10-Q 1 a07-11145_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 March 31, 2007

Or

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

For the transition period from              to

Commission file number: 1-8422

Countrywide 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 May 7, 2007

Common Stock $.05 par value

 

593,391,994

 

 




COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q
March 31, 2007

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

1

Item 1.

 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets—March 31, 2007 and December 31, 2006

 

1

 

 

Consolidated Statements of Earnings—Quarters Ended March 31, 2007 and 2006

 

2

 

 

Consolidated Statement of Changes in Shareholders’ Equity—Quarters Ended March 31, 2007 and 2006

 

3

 

 

Consolidated Statements of Cash Flows—Quarters Ended March 31, 2007 and 2006

 

4

 

 

Notes to Consolidated Financial Statements

 

5

Item 2.

 

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

 

30

 

 

Overview

 

30

 

 

Results of Operations Comparison—Quarters Ended March 31, 2007 and 2006

 

33

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

53

 

 

Credit Risk Management

 

55

 

 

Loan Servicing

 

62

 

 

Liquidity and Capital Resources

 

63

 

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

64

 

 

Prospective Trends

 

65

 

 

Regulatory Trends

 

67

 

 

New Accounting Standards

 

67

 

 

Factors That May Affect Our Future Results

 

68

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

69

Item 4.

 

Controls and Procedures

 

69

PART II. OTHER INFORMATION

 

70

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

Item 6.

 

Exhibits

 

70

 




PART I. FINANCIAL INFORMATION

Item 1.                        Financial Statements

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

(Audited)

 

 

 

(in thousands, except share data)

 

ASSETS

 

 

 

 

 

Cash

 

$

1,202,114

 

$

1,407,000

 

Mortgage loans held for sale

 

32,282,579

 

31,272,630

 

Trading securities owned, at fair value

 

16,794,223

 

20,036,668

 

Trading securities pledged as collateral, at fair value

 

4,839,902

 

1,465,517

 

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

 

28,851,069

 

27,269,897

 

Loans held for investment, net of allowance for loan losses of $374,367 and $261,054, respectively

 

75,177,094

 

78,085,757

 

Investments in other financial instruments, at fair value

 

19,445,697

 

12,769,451

 

Mortgage servicing rights, at fair value

 

17,441,860

 

16,172,064

 

Premises and equipment, net

 

1,653,233

 

1,625,456

 

Other assets

 

10,262,832

 

9,841,790

 

Total assets

 

$

207,950,603

 

$

199,946,230

 

LIABILITIES

 

 

 

 

 

Deposit liabilities

 

$

57,525,061

 

$

55,578,682

 

Securities sold under agreements to repurchase and federal funds purchased

 

44,085,743

 

42,113,501

 

Trading securities sold, not yet purchased, at fair value

 

3,380,852

 

3,325,249

 

Notes payable

 

74,322,902

 

71,487,584

 

Accounts payable and accrued liabilities

 

8,650,035

 

8,187,605

 

Income taxes payable

 

5,167,561

 

4,935,763

 

Total liabilities

 

193,132,154

 

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, 591,596,654 shares and 585,466,719 shares at March 31, 2007 and December 31, 2006, respectively; outstanding, 591,201,542 shares and 585,182,298 shares at March 31, 2007 and December 31, 2006, respectively

 

29,580

 

29,273

 

Additional paid-in capital

 

2,320,760

 

2,154,438

 

Accumulated other comprehensive loss

 

(16,535

)

(17,556

)

Retained earnings

 

12,484,644

 

12,151,691

 

Total shareholders’ equity

 

14,818,449

 

14,317,846

 

Total liabilities and shareholders’ equity

 

$

207,950,603

 

$

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

 

 

Quarters Ended March 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

(in thousands, except per
share data)

 

Revenues

 

 

 

 

 

Gain on sale of loans and securities

 

$

1,234,104

 

$

1,361,178

 

Interest income

 

3,351,982

 

2,593,758

 

Interest expense

 

(2,621,045

)

(1,899,323

)

