美國銀行 (BAC) 2002 Q1 法說會逐字稿

With that being said, here now is your host, Countrywide Chairman, Chief Executive Officer, and President, Mr. Angelo Mozilo. Please go ahead sir.

Thank you. Good morning and welcome to Countrywide's earnings conference for the first calendar quarter of 2002. We strongly encourage all participants to view the first quarter earnings and performance report while listening to this call. This report can be found on our website www.countrywide.com, by clicking on Investor Relations on the homepage and then selecting presentations and quarterly earnings and performance reports. On page two of the earnings and performance report, we provide an agenda for today's teleconference. First, I will focus on the operational and earnings performance of our diversification activities. These diversification businesses are a key driver of Countrywide's earnings growth. The next topic is our core business, mortgage banking, where we'll specifically address our success in the home purchase mortgage market. The formal presentation will conclude with various earnings analyses. I will then open the call for questions from teleconference participants.

Countrywide reached unprecedented milestones in numerous categories during this quarter. Most importantly, an all-time record earnings of above 32 per diluted share were 55 percent higher than last year. This was our fourth consecutive quarter of record earnings. Let's begin with our first topic on page three, the historical earnings contribution of our diversification activities. For several years, Countrywide's management has strategically focused on diversifying the company's earnings and reducing its sensitivity to mortgage banking cycles. Our core strategy is to leverage a world-class mortgage banking platform to grow our other consumer and institutional businesses. Pre-tax earnings from our diversified businesses in the first quarter reached 75 million. They were up 92 percent over the prior year quarter. As depicted on the bottom line of the schedule, the contribution of earnings from our diversification activities has grown from 19 percent in the first quarter of 2000 to 24 percent in 2001 and 28 percent this past quarter. Since our mortgage banking business doubled its earnings in the same timeframe, it is more remarkable that diversification increased as a percentage of the mix. Turning to page four, we focus on our capital markets business that provided 15 percent of the consolidated earnings during the first quarter. Capital markets earnings were $40 million for the quarter, up from 16 million last year. The driving force in capital markets is our securities broker-dealer. Countrywide -- the securities trading volume reached 433 billion during the quarter, 47 percent higher than last year and 214 percent higher than 2000. Countrywide Securities Corp ranked number 12 in calendar 2001 in [indiscernible] mortgage bank securities trading up from 15 -- number 15 in 2000. Countrywide Securities Corp was the lead underwriter on five CMOs transactions during the quarter, two ARM securitizations, four [sub-prime] securitizations and five ABS securitizations. In addition, Countrywide Securities led nine supported bond deals and a Countrywide Home Loans medium-term note issuance. Dispelling the notion that CSE is strictly driven by Countrywide-directed business, many of these securitizations will collateralize by third-party product. Other capital market subsidiaries include Countrywide Service Exchange, a broker mortgage servicing rights and Countrywide Asset Management, a distressed asset manager that acquires and manages non-performing loans for rehabilitation and eventual sale.

On page five of the presentation, we next review our insurance businesses. Second Charter is our reinsurance subsidiary that exclusively reinsures Countrywide-originated products. The number of policies we insured has grown in line with the servicing portfolio, and our goal is to maintain that trend in the future. Balboa Life and Casualty is our insurance carrier. Polices in force have grown 28 percent over the prior year.

Joe Haque]:

Our newest diversification initiatives; banking, is addressed on page six. Total assets of the bank reached 3 billion at March 31. The asset mix will ultimately feature prime, adjustable-rate first mortgages, prime home equity loans, AAA and AA rated securities. Earnings reached 10 million during the first quarter, a significant amount given that banking operations have only recently commenced. Return on assets will improve at the bank as we deploy recently acquired funds into their intended investment categories. Countrywide's banking strategy is designed to capitalize on numerous readily available synergies with our other businesses. Operating and overhead cost will be kept at an absolute minimum. We will leverage certain of our existing retail loan branches by adding financial centers that will provide a physical presence to complement the Internet. In addition, our 3.4 million mortgage customers will provide a captive retail audience. The bank can also draw on instantly available low-cost funding through the $6 billion of core Escrow funds we control, attendant to our servicing portfolio. The bank will empower portfolio-lending capability at Countrywide and provide significant spread income in the future. This capability will make the company a much more competitive adjustable rate lender, which is especially important when rates begin to rise and the re-finance boom ends.

Also included in banking is Countrywide's warehouse lending. A warehouse [indiscernible] finances, the mortgage inventory of small mortgage bankers and mortgage brokers. The pie chart on page seven reflect a mix of earnings between the core business of mortgage banking and our diversification businesses for the first quarter compared to expectations in five years. After comprising 22 percent of earnings for the 10 months ended December 31st, 2001, our diversification businesses provided 28 percent of earnings in the first quarter. Management expects that these businesses will contribute 50 percent of consolidated earnings within five years. Banking is expected to grow at a rate that substantially exceeds the consolidated growth and provide 25 percent of the earnings in five years. Capital markets and insurance are expected to grow at a rate similar to the consolidated group, and we've [made] it roughly 10 percent. Global, our international mortgage processing operation is expected to derive 5 percent of earnings in five years. Mortgage banking, our core business, will continue to grow, although not at the same rate as the overall company. Keep in mind that the consolidated earnings pie will be significantly bigger in 2006 than it is today. We remain very bullish on our mortgage banking business especially due to the extraordinary opportunity provided to us by the consolidation in our industry. Moving forward to page eight, we turn our attention to LandSafe companies, our loan closing services provider. LandSafe provides Countrywide with a significant competitive advantage, since we can provide a one-stop shop for customers, and we retain a higher degree of control over the customer service level. While LandSafe is diversification activity and is classified in the mortgage banking operation because of its high correlation with interest rate cycles. By filling 1.9 million orders for all products during the first quarter, LandSafe grew by 54 percent over this last year. While the LandSafe businesses do not require significant equity, they did provide 5 percent of consolidated earnings.

