General

The Company's businesses fall into six general categories: consumer mortgage originations, mortgage-related investments, B2C insurance, processing and technology, capital markets and B2B insurance. See "Business - Mortgage Originations Segment," "Business - Mortgage-Related Investments Segment," "Business - B2C Insurance Segment," "Business - Processing and Technology Segment," "Business - Capital Markets Segment" and "Business - B2B Insurance Segment." The Company intends to continue its efforts to expand its operations in each of these areas. A strong production capability and a growing servicing portfolio are the primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates because the effect of interest rate changes on loan production income is countercyclical to their effect on servicing income. The operations of the B2C Insurance Segment includes acting as an agent in the sale of insurance, including homeowners, fire, flood, earthquake, life and disability and creditor-placed auto and homeowner insurance. The operations of the Capital Markets Segment include trading MBS and other mortgage-related assets as well as brokering service contracts and bulk purchases and sales of whole loans. In addition, the Capital Markets Segment also purchases closed loans from mortgage bankers, commercial banks and other financial institutions through the Correspondent Division. The operations of the B2B Insurance Segment includes underwriting insurance, including homeowners, fire, flood, earthquake, life and disability and creditor-placed auto and homeowner insurance.

  The Company's results of operations historically have been influenced primarily by the level of demand for mortgage loans, which is affected by such external factors as the level and direction of interest rates, and the strength of the overall economy and the economy in each of the Company's lending markets.

  The fiscal year ended February 28, 1999 ("Fiscal 1999") was a then record year for the Company in terms of revenues and net earnings. Loan production increased to $92.9 billion, an all-time Company record, up from $48.8 billion in the prior fiscal year. The Company attributed the increase in production to: (i) an increase in the overall mortgage market driven largely by refinances; (ii) the generally strong economy and home purchase market; and (iii) an increase in the Company's market share, driven largely by the expansion of its Home Finance Network and Consumer Markets Division and Wholesale branch networks, including new retail sub-prime branches. For calendar 1998, the Company ranked second in the amount of single-family mortgage originations nationwide. During calendar 1998, the Company's market share increased to approximately 6.1%, up from approximately 5.1% in calendar 1997. During Fiscal 1999, the Company's loan servicing portfolio grew to $215.5 billion, up from $182.9 billion at the end of Fiscal 1998. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $4.6 billion. This growth in the loan servicing portfolio was partially offset by prepayments, partial prepayments and scheduled amortization of $53.2 billion and the transfer out of $6.5 billion of subservicing. The prepayment rate in the servicing portfolio was 28%, up from the prior year due to increased refinance activity driven by the lower mortgage interest rate environment in Fiscal 1999.

  The fiscal year ended February 29, 2000 ("Fiscal 2000") was again a record year for the Company in terms of revenues and net earnings. Loan production decreased to $66.7 billion, down from $92.9 billion in the prior fiscal year. The Company attributed the decrease in production primarily to a decrease in the overall mortgage market driven largely by a decrease in refinance activity, combined with a slight decrease in the Company's market share. For calendar 1999 the Company ranked third in the amount of single-family mortgage originations nationwide. During calendar 1999 the Company's market share decreased to approximately 5.8% down from approximately 6.1% in calendar 1998. During Fiscal 2000, the Company's loan servicing portfolio grew to $250.2 billion, up from $215.5 billion at the end of Fiscal 1999. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $2 billion. This growth in the loan servicing portfolio was partially offset by prepayments, partial prepayments and scheduled amortization of $28.5 billion. The prepayment rate in the servicing portfolio was 13%, down from 28% the prior year due to the higher mortgage interest rate environment in Fiscal 2000.

  The fiscal year ended February 28, 2001 ("Fiscal 2001") was another strong year for the Company in terms of revenues and net earnings. Loan production increased slightly to $68.9 billion, up from $66.7 billion in the prior fiscal year. The Company attributed the increase in production to an increase in the Company's market share. For calendar 2000, the Company ranked third in the amount of single-family mortgage originations nationwide. During calendar 2000 the Company's market share increased to approximately 5.9% up from approximately 5.8% in calendar 1999. During Fiscal 2001, the Company's loan servicing portfolio grew to $293.6 billion, up from $250.2 billion at the end of Fiscal 2000. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $8.7 billion. This growth in the loan servicing portfolio was partially offset by prepayments, partial prepayments and scheduled amortization of $28.7 billion. The prepayment rate in the servicing portfolio was 11%, down from 13% the prior year.

