10-Q 1 a07-19124_110q.htm 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

Or

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 193
4

For the transition period from             to             

Commission file number: 1-8422

Countrywide Financial Corporation

(Exact name of registrant as specified in its charter)

Delaware

 

13-2641992

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer Identification No.)

4500 Park Granada, Calabasas, California

 

91302

(Address of principal executive offices)

 

(Zip Code)

 

(818) 225-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o      No x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at August 6, 2007

Common Stock, $.05 par value

 

576,016,774

 

 




COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q

June 30, 2007

TABLE OF CONTENTS

 

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

 

1

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

Consolidated Balance Sheets—June 30, 2007 and December 31, 2006

 

 

1

 

 

 

 

Consolidated Statements of Earnings—Three and Six Months Ended
June 30, 2007 and 2006

 

 

2

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity—Six Months Ended June 30, 2007 and 2006

 

 

3

 

 

 

 

Consolidated Statements of Cash Flows—Six Months Ended
June 30, 2007 and 2006

 

 

4

 

 

 

 

Notes to Consolidated Financial Statements

 

 

5

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

39

 

 

 

 

Overview

 

 

39

 

 

 

 

Results of Operations Comparison—Quarters Ended June 30, 2007 and 2006

 

 

41

 

 

 

 

Results of Operations Comparison—Six Months Ended June 30, 2007 and 2006

 

 

61

 

 

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

80

 

 

 

 

Credit Risk Management

 

 

82

 

 

 

 

Loan Servicing

 

 

92

 

 

 

 

Liquidity and Capital Resources

 

 

93

 

 

 

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

 

94

 

 

 

 

Prospective Trends

 

 

95

 

 

 

 

Regulatory Trends

 

 

99

 

 

 

 

New Accounting Standards

 

 

99

 

 

 

 

Factors That May Affect Our Future Results

 

 

100

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

101

 

 

Item 4.

 

Controls and Procedures

 

 

101

 

 

PART II. OTHER INFORMATION

 

 

102

 

 

Item 1A.

 

Risk Factors

 

 

102

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

103

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

103

 

 

Item 6.

 

Exhibits

 

 

104

 

 

 




PART I. FINANCIAL INFORMATION

Item 1.                        Financial Statements

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

(Audited)

 

 

 

(in thousands, except share data)

 

ASSETS

 

 

 

 

 

Cash

 

$

1,154,032

 

$

1,407,000

 

Mortgage loans held for sale

 

34,090,154

 

31,272,630

 

Trading securities owned, at fair value

 

19,271,559

 

20,036,668

 

Trading securities pledged as collateral, at fair value

 

3,521,522

 

1,465,517

 

Securities purchased under agreements to resell, securities borrowed and federal funds sold

 

26,385,089

 

27,269,897

 

Loans held for investment, net of allowance for loan losses of $512,904 and $261,054, respectively

 

74,056,539

 

78,085,757

 

Investments in other financial instruments, at fair value

 

26,601,298

 

12,769,451

 

Mortgage servicing rights, at fair value

 

20,087,368

 

16,172,064

 

Premises and equipment, net

 

1,644,141

 

1,625,456

 

Other assets

 

10,010,058

 

9,841,790

 

Total assets

 

$

216,821,760

 

$

199,946,230

 

LIABILITIES

 

 

 

 

 

Deposit liabilities

 

$

60,292,841

 

$

55,578,682

 

Securities sold under agreements to repurchase and federal funds purchased

 

46,186,848

 

42,113,501

 

Trading securities sold, not yet purchased, at fair value

 

4,145,425

 

3,325,249

 

Notes payable

 

77,669,067

 

71,487,584

 

Accounts payable and accrued liabilities

 

8,914,175

 

8,187,605

 

Income taxes payable

 

5,227,509

 

4,935,763

 

Total liabilities

 

202,435,865

 

185,628,384

 

Commitments and contingencies

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock—authorized, 1,500,000 shares of $0.05 par value; none issued and outstanding

 

 

 

Common stock—authorized, 1,000,000,000 shares of $0.05 par value; issued, 574,655,984 shares and 585,466,719 shares at June 30, 2007 and December 31, 2006, respectively; outstanding, 574,218,312 shares and 585,182,298 shares at June 30, 2007 and December 31, 2006, respectively

 

28,733

 

29,273

 

Additional paid-in capital

 

1,612,901

 

2,154,438

 

Accumulated other comprehensive loss

 

(136,228

)

(17,556

)

Retained earnings

 

12,880,489

 

12,151,691

 

Total shareholders’ equity

 

14,385,895

 

14,317,846

 

Total liabilities and shareholders’ equity

 

$

216,821,760

 

$

199,946,230

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(Unaudited)
(in thousands, except per share data)

 

Revenues

 

 

 

 

 

 

 

 

 

Gain on sale of loans and securities

 

$

1,493,458

 

$

1,527,450

 

$

2,727,562

 

$

2,888,628

 

Interest income

 

3,499,644

 

2,845,580

 

6,851,626

 

5,439,338

 

Interest expense

 

(2,771,648

)

(2,155,106

)

(5,392,693

)

(4,054,429

)

Net interest income

 

727,996

 

690,474

 

1,458,933

 

1,384,909

 

Provision for loan losses

 

(292,924

)

(61,898

)

(444,886

)

(125,036

)

Net interest income after provision for loan losses

 

435,072

 

628,576

 

1,014,047

 

1,259,873

 

Loan servicing fees and other income from mortgage servicing rights and retained interests

