assets $5,985,027 $31,451,265 $39,917,385 ($19,322,894) $58,030,783
================= ================== ================ ================ ===============
Company-obligated mandatorily redeemable $ $ $
capital trust pass-through securities - - $ 500,000 - $ 500,000
Deposit liabilities - - 3,114,271 - 3,114,271
Indebtedness 745,997 23,522,271 32,273,803 (14,613,444) 41,928,627
Other liabilities 77,897 5,699,928 1,607,056 (58,129) 7,326,752
Equity 5,161,133 2,229,066 2,422,255 (4,651,321) 5,161,133
----------------- ------------------ ---------------- ---------------- ---------------
Total liabilities and equity $5,985,027 $31,451,265 $39,917,385 ($19,322,894) $58,030,783
================= ================== ================ ================ ===============
- ------------------------------------------------ ----------------- -- ------------------ - ---------------- - ---------------- -- ---------------
- -------------------------------------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2002
----------------------------------------------------------------------------------------------------
Countrywide Countrywide
Financial Home Other
(Dollar amounts in thousands) Corporation Loans, Inc. Subsidiaries Eliminations Consolidated
- ------------------------------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Statements of Earnings:
Revenues $ (6,898) $ 518,437 $ 416,220 $ (14,007) $ 913,752
Expenses 2,111 399,330 260,224 (14,007) 647,658
Provision for income taxes (3,378) 44,638 57,275 - 98,535
Equity in net earnings of subsidiaries 173,190 - - (173,190) -
------------------ ------------------- ------------------ ------------------- ------------------
Net earnings $ 167,559 $ 74,469 $ 98,721 $ (173,190) $ 167,559
================== =================== ================== =================== ==================
- -------------------------------------------------------------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on
Form 10-Q represents an update to the more detailed and comprehensive
disclosures included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2002. As such, a reading of the Annual Report on Form
10-K is necessary to an informed understanding of the following discussions.
FORWARD-LOOKING
STATEMENTS
This Quarterly Report on
Form 10-Q contains forward-looking statements. These discussions include
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, regarding management’s beliefs,
estimates, projections, and assumptions with respect to future operations, as
well as business plans and strategies that are subject to change. Actual
operations and operating results for any future period may vary materially from
those projected herein and from past results discussed herein. Factors which
could cause actual results to differ materially from historical results or those
anticipated include, but are not limited to:
Words like “believe”, “expect”, “anticipate”, “promise”, plan and other expressions or words of similar meanings, as well as future or conditional verbs such as “will”, “would”, “should”, “could”, or “may” are generally intended to identify forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements.
GENERAL
The Company’s core
business is residential Mortgage Banking. Historically, the Mortgage Banking
business was the primary source of the Company’s earnings and the focus of
its capital investment. The Company’s results of operations historically
have been influenced primarily by the level of demand for mortgage loans, which
is affected by external factors such as prevailing mortgage rates and the
strength of the U.S. housing market.
In recent years, the Company has expanded its operations beyond Mortgage Banking. The Company now has five business segments: Mortgage Banking, Insurance, Capital Markets, Global Operations and Banking. This diversification has been pursued to capitalize on meaningful synergies with the Company’s core Mortgage Banking business and to provide sources of earnings that are not as cyclical as the mortgage banking business.
CRITICAL ACCOUNTING POLICIES
As discussed in further detail in the Company’s Annual Report on Form 10-K, the accounting policies that have the greatest impact on the Company’s financial condition and results of operations and that require the most judgment are those relating to its mortgage securitization activities and the ongoing valuation of retained interests, particularly Mortgage Servicing Rights (“MSRs”), that arise from those activities, as well as the Company’s interest rate risk management activities. The Company’s critical accounting policies involve accounting for gains on sales of loans and securities, valuation of MSRs and other retained interests, amortization of MSRs and accounting for derivatives and interest rate risk management activities.
The values of the Company’s retained interests are impacted by changes in interest rates. Mortgage rates have decreased and estimated market required yields for MSRs have increased during the current period resulting in changes to the key assumptions used in the valuation of MSRs. The key assumptions used to value the other retained interests, which are generally less sensitive to changes in interest rates than MSRs, have not changed significantly from those used at December 31, 2002.
The long-term estimated weighted average prepayment speed (annual rate) for the MSRs has increased from 21.7% at December 31, 2002 to 23.8% at March 31, 2003. As of March 31, 2003, the option-adjusted spread (“OAS”) used in the valuation of the MSRs ranged from 3.5% for conventional, conforming MSRs to 7.5% for subprime MSRs. As of December 31, 2002, the OAS used in the valuation of MSRs ranged from 2.9% for conventional, conforming MSRs to 6.9% for subprime MSRs.
At March 31, 2003, the Company’s investment in MSRs was stratified as follows:
------------------------------ --- ------------------------------------------------------------------------------------------
(Dollar amounts in millions) Total Portfolio
------------------------------ --- ------------------------------------------------------------------------------------------
Weighted
Mortgage Principal Percent Average MSR
Rate Balance (1) of Total Maturity (Years) Balance
------------------------------ --- ----------------- --- ----------------- -- ------------------------- --- -----------------
6% and under $106,682 23% 23.6 $1,531
6.01-7% 239,006 52% 26.4 2,681
7.01-8% 85,818 18% 25.9 773
8.01-9% 21,002 5% 25.5 214
9.01-10% 5,708 1% 24.5 71
over 10% 5,514 1% 21.7 76
----------------- ----------------- -----------------
$463,730 100% 25.5 $5,346
================= ================= =================
(1) Excludes subservicing and loans held for sale.
------------------------------ --- ----------------- --- ----------------- -- ------------------------- --- -----------------
Quarter Ended March 31, 2003 Compared to the Quarter Ended March 31, 2002
CONSOLIDATED EARNINGS PERFORMANCE
The Company’s diluted earnings per share for the quarter ended March 31, 2003 was $2.44, an 85% increase over diluted earnings per share for the quarter ended March 31, 2002. Net earnings were $326.3 million, a 95% increase from the quarter ended March 31, 2002. This earnings performance was driven principally by the increased level of mortgage loans produced by the Company—$102.4 billion—as compared to $44.0 billion for the year-ago period.
Industry-wide, residential mortgage originations were approximately $940 billion during the first quarter of 2003, up from approximately $855 billion in the fourth quarter of 2002 (Source: Fannie Mae). Approximately 70% of the residential mortgages produced in the first quarter of 2003 were refinances triggered primarily by historically low mortgage rates. The balance of mortgages produced related to home purchases. Partially fueled by the level of mortgage rates, activity in the U.S. housing market also reached record levels in the first quarter of 2003.
The continuing high demand for mortgages drove not only high volumes but also high production margins. The combination of high volumes and margins increased loan production sector pre-tax earnings to $882.4 million for the quarter, an increase of $437.7 million from the year-ago period.
The high levels of mortgage refinances and home purchases resulted in significant prepayments within the Company’s mortgage loan servicing portfolio during the period. This, along with the expectation of continued higher-than-normal prepayments in the future due to historically low mortgage rates, resulted in significant amortization and impairment of the Company’s MSRs and other retained interests. The combined amount of amortization and impairment of MSRs and other retained interests, net of Servicing Hedge gains, was $1,018.6 million, resulting in a pre-tax loss of $554.2 million in the Loan Servicing Sector for the current quarter, $286.6 million more than the pre-tax loss in the year-ago period.
Overall, the Mortgage Banking Segment generated pre-tax earnings of $354.3 million for the quarter ended March 31, 2003, an increase of 85% from the quarter ended March 31, 2002.