Net interest income

 

730,937

 

694,435

 

Provision for loan losses

 

(151,962

)

(63,138

)

Net interest income after provision for loan losses

 

578,975

 

631,297

 

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

 

1,387,289

 

1,199,887

 

Realization of expected cash flows from mortgage servicing rights

 

(924,706

)

(738,567

)

Change in fair value of mortgage servicing rights

 

179,007

 

978,281

 

Impairment of retained interests

 

(429,601

)

(120,654

)

Servicing Hedge losses

 

(113,738

)

(885,870

)

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

 

98,251

 

433,077

 

Net insurance premiums earned

 

334,177

 

279,793

 

Other

 

160,269

 

130,603

 

Total revenues

 

2,405,776

 

2,835,948

 

Expenses

 

 

 

 

 

Compensation

 

1,075,408

 

1,074,818

 

Occupancy and other office

 

264,213

 

245,331

 

Insurance claims

 

57,305

 

124,042

 

Advertising and promotion

 

70,017

 

60,230

 

Other

 

238,038

 

212,164

 

Total expenses

 

1,704,981

 

1,716,585

 

Earnings before income taxes

 

700,795

 

1,119,363

 

Provision for income taxes

 

266,814

 

435,852

 

NET EARNINGS

 

$

433,981

 

$

683,511

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.74

 

$

1.14

 

Diluted

 

$

0.72

 

$

1.10

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

683,511

 

683,511

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized losses from available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

(80,984

)

 

 

(80,984

)

Net unrealized losses from cash flow hedging instruments

 

 

 

 

 

 

 

 

 

 

 

(7,647

)

 

 

(7,647

)

Net change in foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

1,114

 

 

 

1,114

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

595,994

 

Issuance of common stock pursuant to stock-based compensation plans

 

 

4,147,375

 

 

 

212

 

 

 

87,441

 

 

 

 

 

 

87,653

 

Excess tax benefit related to stock-based compensation

 

 

 

 

 

 

 

 

22,000

 

 

 

 

 

 

22,000

 

Issuance of common stock, net of treasury stock

 

 

193,884

 

 

 

10

 

 

 

6,539

 

 

 

 

 

 

6,549

 

Issuance of common stock in conversion of convertible debt

 

 

414,868

 

 

 

21

 

 

 

1,444

 

 

 

 

 

 

1,465

 

Cash dividends paid—$0.15 per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

(90,333

)

(90,333

)

Balance at March 31, 2006

 

 

604,786,813

 

 

 

$

30,251

 

 

 

$

3,071,443

 

 

 

$

(26,403

)

 

$

10,430,962

 

$

13,506,253

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

433,981

 

433,981

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized losses from available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

(5,160

)

 

 

(5,160

)

Net change in foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

4,251

 

 

 

4,251

 

Change in unfunded liability relating to defined benefit plans

 

 

 

 

 

 

 

 

 

 

 

1,930

 

 

 

1,930

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

435,002

 

Issuance of common stock pursuant to stock-based compensation plans

 

 

5,717,442

 

 

 

292

 

 

 

116,035

 

 

 

 

 

 

116,327

 

Excess tax benefit related to stock-based compensation

 

 

 

 

 

 

 

 

38,513

 

 

 

 

 

 

38,513

 

Issuance of common stock, net of treasury stock

 

 

301,802

 

 

 

15

 

 

 

11,774

 

 

 

 

 

 

11,789

 

Cash dividends paid—$0.15 per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

(88,309

)

(88,309

)

Balance at March 31, 2007

 

 

591,201,542

 

 

 

$

29,580

 

 

 

$

2,320,760

 

 

 

$

(16,535

)

 

$

12,484,644

 

$

14,818,449

 

 

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

3




COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Quarters Ended 
March 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

433,981

 

$

683,511

 

Adjustments to reconcile net earnings to net cash (used) provided by operating activities:

 

 

 

 

 

Gain on sale of loans and securities

 

(1,234,104

)

(1,361,178

)