 

1,421,255

 

1,207,159

 

2,808,544

 

2,407,046

 

Realization of expected cash flows from mortgage servicing rights

 

(1,007,241

)

(768,132

)

(1,931,947

)

(1,506,699

)

Change in fair value of mortgage servicing rights

 

1,327,446

 

569,002

 

1,506,453

 

1,547,283

 

(Impairment) recovery of retained interests

 

(268,117

)

51,498

 

(697,718

)

(69,156

)

Servicing Hedge losses

 

(1,373,089

)

(621,074

)

(1,486,827

)

(1,506,944

)

Net loan servicing fees and other income from mortgage servicing rights and retained interests

 

100,254

 

438,453

 

198,505

 

871,530

 

Net insurance premiums earned

 

352,384

 

284,226

 

686,561

 

564,019

 

Other

 

167,229

 

121,511

 

327,498

 

252,114

 

Total revenues

 

2,548,397

 

3,000,216

 

4,954,173

 

5,836,164

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation

 

1,109,016

 

1,143,707

 

2,184,424

 

2,218,525

 

Occupancy and other office

 

269,017

 

261,080

 

533,230

 

506,411

 

Insurance claims

 

154,769

 

102,809

 

212,074

 

226,851

 

Advertising and promotion

 

79,540

 

65,686

 

149,557

 

125,916

 

Other

 

271,357

 

232,911

 

509,395

 

445,075

 

Total expenses

 

1,883,699

 

1,806,193

 

3,588,680

 

3,522,778

 

Earnings before income taxes

 

664,698

 

1,194,023

 

1,365,493

 

2,313,386

 

Provision for income taxes

 

179,630

 

471,833

 

446,444

 

907,685

 

NET EARNINGS

 

$

485,068

 

$

722,190

 

$

919,049

 

$

1,405,701

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.83

 

$

1.19

 

$

1.57

 

$

2.32

 

Diluted

 

$

0.81

 

$

1.15

 

$

1.53

 

$

2.25

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

Number of
Shares of
Common Stock

 

Common
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Retained
Earnings

 

Total

 

 

 

(Unaudited)

 

 

 

(in thousands, except share data)

 

Balance at December 31, 2005

 

 

600,030,686

 

 

 

$

30,008

 

 

 

$

2,954,019

 

 

 

$

61,114

 

 

$

9,770,719

 

$

12,815,860

 

Remeasurement of mortgage servicing rights to fair value upon adoption of SFAS 156

 

 

 

 

 

 

 

 

 

 

 

 

 

67,065

 

67,065

 

Balance as adjusted, January 1, 2006

 

 

600,030,686

 

 

 

30,008

 

 

 

2,954,019

 

 

 

61,114

 

 

9,837,784

 

12,882,925

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

1,405,701

 

1,405,701

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized losses from available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

(127,156

)

 

 

(127,156

)

Net unrealized losses from cash flow hedging instruments

 

 

 

 

 

 

 

 

 

 

 

(9,918

)

 

 

(9,918

)

Net change in foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

12,120

 

 

 

12,120

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,280,747

 

Issuance of common stock pursuant to stock-based compensation plans

 

 

9,811,695

 

 

 

498

 

 

 

232,775

 

 

 

 

 

 

233,273

 

Excess tax benefit related to stock-based compensation

 

 

 

 

 

 

 

 

62,343

 

 

 

 

 

 

62,343

 

Issuance of common stock, net of treasury stock

 

 

487,731

 

 

 

24

 

 

 

17,839

 

 

 

 

 

 

17,863

 

Issuance of common stock in conversion of convertible debt

 

 

414,868

 

 

 

21

 

 

 

1,444

 

 

 

 

 

 

1,465

 

Cash dividends paid—$0.30 per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

(181,659

)

(181,659

)

Balance at June 30, 2006

 

 

610,744,980

 

 

 

$

30,551

 

 

 

$

3,268,420

 

 

 

$

(63,840

)

 

$

11,061,826

 

$

14,296,957

 

Balance at December 31, 2006

 

 

585,182,298

 

 

 

$

29,273

 

 

 

$

2,154,438

 

 

 

$

(17,556

)

 

$

12,151,691

 

$

14,317,846

 

Remeasurement of income taxes payable upon adoption of FIN 48

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,719

)

(12,719

)

Balance as adjusted, January 1, 2007

 

 

585,182,298

 

 

 

29,273

 

 

 

2,154,438

 

 

 

(17,556

)

 

12,138,972

 

14,305,127

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

919,049

 

919,049

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized losses from available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

(130,123

)

 

 

(130,123

)

Net change in foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

9,237

 

 

 

9,237

 

Change in unfunded liability relating to defined benefit plans

 

 

 

 

 

 

 

 

 

 

 

2,214

 

 

 

2,214

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

800,377

 

Issuance of common stock pursuant to stock-based compensation plans

 

 

9,887,079

 

 

 

502

 

 

 

226,734

 

 

 

 

 

 

227,236

 

Excess tax benefit related to stock-based compensation

 

 

 

 

 

 

 

 

68,348

 

 

 

 

 

 

68,348

 

Issuance of common stock, net of treasury stock

 

 

652,447

 

 

 

33

 

 

 

25,862

 

 

 

 

 

 

25,895

 

Repurchase and cancellation of common stock

 

 

(21,503,512

)

 

 

(1,075

)

 

 

(862,481

)

 

 

 

 

 

(863,556

)

Cash dividends paid—$0.30 per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