The Company’s non-mortgage banking businesses were also significant contributors to the earnings performance in the quarter ended March 31, 2003. In particular, the Capital Markets Segment had pre-tax earnings of $96.1 million, as compared to $39.5 million in the year-ago period. Capital Markets has grown its core franchise significantly over the last five years and is now among the leading investment banking firms in its niche, the mortgage-backed securities market. This segment continued to benefit from robust activity in the mortgage-backed securities market, as well as from a highly-favorable interest rate environment. In total, non-mortgage banking businesses contributed $170.3 million in pre-tax earnings for the quarter ended March 31, 2003 (32% of consolidated pre-tax earnings), an increase of 128% from $74.6 million (28% of total pre-tax earnings) for the year-ago period.
OPERATING SEGMENT RESULTS
The Company’s pre-tax earnings by segment are summarized below:
- -----------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
Dollar amounts in thousands) 2003 2002
- ------------------------------------ ---------------------------- ---------------------------
Mortgage Banking:
Production $ 882,449 $ 444,741
Servicing (554,182) (267,613)
Closing Services 25,983 14,398
---------------------------- ---------------------------
Total Mortgage Banking 354,250 191,526
---------------------------- ---------------------------
Other Businesses:
Insurance 24,758 23,833
Capital Markets 96,112 39,533
Global Operations 5,827 (501)
Banking 43,333 10,221
Other 288 1,482
--------------------------- ----------------------------
Total Other Businesses 170,318 74,568
---------------------------- ---------------------------
Pre-tax earnings $ 524,568 $ 266,094
============================ ===========================
- -----------------------------------------------------------------------------------------------
The Company’s mortgage loan production by segment is summarized below:
- --------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in millions) 2003 2002
- --------------------------------------- ---------------------------- ---------------------------
Mortgage Banking $ 96,595 $ 42,174
Capital Markets conduit acquisitions 4,074 1,729
Treasury Bank 1,734 130
---------------------------- ---------------------------
$ 102,403 $ 44,033
============================ ===========================
- --------------------------------------------------------------------------------------------------
MORTGAGE
BANKING SEGMENT
The Mortgage Banking Segment is comprised of three distinct sectors: Loan Production, Loan Servicing and Loan Closing Services.
Loan Production Sector
The Loan Production Sector
produces mortgage loans through CHL’s three production divisions - Consumer
Markets, Wholesale Lending and Correspondent Lending and through Full Spectrum
Lending, Inc.
The pre-tax earnings of the Loan Production Sector are summarized below:
- ----------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
-----------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- --------------------------------- -------------------------------------------- ------------------------------------------
Percent of Loan Percent of Loan
Dollars Volume Dollars Volume
------------------------- ----------------- ----------------------- -----------------
Revenues $ 1,470,213 1.52% $ 782,817 1.85%
Expenses 587,764 0.61% 338,076 0.80%
------------------------- ----------------- ----------------------- -----------------
Pre-tax earnings $ 882,449 0.91% $ 444,741 1.05%
========================= ================= ======================= =================
----------------------------------------------------------------------------------------------------------------------------
Increased demand for mortgages enabled the Loan Production Sector to achieve significant growth in revenues and earnings in the quarter ended March 31, 2003 compared to the year-ago period. This performance was enhanced by a significant increase in market share from the year ago period. Favorable market conditions enabled the Company to increase revenues earned on prime first mortgage loans, while high levels of productivity helped keep units costs low. These factors combined to produce continued high profit margins (pre-tax earnings as a percentage of loan volume) for the Loan Production Sector. The decline in revenues as a percentage of loan volume in the current period is attributable to unsold loan production, which amounted to 17% of the loans produced during the quarter. Substantially all of the unsold loans were classified as held for sale at quarter end.
The following table shows total Mortgage Banking loan volume by division:
- ------------------------------------------------------------------------------------------------
Mortgage Banking
Loan Production
Quarter Ended March 31,
--------------------------------------------------------
(Dollar amounts in millions) 2003 2002
- -------------------------------------- ---------------------------- --------------------------
Correspondent Lending Division $ 49,822 $ 16,944
Wholesale Lending Division 23,245 13,186
Consumer Markets Division 22,242 11,390
Full Spectrum Lending, Inc. 1,286 654
---------------------------- --------------------------
$ 96,595 $ 42,174
============================ ==========================
- ------------------------------------------------------------------------------------------------
Overall loan production for the quarter ended March 31, 2003 increased 129% in comparison to the year-ago period. The increase was due to a rise in both purchase and non–purchase loan production of 55% and 169%, respectively. The increase in purchase loans is significant as this is the relatively stable growth component of the mortgage market, with average annual growth of 8% over the last 10 years. (The non-purchase, or refinance component of the mortgage market is highly volatile as it is driven almost exclusively by prevailing mortgage rates.) All divisions, in particular Correspondent Lending, contributed to the increase in origination volume.
The following table summarizes loan production by purpose and by interest rate type:
- ----------------------------------------------------------------------------------------------
Mortgage Banking
Loan Production
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in millions) 2003 2002
- ----------------------------------- ---------------------------- ---------------------------
Purpose:
Purchase $ 23,092 $ 14,895
Non-purchase 73,503 27,279
---------------------------- ---------------------------
$ 96,595 $ 42,174
============================ ===========================
Interest Rate Type:
Fixed Rate $ 85,610 $ 35,385
Adjustable Rate 10,985 6,789
---------------------------- ---------------------------
$ 96,595 $ 42,174
============================ ===========================
- ----------------------------------------------------------------------------------------------
As shown in the following table, the volume of Prime Home Equity and Subprime mortgages produced (which is included in the Company’s total volume of loans produced) increased 43% during the current period from the prior period:
- ----------------------------------------------------------------------------------------------
Mortgage Banking
Prime Home Equity and Subprime
Mortgage Production
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in millions) 2003 2002
- ----------------------------------- ---------------------------- ---------------------------
Prime Home Equity $ 2,543 $ 2,219
Subprime 2,439 1,267
---------------------------- ---------------------------
$ 4,982 $ 3,486
============================ ===========================
Percent of total loan production 5.2% 8.3%
============================ ===========================
- ----------------------------------------------------------------------------------------------
Prime Home Equity and Subprime loans carry higher profit margins historically and the demand for such loans is believed to be less rate sensitive than the demand for prime first mortgage loans.
The Company successfully retained a significant percentage of the customers who prepaid their mortgages during the period. The overall retention rate for the quarter was 41%, and for retail customers the rate was 44%. Notably, 64% of the Consumer Market Division’s total loan production during the period was sourced from the Company’s servicing portfolio. The high retention rates during the period were due, in part, to the high level of refinancing transactions. The Company has been most successful retaining customers who refinance their existing mortgages in such an environment. During the quarter ended March 31, 2003, 80% of the Consumer Markets Division’s refinance loan volume was from existing mortgage customers. This synergy is a major source of intrinsic value derived from the Company’s MSRs.
During the quarter ended March 31, 2003, the Loan Production Sector operated at approximately 116% of planned operational capacity. (The primary capacity constraint in the Company’s loan origination activities is the number of loan operations personnel it has on staff. Therefore, the Company measures planned capacity with reference to the number of loan operations personnel it has on staff multiplied by the number of loans each available loan operations staff person is expected to process under normal conditions.) The Company continued to increase the number of sales and operations staff in its loan production divisions to capitalize upon the current market environment. When loan volumes moderate, the operations staff (including a significant number of temporary employees) will be reduced. However, the Company plans to continue building its sales staff despite any potential drop in loan origination volume as a primary means to increase the Company’s market share.