We are most proud of the fact that 31 percent of the orders filled during the first quarter came from third-party sources outside of the Countrywide family. Only 20 percent of orders filled in the first quarter of 2001 were external and 7 percent in 2000, a significant improvement. On page nine is a brief summary of our mortgage banking operations and earnings performance. Log] reduction was up 85 percent over the prior year and 266 percent over 2000. The servicing portfolio stands at 355 billion at March 31st. Countrywide grew its servicing portfolio fast than ever during the 2001 refinance boom while certain competitors actually experienced shrinkage in their portfolio. Production earned an all-time best, 448 million, driven by record fundings and margins. Extraordinarily high margins were realized in November and December applications that funded later in the first quarter. Rates remained much lower than expected during the quarter and resulted in a strong purchase in the refinance market. Countrywide also foresees significant increase in market share. Warehousing of home equity loans provided 30 million of spread income that was included in the production sector. In addition, home equity loan sales were re-instituted during the first quarter. A gain of 36 million was realized on the sale of 1.05 billion of home equity loans. Servicing incurred a loss of 271 million during the first quarter. Servicing hedge cost increased significantly during the quarter due to spread's tightening between Treasuries and Mortgages. While this spread tightening adversely affected positions in the servicing hedge, the tightening kept mortgage rates low and drove the afore mentioned record fundings and production margins. This is a classic example of the macro hedge at work.

Ordinarily, the MSRs to be written up as their market value increased that would offset the increased hedge cost. However, since rates remain relatively low and prepayment stayed relatively high, management believed it prudent to maintain a conservative posture on MSR amortization. Therefore, sections used to dilute MSRs did not resolve in a write up on the balance sheet. The bottom line for our mortgage banking business during the first quarter is that macro hedge worked precisely as designed. An unusually low-rate environment resulted in record production earnings driven by record fundings and margins. These earnings subsidize the performance of our servicing operation.

The presentation addresses one other important issue under the heading of mortgage banking on page 10. Countrywide has strategically focused on home purchase mortgages because of the consistent consumer demand to this product, which in turn results in a very stable growth in the overall purchase market. The chart on page 10 reflects that industry purchase volume has grown at a compound annual rate of 9 percent through the last ten years. During that same time frame, Countrywide has grown its purchase volume at a compound annual growth rate of 29 percent. Accordingly, while the overall purchase market has nearly doubled, Countrywide has grown by over 10 times.

We address home purchase mortgage activity in a more recent time frame on page 11. The overall industry, the [MPA] application index grew over 10 percent during the first quarter compared to last year. Based on Countrywide's estimates, industry purchase fundings for the first quarter of this year grew 13 percent over last year. By comparison, Countrywide's purchase application grew 51 percent over the prior year, compared to 10 percent of the industry. More important Countrywide's purchase fundings grew 65 percent over the prior year compared to 13 percent for the industry. Thus, Countrywide now estimates its purchase market share at over 8 percent. Our correspondent mortgage broker divisions enjoy significant increases in purchase funding volume as well. While eminently successful in minding our own portfolio refinances, our retail division has also developed another key strategy for purchase business. In order to augment our proprietary retail branch strategy first developed in 1974, we have assembled a commission sales force, second to none. Head count in the commission sales force for the retail division exceeded 1,600 people at March 31, compared to less than 800 one year ago. This new team is complimented by 1,200 retail branch managers, internal home consultants, and call center personnel. We expect this growing world-class sales force to be a key driver of future purchase market share growth. Turning to page 12, we analyze our earnings estimates to the second calendar quarter. Consistent with prior policy, management believes that it is appropriate to provide earnings guidance for our next quarter. This information is included in our earnings press release and is intended to facilitate analysis of the company by investors and other parties. Low interest rates are expected to drive relatively high funding volumes of prepayments again in the second quarter. Accordingly, production earnings will remain strong while high MSR amortization will continue to impact servicing earnings. Diversification earnings are expected to be in line with the past quarter. In view of these anticipated results, management believes that Countrywide's earnings for the second calendar quarter of 2002 should fall in the range of between $1.33 and $1.37 per diluted share. This estimate should be considered as a forward-looking statement as described in the disclaimer on the last page of this presentation. On page 12, we depict hypothetical scenarios under which we match the low point and the high point of our estimated earnings range for the second calendar quarter. Production range for the low scenario are based on [kind of] total market size of 400 billion, a market share of 8 percent, and a margin of 66 basis points. Production range for the high scenario are based on a total market share -- market size of over 150 billion, a market share of 8 percent, and margins of a 100 basis points. Production in margins last quarter were 102 basis points. Servicing earnings for the low scenario are based on an average portfolio of 360 billion and a breakeven margin. Servicing earnings for the high scenario are based upon an average portfolio of 360 billion, and margins of minus 18 basis points. The rates -- ultimately while -- when rates ultimately rise and we return to a normal market, servicing would be expected to [comply] 35 to 50 percent of mortgage banking earnings. Servicing margins last quarter were minus 32 basis points. Diversification earnings for the low scenario are 75 percent of the first quarter actual, while diversification earnings for the high scenario are 100 percent of the first quarter actually. Based on the actual first quarter effective rate of 37 percent, and weighted average shares outstanding for 127 million, diluted earnings per share for the low scenario would be a $1.33 and a $1.37 for the high scenario.