(177,532

)

(177,532

)

Balance at June 30, 2007

 

 

574,218,312

 

 

 

$

28,733

 

 

 

$

1,612,901

 

 

 

$

(136,228

)

 

$

12,880,489

 

$

14,385,895

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

919,049

 

$

1,405,701

 

Adjustments to reconcile net earnings to net cash used by operating activities:

 

 

 

 

 

Gain on sale of loans and securities

 

(2,727,562

)

(2,888,628

)

Accretion of discount on securities

 

(260,618

)

(233,832

)

Interest capitalized on loans

 

(456,973

)

(273,469

)

Amortization of deferred premiums, discounts, fees and costs, net

 

209,442

 

160,938

 

Accretion of fair value adjustments and discount on notes payable

 

(29,348

)

(57,913

)

Change in fair value of hedged notes payable and related interest-rate and foreign-currency swaps

 

(9,787

)

8,408

 

Amortization of deferred fees on time deposits

 

11,113

 

9,594

 

Provision for loan losses

 

444,886

 

125,036

 

Change in MSR value due to realization of expected cash flows from mortgage servicing rights

 

1,931,947

 

1,506,699

 

Change in fair value of mortgage servicing rights

 

(1,506,453

)

(1,547,283

)

Impairment of retained interests

 

759,529

 

84,054

 

Servicing hedge losses

 

1,486,827

 

1,506,944

 

Stock-based compensation expense

 

48,353

 

82,182

 

Depreciation and other amortization

 

151,188

 

124,641

 

Provision for deferred income taxes

 

836,807

 

676,286

 

Origination and purchase of loans held for sale

 

(242,781,618

)

(209,604,399

)

Proceeds from sale and principal repayments of loans held for sale

 

236,995,850

 

212,007,060

 

Increase in trading securities

 

(1,290,896

)

(4,373,143

)

Net increase in retained interests and servicing hedge securities accounted for as trading securities

 

(2,097,311

)

(466,779

)

Increase in other assets

 

(267,276

)

(475,592

)

Increase in trading securities sold, not yet purchased, at fair value

 

820,176

 

792,156

 

Increase in accounts payable and accrued liabilities

 

446,674

 

798,841

 

(Decrease) increase in income taxes payable

 

(473,482

)

152,584

 

Net cash used by operating activities

 

(6,839,483

)

(479,914

)

Cash flows from investing activities:

 

 

 

 

 

Decrease (increase) in securities purchased under agreements to resell, federal funds sold and securities borrowed

 

884,808

 

(1,967,830

)

Repayments (additions) to loans held for investment, net

 

5,467,977

 

(10,692,342

)

Sales of loans held for investment, net

 

 

64,876

 

Additions to investments in other financial instruments accounted for as available for sale

 

(15,809,059

)

(2,071,758

)

Proceeds from sale and repayment of investments in other financial instruments accounted for as available for sale

 

2,182,069

 

1,395,127

 

Purchases of mortgage servicing rights

 

(184,511

)

(8,067

)

Purchases of premises and equipment, net

 

(135,173

)

(287,142

)

Net cash used by investing activities

 

(7,593,889

)

(13,567,136

)

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposit liabilities

 

4,703,046

 

11,103,539

 

Net increase in securities sold under agreements to repurchase and federal funds purchased

 

4,073,347

 

4,008,020

 

Net increase (decrease) in short-term borrowings

 

3,510,080

 

(4,162,083

)

Issuance of long-term debt

 

24,026,503

 

8,639,127

 

Repayment of long-term debt

 

(21,364,797

)

(4,250,919

)

Excess tax benefit related to stock-based compensation

 

68,535

 

60,309

 

Repurchase and cancellation of common stock

 

(863,556

)

 

Issuance of common stock

 

204,778

 

168,954

 

Payment of dividends

 

(177,532

)

(181,659

)

Net cash provided by financing activities

 

14,180,404

 

15,385,288

 

Net (decrease) increase in cash

 

(252,968

)

1,338,238

 

Cash at beginning of period

 

1,407,000

 

1,031,108

 

Cash at end of period

 

$

1,154,032

 

$

2,369,346

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—Basis of Presentation

Countrywide Financial Corporation (“Countrywide”) is a holding company which, through its subsidiaries (collectively, the “Company”), is engaged in mortgage lending and other real estate finance-related businesses, including mortgage banking, banking and mortgage warehouse lending, dealing in securities and insurance underwriting.

The accompanying consolidated financial statements have been prepared in compliance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission’s 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 U.S. GAAP for complete financial statements.

In preparing financial statements in compliance with U.S. GAAP, management is required to make estimates and assumptions that materially affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, including a description of the Company’s significant accounting policies, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2006, for the Company (the “2006 Annual Report”).

Certain amounts reflected in the prior year consolidated financial statements have been reclassified to conform to current year presentation.

Note 2—Adoption of New Accounting Pronouncements

Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS 133 and SFAS 140 (“SFAS 155”), was effective for all financial instruments acquired or issued after December 31, 2006. This Statement:

·       Establishes a requirement to evaluate whether interests in securitized financial instruments contain an embedded derivative that requires bifurcation;

·       Permits fair value accounting to be elected for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

·       Clarifies which interest-only stripped securities and principal-only stripped securities are not subject to SFAS 133; and

·       Clarifies that concentration of credit risks in the form of subordination are not embedded derivatives.

The application of SFAS 155 did not have a significant impact on the consolidated financial position or earnings of the Company.