The following table summarizes the Loan Production Sector workforce:
- -----------------------------------------------------------------------------
Workforce At
March 31,
---------------------------------------------
2003 2002
- ------------------------------ -------------------- -----------------------
Sales 6,702 4,351
Operations:
Regular employees 6,335 3,860
Temporary staff 2,093 750
-------------------- -----------------------
8,428 4,610
Production technology 577 350
Administration and support 1,367 783
-------------------- -----------------------
17,074 10,094
==================== =======================
- -----------------------------------------------------------------------------
The Consumer Markets Division successfully grew its commissioned sales force (external home loan consultants) by 260 during the quarter. At March 31, 2003, the Company employed 2,744 external home loan consultants whose primary focus is to increase overall purchase market share. In the quarter ended March 31, 2003, external home loan consultants contributed $4.0 billion in purchase loans, a 76% increase over the year-ago period. The purchase production generated by the external home loan consultants represented 68% of the Consumer Market Division’s purchase production for the quarter ended March 31, 2003. At March 31, 2003, the Consumer Markets Division had 5 centralized processing units and 20 regional processing centers nationwide. During the quarter ended March 31, 2003, the regional processing centers handled 24% of the division’s total loan volume.
Similar to the Consumer Markets Division, the Wholesale Lending and Correspondent Lending Divisions continued to grow their sales forces as a core strategy to increase market share. At March 31, 2003, the sales force in the Wholesale Lending Division numbered 549, an increase of 16% during the quarter. The Correspondent Lending Division expanded its sales force by 25% during the quarter ended March 31, 2003.
Loan Servicing Sector
The Loan Servicing Sector
reflects the performance of the Company’s investments in MSRs and other
retained interests and associated risk management activities, as well as profits
from subservicing activities in the United States. The Loan Servicing Sector
incorporates a significant processing operation, consisting of approximately
5,600 employees that service the Company’s 4.3 million mortgage customers.
How effectively this servicing operation manages costs and generates ancillary
income from the portfolio has a significant impact on the long-term performance
of this sector.
The pre-tax earnings of the Loan Servicing Sector are summarized below:
- ------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
--------------------------------------------------------------------------------
2003 2002
--------------------------------------- ---------------------------------------
Amount Percentage of Amount Percentage of
Average
Servicing Average Servicing
(Dollar amounts in thousands) Portfolio* Portfolio*
- -------------------------------------- ------------------- ------------------ ------------------ -------------------
Revenues $ 599,088 0.508% $ 482,181 0.566%
Servicing Hedge gains (loss) 6,361 0.005% (330,435) (0.388%)
Amortization (362,500) (0.307%) (257,731) (0.302%)
Impairment (662,413) (0.562%) (13,672) (0.016%)
Operating expense (101,618) (0.086%) (90,138) (0.106%)
Interest expense, net (33,100) (0.028%) (57,818) (0.068%)
------------------- ------------------ ------------------ -------------------
Pre-tax loss $ (554,182) (0.470%) (267,613) (0.314%)
=================== ================== ================== ===================
Average Servicing Portfolio $ 471,555,000 $ 341,061,000
=================== ==================
- ------------------------------------------------------------------------------------------------------------------------
*Annualized
The Loan Servicing Sector experienced continued losses during the recent period due to ongoing high levels of refinance activity that were driven by mortgage rates that again reached forty-year lows. The Company’s MSRs and other retained interests represent the present value of cash flow streams that are closely linked to the expected life of the underlying servicing portfolio. The continued high level of actual and forecasted prepayment activity reduced the life of the servicing portfolio and thus the value of the Company’s related investments. In addition, an increase in estimated market yields for MSRs contributed to the decline in estimated fair value of the Company’s retained interests, as reflected by a combined impairment and amortization charge of $1,024.9 million incurred in the quarter ended March 31, 2003.
The Servicing Hedge generated a net gain of $6.4 million during the period. The Servicing Hedge was comprised almost entirely of financial instruments linked to long-term Treasury and swap rates, which were basically unchanged during the quarter. Amortization and impairment, net of the Servicing Hedge, was $1,018.6 million for the quarter ended March 31, 2003, an increase of $416.7 million over the quarter ended March 31, 2002. In a stable interest rate environment, management would expect no significant impairment and would expect to incur expenses related to the Servicing Hedge driven primarily by the composition of the hedge, the shape of the yield curve and the level of interest rate volatility.
During the quarter ended March 31, 2003, the Company securitized a portion of its net servicing fees (“excess servicing”). Proceeds from the sale of these securities amounted to $306.2 million. Management believes such securitizations enable the Company to improve the overall returns on its MSR investment and more efficiently manage its capital.
Despite the level of prepayments, the Company increased its servicing portfolio to $502.1 billion at March 31, 2003, a 41% increase from March 31, 2002. At the same time, the overall weighted-average note rate of the owned servicing portfolio declined from 7.3% to 6.6%.
Loan Closing Services Sector
The LandSafe companies
produced $26.0 million in pre-tax earnings, representing an 80% increase from
the year-ago period. The increase in LandSafe’s contribution to pre-tax
earnings was primarily due to a 60% increase in the volume of closing services
provided, which resulted from the increase in loan origination activity in the
Loan Production Sector. During the quarter ended March 31, 2003, 31% of
LandSafe’s revenues were from third parties, as compared to 25% for the
comparable period in 2002. Management believes that this percentage should
continue to rise in the future.
The following table shows the number of units processed during the respective periods:
- ----------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(In units) 2003 2002
- ----------------------------------------- ---------------------------- ---------------------------
Credit reports 1,591,921 922,054
Automated property valuation services 574,952 497,942
Flood determinations 794,190 444,655
Appraisals 163,875 87,851
Other 37,431 26,360
---------------------------- ---------------------------
Total 3,162,369 1,978,862
============================ ===========================
- ----------------------------------------------------------------------------------------------------
NON-MORTGAGE BANKING BUSINESSES
The Company’s other business segments include Capital Markets, Insurance, Banking and Global Operations. Pre-tax earnings from these other businesses increased $95.8 million in the quarter ended March 31, 2003 over the quarter ended March 31, 2002.
Insurance Segment
Segment pre-tax earnings increased 4% over the year-ago period, to $24.8 million. The following table shows pre-tax earnings by business line:
- ------------------------------------------------------------------------------------------------
Quarter Ended March 31,
----------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- ------------------------------------ ---------------------------- ---------------------------
Carrier Operations:
Balboa Reinsurance Company $ 19,132 $ 16,014
Balboa Life and Casualty 9,138 7,431
---------------------------- ---------------------------
28,270 23,445
Agency operations 2,028 2,483
Parent expenses (5,540) (2,095)
---------------------------- ---------------------------
$ 24,758 $ 23,833
============================ ===========================
- ------------------------------------------------------------------------------------------------
The Company’s mortgage reinsurance business produced $19.1 million in pre-tax earnings, a 19% increase over the year-ago period, due primarily to a 12% increase in net earned premiums that was driven by growth in the Company’s loan servicing portfolio.
The Company’s Life and Casualty insurance business produced pre-tax earnings of $9.1 million, an increase of $1.7 million, or 23%, from the comparable quarter in 2002. The increase was due to a $42.9 million, or 43%, increase in premiums earned during the quarter ended March 31, 2003 compared to the comparable period in 2002, partially offset by an increase in the loss ratio. Balboa Life and Casualty’s overall loss ratio was 54% and 50% in the quarters ended March 31, 2003 and 2002, respectively.
Both the carrier and agency operations showed significant growth in net earned premiums in comparison to the comparable period a year ago. Following are the net earned premiums for each business line:
- -----------------------------------------------------------------------------------------
Quarter Ended March 31,
-------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- -------------------------------------- ------------------------ -----------------------
Carrier Operations
Balboa Life and Casualty $143,384 $100,455
Balboa Reinsurance Company 17,750 15,865
------------------------ -----------------------
$161,134 $116,320
======================== =======================
----------------------------------------------------------------------------------------
The increase in life and casualty net earned premiums is primarily attributable to growth in lender-placed property hazard product lines. The growth in lender-placed insurance was achieved through the addition of several mortgage lenders during 2002, and to a lesser extent, as a result of an increase in the Company’s mortgage customer base, which increased significantly from the prior year as a result of increased originations.