We now turn your attention to the disclaimer on page 13. The estimates addressed earlier are subject to certain risks and uncertainties, which would cause actual results to differ from those anticipated due to a number of factors including, but not limited to, those listed in the disclaimer. In closing, I'd like to mention certain commendations that we are very proud at the Countrywide that we have recently received. Countrywide's management and all 20,000 employees of the company were proud of these achievements that are listed -- and they're listed in no particular order. Countrywide was ranked number one in customer satisfaction among the largest national home mortgage lender like JD Power, JD Power's [model] 2002 home mortgage study. Countrywide is ranked as the number one lender to minorities by mortgagestats.com, an affiliate of The National Mortgage News. This ranking was based on 2000 [indiscernible] rankings.

Countrywide was ranked number 183 in the Forbes 500 for 2002. Our ranking in 2001 was 264. Countrywide was ranked number 345 in the Fortune 500 for 2002. Our ranking for 2001 was 506. Countrywide was ranked number four in mortgage finance in Fortune's 20th anniversary list of America's most admired companies. Countrywide is ranked number two in the overall first quarter 2002 Gomez Proprietary Internet Mortgage Scoreboard. Countrywide is ranked number one in the Onsite Resources and novice homebuyer categories. These again are accolades that we're extremely proud of. This concludes my prepared remarks. I now ask the operator to explain how we'll conduct our questions and answer period. Thank you very much.

Thank you. Once again ladies and gentlemen, if you wish to ask a question please depress the "1" on your touchtone phone. Once again if you wish to ask a question, please depress the "1." The first question will come from the line of Mike Vinciquerra. Please go ahead.

Thanks very much, and congratulations on a great quarter guys. I wanted to ask on the bank side, you've grown the liabilities in that area fairly rapidly and the estimates as well.. I'm just curious. What's your current composition of assets there? How do you see that changing over the next couple of quarters, and can you give us a general feel for what those assets are approximately yielding in today's market?

Stan's going to respond to that.

Okay.

The -- you know primarily what we've invested in is -- are [Heelocks] mortgages. Those mortgages have a spread over live or about 2 percent over live or an average. The -- then we have adjustable rate mortgage securities and some fixed rate seconds as well, and that, you know, given the mortgage backed securities, [Heelocks], most of the assets are very tied to floating rate levels and have significant spread over our cost of funds.

And the credit performances on that just has remained very high I assume?

Yes, everything that the bank has invested in is, you know, prime quality. The securities are in AAA securities. So it's a this very low level of credit exposure by the -- at the bank, the [Heelocks] that the bank is originating are prime coming out of the Countrywide portfolio, and we have years of experience in terms of the performance of those loans, and you know -- we obviously set up appropriate reserves at the point of origination and as the loans are aging.

Okay, very good. I'll jump back in line for another follow up. Thanks.

Thank you. Our next question will then come from the line of Paul Miller. Please go ahead.

Yes, great quarter guys. Hey Angelo, can you talk about your capital markets and where you're heading from here. It doubled from last -- the November quarter, and can we expect this type of growth going forward. I saw in your estimates for diversified income, you kept it at $75 million. Could you just talk about it a little bit?

Angelo Mozilo, Countrywide Credit Industries Inc. - Chairman, President, and Chief Executive Officer

While I think -- this is Angelo -- the capital markets is somewhat correlated to the overall size of the market. So if the size of the market decreases, you would expect that the capital markets would be impacted by it, because of the numbers of securitizations would be reduced. The counter to that and what we would hope would happen, if we take a conservative view of this project, is that they -- they will increase the number of customers they have outside of the Countrywide family. So to the extent that they can accomplish that, it could counter a slow down would be created by lower volumes.

Okay, thanks.

Thank you. Our next question will be from the line of Brad Ball. Please go ahead.

Thanks. You mentioned in your comments that ultimately as rates rise you expect servicing to comprise 35 to 50 percent of earnings. Would you comment -- does that include any impairment recovery? And, you know, at what point would you expect to start seeing recovery of the impairments that you incurred last year? Some of your peers in the industry have already started to show some of that. Where do the rates have to go to?

We don't have any peers in the industry. The -- you want to comment on it? Yes, you know, basically when we quote the 30 to 50 percent level, that does not include any net income from impairment recovery to the extent that we would have impairment recovery basically in the mode where there were -- where we were offsetting, you know, hedge losses. That's our -- you know, the primary way that we have designed. The hedge is in position that we are managing; however, you know, it's not a perfect science. You know, there are spread changes and changes in the market that could result in our having gains that are the result of impairment recovery, but if you look at it really as a net of the hedge activity versus impairment recovery, you have the hedge which is -- you know, is set to decline in value in a rising rate environment and the servicing asset set to increase in value.

Yes. I would say just that this is not a direct answer to your question, but our view of it -- as I mentioned in my remarks that we want to continue to take a conservative view of the -- of that asset and be very diligent and scrupulous in writing that asset off.