5




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) was issued to clarify the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, relating to the recognition of income tax benefits.

FIN 48 provides a two-step approach to recognizing and measuring tax benefits when the benefits’ realization is uncertain. The first step is to determine whether the benefit is to be recognized; the second step is to determine the amount to be recognized:

·       Income tax benefits should be recognized when, based on the technical merits of a tax position, the entity believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50 percent) that the tax position would be sustained as filed; and

·       If a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

FIN 48 was applicable beginning January 1, 2007. The opening balances of income taxes payable and retained earnings were adjusted for the cumulative effect of applying the provisions of FIN 48 as follows:

 

 

Income Taxes
Payable

 

Retained
Earnings

 

 

 

(in thousands)

 

Balance at December 31, 2006

 

 

$

4,935,763

 

 

$

12,151,691

 

Remeasurement of income tax liability upon adoption
of FIN 48

 

 

12,719

 

 

(12,719

)

Balance at January 1, 2007

 

 

$

4,948,482

 

 

$

12,138,972

 

 

The total amount of unrecognized tax benefits on uncertain tax positions as of January 1, 2007 was $180.6 million. If recognized, $126.8 million of unrecognized tax benefits would impact the Company’s effective income tax rate. As of June 30, 2007, there have been no material changes to the unrecognized tax benefits, including those that would impact the Company’s effective income tax rate.

As of January 1, 2007 and June 30, 2007, the Company is not aware of any tax positions for which it was reasonably possible that a change in the amount of unrecognized tax benefits during the next twelve months would significantly impact the Company’s effective income tax rate.

The Company recognizes interest and penalties related to income tax uncertainties in its provision for income taxes and income taxes payable. The after-tax equivalent of approximately $17.2 million for interest and penalties on uncertain tax positions was included in income taxes payable at January 1, 2007. As of June 30, 2007 there have been no material changes to the amounts of interest and penalties recognized in the statement of earnings or balance sheet.

As of June 30, 2007, the IRS exam team had completed its fieldwork for tax years for 2003 and 2004, and forwarded the results for administrative review.  The California Franchise Tax Board examination for 2003 and 2004 is not expected to be completed by December 31, 2007 and the 2002 tax year is still open to examination.

6




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

During the quarter ended June 30, 2007, the Company recognized a non-recurring reduction of its deferred income tax liabilities resulting from moving certain of our operations to other states.  This adjustment resulted in a reduced income tax rate of 27.0 percent.

Note 3—Earnings Per Share

Basic earnings per share is determined using net earnings divided by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings available to common shareholders by the weighted-average shares outstanding, assuming all potentially dilutive common shares were issued.

The following table summarizes the basic and diluted earnings per share calculations for the periods indicated:

 

 

Three Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

Net
Earnings

 

Shares

 

Per-Share
Amount

 

Net
Earnings

 

Shares

 

Per-Share
Amount

 

 

 

(in thousands, except per share data)

 

Net earnings and basic earnings per share

 

$

485,068

 

583,669

 

 

$

0.83

 

 

$

722,190

 

607,831

 

 

$

1.19

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive stock-based compensation instruments

 

 

11,871

 

 

 

 

 

 

18,779

 

 

 

 

 

Diluted earnings and earnings per share

 

$

485,068

 

595,540

 

 

$

0.81

 

 

$

722,190

 

626,610

 

 

$

1.15

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

Net
Earnings

 

Shares

 

Per-Share
Amount

 

Net
Earnings

 

Shares

 

Per-Share
Amount

 

 

 

(in thousands, except per share data)

 

Net earnings and basic earnings per share

 

$

919,049

 

585,901

 

 

$

1.57

 

 

$

1,405,701

 

604,725

 

 

$

2.32

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive stock-based compensation instruments

 

 

12,963

 

 

 

 

 

 

18,639

 

 

 

 

 

Convertible
debentures

 

 

 

 

 

 

 

15

 

109

 

 

 

 

 

Diluted earnings and earnings per share

 

$

919,049

 

598,864

 

 

$

1.53

 

 

$

1,405,716

 

623,473

 

 

$

2.25

 

 

 

7




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

During the quarters ended June 30, 2007 and 2006, options to purchase 172,011 shares and 72,890 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. During the six months ended June 30, 2007 and 2006, options to purchase 26,390 shares and 123,940 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 4—Loan Sales

As more fully discussed in “Note 3—Loan Sales” included in the consolidated financial statements in the 2006 Annual Report, the Company retains financial interests in its loan sales activities in the form of interest-only, principal-only and subordinated interests. The Company also obtains mortgage servicing rights (“MSRs”) through its loan sales activities.

MSRs and retained interests are carried at fair value. The Company estimates fair value through the use of discounted cash flow models. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds and discount rates. The key assumptions used in the valuation of retained interests include mortgage prepayment speeds, discount rates, and for those subordinated interests containing credit risk, net credit losses over the expected lifetime of the security. The discounted cash flow models incorporate cash flow and prepayment projections based on data drawn from the historical performance of the loans underlying the Company’s MSRs and retained interests, which management believes are consistent with assumptions other major market participants would use in determining the assets’ fair value.