Fiscal 2001 Compared with Fiscal 2000
Operating Segment Results
The Company's pre-tax earnings by segment is summarized below.
	Pre-Tax Earnings
(Dollar amounts in thousands)	Fiscal 2001		Fiscal 2000
Consumer Businesses:
Consumer Mortgage Originations	$	190,411	$	218,121
Mortgage-Related Investments		166,944		250,296
B2C Insurance		4,158		6,041
Total Consumer Businesses		361,513		474,458
Institutional Businesses:
Processing and Technology		62,540		35,924
Capital Markets		94,373		87,028
B2B Insurance		69,874		31,759
Total Institutional Businesses		226,787		154,711
Other		(2,265)		2,029
Pre-Tax Earnings	$	586,035	$	631,198
Consumer Mortgage Originations Segment The Consumer Mortgage Originations Segment activities include loan origination through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division, the warehousing and sales of such loans and loan closing services. Total Consumer Mortgage Originations Segment loan production by Division is summarized below.
	Loan Production
(Dollar amounts in millions)	Fiscal 2001		Fiscal 2000
Consumer Mortgage Originations:
Consumer Markets Division	$	18,976	$	19,967
Wholesale Division		19,940		19,116
Full Spectrum Lending, Inc.		1,605		1,417
Total	$	40,521	$	40,500

  The decline in pre-tax earnings of $27.7 million in Fiscal 2001 as compared to Fiscal 2000 was primarily attributable to reduced margins and increased price competition throughout Fiscal 2001. The lower net earnings rate on the inventory was due to an increase in short-term rates during Fiscal 2001 combined with a decrease in long-term rates. The declines were partially offset by improved margins on home equity and sub-prime loan production and increased profits from loan closing services.

Mortgage-Related Investments Segment

Mortgage-Related Investment Segment activities include investments in assets retained in the mortgage securitization process, including MSRs, residual interests in asset-backed securities and other mortgage-related assets.

  The decrease in pre-tax earnings of $83.4 million in Fiscal 2001 as compared to Fiscal 2000 was primarily due to increased amortization and impairment of the MSRs net of servicing hedge expense, increased interest expense related to financing the mortgage-related investments and higher servicing expenses driven by the growth in the servicing portfolio, including the subservicing fee paid to the Processing and Technology Segment. These factors offset an increase in revenues generated from a larger servicing portfolio and improved performance of the residual investments. The growth in the Company's servicing portfolio since Fiscal 2000 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization.

  During Fiscal 2001, the Company recorded gains of $208.3 million in accumulated other comprehensive income related to the available-for-sale securities included in its Servicing Hedge.

  During Fiscal 2001, the annual prepayment rate of the Company's servicing portfolio was 11%, compared to 13% for Fiscal 2000. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven primarily by the relative level of mortgage interest rates. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of February 28, 2001 was 7.8% compared to 7.5% as of February 29, 2000.

B2C Insurance Segment

B2C Insurance Segment activities include the operations of CIS, an insurance agency that provides homeowners, life, disability and automobile as well as other forms of insurance, primarily to the Company's mortgage customers. The decrease in pre-tax earnings of $1.9 million in Fiscal 2001 as compared to Fiscal 2000 was primarily due to a decline in new policies sold.

	Loan Production
(Dollar amounts in millions)	Fiscal 2001		Fiscal 2000
Purchase	$	49,696	$	43,594
Refinance		19,227		23,146
Total	$	68,923	$	66,740
Fixed Rate	$	59,349	$	57,178
Adjustable Rate		9,574		9,562
Total	$	68,923	$	66,740
Total loan production by Segment is summarized below.
	Loan Production
(Dollar amounts in millions)	Fiscal 2001		Fiscal 2000
Consumer Mortgage Originations	$	40,521	$	40,500
Correspondent Division		28,402		26,240
Total	$	68,923	$	66,740
The factors which affect the relative volume of production among the Company's Segments include the price competitiveness of each Segment's various product offerings, the level of mortgage lending activity in each Segment's market and the success of each Segment's sales and marketing efforts.   Non-traditional loan production (which is included in the Company's total volume of loans produced) is summarized below.
	Non-Traditional Loan Production
(Dollar amounts in millions)	Fiscal 2001		Fiscal 2000
Sub-Prime	$	5,360	$	4,156
Home Equity		4,659		3,636
Total	$	10,019	$	7,792

  Loan production revenues increased in Fiscal 2001 as compared to Fiscal 2000 due to increased trading activity in the Capital Markets Segment and improved margins on home equity and sub-prime loan production partially offset by reduced margins on prime credit quality, first lien mortgages. Sub-prime loans contributed $256.3 million to the gain on sale of loans in Fiscal 2001 and $185.7 million in Fiscal 2000. The sale of home equity loans contributed $122.5 million and $86.9 million to gain on sale of loans in Fiscal 2001 and Fiscal 2000, respectively. In general, loan production revenue is affected by numerous factors including the volume and mix of loans produced and sold, the level of competition in the market place and changes in interest rates.