Accretion of discount on securities

 

(138,089

)

(121,641

)

Interest capitalized on loans

 

(234,589

)

(109,433

)

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

 

106,761

 

69,465

 

Accretion of fair value adjustments and discount on notes payable

 

(8,087

)

(40,558

)

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

 

(7,959

)

(4,481

)

Amortization of deferred fees on time deposits

 

5,981

 

4,319

 

Provision for loan losses

 

151,962

 

63,138

 

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

 

924,706

 

738,567

 

Change in fair value of mortgage servicing rights

 

(179,007

)

(978,281

)

Impairment of retained interests

 

418,109

 

123,982

 

Servicing hedge losses

 

113,738

 

885,870

 

Stock-based compensation expense

 

15,898

 

22,153

 

Depreciation and other amortization

 

74,503

 

62,189

 

Provision for deferred income taxes

 

330,322

 

357,931

 

Origination and purchase of loans held for sale

 

(114,407,534

)

(98,372,317

)

Proceeds from sale and principal repayments of loans held for sale

 

112,027,953

 

103,245,396

 

Increase in trading securities

 

(131,940

)

(1,090,372

)

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

 

(791,795

)

(244,006

)

Increase in other assets

 

(433,472

)

(634,651

)

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

 

55,603

 

1,107,957

 

Increase (decrease) in accounts payable and accrued liabilities

 

466,092

 

(694,651

)

(Decrease) increase in income taxes payable

 

(109,278

)

50,062

 

Net cash (used) provided by operating activities

 

(2,550,245

)

3,762,971

 

Cash flows from investing activities:

 

 

 

 

 

(Increase) decrease in securities purchased under agreements to resell, federal funds sold and securities borrowed

 

(1,581,172

)

1,801,102

 

Repayments (additions) to loans held for investment, net

 

3,597,579

 

(4,318,121

)

Sales of loans held for investment, net

 

 

52,787

 

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

 

(7,729,622

)

(1,034,764

)

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

 

1,488,814

 

651,515

 

Purchases of mortgage servicing rights

 

(116,592

)

(1,911

)

Purchases of premises and equipment, net

 

(85,088

)

(106,405

)

Net cash used by investing activities

 

(4,426,081

)

(2,955,797

)

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposit liabilities

 

1,940,398

 

5,934,707

 

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

 

1,972,242

 

(1,553,360

)

Net increase (decrease) in short-term borrowings

 

5,852,162

 

(4,865,836

)

Issuance of long-term debt

 

5,268,740

 

3,634,793

 

Repayment of long-term debt

 

(8,325,000

)

(2,347,681

)

Excess tax benefits related to stock-based compensation

 

38,989

 

22,000

 

Issuance of common stock

 

112,218

 

72,049

 

Payment of dividends

 

(88,309

)

(90,333

)

Net cash provided by financing activities

 

6,771,440

 

806,339

 

Net (decrease) increase in cash

 

(204,886

)

1,613,513

 

Cash at beginning of period

 

1,407,000

 

1,031,108

 

Cash at end of period

 

$

1,202,114

 

$

2,644,621

 

 

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 conformity 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 conformity 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 quarter ended March 31, 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:

 

 

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 January 1, 2007 the Company had no tax positions for which it was reasonably possible that the total amounts of unrecognized tax benefits would significantly increase or decrease by December 31, 2007.

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 January 1, 2007 the Internal Revenue Service (“IRS”) had examined the Company’s tax returns for tax years through 2002 and was in the process of auditing tax years 2003 and 2004. As of March 31, 2007 the IRS had substantially completed its examination for 2003 and 2004. As of January 1, 2007 the Company was under audit for tax years 2003 and 2004 by the California Franchise Tax Board (“FTB”), and tax year 2002 is open to examination. The FTB examination for 2003 and 2004 is not expected to be completed by December 31, 2007.