Key assumptions used in measuring the fair value of the Company’s MSRs at June 30, 2007 and December 31, 2006, and the effect on their fair value from adverse changes in those assumptions, are as follows:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(dollar amounts in thousands)

 

Fair value of MSRs

 

$

20,087,368

 

$

16,172,064

 

Weighted-average life (in years)

 

6.5

 

5.8

 

Weighted-average annual prepayment speed

 

18.5

%

21.0

%

Impact of 5% adverse change

 

$

335,463

 

$

293,639

 

Impact of 10% adverse change

 

$

654,783

 

$

571,577

 

Impact of 20% adverse change

 

$

1,249,706

 

$

1,085,394

 

Weighted-average OAS

 

6.2

%

6.2

%

Impact of 5% adverse change

 

$

167,829

 

$

129,460

 

Impact of 10% adverse change

 

$

332,825

 

$

256,746

 

Impact of 20% adverse change

 

$

654,612

 

$

505,029

 

 

8




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Key assumptions used in measuring the fair value of the Company’s retained interests at June 30, 2007 and December 31, 2006, and the effect on their fair value from adverse changes in those assumptions are as follows:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(dollar amounts in thousands)

 

Fair value of retained interests

 

$

2,735,513

 

 

$

3,040,575

 

 

Weighted-average life (in years)

 

4.8

 

 

3.1

 

 

Weighted-average annual prepayment speed

 

23.4

%

 

30.6

%

 

Impact of 5% adverse change

 

$

85,793

 

 

$

97,971

 

 

Impact of 10% adverse change

 

$

164,777

 

 

$

184,866

 

 

Impact of 20% adverse change

 

$

297,468

 

 

$

335,668

 

 

Weighted-average annual discount rate

 

18.4

%

 

18.2

%

 

Impact of 5% adverse change

 

$

38,765

 

 

$

33,809

 

 

Impact of 10% adverse change

 

$

78,115

 

 

$

60,475

 

 

Impact of 20% adverse change

 

$

152,084

 

 

$

127,056

 

 

Weighted-average net lifetime credit losses

 

5.1

%

 

2.7

%

 

Impact of 5% adverse change

 

$

74,644

 

 

$

48,550

 

 

Impact of 10% adverse change

 

$

148,024

 

 

$

117,336

 

 

Impact of 20% adverse change

 

$

277,800

 

 

$

224,616

 

 

 

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a given percentage variation in individual assumptions generally cannot be extrapolated. Also, in the preceding tables, the effect of a variation in a particular assumption on the fair value of the MSRs or retained interests is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another which might compound or counteract the sensitivities.

Note 5—Derivative Financial Instruments

Derivative Financial Instruments

The primary market risk facing the Company is interest rate risk, which includes the risk that changes in market interest rates will result in unfavorable changes in the value of our assets or liabilities (“price risk”) and the risk that net interest income from our mortgage loan and investment portfolios will change in response to changes in interest rates. The overall objective of the Company’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

The Company manages interest rate risk with derivative financial instruments and by the structure of its activities as follows:

·       The Company uses various financial instruments, including derivatives, to manage the interest rate risk related specifically to the values of its commitments to make loans (also referred to as interest rate lock commitments or “IRLCs”), mortgage loans held by the Company pending sale (“Mortgage Loan Inventory”), retained interests and trading securities, as well as a portion of its debt.

9




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

·       Structurally, the Company manages interest rate risk in its Mortgage Banking Segment through the natural counterbalance of its loan production and servicing businesses. In its Banking Segment, the Company manages interest rate risk by funding the segment’s interest-earning assets with liabilities of similar duration or a combination of derivative instruments and certain liabilities that create repricing characteristics that closely reflect the repricing behaviors of those assets.

Risk Management Activities Related to Mortgage Loan Inventory and Interest Rate Lock Commitments

To manage the price risk associated with the IRLCs, the Company generally uses a combination of net forward sales of Mortgage Backed-Securities (“MBS”) and put and call options on MBS, Treasury futures and Eurodollar futures. The Company generally makes forward sales of MBS in an amount equal to the portion of the IRLCs expected to close, assuming no change in mortgage rates. The Company acquires put and call options to protect against the variability of loan closings caused by changes in mortgage rates. To manage the credit spread risk associated with its IRLCs the Company may enter into credit default swaps.

The Company manages the price risk related to the Mortgage Loan Inventory primarily by entering into forward sales of MBS and Eurodollar futures. The values of these forward MBS sales and Eurodollar futures move in opposite direction to the value of the Mortgage Loan Inventory. To manage the credit spread risk associated with its Mortgage Loan Inventory, the Company may enter into credit default swaps or similar instruments. The Company actively manages the risk profiles of its IRLCs and Mortgage Loan Inventory on a daily basis.

The Company manages the price risk, including credit spread risk, related to its commercial mortgage loans, using interest rate, total rate of return and credit default swaps.

During the six months ended June 30, 2007, the interest rate risk management activities associated with 51% of the fixed-rate mortgage loan inventory and 44% of the adjustable-rate mortgage loan inventory were accounted for as fair value hedges. For the six months ended June 30, 2007 and 2006, the Company recognized net pre-tax losses of $6.4 million and $41.8 million, respectively, representing the ineffective portion of the hedges of its Mortgage Loan Inventory that qualified as fair value hedges.

Risk Management Activities Related to Mortgage Servicing Rights and Retained Interests

To moderate negative impacts on earnings caused by a rate-driven decline in fair value of its MSRs and retained interests from securitization, the Company maintains a portfolio of financial instruments, including derivatives and securities, which generally increase in value when interest rates decline. In addition, the Company uses credit default swaps or similar instruments to moderate the negative impact on earnings caused by a credit spread-driven decline in fair value. This portfolio of financial instruments is collectively referred to herein as the “Servicing Hedge.”