If we're looking for some impairment recovery later this year, would it be -- you know only if rates get above 750 let's say or...

I think -- look, I don't think it [indiscernible] to a formula. As Stan says, it's not an exact science. There's a lot of moving parts. So I would hate like hell to commit to you and anybody else that at a certain level we would do X and another level we would do Y. I don't think we're prepared to respond to that now, and I'd be concerned about responding to that type of question on a going forward basis. I think that -- I said overall that's what we're approaching on a conservative basis, but I can't give a level -- no one at this table can give you a level at which we would start writing up to portfolio using the impairment reserve.

Thank you. Our next question will now come from the line of Mike McMahon. Please go ahead.

Anne will go through that with you. I don't think [indiscernible] came from Treasury Bank. Twelve million?

Yes -- about 12 million was from the -- from Treasury Bank.

Let Stan - Stan will go through the matrix with you as to why that -- you know, what had happened because it was two and three million versus zero -- you know, in this comparable quarter. We are, you know, within the bank -- the bank is comprised of two -- our bank is comprised of two segments, the Treasury Bank, which is about $12 million of the spread and Countrywide Warehouse lending, which made up of about 5 million. The spread that we're enjoying is obviously the result of the very steep yield curve. I think in understanding interest, it's important to understand that in the modeling of mortgage pricing, we look to generate our margins and part of that margin, of the -- and the profitability of originating a mortgage is what is your warehouse spread going to be versus what is your gain on sale value. And so as the -- you know, basically when the yield curve becomes very steep, and this is also true in our capital market's area, more income is generated from interest spread. And when the yield curve flattens, as we anticipate that it ultimately will, you know, flat from this very steep level, then the models used for pricing mortgages will shift more of that gain to gain on sale. So I think it's important to understand that attribute of net interest income. There is a portion obviously of our net interest spread, which is volume related. In the sense that just as origination margins are volume related, this is just a -- most of it is just a component of the, you know, for example, about a $165 million of the spread relates to our mortgage origination operations, of which I think about 30 to 35 million will actually include [Heelocks] spreads that we're holding. You know, this is a good environment obviously for more of this production, and a good environment for spread income. Spread income will, you know -- want to make a clear shift to gain on sale in a less steep yield curve.

A follow up to that. Where is the -- where do you allocate the benefit from your escrow balances? To what segment -- is that production or mortgage servicing?

Servicing.

Thank you. Our next question will now be from the line of Jonathan Gray. Please go ahead.

Yes. First of all, you know, congratulations on a tremendously exciting quarter. The market share penetration is very exciting. Let me just voice my frustration. In that 76 percent of your pre-tax income is now spread income derived from the $42 billion balance sheet, which would make you one of the 25 largest commercial banks in the country by assets, and the information is just not available to allow any insight into that component of your earnings. We need detailed information on the yields, on assets on the balance sheet, whether they're adjustable or fixed, and we need detailed information on the nature of the liability portfolio -- maturities by quarter for a year and annually thereafter and the rates on the maturing balances. Otherwise, commentary on the steep yield curve, flat yield curve, and how it will all move, we really need to quantify. Three quarters of earnings comes from the balance sheet. It's a black box right now. Let me ask specific questions. The company's historical by segment analysis; for some reason, why you release it days after you release earnings -- I have no idea. But there are a number of numbers that that contains that would be of help. Can you tell us what the hedge gain was in the quarter? What amortization expense was? What impairment was? What interest on escrow balances were? And what the gain on sale of sub prime loans was?

Okay. Let's take it one at a time here. First of all let me just comment on your first question. Jonathan asked initially for some information relative to interest earnings -- is it what he's articulated. Can that be supplied to him?

Everybody.

I think -- I understand your question.

I believe we can. We certainly can, and we did put some additional disclosure into the 10K that should give some insight into it.

Okay. Let me ask [Keith] could you -- may be off line get with Jonathan.

I'm sure everyone would want that information.

I know. We just -- I just -- but I want to make sure we understand exactly, you know, what you just articulated.

I have a send a detailed question list to investor relations. If you take the Annual Report of a [thrift] Golden West Financial, for example, you'll find a format it's very helpful.

Okay, Yes Jennifer just mentioned that she has your list and I'll have [Keith] go through it. Okay. Now, the B part of your question; can you run through those three or four items again that you?

Can you tell us what the hedging gain was that will be disclosed in three to five days in the historicals by segment analysis; if you have that information?

[indiscernible]. All right, go ahead.

On the servicing asset, which I think you are referring to, we had a hedge loss of about $330 million.

Amortization expense, separate and apart from impairment or recovery, or the impairment and recovery?

Amortization was about 267 million.

Okay and was there an impair -- there was no recovery you said was...

Eleven million recovery.

Seven million recovery?

Eleven.

Eleven?

Yes, 11.

Interest on escrow balances?

Yes, net of about $3 million.

Okay and gain on sale of subprime in the quarter?

Seventy five million.

Thank you very much and fantastic results on all business. Congratulations.

Thank you Jonathan, we'll get -- you know, if you're not -- you know, if we're not connecting here. Just give me a call, and I'll make sure that we connect on the stuff, and we'll just break that information to everybody.

Absolutely, thank you very much.

Thank you John.

Our next question will now be from the line of Gary Gordon. Please go ahead.