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

6




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

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:

 

 

Quarters Ended March 31,

 

 

 

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

 

$

433,981

 

588,158

 

 

$

0.74

 

 

$

683,511

 

601,585

 

 

$

1.14

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive stock options

 

 

14,079

 

 

 

 

 

 

18,528

 

 

 

 

 

Accelerated share repurchase program

 

 

763

 

 

 

 

 

 

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

15

 

219

 

 

 

 

 

Diluted earnings and earnings per share

 

$

433,981

 

603,000

 

 

$

0.72

 

 

$

683,526

 

620,332

 

 

$

1.10

 

 

 

During the quarters ended March 31, 2007 and 2006, options to purchase 10,000 shares and 187,209 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 4—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 in its Mortgage Banking Segment 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 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.

The Company manages interest rate risk in its Banking Segment 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.

7




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

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 quarter ended March 31, 2007, the interest rate risk management activities associated with 55% of the fixed-rate mortgage loan inventory and 48% of the adjustable-rate mortgage loan inventory were accounted for as fair value hedges. For the quarters ended March 31, 2007 and 2006, the Company recognized net pre-tax losses of $6.2 million and $28.8 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 mortgage servicing rights (“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.”

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,
March 31,
2007

 

 

 

(in millions)

 

Mortgage forward rate agreements

 

 

$

48,000

 

 

 

$

37,000

 

 

 

$

(32,000

)

 

 

$

53,000

 

 

Interest rate swaptions

 

 

41,750

 

 

 

18,375

 

 

 

(14,050

)

 

 

46,075

 

 

Interest rate swaps

 

 

29,025

 

 

 

13,990

 

 

 

(5,010

)

 

 

38,005

 

 

Long treasury futures

 

 

 

 

 

25,750

 

 

 

(5,000

)

 

 

20,750

 

 

Long call options on interest rate futures

 

 

4,500

 

 

 

18,250

 

 

 

(15,750

)

 

 

7,000

 

 

Credit default swaps

 

 

 

 

 

424

 

 

 

(312

)

 

 

112

 

 

 

8




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

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 $5.2 billion as of March 31, 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 March 31, 2007). These transactions are generally designated as fair value hedges under SFAS 133. For the quarters ended March 31, 2007 and 2006, the Company recognized net pre-tax gains of $8.0 million and $4.5 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 quarters ended March 31, 2007 and 2006, the Company recognized a net pre-tax gain of $1.3 million and a net pre-tax loss of $1.0 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 futures contracts, interest rate swaps, credit default swaps, long put/call options on futures contracts, interest rate caps and receiver swaptions.

9




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

Note 5—Mortgage Loans Held for Sale

Mortgage loans held for sale include the following:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Prime

 

$

22,471,526

 

$

22,597,825

 

Nonprime

 

4,864,435

 

4,895,438

 

Prime home equity

 

2,596,880

 

1,825,483

 

Commercial real estate

 

2,370,175

 

1,930,100

 

Deferred premiums, discounts, fees and costs, net

 

(20,437

)

23,784

 

 

 

$

32,282,579

 

$

31,272,630

 

 

At March 31, 2007, the Company had pledged $10.2 billion and $0.7 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 6—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:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Mortgage pass-through securities:

 

 

 

 

 

Fixed-rate

 

$

11,462,638

 

$

13,502,403

 

Adjustable-rate

 

511,876

 

1,381,675

 

Total mortgage pass-through securities

 

11,974,514

 

14,884,078

 

Collateralized mortgage obligations

 

4,692,800

 

3,307,594

 

U.S. Treasury securities

 

3,405,917

 

1,801,221

 

Obligations of U.S. Government-sponsored
enterprises

 

842,462

 

781,657

 

Interest-only securities

 

264,137

 

287,206

 

Asset-backed securities

 

208,598

 

203,979

 

Derivative financial instruments

 

118,556

 

15,728

 

Mark-to-market on TBA securities

 

92,946

 

144,674

 

Residual securities

 

18,301

 

52,097

 

Other

 

15,894

 

23,951

 

 

 

$

21,634,125

 

$

21,502,185

 

 

10




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

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

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

U.S. Treasury securities

 

$

2,671,722

 

 

$

2,803,030

 

 

Obligations of U.S. Government-sponsored enterprises

 

518,671

 

 

305,826

 

 

Mark-to-market on TBA securities

 

115,537

 

 

181,119

 

 

Mortgage pass-through securities, fixed-rate

 

48,371

 

 

26,024

 

 

Derivative financial instruments

 

20,660

 

 

9,235

 

 

Other

 

5,891

 

 

15

 

 

 

 

$

3,380,852

 

 

$

3,325,249

 

 

 

As of March 31, 2007, $18.1 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 $4.8 billion.