  Net interest expense (interest earned net of interest charges) of $6.8 million for Fiscal 2001 was down from net interest income of $76.4 million for Fiscal 2000. Net interest income (expense) is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($92.5 million and $157.5 million for Fiscal 2001 and Fiscal 2000, respectively); (ii) interest expense related to the Company's mortgage-related investments ($392.3 million and $280.0 million for Fiscal 2001 and Fiscal 2000, respectively); (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($232.2 million and $172.2 million for Fiscal 2001 and Fiscal 2000, respectively); and (iv) interest income earned from investments in the Capital Markets and B2B Insurance Segments ($55.3 million and $15.8 million for Fiscal 2001 and Fiscal 2000, respectively).

The decrease in net interest income from the Company's mortgage loan inventory was primarily attributable to lower inventory levels combined with a lower net earnings rate during Fiscal 2001, which resulted from an increase in short-term rates. The increase in interest expense related to mortgage-related investments resulted primarily from an increase in amounts financed coupled with an increase in short-term interest rates. The increase in net interest income earned from the custodial balances was primarily due to an increase in the earnings rate and an increase in the average custodial balances. The increase in net interest income from the investments in the Capital Markets and B2B Insurance Segments was primarily due to the acquisition of Balboa on November 30, 1999.

  The Company recorded MSR amortization for Fiscal 2001 totaling $518.2 million compared to $459.3 million for Fiscal 2000. The Company recorded impairment of $896.1 million Fiscal 2001 compared to recovery of previous impairment of $278.3 million for Fiscal 2000. The primary factors affecting the amount of amortization and impairment or impairment recovery of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge").

  In Fiscal 2001, the Company recognized a net benefit of $797.1 million from its Servicing Hedge. The net benefit included unrealized net gains of $520.9 million and realized net gain of $276.2 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In addition, the Company recorded additional gains of $208.3 million in accumulated other comprehensive income related to the available-for-sale securities included in its Servicing Hedge. In Fiscal 2000, the Company recognized a net expense of $264.1 million from its Servicing Hedge. The net expense included unrealized net losses of $230.9 million and realized net loss of $33.2 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In addition, the Company recorded additional losses of $50.0 million in accumulated other comprehensive income related to the available-for-sale securities included in its Servicing Hedge.

  The financial instruments that comprised the Servicing Hedge included interest rate floors, principal only securities ("P/O Securities"), options on interest rate swaps ("Swaptions"), options on MBS, options on interest rate futures, interest rate swaps, interest rate swaps with the Company's maximum payment capped ("Capped Swaps"), principal only swaps ("P/O Swaps") and interest rate caps.

  The Servicing Hedge is designed to protect the value of the MSRs from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the MSRs increases while the value of the hedge instruments declines. With respect to the interest rate floors, options on interest rate futures and MBS, interest rate caps, and Swaptions, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. With respect to the interest rate swaps, Capped Swaps and P/0 Swaps contracts entered into by the Company as of February 28, 2001, the Company estimates that its maximum exposure to loss over the remaining contractual terms is $1 million.

  Salaries and related expenses are summarized below for Fiscal 2001 and Fiscal 2000.

	Fiscal 2001
(Dollar amounts in thousands)	Consumer Businesses		Institutional Businesses		Corporate Administration		Total
Base Salaries	$	248,416	$	150,527	$	106,691	$	505,634
Incentive Bonus and Commissions		119,605		42,192		18,682		180,479
Payroll Taxes and Benefits		41,129		23,817		18,228		83,174
Total Salaries and Related Expenses	$	409,150	$	216,536	$	143,601	$	769,287
Average Number of Employees		6,069		3,942		1,693		11,704

	Fiscal 2000
(Dollar amounts in thousands)	Consumer Businesses		Institutional Businesses		Corporate Administration		Total
Base Salaries	$	266,120	$	101,402	$	101,514	$	469,036
Incentive Bonus		98,759		26,533		20,659		145,951
Payroll Taxes and Benefits		41,231		15,345		18,205		74,781
Total Salaries and Related Expenses	$	406,110	$	143,280	$	140,378	$	689,768
Average Number of Employees		6,321		2,837		1,776		10,934

  The amount of salaries increased during Fiscal 2001 as compared to Fiscal 2000 primarily due to an increase in staff in the institutional businesses due to a larger servicing portfolio and the acquisition of Balboa on November 30, 1999. Incentive bonuses and commissions earned during the Fiscal 2001 increased primarily due to an increase in production volume, the addition of commissioned sales personnel in the Consumer Mortgage Originations Segment and increased activity in the Capital Markets Segment.