Okay thanks. I sure would like to follow up a little on Jonathan's questions. To broaden out the -- the gain thing that is -- total value of the servicing booked, what was that?

We're looking out for that number, what's your next question?

Yes, that service number [indiscernible] -- too -- I guess hearing the numbers you just gave Jonathan, you know, typically you're much closer matched on the hedge result and the impairments/recovery charge. This is 330 versus 11. This is highly unusual in your history. What was going on?

You know, basically you have rates increasing during the period. So you know, clearly in a hedge you're going to have a loss in your hedge instruments that when you market in the market in a rising rate environment during -- so we -- you know, we have a level of expense in running a derivative position that is normal for the hedge asset. And during the -- this particular quarter, we had a spread tightening -- a tightening between treasuries and mortgage backs which resulted in a decline -- a further decline in the value of the hedge instruments which wasn't fully offset by the value of the servicing asset. At the same time, we've taken a very prudent and conservative view in terms of the value of the servicing asset. So as we indicated, we only recovered about $11 million of value on the portfolio. And that's you know, the general explanation.

Yes, I think generally, you know, when you say what's going on Gary. We, you know, we are a different company today, and you're going to see a lot of changes that you're not going to be used to, you know, based upon a short span. We are a different company than we were just a year ago. Not only are we diversified, but as I stated at least three times in my presentation that we going to continue to treat the balance sheet in a very conservative and transparent way and so this is part of the trend you're going to see. That's, you know, that's the difference. No question there's a difference in our approach to the balance sheet. What was the...

Yes, Gary, to circle back on your question, the total amount of MSRs capitalized during the quarter was roughly at 770 million.

Okay thanks. One final thing, the -- your -- the business, it's sort of off the track in the mortgage businesses, the homeowners insurance underwriting. Maybe just a quick deal for how your underwriting results were in the homeowner's business?

Yes, just trying to get a feel for the profit margin. What were your -- the claims for the results?

Okay, what was the profit for Balboa? Balboa was 7 million for -- no, 8 million. The profit in Balboa for the quarter was $8 million.

Okay thanks.

You're welcome.

Thank you. We'll now go to the line of Michael Vinciquerra. Please go ahead.

Thanks very much. Kind of on the lines of what that Jonathan is getting at, it's just that a lot of the metrics are changing pretty rapidly. So I think that's what, why he's looking for some additional information. I think that would be helpful for all of us but...

We agree. We don't have any disagreement with Jonathan.

Okay, great. Two things that I do want to look at that are also changing. Just looking at your -- the average servicing fees seemed to jump in the quarter, and I'm wondering if that's just a -- is it a result of lower guarantee fees, because you report a net number now, or is it a result of higher late fee income or what was going on with that?

Actually, it's been up about from 48 basis points to about 51, quarter over quarter.

It's more than the just the net service being included in that number. That would also include the net earnings from our residual interests, as well as other ancillary fees. So in tandem, those were up over the previous quarters, primarily earnings on residuals.

Okay. And then just looking at your employee count, certainly earnings have been growing very nicely, and so there's a reason from full [account] to continue going up, but at what point in the cycle, do you start to look at the production side of the business and some other areas and start to cut back? Are most of your employee additions besides the commission sales force still the temporary type of employees or what should we look at?

Let me just go through it. First of all, you know, obviously we have to depend upon management. We've been through theses cycles not too many times about 47 in less than two years. So I think you have to have confidence that we understand the cycles and what to do in those cycles. But let me give you the basic breakdown of how -- of what the increase is. We have, obviously, in expanding -- we have had an expanding capital markets area, so they continue to hire. The servicing area; we continue to grow there. That's a growing asset, ever-growing asset and for every -- we put on about -- net about 60,000 loans a month. For those 60,000 loans, we have to hire 30 people. That's about 2,000 loans per person. So servicing continues to grow. We continue to grow the Balboa, irrespective of interest rates. That's not impacted because we're growing outside customers, institutional customers. So that's growing and so there's, you know -- as long as we're executing properly and providing good quality products and service, that business will continue to grow. On the production side, we will continue to grow the sales force. Our intention is we have about -- I think I mentioned about 2,500 to 2,600 people. We'll grow that to an over 3,000 by the end of the year. Those are commission sales force. Where the cut backs will come? In the event that the volumes slowdown, will be in the on the operational side of production. So if you see the volumes slow down, you'll know that we are cutting back on the production side of business - that's the processing side of the business. And that's probably the one that's materially most affected, when interest rates rise. However, you can see by the presentation that we're picking up market share at a record breaking pace, and that's created by two things. One is we have an extraordinarily aggressive sales campaign going on and bringing on these commission sales people at a very rapid pace. We're seeing the results of that already. That's where our purchased market share has picked up. The second thing we have going on is a consolidation taking place in the industry with [Willmore] and [Wells], primarily [Willmore] which is very disruptive to them, culturally and disruptive to the companies they are acquiring, and we're able to pick up some terrific intellectual talent as the [indiscernible] take place. So I would expect that even though interest rates will rise, we have an opportunity this time with this sales force to continue to increase our volumes. But if that is not the case -- you know, if you see our volumes start decreasing significantly where the cut will be, will be on the operational side of the business.

Okay very good, and the net sales force remains almost entirely a variable cost?

It's a variable cost, right,and we're going to continue to grow it.

Okay thanks Angelo.