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.

Note 7—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:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Securities purchased under agreements to resell

 

$

24,873,486

 

$

22,559,194

 

Securities borrowed

 

2,877,583

 

3,460,703

 

Federal funds sold

 

1,100,000

 

1,250,000

 

 

 

$

28,851,069

 

$

27,269,897

 

 

As of March 31, 2007, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $55.6 billion that it had the contractual ability to sell or re-pledge, including $27.8 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of March 31, 2007, the Company had re-pledged $52.4 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.

11




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

Note 8—Loans Held for Investment, Net

Loans held for investment include the following:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Mortgage loans:

 

 

 

 

 

Banking Operations:

 

 

 

 

 

Prime

 

$

48,584,259

 

$

51,634,926

 

Prime home equity

 

19,877,711

 

20,163,337

 

Nonprime

 

16,927

 

 

 

 

68,478,897

 

71,798,263

 

Mortgage Banking:

 

 

 

 

 

Nonprime

 

1,127,257

 

115,054

 

Prime

 

388,212

 

252,731

 

Prime home equity

 

58,280

 

57,518

 

 

 

1,573,749

 

425,303

 

Commercial real estate

 

74,091

 

72,413

 

Total mortgage loans

 

70,126,737

 

72,295,979

 

Warehouse lending advances secured by mortgage
loans

 

2,771,074

 

3,185,248

 

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

 

1,770,410

 

1,761,170

 

 

 

74,668,221

 

77,242,397

 

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

 

883,240

 

1,104,414

 

Allowance for loan losses

 

(374,367

)

(261,054

)

Loans held for investment, net

 

$

75,177,094

 

$

78,085,757

 

 

During the quarter ended March 31, 2007, the Company transferred nonprime mortgage loans with an unpaid principal balance of $906.9 million and a carrying value of $713.1 million from mortgage loans held for sale to loans held for investment.

Mortgage loans totaling $60.7 billion and $57.5 billion were pledged to secure Federal Home Loan Bank (“FHLB”) advances and to enable additional borrowings from the FHLB at March 31, 2007 and December 31, 2006, respectively.

Mortgage loans held for investment totaling $3.9 billion and $2.9 billion were pledged to secure an unused borrowing facility with the Federal Reserve Bank (“FRB”) at March 31, 2007 and December 31, 2006, respectively.

As of March 31, 2007 and December 31, 2006, the Company had accepted mortgage loan collateral of $2.9 billion and $3.5 billion, respectively, that it had the contractual ability to re-pledge. The collateral secures warehouse lending advances. Of this collateral, $1.3 billion and $1.6 billion, respectively, has been re-pledged to secure borrowings under a secured revolving line of credit as of March 31, 2007 and December 31, 2006.

12




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

Changes in the allowance for loan losses were as follows:

 

 

Quarters Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

261,054

 

$

189,201

 

Provision for loan losses

 

151,962

 

63,138

 

Net charge-offs

 

(38,649

)

(66,421

)

Reclassification of allowance for unfunded commitments and other

 

 

(13,647

)

Balance, end of period

 

$

374,367

 

$

172,271

 

 

The Company has recorded a liability for losses on unfunded loan commitments in accounts payable and accrued liabilities totaling $13.8 million and $8.1 million at March 31, 2007 and December 31, 2006, respectively. The provision for these loans is recorded in other expenses. The following is a summary of changes in the liability:

 

 

Quarters Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

8,104

 

