- Net Loss of $893 Million -
- Profitability in Loan Production Sector, MSR Investment, and Balboa Life & Casualty Business Offset by $3 Billion in Credit-Related Charges -
- Board Announces $0.15 Dividend -
CALABASAS, Calif., April 29 /PRNewswire-FirstCall/ -- CountrywideFinancial Corporation (NYSE: CFC) today reported a net loss of $893 million,or $1.60 per diluted share, for the first quarter ended March 31, 2008, whichcompares to net income of $434 million, or $0.72 per diluted share, for thefirst quarter of 2007.
Key quarterly results include the following:
Table 1 Quarter Ended ($ in millions, except per share Mar. 31, Dec. 31, Mar. 31, amounts) 2008 2007 2007 Consolidated Company Net (Loss) Earnings $(893) $(422) $434 Diluted (Loss) Earnings per Share $(1.60) $(0.79) $0.72 Shareholders' Equity $13,155 $14,656 $14,818 Total Assets $199,018 $208,367 $207,183 Key Segment Pre-tax (Loss) Earnings Mortgage Banking $(552) $(623) $100 Banking $(960) $(279) $288 Capital Markets $1 $118 $132 Insurance $36 $172 $180 Key Operating Statistics ($ in billions) Total Loan Fundings $73 $69 $117 Ending Loan Servicing Portfolio $1,484 $1,476 $1,352 Ending Assets of Banking Operations $110 $113 $84
During the first quarter of 2008, operating results benefited fromprofitability in the Company's Loan Production sector, from its investment inmortgage servicing rights(a), and from its Balboa Life & Casualty insurancebusiness. However, these results were more than offset by materially highercredit-related costs during the quarter. Increased credit-related chargeswere driven by increased levels of mortgage delinquencies, defaults and lossseverities, as well as downward revisions in expectations of home pricesrelative to prior quarters.
(a) MSR portfolio operating earnings and MSR valuation changes, net ofrelated hedging results.
FIRST QUARTER 2008 CREDIT-RELATED CHARGES
Table 2 Quarter Ended March 31, 2008 Insurance Mortgage Banking Segment Banking & Production Servicing Segment other Total ($ in millions)
Provision for credit losses $- $213 $1,316 $- $1,529 Provision for representations & warranty claims 51 404 - 1 456 Impairment of credit-sensitive retained interests (1) - 441 - - 441 Provision for captive mortgage reinsurance claims - - - 236 236 Senior and mezzanine security valuation adjustments (2) - 202 - - 202 Inventory and pipeline valuation adjustments 188 - - - 188
Total $239 $1,260 $1,316 $237 $3,052
(1) Includes $154 million related to HELOC rapid amortization.
(2) These securities were retained in securitizations and are backed by nonprime, home equity and non-conforming prime loans and are carried at estimated fair value.
The credit-related charges in the first quarter of 2008 are furtherdiscussed below:
-- Provision for credit losses on the Company's investment in residential loans was $1.5 billion during the quarter, compared to $925 million last quarter and $158 million in the first quarter of 2007. Charge- offs for the first quarter of 2008 were $606 million, compared to $283 million for the fourth quarter of 2007 and $39 million for the first quarter of 2007. The reserve for credit losses was increased by approximately $1 billion to $3.4 billion at the end of the quarter.(b)
-- Provision for representations and warranty claims was $456 million during the quarter, compared to a recovery of $58 million in the fourth quarter of 2007 and a $42 million provision in the first quarter of 2007. Charge-offs related to claims settled during the quarter were $129 million for the first quarter of 2008, compared to $5 million for the fourth quarter of 2007 and $43 million for the first quarter of 2007. The sequential quarter build in the representations and warranty claims liability was approximately $320 million, increasing it to $1 billion at March 31, 2008.
-- Impairment of credit-sensitive retained interests was $441 million during the quarter, compared to impairment of $852 million last quarter and $366 million in the first quarter of 2007. Of the $441 million in impairment charges, $347 million related to home equity securitizations and $67 million related to subprime residuals. The carrying value of the Company's credit-sensitive residual assets at March 31, 2008 was $483 million, including $207 million related to subprime loans and $234 million related to home equity loans. The liability for estimated losses on future draws related to HELOC rapid amortization amounted to $798 million at March 31, 2008, which compares to $704 million at December 31, 2007 and no liability existed at March 31, 2007.