Thank you. Our next question is also a follow up from Paul Miller. Please go ahead.

Yes, I have two follow-up questions. One really quick on the $770 million of MSRs that were capitalized over the quarter, can you tell me what -- where was the capitalized cost of servicing of that $770 million?

The capitalized costs.

Were you ba -- yes?

Yes.

One seventy four.

One, yes 1.74.

One point seven four, and then you also talked about, you sold about $1.05 billion of home equity loans?

Correct.

And I estimate -- I mean, you said in the last call you had about $2.5 billion. Can you tell me what the new balance of the home equity loans are?

It's about 3.5.

And I -- did you transfer any to the bank at this point?

Yes, we -- you know, just round of those numbers for you. We produced in the quarter about 2.3 billion of [Heelocks] and sold, yes as we mentioned, just over a billion dollars of [Heelocks]. At the same, we transferred 500 or contributed $500 million of [Heelocks] to the bank, and also within our production -- actually, the bank produced on its own about $80 million of [Heelocks] during the quarter, which is included in the 2.3 billion of production.

Okay. And -- and most of the [Heelocks] will be sold in the secondary markets that you have on the books right now.

Yes, eventually --.

In the parent -- in the parent, not in the bank.

At the parent, that's what I meant. That will be sold in the secondary markets?

Yes.

Okay. And can you mention really briefly -- sorry about that -- your global homes markets? I noticed that it really was down this quarter.

We have -- when we originally made the -- put together the transaction, as you know we put together with the [indiscernible], it was based upon the volumes they had at the time. Two things have happened since then. Their volumes have quadrupled primarily as a result of the fact that we've taken the processing burden off their back, and their sales arm has gone wild, and they have -- they've produced last month 22,000 known applications in the UK, just in the [indiscernible]. indiscernible] then was purchased by the Barclays, and now we have to gear ourselves to not only quadruple the business we anticipated, but now taking down the Barclays' servicing and origination operation. That requires a substantial investment both intellectual -- in intellectual assets as well as technological assets, operational, space facilities. And so we're going through this -- we're going through it now, and that's what those numbers reflect as this investment we're making to handle the substantially higher volumes that have occurred since we have put the partnership together.

And when do you think it can start adding [indiscernible].

I think it's going to take another -- I should say another quarter at least for us to work our way through all the changes that have to made to provide more robust technology, and you know, get all the people that we have to get in place. So I would say it's going to be at least another quarter before we see the results coming.

Thank you very much.

You're welcome.

Thank you. Our next question is now from the line of Richard Eckert. Please go ahead.

Yes. I noticed that there was a substantial increase in your gain on sale margin. Was that from the [Heelocks] securitization and will those be a regular part of your loan sales going forward? I believe you didn't do one in either of the previous two quarters.

First of all, it's a -- we are securitizing all of the [Heelocks] that we're holding. So it was simply the sale that generated earnings, but you should be aware that there're -- the [Heelocks] -- are held in very liquid form. You know, gain on sale was robust in all of our operations as a result of the huge volumes that -- the application activity that we've had particularly, you know, in the November, December time frame with those fundings occurring during the first quarter. So margins have been very good and with the added, you know, value of selling some of the [Heelocks] this quarter attributes to, you know, the increase that we've seen.

Fair enough.

Thank you, our next question is now from the line of Jay [Wynchild]. Please go ahead.

Joe Haque]:

Yes. Good morning. Great quarter. I had a few questions regarding the mortgage warehousing business. How large is it, and what are your aspirations there -- I guess - and also why not house that within the bank?

Okay. The last part of it was?

Joe Haque]:

Why not house the mortgage warehousing business within the bank?

It is.

Joe Haque]:

I thought it was -- it was kept outside. It was reported.

It was kept -- right-- but it should be included in the numbers that we just gave you right in the... In the banking segment. In the banking segment, right. So I view it as a -- you know, it's a good question -- I view it as a banking business. It's a natural part of the banking business. We're working on that, as to how we're going to position it. But I believe it should be in the bank. We started out separately before the bank. We had the warehousing operation. So it's a matter of migrating in there -- into that operation.

Joe Haque]:

And how large is it, and how large would you want it to be?

It's about a billion dollars of outstandings, and it's a business that is provided primarily to correspondent lenders that we have a relationship with, and we have, you know, excellent control on relationships over the quality of that, of the asset. It is, you know, business that we easily fund, you know, outside of the bank because it's, you know, it's been funded in the same manner that we fund our other mortgage assets that are held for sale. You know, eventually, we would agree that it makes a very good segment of our bank, but remember our bank is growing very rapidly and, you know, we have, you know, to deal with these things in a very sustained and coordinated manner with the OCC. I think that in terms of the -- your question is how large it would be. We haven't placed any limit on it. I think it would stand as laid out to you the key component, and that is the -- we have to have a strong relationship with the customer because it's a business that could be treacherous if you just open it up to anybody that wants to use the facility. So within that framework of understanding that we have a correspondent relationship with and that we know the customer well, and we can control the collateral that's in the warehouse, we have placed no limit on it. Whether it be three, four, or five billion, you know -- if you ask me for a number now, I'd say five billion would be the number. But it's a moving target.

Joe Haque]:

And have you had any credit loses anywhere?

Europe.

Joe Haque]:

Okay. Thank you.

Thank you. Our next question is now from the line of Makiko Coakley. Please go ahead.

Thirty five million.