  Occupancy and other office expenses for Fiscal 2001 increased to $275.1 million from $270.0 million for Fiscal 2000. The increase was primarily due to the acquisition of Balboa and growth in the Processing and Technology Segment.

  Marketing expenses for Fiscal 2001 decreased 2% to $71.6 million as compared to $72.9 million for Fiscal 2000.

  Insurance net losses are attributable to insurance claims in the B2B Insurance Segment. Insurance losses were $106.8 million for Fiscal 2001. These losses will increase or decrease during a period depending primarily on the volume of claims caused by natural disasters. The increase in losses for Fiscal 2001 is due to the acquisition of Balboa on November 30, 1999.

  Other operating expenses were $247.5 million for Fiscal 2001 as compared to $183.5 million for Fiscal 2000. The increase was primarily due to the acquisition of Balboa.

Fiscal 2000 Compared with Fiscal 1999
Operating Segment Results

The Company's pre-tax earnings by segment is summarized below.

	Pre-Tax Earnings
(Dollar amounts in thousands)	Fiscal 2000		Fiscal 1999
Consumer Businesses:
Consumer Mortgage Originations	$	218,121	$	517,827
Mortgage-Related Investments		250,296		(26,319)
B2C Insurance		6,041		3,325
Total Consumer Businesses		474,458		494,833
Institutional Businesses:
Processing and Technology		35,924		33,367
Capital Markets		87,028		90,140
B2B Insurance		31,759		13,084
Total Institutional Businesses		154,711		136,591
Other		2,029		381
Pre-Tax Earnings	$	631,198	$	631,805

Consumer Mortgage Originations Segment

The Consumer Mortgage Originations Segment activities include loan origination through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division, the warehousing and sales of such loans and loan closing services. Total consumer mortgage loan production by division is summarized below.

	Loan Production
(Dollar amounts in millions)	Fiscal 2000		Fiscal 1999
Consumer Mortgages:
Consumer Markets Division	$	19,967	$	28,508
Wholesale Division		19,116		30,917
Full Spectrum Lending, Inc.		1,417		708
Total	$	40,500	$	60,133

  The decline in pre-tax earnings of $299.7 million in Fiscal 2000 as compared to Fiscal 1999 was primarily attributable to lower prime credit quality first mortgage loan production and margins driven by a significant reduction in refinances. These declines were partially offset by increased loan production and increased sales of higher margin home equity and sub-prime loans.

Mortgage-Related Investments Segment

Mortgage-Related Investment Segment activities include investments in assets retained in the mortgage securitization process, including mortgage servicing rights, residual interests in asset-backed securities and other mortgage-related assets.

  The increase in pre-tax earnings of $276.6 million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to an increase in servicing revenues resulting from servicing portfolio growth combined with a reduction in amortization and a recovery of previous impairment of the MSRs, and improved performance of the residual investments. These factors were partially offset by higher servicing expenses driven by growth in the servicing portfolio, including the subservicing fee paid to the Processing and Technology Segment. The growth in the Company's servicing portfolio since Fiscal 1999 was the result of loan production volume and the acquisition of bulk servicing rights. This growth was partially offset by prepayments, partial prepayments and scheduled amortization.

  During Fiscal 2000, the annual prepayment rate of the Company's servicing portfolio was 13%, compared to 28% for Fiscal 1999. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven primarily by the relative level of mortgage interest rates.

B2C Insurance Segment

B2C Insurance Segment activities include the operations of CIS, an insurance agency that provides homeowners, life, disability and automobile as well as other forms of insurance, primarily to the Company's mortgage customers. The increase in pre-tax earnings of $2.7 million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to an increase in renewal policies.

Processing and Technology Segment

Processing and Technology Segment activities include internal sub-servicing of the Company's portfolio, as well as mortgage subservicing and sub-processing for other domestic and foreign financial institutions. The increase in pre-tax earnings of $2.6 million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to growth in the sub-servicing portfolio and in sub-processing activities.