$

9,391

 

Provision for losses on unfunded loan commitments

 

5,655

 

 

Reclassification of allowance for unfunded loan commitments

 

 

4,005

 

Balance, end of period

 

$

13,759

 

$

13,396

 

 

13




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

Note 9—Investments in Other Financial Instruments, at Fair Value

Investments in other financial instruments include the following:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Available-for-sale securities:

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

$

13,369,569

 

 

$

7,007,786

 

Obligations of U.S. Government-sponsored enterprises

 

 

654,361

 

 

776,717

 

Municipal bonds

 

 

414,049

 

 

412,886

 

U.S. Treasury securities

 

 

141,424

 

 

168,313

 

Other

 

 

2,697

 

 

2,858

 

Subtotal

 

 

14,582,100

 

 

8,368,560

 

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

 

 

 

 

 

 

 

Prime interest-only and principal-only securities

 

 

264,266

 

 

279,375

 

Prime home equity line of credit transferor’s interest

 

 

101,686

 

 

144,346

 

Nonprime residuals and other related securities

 

 

90,547

 

 

152,745

 

Prepayment penalty bonds

 

 

38,516

 

 

52,697

 

Prime home equity residual securities

 

 

25,842

 

 

40,766

 

Nonprime interest-only securities

 

 

14,996

 

 

3,757

 

Prime home equity interest-only securities

 

 

6,255

 

 

7,021

 

Subordinated mortgage-backed pass-through securities

 

 

799

 

 

1,382

 

Prime residual securities

 

 

715

 

 

1,435

 

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

 

 

543,622

 

 

683,524

 

Total available-for-sale securities

 

 

15,125,722

 

 

9,052,084

 

Interests retained in securitization accounted for as trading securities:

 

 

 

 

 

 

 

Prime home equity line of credit transferor’s interest

 

 

679,389

 

 

553,701

 

Prime interest-only and principal-only securities

 

 

634,098

 

 

549,635

 

Prime home equity residual securities

 

 

591,434

 

 

737,808

 

Nonprime residuals and other related securities

 

 

292,054

 

 

388,963

 

Prepayment penalty bonds

 

 

116,249

 

 

90,666

 

Subordinated mortgage-backed pass-through securities

 

 

46,487

 

 

 

Prime home equity interest-only securities

 

 

22,141

 

 

22,467

 

Prime residual securities

 

 

6,999

 

 

11,321

 

Interest rate swaps

 

 

964

 

 

2,490

 

Total interests retained in securitization accounted for as trading securities

 

 

2,389,815

 

 

2,357,051

 

Servicing hedge principal-only securities accounted for as trading
securities

 

 

466,245

 

 

 

Hedging and mortgage pipeline derivatives:

 

 

 

 

 

 

 

Mortgage servicing related

 

 

761,984

 

 

837,908

 

Notes payable related

 

 

486,031

 

 

444,342

 

Mortgage loans held for sale and pipeline related

 

 

215,900

 

 

78,066

 

Total investments in other financial instruments

 

 

$

19,445,697

 

 

$

12,769,451

 

 

14




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

At March 31, 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 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:

 

 

March 31, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

13,447,213

 

 

$

16,999

 

 

$

(94,643

)

$

13,369,569

 

Obligations of U.S. Government-sponsored enterprises

 

656,901

 

 

1,565

 

 

(4,105

)

654,361

 

Municipal bonds

 

415,517

 

 

1,429

 

 

(2,897

)

414,049

 

U.S. Treasury securities

 

140,291

 

 

1,630

 

 

(497

)

141,424

 

Interests retained in securitization

 

497,433

 

 

64,555

 

 

(18,366

)

543,622

 

Other

 

2,698

 

 

2

 

 

(3

)

2,697

 

 

 

$

15,160,053

 

 

$

86,180

 

 

$

(120,511

)

$

15,125,722

 

 

 

 

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

 

 

15




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:

 

 

March 31, 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.