10




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The following table summarizes the activity for derivative contracts included in the Servicing Hedge expressed by notional amounts:

 

 

Balance,
December 31,
2006

 

Additions

 

Dispositions/
Expirations

 

Balance,
June 30,
2007

 

 

 

(in millions)

 

Mortgage forward rate agreements

 

 

$

48,000

 

 

 

$

63,000

 

 

 

$

(84,000

)

 

$

27,000

 

Interest rate swaptions

 

 

41,750

 

 

 

51,825

 

 

 

(22,500

)

 

71,075

 

Interest rate swaps

 

 

29,025

 

 

 

46,585

 

 

 

(16,425

)

 

59,185

 

Long treasury futures

 

 

 

 

 

26,750

 

 

 

(5,000

)

 

21,750

 

Long call options on interest rate futures

 

 

4,500

 

 

 

91,770

 

 

 

(29,320

)

 

66,950

 

Credit default swaps

 

 

 

 

 

424

 

 

 

(424

)

 

 

 

Risk Management Activities Related to Issuance of Long-Term Debt

The Company has entered into interest rate swap contracts in which the rate received is fixed and the rate paid is adjustable and is indexed to LIBOR. These interest rate swaps enable the Company to convert a portion of its fixed-rate long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of $26.8 billion as of June 30, 2007) and a portion of its foreign currency-denominated fixed and floating-rate long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of $4.4 billion as of June 30, 2007). These transactions are generally designated as fair value hedges under SFAS 133. For the six months ended June 30, 2007 and 2006, the Company recognized net pre-tax gains of $9.8 million and $8.4 million, respectively, representing the ineffective portion of its fair value hedges of debt.

Risk Management Activities Related to Deposit Liabilities

The Company has entered into interest rate swap contracts that have the effect of converting a portion of its fixed-rate deposit liabilities to LIBOR-based variable-rate deposit liabilities. These transactions are designated as fair value hedges. For the six months ended June 30, 2007 and 2006, the Company recognized a net pre-tax gain of $0.3 million and a net pre-tax loss of $2.2 million, respectively, representing the hedge ineffectiveness relating to these swaps.

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 instruments including forward sales/purchases of To-Be-Announced (“TBA”) MBS, short/long interest rate futures contracts, interest rate swaps, credit default swaps, long put/call options on interest rate futures contracts, interest rate caps and receiver swaptions.

11




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 6—Mortgage Loans Held for Sale

Mortgage loans held for sale include the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Prime

 

 

$

23,117,955

 

 

$

22,494,274

 

Prime home equity

 

 

5,050,134

 

 

1,813,947

 

Nonprime

 

 

3,838,506

 

 

4,917,895

 

Commercial real estate

 

 

2,277,855

 

 

1,930,100

 

Deferred premiums, discounts, fees and costs, net

 

 

(194,296

)

 

116,414

 

 

 

 

$

34,090,154

 

 

$

31,272,630

 

 

At June 30, 2007, the Company had pledged $8.3 billion and $2.6 billion in mortgage loans held for sale to secure asset-backed commercial paper and a secured revolving line of credit, respectively.

At December 31, 2006, the Company had pledged $7.9 billion and $0.6 billion in mortgage loans held for sale to secure asset-backed commercial paper and a secured revolving line of credit, respectively.

Note 7—Trading Securities and Trading Securities Sold, Not Yet Purchased

Trading securities, which consist of trading securities owned and trading securities pledged as collateral, include the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Mortgage pass-through securities:

 

 

 

 

 

Fixed-rate

 

$

13,481,757

 

$

13,502,403

 

Adjustable-rate

 

518,346

 

1,381,675

 

Total mortgage pass-through securities

 

14,000,103

 

14,884,078

 

Collateralized mortgage obligations

 

5,100,078

 

3,307,594

 

U.S. Treasury securities

 

1,486,515

 

1,801,221

 

Obligations of U.S. Government-sponsored enterprises

 

1,096,774

 

781,657

 

Derivative financial instruments

 

312,085

 

15,728

 

Asset-backed securities

 

301,029

 

203,979

 

Interest-only securities

 

292,308

 

287,206

 

Mark-to-market on TBA securities

 

183,211

 

144,674

 

Residual securities

 

7,782

 

52,097

 

Other

 

13,196

 

23,951

 

 

 

$

22,793,081

 

$

21,502,185

 

 

As of June 30, 2007, $19.4 billion of the Company’s trading securities had been pledged as collateral for financing purposes, of which the counterparty had the contractual right to sell or re-pledge $3.5 billion.

12




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

As of December 31, 2006, $19.5 billion of the Company’s trading securities had been pledged as collateral for financing purposes, of which the counterparty had the contractual right to sell or re-pledge $1.5 billion.

Trading securities sold, not yet purchased, include the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

U.S. Treasury securities

 

 

$

2,973,387

 

 

 

$

2,803,030

 

 

Obligations of U.S. Government-sponsored enterprises

 

 

712,934

 

 

 

305,826

 

 

Derivative financial instruments

 

 

231,084

 

 

 

9,235

 

 

Mark-to-market on TBA securities

 

 

221,071

 

 

 

181,119

 

 

Mortgage pass-through securities, fixed-rate

 

 

3,034

 

 

 

26,024

 

 

Other

 

 

3,915

 

 

 

15

 

 

 

 

 

$

4,145,425

 

 

 

$

3,325,249

 

 

 

Note 8—Securities Purchased Under Agreements to Resell, Securities Borrowed and Federal Funds Sold

The following table summarizes securities purchased under agreements to resell, securities borrowed and federal funds sold:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Securities purchased under agreements to resell

 

 

$

20,533,604

 

 

$

22,559,194

 

Securities borrowed

 

 

4,401,485

 

 

3,460,703

 

Federal funds sold

 

 

1,450,000

 

 

1,250,000

 

 

 

 

$

26,385,089

 

 

$

27,269,897

 

 

As of June 30, 2007, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $46.2 billion that it had the contractual ability to sell or re-pledge, including $21.1 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of June 30, 2007, the Company had re-pledged $41.9 billion of such collateral for financing purposes.