Capital Markets Segment

Capital Markets Segment activities include primarily the operations of CSC, a registered broker-dealer specializing in mortgage-related securities, and the Correspondent Division, through which the Company purchases closed loans from mortgage bankers, commercial banks and other financial institutions. The decrease in pre-tax earnings of $3.1 million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to CLD's decreased production volume and reduced margins on prime credit quality first mortgages driven primarily by the decline in refinance activity. This decline was partially offset by increased profitability of CSC due to higher trading volumes.

B2B Insurance Segment

B2B Insurance Segment includes the activities of Balboa, an insurance carrier that offers property and casualty insurance (specializing in creditor placed insurance) and life and disability insurance, together with the activities of Second Charter Reinsurance Company, a mortgage reinsurance company. The increase in pre-tax earnings of $18.7 million in Fiscal 2000 as compared to Fiscal 1999 was due to the acquisition of Balboa (on November 30, 1999) and increased mortgage reinsurance premium volume.

Consolidated Earnings Performance

Revenues for Fiscal 2000 increased 4% to $1.9 billion, up from $1.8 billion for Fiscal 1999. Net earnings increased 6% to $410.2 million for Fiscal 2000, up from $385.4 million for Fiscal 1999. The slight increase in revenues for Fiscal 2000 compared to Fiscal 1999 was primarily attributed to the Mortgage-Related Investments and B2B Insurance Segments, together with increased production of non traditional loan products (i.e., home equity and sub-prime loans). This increase was largely offset by a decline in traditional prime loan originations, which was attributable to a market-wide decline in refinance activity. Included in net earnings in Fiscal 2000 was a nonrecurring tax benefit of $25 million that related primarily to a corporate reorganization.

  The total volume of loans produced by the Company decreased 28% to $66.7 billion for Fiscal 2000, down from $92.9 billion for Fiscal 1999. The decrease in loan production was primarily due to a decrease in the mortgage market, driven largely by a reduction in refinances.

  Total loan production by purpose and by interest rate type is summarized below.

	Loan Production
(Dollar amounts in millions)	Fiscal 2000		Fiscal 1999
Purchase	$	43,594	$	39,681
Refinance		23,146		53,200
Total	$	66,740	$	92,881
Fixed Rate	$	57,178	$	88,334
Adjustable Rate		9,562		4,547
Total	$	66,740	$	92,881
Total loan production by Segment is summarized below.
	Loan Production
(Dollar amounts in millions)	Fiscal 2000		Fiscal 1999
Consumer Mortgages	$	40,500	$	60,133
Correspondent Division		26,240		32,748
Total	$	66,740	$	92,881

	Non-Traditional Loan Production
(Dollar amounts In millions)	Fiscal 2000		Fiscal 1999
Sub-Prime	$	4,156	$	2,496
Home Equity		3,636		2,221
Total	$	7,792	$	4,717

  Loan production revenues decreased in Fiscal 2000 as compared to Fiscal 1999 due to lower production and reduced margins on prime credit quality, first lien mortgages. This decrease was partially offset by improved margins on home equity and sub-prime loan production. Sub-prime loans contributed $186 million to the gain on sale of loans in Fiscal 2000 and $92 million in Fiscal 1999. The sale of home equity loans contributed $87 million and $65 million to gain on sale of loans in Fiscal 2000 and Fiscal 1999, respectively. In general, loan production revenue is affected by numerous factors including the volume and mix of loans produced and sold, and the level of pricing competition.

  Net interest income (interest earned net of interest charges) increased to $76.4 million for Fiscal 2000, up from net interest income of $51.7 million for Fiscal 1999. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($157.5 million and $124.7 million Fiscal 2000 and Fiscal 1999, respectively); (ii) interest expense related to the Company's mortgage-related investments ($280.0 million and $265.5 million for Fiscal 2000 and Fiscal 1999, respectively); and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($172.2 million and $184.6 million for Fiscal 2000 and Fiscal 1999, respectively).

  The increase in net interest income from the Company's mortgage loan inventory was primarily attributable to an increase in inventory levels as a result of a longer warehouse period combined with a higher net earnings rate during Fiscal 2000. The increase in interest expense on the investment in servicing rights resulted from a larger servicing portfolio. The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances caused by a decrease in the amount of mortgage prepayments.

  The Company recorded MSR amortization for Fiscal 2000 totaling $459.3 million compared to $556.4 million for Fiscal 1999. The Company recorded recovery of previous impairment of $278.3 million for Fiscal 2000 compared to impairment of $457.2 million for Fiscal 1999. The primary factors affecting the amount of amortization and impairment or impairment recovery of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline.