Balboa Reinsurance’s increase in net earned premiums resulted from a 26% increase in the number of policies in force that was driven by growth in the Company’s loan servicing portfolio, coupled with an overall increase in the ceded premium percentage. During 2002, the Company revised its reinsurance contracts to provide additional coverage in exchange for additional ceded premiums. Management expects Balboa Reinsurance to incur insurance losses in the future as the underlying insured loans season.
Capital Markets Segment
The Capital Markets Segment
(“CCM”) achieved pre-tax earnings of $96.1 million for the quarter, an
increase of $56.6 million, or 143%, from the year-ago period. Total revenues
were $162.6 million, an increase of $78.0 million, or 92% compared to the year
ago period. Total securities trading volume increased 46% to $640.0 billion.
This performance was largely driven by a highly favorable operating environment
consisting of a robust mortgage-backed securities market, high mortgage
securities price volatility, and low short-term financing costs.
The following table shows pre-tax earnings by company:
- -------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- -------------------------------------------- ---------------------------- ---------------------------
Countrywide Securities Corporation(1) $ 75,235 $ 39,772
Countrywide Asset Management Corporation 20,877 (239)
---------------------------- ---------------------------
$ 96,112 $ 39,533
============================ ===========================
- -------------------------------------------------------------------------------------------------------
(1) Includes CSE, CCMI and CCM, Inc.
The following table shows the composition of CSC's trading volume, which includes trades with the Mortgage Banking Segment, by instrument:
- ----------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in millions) 2003 2002
- ----------------------------------- ---------------------------- ---------------------------
Mortgage-backed securities $ 603,918 $ 404,251
Government agency debt 25,708 17,342
Asset-backed securities 8,186 8,719
Other 2,225 2,978
---------------------------- ---------------------------
$ 640,037 $ 433,290
============================ ===========================
- ----------------------------------------------------------------------------------------------
Approximately $49.7 million, or 31%, of the Segment’s revenues during the current period resulted from its mortgage conduit activities.
Banking Segment
The Banking Segment
commenced operations in calendar 2001. The segment achieved pre-tax earnings of
$43.3 million as compared to $10.2 million for the year-ago period. Following is
the composition of pre-tax earnings by company:
- ------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- ------------------------------------------------- ---------------------------- ---------------------------
Treasury Bank ("Bank") $ 28,581 $ 6,087
Countrywide Warehouse Lending ("CWL") 18,101 4,199
Parent and allocated corporate overhead expenses (3,349) (65)
---------------------------- ---------------------------
$ 43,333 $ 10,221
============================ ===========================
- ------------------------------------------------------------------------------------------------------------
The Bank produced pre-tax earnings of $28.6 million for the quarter. The overall increase was primarily due to an increase in net interest income arising from growth in average earning assets and an increase of $9.5 million in profits resulting from document custodian services provided to the Company’s Mortgage Banking operation. Average earning assets increased to $6.7 billion at quarter end, an increase of $4.8 billion in comparison to the year-ago period. Asset growth was funded primarily by the transfer of mortgagor and investor impound accounts controlled by CHL from third party banks to the Bank, a capital contribution from Countrywide Financial Corporation, Federal Home Loan Bank advances and growth in the Bank’s retail deposit base. As of March 31, 2003 $4.5 billion of borrower and investor custodial accounts controlled by the Company were placed as deposits in Treasury Bank. The Bank’s annual pre-tax return on assets for the quarter ended March 31, 2003 was 1.7%. The composition of the Bank’s assets was as follows:
- ----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, 2003 December 31, 2002
- ----------------------------------------------------------------------------------- ---------------------------
Cash $ 117,633 $ 163,547
Short term investments 325,000 300,000
Loans receivable, net 4,216,389 1,902,793
Investment securities classified as available-for-sale 3,923,552 2,590,789
Other assets 293,469 153,690
---------------------------- ---------------------------
Total $ 8,876,043 $ 5,110,819
============================ ===========================
- ----------------------------------------------------------------------------------------------------------------
CWL’s pre-tax earnings increased by $13.9 million during the quarter ended March 31, 2003 in comparison to the year-ago period, primarily due to the growth in average outstanding mortgage warehouse advances partially offset by a decline in the average net spread from 2.25% during the quarter ended March 31, 2002 to 1.92% during the quarter ended March 31, 2003. For the current quarter, average mortgage warehouse advances outstanding were $3.7 billion, an increase of $2.9 billion in comparison to the year-ago period. The increase in advances was largely attributable to growth in the overall mortgage originations market.
Global Operations Segment
For the quarter ended March
31, 2003, the Global Operations Segment’s pre-tax earnings totaled $5.8
million, representing an increase of $6.3 million in comparison to the year-ago
period. Results in the current period were positively impacted by growth in the
portfolio of mortgage loans sub-serviced and the number of new mortgage loans
processed on behalf of GHL’s minority joint venture partner, Barclays plc.
DETAILED DISCUSSION OF CONSOLIDATED STATEMENT OF EARNINGS
Gain on sale of loans and securities is summarized below for the quarters ended March 31, 2003 and 2002:
- ---------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
-----------------------------------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- -------------------------------- ----------------------------------------- ----------------------------------------
Percentage of Percentage of
Dollars Loans Sold Dollars Loans Sold
-------------------- ------------------- ------------------- -------------------
Mortgage Banking:
Prime First Mortgages $ 1,257,866 1.58% $ 490,074 1.26%
Subprime Mortgages 63,230 5.33% 85,915 4.42%
Prime Home Equity Mortgages 1,279 3.27% 38,727 3.67%
Re-performing loans 66,245 6.30% 21,153 3.22%
-------------------- -------------------
1,388,620 1.70% 635,869 1.50%
Capital Markets
Trading Securities 8,826 (398)
Conduit Activities 39,307 16,853
-------------------- -------------------
48,133 16,455
Other 7,251 4,302
-------------------- -------------------
$ 1,444,004 $ 656,626
==================== ===================
- ---------------------------------------------------------------------------------------------------------------------
Gain on sale of loans and securities increased in the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002 primarily due to higher production and sales volume combined with higher margins on Prime First Mortgages. Margins on Prime First Mortgages were high in both periods on a relative historical basis, due largely to the very favorable mortgage market environment that prevailed during those periods. That market was characterized by record consumer demand for mortgages and modest price competition by historical industry standards. Management expects margins, particularly on Prime First Mortgages, to decline in the future as the level of mortgage originations subsides.
Capital Markets’ revenues from its trading activities consist of gains on the sale of securities and net interest income. In a very steep yield curve environment, which existed during both periods, trading revenues will derive largely or entirely from net interest income earned during the securities’ holding period. As the yield curve flattens, the mix of revenues will shift toward gain on sale of securities. The increase in Capital Markets’ gain on sale of loans related to its conduit activities was due to increased securitizations during the quarter ended March 31, 2003 in comparison to the year-ago period.
In general, gain on sale of loans and securities are affected by numerous factors, including the volume and mix of loans sold, production channel mix, the level of price competition, and the slope of the yield curve.
Net interest income is summarized below for the quarters ended March 31, 2003 and 2002:
------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- --------------------------------------------------- ---------------------------- ---------------------------
Net interest income:
Mortgage loans and securities held for sale $ 133,421 $ 164,883
Capital Markets securities trading portfolio 95,780 64,586
Servicing Sector interest expense (61,967) (83,184)
Re-performing loans 38,995 24,857
Banking Segment loans and securities 50,337 12,025
Custodial balances (42,552) 3,095
Insurance Segment investments 8,481 8,065
Other 5,498 2,983
---------------------------- ---------------------------
Net interest income $ 227,993 $ 197,310
============================ ===========================
- -------------------------------------------------------------------------------------------------------------
The decrease in net interest income from mortgage loans and securities held for sale reflects a small growth in the average inventory combined with a lower overall net earnings rate during the quarter ended March 31, 2003. The Company finances the major portion of its mortgage loans and securities held for sale at prevailing short-term borrowing rates, which did not decrease in tandem with the decrease in mortgage rates when compared to the year-ago period.