 

$

2,472,542

 

 

$

(8,615

)

 

$

4,806,948

 

$

(86,028

)

$

7,279,490

 

$

(94,643

)

Obligations of U.S. Government-sponsored enterprises

 

13,978

 

 

(36

)

 

474,196

 

(4,069

)

488,174

 

(4,105

)

Municipal bonds

 

67,000

 

 

(381

)

 

210,303

 

(2,516

)

277,303

 

(2,897

)

U.S. Treasury securities

 

2,003

 

 

(3

)

 

80,374

 

(494

)

82,377

 

(497

)

Interests retained in
securitization

 

1,285

 

 

(7

)

 

126,132

 

(18,359

)

127,417

 

(18,366

)

Other

 

 

 

 

 

48

 

(3

)

48

 

(3

)

Total impaired securities

 

$

2,556,808

 

 

$

(9,042

)

 

$

5,698,001

 

$

(111,469

)

$

8,254,809

 

$

(120,511

)

 

 

 

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

 

(2,695

)

271,079

 

(3,012

)

U.S. Treasury securities

 

 

6,477

 

 

 

(22

)

 

103,018

 

(803

)

109,495

 

(825

)

Interests retained in securitization

 

 

42,854

 

 

 

(4,114

)

 

84,978

 

(13,585

)

127,832

 

(17,699

)

Other

 

 

 

 

 

 

 

48

 

(2

)

48

 

(2

)

Total impaired securities

 

 

$

1,677,149

 

 

 

$

(9,196

)

 

$

5,991,398

 

$

(125,584

)

$

7,668,547

 

$

(134,780

)

 

The Company’s Asset/Liability Committee (“ALCO”) assesses securities classified as available-for sale for other-than-temporary impairment on a quarterly basis. This assessment evaluates whether the Company intends and is able to recover the amortized cost of the securities when taking into account the Company’s present investment objectives and liquidity requirements and whether the creditworthiness of the issuer calls the realization of contractual cash flows into question. Based on the Company’s review of these securities, ALCO has concluded that Countrywide has both the intent and ability to hold these securities until they recover their amortized cost and the issuer’s creditworthiness does not call into question the realization of contractual cash flows. Accordingly, other-than-temporary impairment related to these securities has not been recognized as of March 31, 2007 and December 31, 2006.

16




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

Gross gains and losses realized on the sales of available-for-sale securities are as follows:

 

 

Quarters Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Obligations of U.S. Government-sponsored enterprises:

 

 

 

 

 

Gross realized gains

 

$

11

 

$

 

Gross realized losses

 

 

(50

)

Net

 

11

 

(50

)

Municipal bonds:

 

 

 

 

 

Gross realized gains

 

24

 

33

 

Gross realized losses

 

(53

)

(30

)

Net

 

(29

)

3

 

Interests retained in securitization:

 

 

 

 

 

Gross realized gains

 

1,021

 

 

Gross realized losses

 

 

 

Net

 

1,021

 

 

Total gains and losses on available-for-sale securities:

 

 

 

 

 

Gross realized gains

 

1,056

 

33

 

Gross realized losses

 

(53

)

(80

)

Net

 

$

1,003

 

$

(47

)

 

Note 10—Mortgage Servicing Rights, at Fair Value

The activity in MSRs is as follows:

 

 

Quarters Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

16,172,064

 

$

12,610,839

 

Remeasurement to fair value upon adoption of SFAS 156

 

 

109,916

 

Fair value at beginning of period

 

16,172,064

 

12,720,755

 

Additions:

 

 

 

 

 

Servicing resulting from transfers of financial assets

 

1,898,903

 

1,209,424

 

Purchases of servicing assets

 

116,592

 

1,911

 

Total additions

 

2,015,495

 

1,211,335

 

Change in fair value:

 

 

 

 

 

Due to changes in valuation inputs or assumptions in valuation model(1)

 

179,007

 

978,281

 

Other changes in fair value(2)

 

(924,706

)

(738,567

)

Balance, end of period

 

$

17,441,860

 

$

14,171,804

 


(1)          Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

(2)          Represents changes due to realization of expected cash flows.