  In Fiscal 2000, the Company recognized a net expense of $264.1 million from its Servicing Hedge. The net expense included unrealized net losses of $230.9 million and realized net loss of $33.2 million from the sale of various financial instruments that comprise the Servicing Hedge, net of premium amortization. In Fiscal 1999, the Company recognized a net gain of $412.8 million from its Servicing Hedge. The net gain included unrealized net gains of $26.1 million and net realized gain of $386.7 million from the sale of various financial instruments that comprise the Servicing Hedge, net of premium amortization.

  Salaries and related expenses are summarized below for Fiscal 2000 and Fiscal 1999.

	Fiscal 2000
(Dollar amounts in thousands)	Consumer Businesses		Institutional Businesses		Corporate Administration		Total
Base Salaries	$	266,120	$	101,402	$	101,514	$	469,036
Incentive Bonus		98,759		26,533		20,659		145,951
Payroll Taxes and Benefits		41,231		15,345		18,205		74,781
Total Salaries and Related Expenses	$	406,110	$	143,280	$	140,378	$	689,768
Average Number of Employees		6,321		2,837		1,776		10.934
	Fiscal 1999
(Dollar amounts in thousands)	Consumer Businesses		Institutional Businesses		Corporate Administration		Total
Base Salaries	$	245,131	$	78,609	$	90,597	$	414,337
Incentive Bonus		149,376		19,877		20,107		189,360
Payroll Taxes and Benefits		40,790		12,556		12,643		65,989
Total Salaries and Related Expenses	$	435,297	$	111,042	$	123,347	$	669,686
Average Number of Employees		6,013		2,328		1,606		9,947

  The amount of salaries and related expenses increased during the Fiscal 2000 as compared to Fiscal 1999 primarily due to expansion of the consumer branch network, including the retail sub-prime branches and an increase in staff in the institutional businesses due to a larger servicing portfolio and the acquisition of Balboa on November 30, 1999. The increase was partially offset by a decline in consumer businesses as a result of a decline in mortgage originations. Incentive bonuses earned during Fiscal 2000 decreased primarily due to the reduction in loan production.

  Occupancy and other office expenses for Fiscal 2000 increased to $270.0 million from $254.6 million for Fiscal 1999. This was primarily due to expansion of the consumer branch network, a larger servicing portfolio and growth in the Company's institutional businesses primarily due to the acquisition of Balboa, partially offset by a reduction in temporary personnel expense as a result of decreased production.

  Marketing expenses for Fiscal 2000 increased 13% to $72.9 million, up from $54.5 million for Fiscal 1999. The increase was primarily related to the growth in the Company's origination volume of non-traditional loan products.

  Insurance net losses are attributable to insurance claims in the B2B Insurance Segment. Insurance losses were $23.4 million for Fiscal 2000 and are due to the acquisition of Balboa on November 30, 1999. These losses will increase or decrease during a period depending primarily on the volume of claims caused by natural disasters.

  Other operating expenses were $183.5 million for Fiscal 2000 as compared to $173.8 million for Fiscal 1999. The increase was primarily due to the acquisition of Balboa, partially offset by a reduction in reserves for bad debt due primarily to improved property values nationally.

  In Fiscal 2000, the Company initiated a corporate reorganization related to its servicing operations. As a result of the reorganization, future state income tax liabilities are expected to be less than the amounts that were previously recorded as deferred income tax expense and liability in the Company's financial statements. The expected reduction in tax liabilities was reflected as a reduction in deferred state income tax expense in Fiscal 2000.

Quantitative and Qualitative Disclosure About Market Risk

The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination (consumer and institutional) operations and mortgage-related investments, which are counter cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory and MBS held for sale, MSRs, MBS retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk.

  As part of its interest rate risk management process, the Company performs various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses incorporate scenarios including selected hypothetical (instantaneous) parallel shifts in the yield curve. Various modeling techniques are employed to value the financial instruments. For mortgages loans, MBS and MBS forward contracts and CMOs, an option-adjusted spread ("OAS") model is used. The primary assumptions used in this model are the implied market volatility of interest rates and prepayment speeds. For options and interest rate floors, an option-pricing model is used. The primary assumption used in this model is implied market volatility of interest rates. MSRs and residual interests are valued using discounted cash flow models. The primary assumptions used in these models are prepayment rates, discount rates and credit losses.