The increase in net interest income from the Capital Markets securities trading portfolio is attributable to a 95% increase in the average inventory of securities held partially offset by a decrease in the average net spread earned from 1.90% in the quarter ended March 31, 2002 to 1.50% in the quarter ended March 31, 2003. The decrease in the average net spread is the result of a flatter yield curve.
Interest expense in the Loan Servicing Sector decreased due to a decline in short-term rates (a portion of the Company’s long term debt is variable rate), combined with a decrease in the assets financed.
Re-performing loans are reinstated loans that had previously defaulted and were consequently re-purchased from mortgage securities issued by the Company or others. Such loans are subsequently securitized and re-sold. The increase in interest income related to this activity is a result of an increase in the average balance of such loans during the quarter ended March 31, 2003.
The increase in net interest income from the banking segment was primarily attributable to year-over-year asset growth both in Treasury Bank and in the Company’s warehouse lending activities in addition to an overall increase in the weighted average spread from 1.84% in the quarter ended March 31, 2002 to 1.99% in the quarter ended March 31, 2003. Average assets in the Banking Segment increased to $10.4 billion at March 31, 2003, an increase of $7.7 billion.
Net interest income from custodial balances decreased in the current period due to the substantial increase in loan payoffs over the year ago period. The Company is obligated to pass through interest to security holders on paid-off loans at the underlying security rates, which were substantially higher than the short-term rates earned by the Company on the payoff float. The amount of such interest pass-through was $89.5 million and $36.9 million in the quarters ended March 31, 2003 and 2002, respectively. In addition, the earnings rate on the custodial balances, which is tied to short-term rates, declined from 1.74% during the quarter ended March 31, 2002 to 1.21% during the quarter ended March 31, 2003. Average custodial balances increased $6.3 billion, or 69%, over the prior period, due largely to the increase in loan payoffs.
Loan servicing fees and other income from retained interests is summarized below for the quarters ended March 31, 2003 and 2002:
- --------------------------------------------------------------------------------------------------
Quarter Ended March 31,
----------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- --------------------------------------- --------------------------- ----------------------------
Service fees, net of guarantee fees $ 426,912 $ 343,036
Income from other retained interests 68,967 47,719
Late charges 35,147 32,604
Prepayment penalties 35,475 24,297
Ancillary fees 14,842 11,985
Global Segment subservicing fees 21,916 9,271
--------------------------- ----------------------------
$ 603,259 $ 468,912
=========================== ============================
- --------------------------------------------------------------------------------------------------
The increase in servicing fees, net of guarantee fees, was principally due to a 38% increase in the average servicing portfolio, partially offset by a reduction in the overall net service fee earned from 0.402% of the average portfolio balance during the quarter ended March 31, 2002 to 0.362% during the quarter ended March 31, 2003.
The increase in income from other retained interests was due primarily to a 36% increase in investment balances during the quarter ended March 31, 2003 combined with an increase in the yield of these investments from 22.1% in the quarter ended March 31, 2002 to 23.2% in the quarter ended March 31, 2003. These investments include interest-only and principal-only securities as well as residual interests that arise from the securitization of nonconforming mortgage loans, particularly Subprime and Prime Home Equity loans.
Higher prepayment penalties in the quarter ended March 31, 2003 correspond to the increase in Subprime loan payoffs during the quarter.
The increase in subservicing fees earned in the Global Segment was primarily due to the growth in the portfolio subserviced. The Global subservicing portfolio was $90 billion and $50 billion at March 31, 2003 and 2002, respectively.
Impairment (recovery) of retained interests and Servicing Hedge gains (losses) are detailed below for the quarters ended March 31, 2003 and 2002:
------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- --------------------------------------------------- ---------------------------- ---------------------------
Impairment (recovery) of retained interests:
MSRs $ 602,942 $ (11,755)
Other retained interests (permanent) 59,471 25,427
---------------------------- ---------------------------
$ 662,413 $ 13,672
============================ ===========================
Servicing Hedge:
Hedge gains (losses) recorded through earnings $ 6,361 $ (330,435)
---------------------------- ---------------------------
$ 6,361 $ (330,435)
============================ ===========================
- -------------------------------------------------------------------------------------------------------------
Impairment of MSRs and other retained interests during the quarter ended March 31, 2003 resulted from a reduction in the estimated fair value of those investments driven by a decline in mortgage rates and an increase in estimated market required yields during the period. In addition to the impairment charge, the Company recorded MSR amortization of $362.5 million in the quarter ended March 31, 2003.
During the quarter ended March 31, 2002, mortgage rates increased resulting in a small recovery of MSR impairment. The Company recorded MSR amortization of $257.7 million in the quarter ended March 31, 2002.
Rising mortgage rates in the future should result in an increase in the estimated fair value of the MSRs and recovery of all or a portion of the temporary impairment. The MSR amortization rate, which is tied to the expected net cash flows from the MSRs, likewise should reduce as mortgage rates rise.
During the quarter ended March 31, 2003, long-term Treasury and swap rates, which underlie the Servicing Hedge, were basically unchanged, resulting in a modest Servicing Hedge gain of $6.4 million net of option time value decay.
During the quarter ended March 31, 2002, a significant portion of the Servicing Hedge was comprised of Treasury-based instruments. During this period, the Servicing Hedge generated a loss of $330.4 million resulting from option time value decay and an increase in long-term U.S. Treasury rates. MSR impairment recovery was relatively small because mortgage rates did not rise in tandem with U.S. Treasury rates during the quarter.
The Servicing Hedge is intended to moderate the effect on earnings caused by changes in the fair value of MSRs and other retained interests that generally result from changes in mortgage rates. Rising interest rates in the future will result in Servicing Hedge losses.
Net insurance premiums earned are summarized below for the quarters ended March 31, 2003 and 2002:
- ---------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- ---------------------------------- --------------------------- ----------------------------
Balboa Life and Casualty $ 143,384 $ 100,455
Balboa Reinsurance 17,750 15,865
--------------------------- ----------------------------
$ 161,134 $ 116,320
=========================== ============================
- ---------------------------------------------------------------------------------------------
The increase in net insurance premiums earned is primarily due to an increase in policies-in-force.
Commissions and other revenue consisted of the following for the quarters ended March 31, 2003 and 2002:
- ----------------------------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- ------------------------------------ --------------------------- ----------------------------
Global Segment processing fees $ 18,334 $ 9,144
Credit report fees, net 17,840 12,338
Appraisal fees, net 15,424 9,354
Insurance agency commissions 13,263 13,533
Title services 11,787 9,447
Other 37,310 22,606
--------------------------- ----------------------------
$ 113,958 $ 76,422
=========================== ============================
- ----------------------------------------------------------------------------------------------
The increase in processing fees earned in the Global Segment was due to growth in number of loans processed.
The increase in credit report, appraisal and title services fees is primarily due to an increase in the volume of closing services provided resulting from the increase in loan origination activity in the Loan Production Sector.
Compensation expenses are summarized below for the quarter ended March 31, 2003 and 2002:
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, 2003
-----------------------------------------------------------------------------------------
(Dollar amounts in thousands) Mortgage Other Corporate Total
Banking Businesses Administration
- ----------------------------------- -------------------- --------------------- -------------------- ---------------------
Base salaries $ 162,756 $ 48,992 $ 40,984 $ 252,732
Incentive bonus 210,736 48,540 15,248 274,524
Payroll taxes and benefits 93,553 17,188 17,125 127,866
-------------------- --------------------- -------------------- ---------------------
Total compensation expenses $ 467,045 $ 114,720 $ 73,357 $ 655,122
==================== ===================== ==================== =====================
Average workforce, including
temporary staff 22,844 4,926 2,861 30,631
==================== ===================== ==================== =====================
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, 2002
-----------------------------------------------------------------------------------------
(Dollar amounts in thousands) Mortgage Other Corporate Total
Banking Businesses Administration
- ----------------------------------- -------------------- --------------------- -------------------- ---------------------
Base salaries $ 113,341 $ 35,205 $ 30,558 $ 179,104
Incentive bonus 102,151 30,761 7,047 139,959
Payroll taxes and benefits 50,580 9,886 11,900 72,366
-------------------- --------------------- -------------------- ---------------------
Total compensation expenses $ 266,072 $ 75,852 $ 49,505 $ 391,429
==================== ===================== ==================== =====================
Average workforce, including
temporary staff 15,216 3,382 2,372 20,970
==================== ===================== ==================== =====================
- ------------------------------------------------------------------------------------------------------------------------------
Compensation expenses increased $263.7 million, or 67%, during the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002.