Let me give you the break down. It's 270 million from prime, 75 million from sub-prime, 35 million from [Heelocks] and 16 million capital markets.

Okay.

That's about an 8 to 10 percent market share presently. The -- you know, we certainly have designs on becoming the dominant fulfillment provider in the UK and ultimately in the -- on the continent. But one thing that we have to make certain of and it's sort of our history is to make sure that we have a proper structure in place that can provide world-class service in that fulfillment responsibility. So the answer is yes; we want to continue to bring on additional customers, but we don't want to do that until such time as we're comfortable that we have a first class operation.

What is the capacity -- utilization of your servicing capacity in UK right now -- of 8 to 10 percent of market share?

I don't know if I -- you know, in terms of, you know -- how much could we do, is that your question?

Okay. Are you number one service visa a vi 8 to 10 percent market share?

I don't -- when you say service, we're in fulfillment. We're not -- you know, we're fulfilling...

Oh, you have a joint venture [indiscernible].

I would say -- I don't -- I don't know of a larger fulfillment operation in the UK today than global home loans. I think we're the largest fulfillment operation.

Okay. Thank you very much.

I don't know why. I hear it. We hear it. Let me see if I can lower the volume. We tried everything. We're turning off --.

No, this is it. Did it go away.

No, Sir. But would you like to move on to the next question.

Yes. We'll just keep on moving. This is it. This is from the arrow that we have in our quiver.

We do have a few more in queue, but our next question is from the line of [Joel Haque]. Please go ahead.

[Joe Haque]

Thanks. Could you give us a little color on the 250 basis point increase in purchase market share and kind of, how you see that shaking out -- you know, the balance over the next, you know, several quarters?

Let me give you some -- let me give you some broader color on it. You know, Countrywide over the last 34 years has really built -- and anybody would give you testimony on this even our worst enemy -- the best performing operation in terms of our ability to process loans on a local basis in 400 and some odd facilities throughout the United States, and what's happened -- couple of things have happened. One is that our competition has abdicated to the -- to the bean counters in their operation and it was proven to them that the centralized processing -- there's better economics in centralization. That may be true on a theoretical basis. On a practical basis, the real estate community and the consumer hate it. So since they've gone more to a centralized operation, we've been able to pick up market share by those who want their loans processed on a local or regional basis. That's one area -- so we were able to make substantial advances in these market places because of the style in which we operate, which is local [indiscernible], and we are expanding that by the way. The second -- the second is that we clearly are the leader on the internet and as represented by the presentation made by [Gomez] the continuous leader on the internet and that has helped us pick up market share. Thirdly, and probably more importantly, when Countrywide decided to go to a sales mode to be super imposed upon this world class performing operation, we -- the timing not by our design happened to be very good, because as the consolidation continued, a lot of these great sales people that worked for these companies that were being purchased such as North America and BNC and others looked for alternatives, sources to fund their loans, and we were there. We were there with a great performing operation with the best product line in the country and very competitive pricing, and so the combination of all of that has manifested itself into a very aggressive sales effort and you can see the - it's coming quicker than we had anticipated. That's what's causing our market share to increase, and I think you'll see that market share continue to increase. I think in the next quarter it will increase again in the purchase market area.

I think it'll go to 10 percent.

[Joe Haque]

Alright. Thank you.

Your next question is now from the line of Jonathan Gray. Please go ahead. Jonathan Gray, your line is open please go ahead with your question.

I'm sorry, I'm -- I'm sort of confused here and can't really find my question. I'm sorry. Please just skip me...

Thank you.

Oh, I know what my question is. I just remembered, sorry. I'm going to try the decaf next time you have a conference call. Why is it that the purchase origination market share is expanded so dramatically, and its fantastic development from the business standpoint and yet the mix of the company's production by channel does not show retail or consumer expanding relative to wholesale and correspondent, which I would have thought would be the case if the share gains are being generated by commission sales force, or is the commission sales force also targeting the brokers in the correspondent market?

I think -- I think, well, first of all, it is -- part of it may be timing, Jonathan. We had -- we had a hell of a increase in correspondent in the first quarter, particularly in the January-February time frame and therefore somewhat muted the impact we were having on the consumer side of it. I think you are going to see -- you know a change in that -- in the percentage mix I think, but you got to remember that we are increasing our volumes -- our purchase volumes in consumer, but our volumes -- if we continue to aggressively move ahead on the wholesale and correspondent area. And they sort of run independently and its where the numbers shake out. Well, let me just see some numbers here. What is this [indiscernible] . So we had -- yes, so they're are all here. A 43 percent increase in C&B, 41 percent in wholesale and in correspondent 47 percent -- 47 -- the correspondent area has just been knocking them dead in terms of bringing in lots of business. Again, we become -- we become the lender of choice for a lot of the institutions in this country because of our execution. But I wouldn't -- I think you may be misled by the relative increase in business, and I think, if you focus on what we're doing in consumer, I think you would have better appreciation of what's happening. But I think all divisions are moving very aggressively and -- you know, when we separated all these things out years ago, we didn't realize that one of the things that would happen is they are very competitive among each other. Not only competitive against the enemy, it was [brothers who revolted]. They are very competitive among themselves, and I think that's a very positive and healthy thing.

Thank you.

OPERATOR

Thank you. Our next question is now from the line of [Girish Raghu], please go ahead.

Yes, you want to break out the...