-- Provision for captive mortgage reinsurance claims was $236 million, compared to a provision of $21 million in the fourth quarter of 2007 and a reversal of $60 million in the first quarter of 2007. The liability for future claims increased to $385 million at March 31, 2008. As of March 31, 2008, approximately $134 billion of mortgage loans in the Company's servicing portfolio are covered by such mortgage reinsurance contracts, and the Company's maximum aggregate losses under the reinsurance contracts are limited to $1.1 billion.
-- Valuation adjustments were $390 million during the quarter. Further disruption in the capital markets and declining liquidity for non- agency mortgage assets persisted and credit spreads on those assets continued to widen. As a result, senior and mezzanine securities retained in prior securitizations and non-agency inventory subject to fair value adjustments were written down. Senior and mezzanine securities were written down by $202 million in the first quarter of 2008 compared to $66 million in the fourth quarter of 2007 and no charge was taken in the first quarter of 2007. Loan inventory was written down in the amount of $188 million in the first quarter of 2008, which compares to write-downs of $428 million in the fourth quarter of 2007 and $253 million in the first quarter of 2007.
(b) The reserve for credit losses and the asset for estimated amountsrecoverable from pool mortgage insurance are shown separately on the balancesheet. The March 31, 2008 and December 31, 2007 balances of the asset were$613 million and $556 million, respectively.
BUSINESS SEGMENT PERFORMANCE
Mortgage Banking -- Loan Production
The Loan Production sector is comprised of the following distributionchannels: consumer-direct lending through Countrywide's retail home loanoffices, call center operations and the Internet; wholesale lending through anetwork of mortgage brokers; and correspondent lending which buys closed loansfrom other financial institutions such as independent mortgage companies,commercial banks, savings and loans and credit unions. The sector alsoincludes the mortgage banking activities of Countrywide Bank.
Table 3 Loan Production Sector Results of Operations (1) Quarter Ended Mar. 31, Dec. 31, Mar. 31, ($ in millions) 2008 2007 2007 Gain on sale of loans (2) $1,045 $274 $1,064 Net warehouse spread 37 22 90 Miscellaneous income 22 15 10 Total revenues 1,104 311 1,164 Operating expenses (757) (729) (856) Allocated corporate expenses (115) (89) (138) Total expenses (872) (818) (993)
Total Loan Production sector pre-tax earnings (loss) $232 $(507) $171
(1) Numbers may not total exactly due to rounding. (2) Includes hedge results and inventory valuation adjustments, and in the first quarter of 2008 includes the impact of the adoption of SAB 109.
Pre-tax earnings in the Loan Production sector were $232 million in thefirst quarter, compared to a pre-tax loss of $507 million in the prior quarterand pre-tax earnings of $171 million in the first quarter of 2007. Thefollowing summarizes the operational and financial highlights in the LoanProduction sector for the first quarter of 2008:
-- On a consolidated basis, the Company's loan originations totaled $73 billion in the first quarter of 2008, of which $67 billion was originated for sale and $6 billion was originated for investment. This compares to $61 billion originated for sale and $8 billion originated for investment in the fourth quarter of 2007.
-- Average daily applications were $2.2 billion in the first quarter of 2008, up 27 percent from the fourth quarter of 2007.
-- Pricing margins on loans originated for sale (i.e., margins at the time of lock) remained stable or improved slightly during the quarter relative to the prior quarter. However, gain on sale margins were negatively impacted by significant secondary market volatility during the quarter.
-- Operating expenses were up $28 million, but down 7 basis points as a percentage of production. The sequential quarter dollar increase is primarily driven by a reduced benefit in the first quarter of 2008 from SFAS 91 deferral due to the Company's adoption of SFAS 159 on most held-for-sale loans.
-- The Company's adoption of the SEC's Staff Accounting Bulletin No. 109 aided first quarter profitability by $358 million. The adoption of this accounting standard requires the Company to book 'gain on sale' at the time of loan lock versus loan sale as was previously the practice.
-- The Company recorded write-downs of $188 million resulting from credit-spread widening during the quarter on non-agency fixed-rate mortgages and on loans that had been previously securitized but on which the Company did not receive sales treatment pursuant to SFAS 140. As a result of first quarter spread widening and lessened liquidity for these loans, management has determined that any new production of non-agency fixed-rate loans will be originated solely for the Company's investment portfolio.