Compensation expenses in the Mortgage Banking segment increased primarily due to growth in the level of loan production activity. In the Production sector, compensation expenses increased $185.9 million, or 90%, as a result of a 67% increase in average staff to support 129% higher loan production. Salaries rose 60% and incentive bonus rose 108%. The relative increase in incentive bonuses reflects a shift towards a more incentive-based compensation structure within the Production sector. In the Loan Servicing sector, compensation expense rose $9.0 million, or 19%, as a result of an increase in average staff of 17% to support a 27% increase in the loan servicing portfolio and a 111% increase in loan payoff activity.
Compensation expenses increased in all other business segments reflecting their growth.
In the Insurance Segment, compensation expenses increased by $3.5 million, or 17%, as a result of a 17% increase in average staff to support a 39% growth in written premiums and growth in the Insurance Segment’s third-party insurance tracking operation.
Banking Segment compensation expenses increased by $9.5 million to accommodate the growth of the Bank’s operations, primarily in its labor-intensive mortgage document custodian business.
In the Capital Markets Segment, incentive bonuses increased $15.3 million, or 53%, reflecting growth in revenues of 92%.
Compensation expenses for Corporate Administration increased $23.9 million, or 48%, in the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002 due to an increase in average staff of 21% to support the overall growth in the Company and higher incentive bonuses earned based upon the Company’s increased profitability.
Occupancy and other office expenses for the quarter ended March 31, 2003 increased primarily to accommodate personnel growth in the Loan Production sector, which accounted for 65% of the increase, as well as in the non-mortgage banking businesses, which accounted for 25% of the increase in this expense.
Insurance claim expenses were $78.1 million, or 48%, of net insurance premiums earned for the quarter ended March 31, 2003, as compared to $51.3 million, or 44%, of net insurance premiums earned for the quarter ended March 31, 2002. The increased loss ratio was primarily attributable to Balboa Life and Casualty, whose loss ratio (including allocated loss adjustment expenses) increased from 50% for the quarter ended March 31, 2002 to 54% for the quarter ended March 31, 2003, due to higher claims experience in both voluntary homeowners’ and lender-placed insurance lines.
Other operating expenses for the quarter ended March 31, 2003 and 2002 are summarized below:
- -----------------------------------------------------------------------------------------------
Quarter Ended March 31,
----------------------------------------------------------
(Dollar amounts in thousands) 2003 2002
- ----------------------------------- ---------------------------- ---------------------------
Insurance commission expense $ 32,874 $ 26,364
Professional fees 20,862 16,188
Bad debt expense 20,491 17,134
Travel and entertainment 13,442 8,556
Insurance 7,770 3,400
Software amortization 6,491 5,478
Taxes and licenses 3,434 3,134
Other 19,774 12,138
---------------------------- ---------------------------
$ 125,138 $ 92,392
============================ ===========================
- ----------------------------------------------------------------------------------------------
Insurance commission expense as a percentage of insurance premiums earned declined from 23% to 20% between the two periods due to reduced contingent commissions accruing to insurance brokers as a result of higher than anticipated insured losses from policies subject to the contingent commission arrangements.
Bad debt expense consists primarily of losses during the period arising from unreimbursed servicing advances on defaulted loans, credit losses arising from repurchased or indemnified loans and defaulted VA-guaranteed loans. (See the “Credit Risk” section of this Report for further discussion.)
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 through the natural counterbalance of its loan production and servicing businesses. The Company also uses various financial instruments, including derivatives, to manage the interest rate risk related specifically to its Committed Pipeline, Mortgage Loan Inventory and MBS held for sale, MSRs, trading securities and other retained interests as well as a portion of its debt. The overall objective of the Company’s interest rate risk management activities is to reduce the variability of reported earnings caused by changes in interest rates.
Impact of Changes in Interest Rates on the Net Value of the Company's Interest Rate - Sensitive Financial Instruments
As of March 31, 2003, the Company estimated that an immediate decline of 0.75% and 0.50% in mortgage rates and long-term swap rates, respectively, coupled with a 0.50% increase in short-term interest rates would result in a $1,226 million net decline in the fair value of its MSRs and other financial instruments and a $4 million net decline in the fair value of its trading securities. As of December 31, 2002, the same change in rates would result in a $538 million net decline in fair value of its MSRs and other financial instruments and a $10 million net decline in fair value related to its trading securities.
The components of the estimated net decline in fair value of the Company’s MSRs and other financial instruments are summarized below:
- ------------------------------------------------------------------------------------------------ -- ------------------------
Change in Value
----------------------------------------------------
(Dollar amounts are in millions) March 31, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------ ------------------------
Retained interests ($1,572) ($1,272)
Impact of Servicing Hedge:
Mortgage-based 41 65
Swap-based 207 411
Treasury-based 326 376
------------------------ ------------------------
Retained interests, net (998) (420)
------------------------ ------------------------
Committed Pipeline 214 256
Mortgage Loan Inventory 801 281
Impact of associated derivative instruments:
Mortgage-based (1,124) (519)
Treasury-based (6) (2)
------------------------ ------------------------
Committed Pipeline and Mortgage Loan Inventory, net (115) 16
------------------------ ------------------------
Notes payable and capital securities (226) (253)
Impact of associated derivative instruments:
Swap-based 71 95
------------------------ ------------------------
Notes payable and capital securities, net (155) (158)
------------------------ ------------------------
Prime home equity line of credit senior securities 15 3
Mortgage loans held for investment 20 12
Insurance and banking investment portfolios 58 18
Deposit liabilities (51) (9)
------------------------ ------------------------
Net loss in fair value related to MSRs and other financial instruments ($1,226) ($ 538)
======================== ========================
- ------------------------------------------------------------------------------------------------ -- ------------------------
Management estimated that an immediate decline of 0.75% and 0.50% in mortgage rates and long-term swap rates, respectively, coupled with a 0.50% increase in short-term interest rates is the largest such change in interest rates that could reasonably occur and results in the largest such loss as of March 31, 2003.
These sensitivity analyses are limited by the fact that they were performed at a particular point in time, are subject to the accuracy of various assumptions used, including prepayment forecasts and discount rates and do not incorporate other factors that would impact the Company’s overall financial performance in such scenarios. In addition, not all of the changes in fair value would impact current period earnings. Consequently, the preceding estimates should not be viewed as an earnings forecast.
Foreign Currency Risk
An additional, albeit less
significant, market risk facing the Company is foreign currency risk. The
Company has issued foreign currency-denominated medium-term notes. The Company
manages the foreign currency risk associated with such medium-term notes through
currency swap transactions. The terms of the currency swaps effectively
translate the foreign currency denominated medium-term notes into United States
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.
CREDIT RISK
Securitization
Substantially all mortgage loans originated by the Company are securitized and sold into the secondary mortgage market. As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, the degree to which credit risk on the underlying loans is transferred through the securitization process depends on the structure of the securitization. The Company’s prime, first mortgage loans generally are securitized on a non-recourse basis, while its Prime Home Equity and Subprime Mortgage Loans generally are securitized with limited recourse for credit losses.