17




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

Note 11—Other Assets

Other assets include the following:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Reimbursable servicing advances, net

 

$

2,266,756

 

 

$

2,121,486

 

 

Securities broker-dealer receivables

 

1,976,388

 

 

1,605,502

 

 

Investments in FRB and FHLB stock

 

1,220,597

 

 

1,433,070

 

 

Interest receivable

 

998,387

 

 

997,854

 

 

Receivables from custodial accounts

 

599,223

 

 

719,048

 

 

Real estate acquired in settlement of loans

 

386,219

 

 

251,163

 

 

Capitalized software, net

 

377,291

 

 

367,055

 

 

Prepaid expenses

 

336,659

 

 

320,597

 

 

Cash surrender value of assets held in trust for deferred compensation plans

 

324,054

 

 

319,864

 

 

Restricted cash

 

321,032

 

 

238,930

 

 

Receivables from sale of securities

 

153,700

 

 

284,177

 

 

Derivative margin accounts

 

133,003

 

 

118,254

 

 

Other

 

1,169,523

 

 

1,064,790

 

 

 

 

$

10,262,832

 

 

$

9,841,790

 

 

 

The Company had pledged $1.8 billion and $1.2 billion of securities broker-dealer receivables to secure securities sold under agreements to repurchase at March 31, 2007 and December 31, 2006, respectively.

Note 12—Deposit Liabilities

The following table summarizes deposit liabilities:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Time deposits:

 

 

 

 

 

Retail

 

$

16,869,704

 

$

17,973,792

 

Brokered

 

10,060,110

 

11,612,674

 

Commercial

 

1,018,313

 

635,927

 

 

 

27,948,127

 

30,222,393

 

Company-controlled custodial deposit accounts(1)

 

16,878,122

 

15,737,632

 

Retail savings and money market accounts

 

7,731,586

 

5,970,245

 

Commercial money market accounts

 

4,797,360

 

3,557,445

 

Non-interest-bearing checking accounts

 

182,877

 

113,045

 

 

 

57,538,072

 

55,600,760

 

Basis adjustment through application of hedge accounting

 

(13,011

)

(22,078

)

 

 

$

57,525,061

 

$

55,578,682

 


(1)          These accounts represent the portion of the investor custodial accounts controlled by Countrywide that have been placed on deposit with Countrywide Bank (the “Bank”).

18




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

Note 13—Securities Sold Under Agreements to Repurchase and Federal Funds Purchased

The following table summarizes securities sold under agreements to repurchase and federal funds purchased:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Securities sold under agreements to repurchase

 

$

43,835,743

 

$

42,113,501

 

Federal funds purchased

 

250,000

 

 

 

 

$

44,085,743

 

$

42,113,501

 

 

The Company routinely enters short-term financing arrangements to sell securities under agreements to repurchase (“repurchase agreements”). The repurchase agreements are collateralized by mortgage loans and securities. 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, 2007, repurchase agreements were secured by $18.1 billion of trading securities, $52.4 billion of securities purchased under agreements to resell and securities borrowed, $0.1 billion in investments in other financial instruments and $1.8 billion of other assets. At March 31, 2007, $27.8 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.

At December 31, 2006, repurchase agreements were secured by $19.5 billion of trading securities, $52.1 billion of securities purchased under agreements to resell and securities borrowed, $0.1 billion in investments in other financial instruments and $1.2 billion of other assets. At December 31, 2006, $30.0 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.

Federal funds purchased generally represent overnight borrowings of reserves from other banks in the Federal Reserve Bank System. Interest is generally settled the next day at the federal funds rate.

19




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

Note 14—Notes Payable

The following table summarizes notes payable:

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

Federal Home Loan Bank advances

 

$

26,525,000

 

$

28,150,000

 

Medium-term notes:

 

 

 

 

 

Floating-rate

 

13,860,183

 

13,155,231

 

Fixed-rate

 

8,426,796

 

9,783,881

 

 

 

22,286,979