Mortgage Banking -- Loan Servicing
The Loan Servicing sector includes the performance of mortgage servicingrights (MSRs), interest-only securities and other mortgage banking segmentinvestments which include: credit-sensitive subprime and home equityresiduals; Mortgage Banking HFI loans; and senior and mezzanine mortgage-backed securities which remain unsold from prior securitizations. Countrywidealso manages a financial hedge within the Loan Servicing sector to mitigatenegative valuation changes in MSRs and retained interests.
Table 4 Quarter Ended (5) Mar. 31, Dec. 31, Mar. 31, ($ in millions) 2008 2007 2007
Loan Servicing sector earnings before credit charges $442 $969 $256 Credit charges (1,260) (1,108) (357) Total Loan Servicing sector pre-tax loss $(818) $(139) $(100)
Loan Servicing sector earnings before credit charges: Servicing fees, net of guarantee fees $1,174 $1,219 $1,080 Escrow balance income 69 168 204 Miscellaneous fees 168 162 209 Income from retained interests 98 112 148 Realization of expected MSR cash flows (754) (659) (800) Operating revenues 756 1,001 840
Direct expenses (268) (244) (179) Allocated corporate expenses (24) (16) (22) Total expenses (293) (260) (201)
Operating earnings 463 741 640
Change in fair value of MSRs (1) (1,558) (1,535) (9) Servicing hedge gains (losses) (1) 1,667 1,986 (161) Valuation changes, net of servicing hedge (1) 109 451 (170)
Interest expense (130) (223) (213) Loan Servicing sector earnings before credit charges 442 969 256
Credit charges Impairment of credit-sensitive retained interests, net of hedge (444) (862) (318) Adjustment to representation and warranty liability (2) (404) 59 (31) Loan loss provision (3) (209) (238) (7) Change in fair value of senior and mezzanine securities (4) (202) (66) - Credit charges (1,260) (1,108) (357)
Total Loan Servicing sector pre-tax loss $(818) $(139) $(100)
Average servicing portfolio ($ in billions) $1,469 $1,456 $1,316 MSR portfolio capitalization rate 1.26% 1.40% 1.40% Actual prepayment speed (CPR) 13.0% 10.5% 17.4% Ending value of credit-sensitive retained interests ($ in millions) $483.1 $771.0 $1,836.9
(1) Includes other non credit-sensitive retained interests, predominately interest-only securities.
(2) We estimate our liability for representations and warranty claims at the time of sale and update our estimates quarterly. At the time of sale, the liability adjusts our gain on sale. Subsequent to sale, adjustments to our liability for representations and warranty claims are included in our Loan Servicing sector.
(3) Represents the provision for loan losses for the Mortgage Banking segment's mortgage loan investment portfolio.
(4) These securities were retained in securitization and are backed by nonprime, home equity and non-conforming prime loans and are carried at estimated fair value.
(5) Numbers may not total exactly due to rounding.
Before the impact of credit charges, Loan Servicing sector pre-taxearnings were $442 million during the first quarter of 2008 compared to $969million and $256 million in the fourth and first quarters of 2007,respectively. The Loan Servicing sector incurred a pre-tax loss of $818million in the first quarter of 2008, which compares to a loss of $139 millionin the fourth quarter of 2007. The sequential quarter comparison was impactedby the following factors:
-- Earnings from the Company's investment in mortgage serving rights were impacted by lower interest rates during the quarter and related increases in prepayment speeds. This resulted in an increase in the write-down of the MSR asset related to 'realization of expected MSR cash flows' from $659 million in the fourth quarter of 2007 to $754 million in the first quarter of 2008. Prepayment speeds on the MSR asset approximated 13 percent in the first quarter, compared to 11 percent for the fourth quarter of 2007. However, while up from the previous quarter, prepayment speeds continue to be slow relative to historic speeds in similar interest rate environments due to slowing housing conditions and lesser credit availability in the mortgage markets.
-- While the Company's servicing hedge applicable to the MSR asset performed favorably during the quarter resulting in hedge gains exceeding MSR impairment by $109 million, the valuation change on the MSR asset, net of hedge gains, in the prior quarter was a gain of $451 million.