The Company’s exposure to credit losses related to its limited recourse securitization activities is limited to the carrying value of its subordinated interests and to the contractual limit of reimbursable losses under its corporate guarantees less the recorded liability for such guarantees. These amounts at March 31, 2003 are as follows:
- -------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, 2003
- ----------------------------------------------------- ------------------------
Subordinated Interests:
Prime Home Equity residual securities $ 478,196
Prime Home Equity transferors' interests 233,137
Subprime residual securities 122,899
------------------------
$ 834,232
========================
Corporate guarantees in excess of recorded reserves $ 112,087
========================
- -------------------------------------------------------------------------------
The carrying value of the residual securities is net of expected future credit losses. Related to the Company’s non-recourse and limited recourse securitization activities, the total credit losses incurred for the quarters ended March 31, 2003 and 2002 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
--------------------------------------------------
(Dollar amounts in thousands) 2003 2003
- --------------------------------------------------------------------- ------------------------ ------------------------
Subprime securitizations with retained residual interest $ 15,312 $ 11,197
Subprime securitizations with corporate guarantee 16,404 3,060
Repurchased or indemnified loans 6,076 2,214
Prime Home Equity securitizations with retained residual interest 2,545 1,116
Prime Home Equity securitizations with corporate guarantee 982 -
VA losses in excess of VA guarantee 631 682
------------------------ ------------------------
$ 41,950 $ 18,269
======================== ========================
- ------------------------------------------------------------------------------------------------------------------------
Mortgage Reinsurance
The Company provides mortgage reinsurance through contracts with several primary mortgage insurance companies on mortgage loans included in the Company’s servicing portfolio. Under these contracts, the Company absorbs mortgage insurance losses in excess of a specified percentage of the principal balance of a given pool of loans, subject to a cap, in exchange for a portion of the pools’ mortgage insurance premium. Approximately $57.6 billion of mortgage loans in the Company’s servicing portfolio are covered by such mortgage reinsurance contracts. The reinsurance contracts place limits on the Company’s maximum exposure to losses. At March 31, 2003, the maximum aggregate losses under the reinsurance contracts was $290.9 million. The Company is required to pledge securities to cover this potential liability.
Mortgage Loans Held for Sale
At March 31, 2003, mortgage loans held for sale amounted to $27.4 billion. While the loans are in inventory, the Company bears total credit risk after taking into consideration primary mortgage insurance (which is generally required for conventional loans with a loan-to-value ratio greater than 80%), FHA insurance or VA guarantees. Historically, credit losses related to loans held for sale have not been significant.
Portfolio Lending Activities
The Company also holds a portfolio of mortgage warehouse advances and mortgage loans held for investment, primarily in its Banking Segment, which amounted to $7.8 billion at March 31, 2003. Management believes the allowance for loan losses is adequate to absorb losses inherent in the loans held for investment at March 31, 2003.
Counterparty Credit Risk
The Company is exposed to credit loss in the event of nonperformance by its trading counterparties and counterparties to its various non-exchange-traded derivative financial instruments. The Company manages this credit risk by selecting only well-established, financially strong counterparties, spreading the credit risk among many such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any single counterparty. The Company’s exposure to credit losses in the event of nonperformance by a counterparty is equal to the net unrealized gains associated with the counterparty’s open trades or derivative contracts, net of any available collateral retained by the Company, a custodian or the Mortgage-Backed Securities Clearing Corporation, which is an independent clearing agent.
The total amount of counterparty credit exposure as of March 31, 2003, after applicable collateral held, was $547 million.
LOAN SERVICING
The following table sets forth certain information regarding the Company’s servicing portfolio of single-family mortgage loans, including loans and securities held for sale and loans subserviced for others, for the periods indicated.
- -----------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
--------------------------------------------------------
(Dollar amounts in millions) 2003 2002
- ------------------------------------------------------- --------------------------- ---------------------------
Summary of changes in the servicing portfolio:
Beginning owned servicing portfolio $ 441,267 $ 327,540
Add: Loan production 102,403 44,033
Purchased MSRs 1,578 1,134
Less: Servicing transferred - -
Servicing sold - -
Runoff (1) (54,126) (26,701)
--------------------------- ---------------------------
Ending owned servicing portfolio 491,122 346,006
Subservicing portfolio 10,957 9,014
--------------------------- ---------------------------
Total servicing portfolio $ 502,079 $ 355,020
=========================== ===========================
-----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
March 31,
--------------------------------------------------------
2003 2002
--------------------------- ---------------------------
Composition of owned servicing portfolio at period end:
Conventional mortgage loans $ 390,648 $ 257,951
FHA-insured mortgage loans 44,536 45,952
VA-guaranteed mortgage loans 14,533 15,689
Subprime loans 24,642 19,822
Prime Home Equity loans 16,763 6,592
--------------------------- ---------------------------
Total owned servicing portfolio $ 491,122 $ 346,006
=========================== ===========================
Delinquent mortgage loans (2):
30 days 2.22% 2.56%
60 days 0.67% 0.76%
90 days or more 0.88% 1.08%
--------------------------- ---------------------------
Total delinquent mortgage loans 3.77% 4.40%
=========================== ===========================
Loans pending foreclosure (2) 0.53% 0.65%
=========================== ===========================
Delinquent mortgage loans (2):
Conventional 2.06% 2.15%
Government 10.59% 10.19%
Subprime 12.45% 12.62%
Prime Home Equity 0.74% 0.79%
--------------------------- ---------------------------
Total delinquent mortgage loans 3.77% 4.40%
=========================== ===========================
Loans pending foreclosure (2):
Conventional 0.23% 0.26%
Government 1.35% 1.25%
Subprime 2.89% 3.09%
Prime Home Equity 0.05% 0.04%
--------------------------- ---------------------------
Total loans pending foreclosure 0.53% 0.65%
=========================== ===========================
- -----------------------------------------------------------------------------------------------------------------
| (1) (2) |
Runoff refers to scheduled principal repayments on loans and unscheduled prepayments (partial prepayments or total prepayments due
to refinancing, modification, sale, condemnation or foreclosure). Expressed as a percentage of the total number of loans serviced excluding subserviced loans and loans purchased at a discount due to their non-performing status. |
Management attributes the overall decline in delinquencies in the Company’s servicing portfolio primarily to the relative overall increase in the conventional and prime home equity portfolios, which carry lower delinquency rates relative to the government and subprime portfolios. Management believes the delinquency rates in the Company’s servicing portfolio are consistent with industry experience for similar mortgage loan portfolios.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 2003, growth in loan origination, banking and capital markets activities significantly increased the Company’s overall financing requirements. In response, in April 2003, the Company obtained an additional $1.6 billion in committed secured lines of credit and has established a $10 billion facility that provides for the issuance of short-term notes and short-term callable notes secured by mortgage loans. With these additional lines of credit Management believes the Company has adequate financing capacity to meet its current needs.
In April 2003, the Company issued $500 million of trust-preferred securities. Trust-preferred securities receive varying degrees of “equity treatment” from rating agencies, bank lenders and regulators. See Note 15 to the Financial Statements for additional discussion.
Cash Flow
Cash flow used by operating
activities was $6.1 billion for the quarter ended March 31, 2003 compared to net
cash provided by operating activities of $4.9 billion for the quarter ended
March 31, 2002. The reduction in cash flow from operations for the quarter ended
March 31, 2003 compared to the quarter ended March 31, 2002 was primarily due to
a $15.5 billion net increase in mortgage loans held for sale.
Net cash used in investing activities was $7.1 billion for the quarter ended March 31, 2003, compared to $6.8 billion for the quarter ended March 31, 2002. Cash flow used in investing activities in both periods was primarily attributable to investments in available-for-sale securities and loans held for investment.
Net cash provided by financing activities for the quarter ended March 31, 2003 totaled $12.9 billion, compared to $3.5 billion for the quarter ended March 31, 2002. The increase in cash provided by financing activities was comprised of a $8.1 billion net increase in short-term (primarily secured) borrowings and a $1.0 billion net increase in bank deposit liabilities.