As of December 31, 2006, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $56.0 billion that it had the contractual ability to sell or re-pledge, including $30.0 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of December 31, 2006, the Company had re-pledged $52.1 billion of such collateral for financing purposes.

13




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 9—Loans Held for Investment, Net

Loans held for investment include the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Mortgage loans:

 

 

 

 

 

 

 

Banking Operations:

 

 

 

 

 

 

 

Prime

 

 

$

44,571,952

 

 

$

51,634,926

 

Prime home equity

 

 

22,676,588

 

 

20,163,337

 

Nonprime

 

 

13,188

 

 

 

 

 

 

67,261,728

 

 

71,798,263

 

Mortgage Banking:

 

 

 

 

 

 

 

Prime

 

 

772,651

 

 

252,731

 

Prime home equity

 

 

168,116

 

 

57,518

 

Nonprime

 

 

1,238,836

 

 

115,054

 

 

 

 

2,179,603

 

 

425,303

 

Commercial real estate

 

 

242,954

 

 

72,413

 

Total mortgage loans

 

 

69,684,285

 

 

72,295,979

 

Warehouse lending advances secured by mortgage loans

 

 

2,457,571

 

 

3,185,248

 

Defaulted FHA-insured and VA-guaranteed loans repurchased from securities

 

 

1,670,714

 

 

1,761,170

 

 

 

 

73,812,570

 

 

77,242,397

 

Premium and discounts, and deferred loan origination fees and costs, net

 

 

756,873

 

 

1,104,414

 

Allowance for loan losses

 

 

(512,904

)

 

(261,054

)

Loans held for investment, net

 

 

$

74,056,539

 

 

$

78,085,757

 

 

During the six months ended June 30, 2007, the Company transferred prime, prime home equity and nonprime mortgage loans with an unpaid principal balance of $0.2 billion, $0.7 billion and $1.0 billion, respectively, and a carrying value after recognition of impairment upon transfer of the loans of $0.2 billion, $0.6 billion and $0.8 billion, respectively, from mortgage loans held for sale to loans held for investment, as the Company decided to hold those loans for the foreseeable future.

Mortgage loans totaling $56.6 billion and $57.5 billion were pledged to secure Federal Home Loan Bank (“FHLB”) advances and to enable additional borrowings from the FHLB at June 30, 2007 and December 31, 2006, respectively.

Mortgage loans held for investment totaling $4.6 billion and $2.9 billion were pledged to secure an unused borrowing facility with the Federal Reserve Bank (“FRB”) at June 30, 2007 and December 31, 2006, respectively.

As of June 30, 2007 and December 31, 2006, the Company had accepted mortgage loan collateral of $2.6 billion and $3.5 billion, respectively, that it had the contractual ability to re-pledge. The collateral secures warehouse lending advances. Of this collateral, $1.1 billion and $1.6 billion, respectively, has been

14




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

re-pledged to secure borrowings under a secured revolving line of credit as of June 30, 2007 and December 31, 2006.

Changes in the allowance for loan losses are as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

374,367

 

$

172,271

 

$

261,054

 

$

189,201

 

Provision for loan losses

 

292,924

 

61,898

 

444,886

 

125,036

 

Net charge-offs

 

(154,387

)

(58,760

)

(193,036

)

(125,181

)

Reclassification of allowance for unfunded commitments and other

 

 

8,172

 

 

(5,475

)

Balance, end of period

 

$

512,904

 

$

183,581

 

$

512,904

 

$

183,581

 

 

The Company has recorded a liability for losses on unfunded loan commitments in accounts payable and accrued liabilities totaling $18.2 million and $8.1 million at June 30, 2007 and December 31, 2006, respectively. The provision for these losses is recorded in other expenses. The following is a summary of changes in the liability:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

13,759

 

$

13,396

 

$

8,104

 

$

9,391

 

Provision for losses on unfunded loan commitments

 

4,463

 

1,100

 

10,118

 

1,100

 

Reclassification of allowance for unfunded loan commitments

 

 

(8,172

)

 

(4,167

)

Balance, end of period

 

$

18,222

 

$

6,324

 

$

18,222

 

$

6,324

 

 

15




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 10—Investments in Other Financial Instruments, at Fair Value

Investments in other financial instruments include the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Available-for-sale securities:

 

 

 

 

 

Mortgage-backed securities

 

$

19,495,594

 

$

7,007,786

 

Obligations of U.S. Government-sponsored enterprises

 

567,096

 

776,717

 

Municipal bonds

 

409,170

 

412,886

 

U.S. Treasury securities

 

199,019

 

168,313

 

Other

 

2,699

 

2,858

 

Subtotal

 

20,673,578

 

8,368,560

 

Interests retained in securitization accounted for as available-for-sale securities:

 

 

 

 

 

Prime interest-only and principal-only securities

 

253,557

 

279,375

 