-- Impairment charges of $444 million applicable to the Company's credit- sensitive retained interests, net of hedge, also negatively impacted Loan Servicing sector earnings with the majority of the impact related to the retained interests from home equity securitizations, including impairment losses related to HELOC rapid amortization. The impairment on retained interests was driven primarily by worsening trends and expectations for delinquencies and home prices and the resulting increases in estimates of future defaults and credit losses. During the first quarter of 2008, Countrywide recorded impairment losses of $154 million related to future draw obligations on the home equity securitization deals that have entered or are probable to enter rapid amortization status. This compares to rapid amortization-related impairment losses of $704 million recorded in the fourth quarter of 2007. The aggregate carrying value of the Company's investments in credit-sensitive retained interests at March 31, 2008 was $483 million, compared to $771 million at December 31, 2007, and $1.8 billion at March 31, 2007.
-- The provision expense applicable to estimated future representations and warranty claims was increased from the fourth quarter of 2007 by $463 million. The increase is primarily attributable to worsening trends and expectations for delinquencies and home prices and the related increases in the projections of future defaults to which representation and warranty claims are correlated. As a result, the reserve for such future claims at March 31, 2008 approximated $1 billion.
-- The loan loss provision applicable to the Mortgage Banking segment loan portfolio was $209 million for the first quarter of 2008 compared to $238 million for the fourth quarter of 2007 and $7 million for the first quarter of 2007.
-- The fair value of senior and mezzanine securities declined $202 million during the first quarter of 2008, as compared to $66 million for the fourth quarter of 2007 and there was no such decline for the first quarter of 2007. The downward change in fair value was driven by further disruption in the capital markets and declining liquidity for non-agency mortgage assets, which resulted in wider credit spreads on those assets.
Banking
The Banking segment includes Banking Operations (primarily the fee andinvestment activities of Countrywide Bank, FSB) and Countrywide WarehouseLending, a provider of mortgage inventory financing to independent mortgagebankers.
Table 5 Banking Segment Results of Operations Quarter Ended (2) Mar. 31, Dec. 31, Mar. 31, ($ in millions) 2008 2007 2007 Banking Operations $(925) $(262) $294 Countrywide Warehouse Lending (2) 5 10 Allocated corporate expenses (34) (23) (16) Total Banking segment pre-tax (loss) earnings $(960) $(279) $288
Table 6 Quarter Ended (2) Mar. 31, Dec. 31, Mar. 31, ($ in millions) 2008 2007 2007 Banking Operations: Net interest income $633 $627 $497 Provision for credit losses (1,316) (688) (129) Non-interest income 6 11 41 Mortgage insurance expense (27) (23) (19) Other non-interest expense (222) (189) (95) Banking Operations pre-tax (loss) earnings $(925) $(262) $294
Other statistics: Total assets $110,190 $113,057 $84,261 Total deposits (1) $64,266 $61,184 $57,783 Loan portfolio, net $84,774 $85,432 $69,271 Net charge-offs $485 $192 $33 Allowance for credit losses $3,066 $2,179 $422
(1) Includes intercompany deposits (2) Numbers may not total exactly due to rounding
During the first quarter of 2008, Banking Operations incurred a pre-taxloss of $925 million, compared to a pre-tax loss of $262 million last quarterand pre-tax income of $294 million in the first quarter of 2007. Thesequential quarter comparison was impacted by the following factors:
-- The provision for credit losses in the first quarter increased 91 percent from the fourth quarter provision to $1.3 billion, driven by the worsening trends and expectations for delinquencies and home prices and the related increase in the projection of future charge- offs during the quarter. During the first quarter of 2008, net charge-offs in Banking Operations were $485 million, which compares to $192 million in the fourth quarter of 2007 and $33 million in the first quarter of 2007. The allowance for credit losses in the Banking Operations sector at March 31, 2008 grew to $3.1 billion from $2.2 billion at December 31, 2007. The estimated amounts recoverable from pool mortgage insurance increased to $613 million at the end of the quarter from $556 million at the end of the fourth quarter of 2007.
-- Net interest income increased modestly from $627 million in the fourth quarter of 2007 to $633 million in the first quarter of 2008. Although the average balance of interest-earning assets increased by 6 percent, the net interest margin declined 16 basis points from the fourth quarter to 2.25 percent in the first quarter of 2008.