PROSPECTIVE TRENDS
Total United States mortgage originations were estimated at approximately $2.5 trillion for 2002. Fannie Mae estimates the market at $940 billion for the quarter ended March 31, 2003. Fannie Mae along with other forecasters put the market for 2003 at between $2.5 trillion and $3.2 trillion. Such a market would be highly favorable for the Company’s loan production business and would place continuing pressure on its loan servicing business (including the Company’s investment in MSRs) due to continuing higher-than-normal mortgage loan prepayment activity.
The long-term consolidation trend in the residential mortgage industry continued in the quarter ended 2003. According to the trade publication, Inside Mortgage Finance, the top five originators produced 50% of all loans originated during the first three months of calendar 2003, as compared to 48% for the quarter ended December 31, 2002. Following is a comparison of market share for the top five originators, according to Inside Mortgage Finance:
- ---------------------------- ------------------------------------------------------------
Quarter Ended
Institution March 31, 2003 December 31, 2002
- ----------- ------------------------ ---------------------------
Washington Mutual 13.3% 12.6%
Wells Fargo Home Mortgage 12.6% 13.0%
Countrywide 12.5% 11.9%
Chase Home Finance 7.6% 7.1%
Bank of America Mortgage 4.0% 3.7%
------------------------ ---------------------------
50.0% 48.3%
======================== ===========================
- ---------------------------- ------------------------ ------- ---------------------------
The consolidation trend has carried over to the loan servicing side of the mortgage business. Following is a comparison of market share for the top five servicers, according to Inside Mortgage Finance:
- ----------------------------------- ------------------------ ------- -------------------------
Institution March 31, 2003 December 31, 2002
----------- ------------------------ -------------------------
1. Washington Mutual 11.0% 11.2%
2. Wells Fargo Home Mortgage 8.8% 8.8%
3. Countrywide 7.6% 7.0%
4. Chase Home Finance 6.5% 6.6%
5. Bank of America Mortgage 3.9% 4.1%
------------------------ -------------------------
Total for Top Five 37.8% 37.7%
======================== =========================
- ----------------------------------- ------------------------ ------- -------------------------
Management believes the consolidation trend in the mortgage market will continue, as the aforementioned market forces will continue to drive out weak competitors. The Company believes it will benefit from this trend through increased market share. In addition, management believes that irrational price competition—which from time-to-time has plagued the industry in the past—should lessen in the future.
Compared to the Company, the other industry leaders are less reliant on the secondary mortgage market as an outlet for adjustable rate mortgages, due to their greater portfolio lending capacity. This could place the Company at a competitive disadvantage in the future if the demand for adjustable rate mortgages increases significantly, the secondary mortgage market does not provide a competitive outlet for these loans and the Company is unable to develop a portfolio lending capacity similar to that of the competition.
Regulatory Trends
The regulatory environments in which the Company operates have an impact on the activities in which the Company may engage, how the activities may be carried out and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent the Company is able to operate profitably. For example, proposed state and federal legislation targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability of mortgage credit for those potential borrowers with less than prime-quality credit histories, thereby resulting in a reduction of otherwise legitimate sub-prime lending opportunities. Similarly, certain proposed state and federal privacy legislation, if passed, could have an adverse impact on the Company’s ability to cross-sell the non-mortgage products offered by Countrywide’s various divisions to its customer base in a cost effective manner.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In response to this Item, the information set forth on pages 37 to 38 of this Form 10-Q is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, these officers have concluded that the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect those controls.
| (a) | Exhibits |
| 4.47 | Form of Medium-Term Notes, Series L (fixed-rate) of CHL (incorporated by reference to Exhibit 4.11 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-103623, 333-103623-01, 333-103623-02 and 333-103623-03) filed with the SEC on March 5, 2003). |
| 4.48 | Form of Medium-Term Notes, Series L (floating-rate) of CHL (incorporated by reference to Exhibit 4.12 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-103623, 333-103623-01, 333-103623-02 and 333-103623-03) filed with the SEC on March 5, 2003). |
| 4.49 | Indenture, dated as of April 11, 2003, among the Company, CHL and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.26 to the Company’s Current Report on Form 8-K, dated April 15, 2003). |
| 4.50 | First Supplemental Indenture, dated as of April 11, 2003, among the Company, CHL, and The Bank of New York, as trustee, providing for the 6.75% Junior Subordinated Deferrable Interest Debentures Due April 1, 2033 of CFC and the related guarantee by CHL (incorporated by reference to Exhibit 4.27 to the Company’s Current Report on Form 8-K, dated April 15, 2003). |
| 4.51 | Amended and Restated Declaration of Trust of Countrywide Capital IV, dated as of April 11, 2003, by and among Sandor E. Samuels, Thomas K. McLaughlin and Jennifer Sandefur, as Regular Trustees, The Bank of New York (Delaware), as Delaware Trustee, The Bank of New York, as Institutional Trustee, the Company, as Sponsor and Debenture Issuer, and CHL., as Debenture Guarantor (incorporated by reference to Exhibit 4.28 to the Company’s Current Report on Form 8-K, dated April 15, 2003). |
| +10.76 | Third Amendment to the Company's Annual Incentive Plan. |
| +10.77 | Second Amendment to the Company's 2000 Executive Incentive Plan. |
| +10.78 | Second Restated Employment Agreement, dated as of February 28, 2003, by and between the Company and Stanford L. Kurland. |
| +10.79 | Second Restated Employment Agreement, dated as of February 28, 2003, by and between the Company and David Sambol. |
| +10.80 | Restated Employment Agreement, dated as of March 1, 2003, by and between the Company and Thomas H. Boone. |
| +10.81 | Restated Employment Agreement, dated as of March 1, 2003, by and between the Company and Carlos M. Garcia. |
| +10.82 | Restated Employment Agreement, dated as of March 1, 2003, by and between the Company and Sandor E. Samuels. |
+ Constitutes a management contract or compensatory plan or arrangement.
Reports on Form 8-K
On March 4, 2003 the Company filed a report on Form 8-K attaching Financial Statements and the Report of Independent Certified Public Accountants for Countrywide Securities Corporation.
On April 16, 2003, the Company filed a report on Form 8-K attaching information regarding its operational statistics for the month ended March 31, 2003.
On April 15, 2003, the Company filed a report on Form 8-K, in connection with the issuance on April 11, 2003 by Countrywide Capital IV, a Delaware statutory trust, of 20,000,000 of its 6.75% Trust Preferred Securities (liquidation preference $25 per Trust Preferred Security) and by Countrywide Financial Corporation and Countrywide Home Loans, Inc. of guarantees related thereto pursuant to the Registration Statement on Form S-3 (File Nos. 333-103623, 333-103623-01, 333-103623-03 and 333-103623-03).
On April 29, 2003 the Company filed a report on Form 8-K attaching information regarding its operations and financial condition for the quarter ended March 31, 2003.
On May 13, 2003, the Company filed a report on Form 8-K attaching information regarding its operational statistics for the month ended April 30, 2003.
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
FINANCIAL CORPORATION
(Registrant)
|
DATE: May 14, 2003
|
/s/ Stanford L. Kurland
Executive Managing Director and Chief Operating Officer |
|
DATE: May 14, 2003
|
/s/ Thomas K. McLaughlin
Senior Managing Director and Chief Financial Officer |
CERTIFICATION
I, Angelo R. Mozilo, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Countrywide Financial Corporation |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b. | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and |
| c. | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
| 6. | The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 14, 2003
/s/ Angelo R. Mozilo
Angelo R. Mozilo
Chief Executive Officer
CERTIFICATION
I, Thomas K. McLaughlin, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Countrywide Financial Corporation |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b. | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and |
| c. | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
| 6. | The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 14, 2003
/s/ Thomas K. McLaughlin
Thomas K. McLaughlin
Chief Financial Officer