Prime home equity line of credit transferor’s interest

 

70,774

 

144,346

 

Prepayment penalty bonds

 

29,225

 

52,697

 

Nonprime residuals and other related securities

 

21,797

 

152,745

 

Prime home equity residual securities

 

17,432

 

40,766

 

Nonprime interest-only securities

 

13,491

 

3,757

 

Prime home equity interest-only securities

 

6,627

 

7,021

 

Subordinated mortgage-backed pass-through securities

 

529

 

1,382

 

Prime residual securities

 

154

 

1,435

 

Total interests retained in securitization accounted for as available-for-sale securities

 

413,586

 

683,524

 

Total available-for-sale securities

 

21,087,164

 

9,052,084

 

Interests retained in securitization accounted for as trading securities:

 

 

 

 

 

Prime interest-only and principal-only securities

 

781,310

 

549,635

 

Prime home equity line of credit transferor’s interest

 

518,033

 

553,701

 

Nonprime residuals and other related securities

 

419,645

 

388,963

 

Prime home equity residual securities

 

406,210

 

737,808

 

Prepayment penalty bonds

 

117,454

 

90,666

 

Subordinated mortgage-backed pass-through securities

 

28,260

 

 

Prime home equity interest-only securities

 

21,644

 

22,467

 

Interest rate swaps

 

21,588

 

2,490

 

Prime residual securities

 

7,783

 

11,321

 

Total interests retained in securitization accounted for as trading securities

 

2,321,927

 

2,357,051

 

Servicing hedge principal-only securities accounted for as trading
securities

 

1,488,435

 

 

Hedging and mortgage pipeline derivatives:

 

 

 

 

 

Mortgage servicing related

 

661,113

 

837,908

 

Notes payable related

 

543,258

 

444,342

 

Mortgage loans held for sale and pipeline related

 

499,401

 

78,066

 

Total investments in other financial instruments

 

$

26,601,298

 

$

12,769,451

 

 

16




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

At June 30, 2007, the Company had pledged $0.1 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge, $0.1 billion of MBS to secure margin calls on derivative instruments and $0.1 billion of MBS to secure an unused borrowing facility with the FRB.

At December 31, 2006, the Company had pledged $0.1 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge and $0.1 billion of MBS to secure an unused borrowing facility with the FRB.

Amortized cost and fair value of available-for-sale securities are as follows:

 

 

June 30, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

19,770,030

 

 

$

3,839

 

 

$

(278,275

)

$

19,495,594

 

Obligations of U.S. Government-sponsored enterprises

 

566,758

 

 

338

 

 

 

567,096

 

Municipal bonds

 

415,165

 

 

315

 

 

(6,310

)

409,170

 

U.S. Treasury securities

 

199,045

 

 

888

 

 

(914

)

199,019

 

Interests retained in securitization

 

372,410

 

 

68,672

 

 

(27,496

)

413,586

 

Other

 

2,699

 

 

 

 

 

2,699

 

 

 

$

21,326,107

 

 

$

74,052

 

 

$

(312,995

)

$

21,087,164

 

 

 

 

December 31, 2006

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

7,111,045

 

 

$

4,091

 

 

$

(107,350

)

$

7,007,786

 

Obligations of U.S. Government-sponsored enterprises

 

781,329

 

 

1,280

 

 

(5,892

)

776,717

 

Municipal bonds

 

414,249

 

 

1,649

 

 

(3,012

)

412,886

 

U.S. Treasury securities

 

167,724

 

 

1,414

 

 

(825

)

168,313

 

Interests retained in securitization

 

589,501

 

 

111,722

 

 

(17,699

)

683,524

 

Other

 

2,860

 

 

 

 

(2

)

2,858

 

 

 

$

9,066,708

 

 

$

120,156

 

 

$

(134,780

)

$

9,052,084

 

 

17




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The Company’s available-for-sale securities in an unrealized loss position are as follows:

 

 

June 30, 2007

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair Value

 

Gross
Unrealized
Loss

 

Fair Value

 

Gross
Unrealized
Loss

 

Fair Value

 

Gross
Unrealized
Loss

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

13,769,545

 

$

(142,271

)

$

4,603,107

 

$

(136,004

)

$

18,372,652

 

$

(278,275

)

Obligations of U.S. Government-sponsored enterprises

 

 

 

 

 

 

 

Municipal bonds

 

99,568

 

(1,318

)

259,953

 

(4,992

)

359,521

 

(6,310

)

U.S. Treasury securities

 

69,275

 

(535

)

57,532

 

(379

)

126,807

 

(914

)

Interests retained in securitization

 

1,117

 

(67

)

130,662

 

(27,429

)

131,779

 

(27,496

)

Other

 

 

 

 

 

 

 

Total impaired securities

 

$

13,939,505

 

$

(144,191

)

$

5,051,254

 

$

(168,804

)

$

18,990,759

 

$

(312,995

)

 

 

 

December 31, 2006

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair Value

 

Gross
Unrealized
Loss

 

Fair Value

 

Gross
Unrealized
Loss

 

Fair Value

 

Gross
Unrealized
Loss

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

1,482,240

 

 

$

(4,580

)

 

$

5,106,195

 

$

(102,770

)

$

6,588,435

 

$

(107,350

)

Obligations of U.S. Government-sponsored enterprises

 

87,472

 

 

(163

)

 

484,186

 

(5,729

)

571,658

 

(5,892

)

Municipal bonds

 

58,106

 

 

(317

)

 

212,973