[Girish Raghu]

Can you break that?

In 2002 we did five billion and one in the consumer area, we did four billion and nine in the wholesale area and eight billion in the correspondent area.

[Girish Raghu]

What was the average servicing fee on the new servicing book?

It was 38 -- 39 basis points.

[Girish Raghu]

Okay and can you describe a little bit more the capital market's operation -- is that -- and the nature of the income strain there basically. Are we making money on underwriting? Are we making money on commissions? Are we making money on proprietary type of things? Can you just give us a sense for how we're making the earnings as a segment?

Sure, the capital markets area, kind of like, securities in particular has a variety of activities. They include ABS, asset-backed securitizations and underwriting and sales. They also trade in agency paper -- you know [callable] securities. They have a [indiscernible] -- an [arm] desk where they are trading in [arm], securities. They also trade in some corporates and do a little bit of the placement of medium term notes for Countrywide. They have a task-to-desk dealing with other mortgage originators, which is considerable part of their activity as well as home loan trading operation where they're acquiring home loans and brokering home loans to other institutions, and then also included in the capital markets is an entity called Countrywide Servicing Exchange that brokers, you know, mortgage servicing rights. So those are the general activities -- each of these activities produce, you know, considerable levels of revenue. But the primary or the -- you know, the biggest pieces come out of home loan trading and the pass through desk.

[Girish Raghu]

Are those numbers [indiscernible]?

In terms of revenues, we have -- in the past three [desks] -- you know for example in the first quarter made up about $21 million of their revenues and home loan activities produced about 30 million.

[Girish Raghu]

I guess I was -- my question was more as to the nature of this stream. You know, are these one-time events or is it mostly commission type of revenue?

Well, revenues -- they are engaged in, you know, many different transactions, and it's, you know, very tied to the volume of investment activities taking place by, you know, fund managers in banks and various long term investors and fixed income assets.

[Girish Raghu]

Is underwriting a large part of the -[indiscernible]?

Underwriting is -- you know would make up I think about -- you know $8 or $9 million of their revenues during the quarter.

Yes, the answer to the question this is not -- these are not one off or one-time transactions. These are traditional transactions done in the securitization business and the traditional type of businesses that Countrywide Securities is involved in, so -- you know it's just really a - it's not a matter of a one time transaction. It's a matter -of really what kind of volumes, will they have an opportunity to participate in over time.

[Girish Raghu]

Okay, thank you very much.

Thank you. Our next question is from the line of [Mac Burns], please go ahead.

You're welcome. Thank you.

Thank you. Our next question then is from the line of [Richard Dimon]. Please go ahead.

1:00:00

[Richard Dimon]

Yes, could you, sort of just break out the percentage of the volume in your banking business -- mortgage banking business that came from purchase money mortgages and refinance activity, and can you contrast Q102 with Q101? And then my second question is in regards to the change in the nature of your borrowers, if any. When you look at market share gains and you go back over the years has there been, you know, any change for example in the FICO scores of home [buyers]?

Let me take the last part first while my people scramble for your -- for the percentages. There has been, -- I would say the FICO scores have been fairly -- if you look at our servicing portfolio, I think, the average FICO is just slightly south of - it's just around 700. It's a fairly high FICO on average in our servicing [core]. And I think that's been relatively consistent. We have the - there's certainly been an effort on our part in conjunction with our partnership with our partnership with [Fannie Mae], to try to lower the barriers of entry for those who have a different life experience in America; primarily low income minorities. And I would guess over time if we're successful that the average FICO would go down, but that is irrelevant in this sense that - what we're finding is that, irrespective of the FICO, the one payment that these people will make is their mortgage payment, because it's -- you know -- it's not a credit card -- it's not - it's something that has much more relevance to them as a family than any other [debt] that they might have. And so we don't -- even though we have been very aggressive for the last 15 years in participating in the low-income minority market, the leader as I stated -- number one in the country to Hispanics and to African Americans, that our delinquency ratios, our foreclosure ratios have been relatively consistent.

[Richard Dimon]

Well, you know, that's really terrific and you need to be commended. I just want to understand if, you know, [indiscernible] share gain comes from, you know, different borrowers, that you're willing to consider?

No. If the inference is that their market share gain has been because of our efforts in the minority area, no. We have -- it is a broad-based market share gain across the entire spectrum of FICOs. So there has been no -- the increase is not related to a specific effort in that minority area. We had -- we have had equal amount of effort through out the spectrum from the 800s down to the beyond 540s.

[Richard Dimon]

[Right].

Let me go through the [indiscernible].

Okay, the purchase and refinance mix for the first calendar quarter of 01 was 11 billion of purchase, 13 billion of refinance for a total of 24 billion. The mix for the calendar of '02 was 18 billion of purchase, 26 billion of refinance for a total of 44.

[Richard Dimon]

Okay, thank you very much.

Thank you. Our next question is our final question from the line of Andrew Tucker. Please go ahead.

Joe Haque]:

35 [Heelocks], 16 capital markets.

Okay. All right, thanks guys.

You're welcome.

Thank you gentlemen. We have no further questions in the queue. Please continue.

Continue. This is the - again, I thank all of you for your participation. We appreciate the comments about a great quarter. We look forward, as we stated in our projections, to an equally good quarter, better quarter coming up, and we'll keep you [indiscernible]. Again, thanks for your support and for your participation and we'll conclude the teleconference at this time.

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