  Utilizing the sensitivity analyses described above, as of February 29, 2001, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in no after-tax loss related to its trading securities or to its other financial instruments and MSRs combined. These sensitivity analyses are limited by the fact that they are performed at a particular point in time, are subject to the accuracy of various assumptions used, including prepayment forecasts, and do not incorporate other factors that would impact the Company's overall financial performance in such a scenario. Consequently, the preceding estimates should not be viewed as a forecast.

  An additional, albeit less significant, market risk facing the Company is foreign currency risk. The Company has issued foreign currency-denominated medium-term notes (See Note F). The Company manages the foreign currency risk associated with such medium-term notes by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars, thereby eliminating the associated foreign currency risk (subject to the performance of the various counterparties to the currency swaps). As a result, potential changes in the exchange rates of foreign currencies denominating such medium-term notes would not have a net financial impact on future earnings, fair values or cash flows.

Inflation

Inflation affects the Company most significantly in the Consumer Mortgage Originations, Mortgage-Related Investments and Capital Markets Segments. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production decreases, particularly from loan refinancings. Although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting primarily from over capacity in the market. In a higher interest rate environment, mortgage-related investment earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio and reducing amortization and impairment of the MSRs, and because the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the prevailing mortgage rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its mortgage-related investment earnings primarily due to increased amortization and impairment of the MSRs, and decreased earnings from residual investments. The Servicing Hedge is designed to mitigate the impact of-changing interest rates on mortgage-related investment earnings.

Seasonality

The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in mortgage rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise temporarily in the winter months.

Liquidity and Capital Resources

The Company's principal financing needs related to its mortgage banking operations are the financing of its mortgage loan inventory, investment in MSRs and available-for-sale securities. To meet these needs, the Company currently utilizes commercial paper supported by revolving credit facilities, medium-term notes, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, redeemable capital trust pass-through securities, convertible debentures, securitization of servicing fee income and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from revolving credit facilities and public offerings of common and preferred stock. The Company strives to maintain sufficient liquidity in the form of unused, committed lines of credit to meet anticipated short-term cash requirements as well as to provide for potential sudden increases in business activity driven by changes in the market environment.

  Certain of the debt obligations of CCI and CHL contain various provisions that may affect the ability of CCI and CHL to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of CCI and CHL to pay dividends.

  The principal financing needs of CCM consist of the financing of its inventory of securities and mortgage loans and its underwriting activities. Its securities inventory is financed primarily through repurchase agreements. CCM also has access to a $200 million secured bank loan facility and a secured lending facility with CHL.

  The primary cash needs for the B2B Insurance Segment are to meet short-term and long-term obligations to policyholders (i.e., payment of policy benefits), costs of acquiring new business (principally commissions) and the purchases of new investments. To meet these needs, Balboa currently utilizes cash flow provided from operations as well as through partial liquidation of its investment portfolio from time to time.

  The Company continues to investigate and pursue alternative and supplementary methods to finance its operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the additional securitization of servicing income cash flows.

  In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management.

  In the course of the Company's mortgage banking operations, the Company sells the mortgage loans it originates and purchases to investors but generally retains the right to service the loans, thereby increasing the Company's investment in MSRs. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity.

Investing Activities The primary investing activity for which cash was used by the Company was the investment in MSRs and available-for-sale securities. Net cash used by investing activities was $2.4 billion for Fiscal 2001 and $3.1 billion for Fiscal 2000.

Financing Activities Net cash provided by financing activities amounted to $5.8 billion for Fiscal 2001 and net cash used by financing activities amounted to $0.9 billion for Fiscal 2000. The increase in cash flow from financing activities was primarily used to fund the Company's investment in MSRs and available-for-sale securities and the increase in trading securities and other financial instruments.

Prospective Trends
Applications and Pipeline of Loans in Process

For the month ended April 30, 2001, the Company received new loan applications at an average daily rate of $675 million. As of April 30, 2001, the Company's pipeline of loans in process was $18.6 billion. This compares to a daily application rate for the month ended April 30, 2000 of $344 million and a pipeline of loans in process as of April 30, 2000 of $9.2 billion. The size of the pipeline is generally an indication of the level of near-term future fundings, as historically 41% to 77% of the pipeline of loans in process has funded. In addition, at April 30, 2001, the Company had committed to make loans in the amount of $2.2 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP® Pipeline"). At April 30, 2000, the LOCK 'N SHOP® Pipeline was $3.2 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage loans, the level of competition in the market, the direction of mortgage rates, seasonal factors and general economic conditions.

Market Factors

Loan production increased 3% from Fiscal 2000 to Fiscal 2001. This increase was primarily due to an increase in loan purchase production of 14% to $49.7 billion during the same period driven by an increase in the Company's market share.

  The prepayment rate in the servicing portfolio decreased from 13% for Fiscal 2000 to 11% for Fiscal 2001.

  The Company's California mortgage loan production (as measured by principal balance) constituted 26% and 22% of its total production during Fiscal 2001 and Fiscal 2000, respectively. Some regions in which the Company operates have experienced slower economic growth, and real estate financing activity in these regions has been impacted negatively. The Company has striven to diversify its mortgage banking activities geographically to mitigate such effects.

  The delinquency rate in the Company's servicing portfolio, excluding sub-servicing, increased to 4.68% as of February 28, 2001 from 3.97% as of February 29, 2000. this increase was primarily the result of changes in portfolio mix and aging. Sub-prime loans (which tend to experience higher delinquency rates than prime loans) represented approximately 5% of the total portfolio as of February 28, 2001, up from 3% as of February 29, 2000. In addition, the weighted average age of the FHA and VA loans (which also tend to experience higher delinquency sales than conventional loans) in the portfolio increased to 36 months at February 28, 2001 from 31 months in February 29, 2000. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. Related late charge income has historically been sufficient to offset incremental servicing expenses resulting from increased loan delinquencies.

  The percentage of loans in the Company's servicing portfolio, excluding sub-servicing, that are in foreclosure increased to 0.54% as of February 28, 2001 from 0.39% as of February 29, 2000. Because the Company services substantially all conventional loans on a non-recourse basis, related credit losses are generally the responsibility of the investor or insurer and not the Company. While the Company does not generally retain credit risk with respect to the prime credit quality first mortgage loans it sells, it does have potential liability under representations and warranties made to purchasers and insurers of the loans. In the event of a breach of these representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent loss on the mortgage loan will be borne by the Company. Similarly, government loans serviced by the Company (22% of the Company's servicing portfolio as of February 28, 2001) are insured by the FHA or partially guaranteed against loss by the VA. The Company is exposed to credit losses to the extent that the partial guarantee provided by the VA is inadequate to cover the total credit losses incurred. For Fiscal 2001, 2000 and 1999, the losses on VA loans in excess of the VA guaranty were approximately $4.1 million, $8.5 million and $13.2 million, respectively. The Company retains credit risk on the home equity and sub-prime loans it securitizes, through retention of a subordinated interest or through a corporate guarantee of losses up to a negotiated maximum amount. As of February 28, 2001, the Company had investments in such subordinated interests amounting to $763.6 million and had reserves amounting to $56.3 million related to such corporate guarantees.

Servicing Hedge

As previously discussed, the Company's Servicing Hedge is designed to protect the value of its investment in MSRs from the effects of increased prepayment activity that generally results from declining interest rates. In periods of increasing interest rates, the value of the Servicing Hedge generally declines and the value of MSRs generally increases. The historical correlation of the Servicing Hedge and the MSRs has been very high. However, given the complexity and uncertainty inherent in hedging MSRs, there can be no assurance that future results will match or approximate the historical performance of the Servicing Hedge.

Implementation of New Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, amended by Statement No. 137, Deferral of the Effective Date of FASB Statement No. 133 and Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to FASB Statement No. 133 (collectively, "FAS 133"). FAS 133 requires companies to record derivatives on their balance sheets at fair value. Changes in the fair values of those derivatives would be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value of assets or liabilities or cash flows from forecasted transactions. This statement was effective for the Company on March 1, 2001. At the date of initial application, the Company recorded certain transition adjustments as required by FAS 133. There was no impact on net income as a result of such transition adjustments. However, such adjustments resulted in the Company reducing the carrying amount of derivative assets by $94 million and recognizing $107 million of derivative liabilities on its balance sheet. Management believes that the Company's hedging activities are highly effective over the long term. However, the implementation of FAS 133 could result in more volatility in quarterly reported earnings as a result of market conditions that temporarily impact the value of the derivatives while not reducing their long term hedge effect.

  In September 2000, the FASB issued Statement No. 140 ("FAS 140"), Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces FAS 125 (of the same title). FAS 140 revises certain standards in the accounting for securitizations and other transfers of financial assets and collateral, and requires some disclosures relating to securitization transactions and collateral that were not required by FAS 125; however. FAS 140 carries over most of FAS 125's provisions. The collateral and disclosure provisions of FAS 140 are effective for fiscal years ending after December 15, 2000. The February 28, 2001 financial statements for the Company include the disclosures required by FAS 140. The other provisions of FAS 140 are effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not expect that the adoption of this statement will have a material impact on the Company.