美國銀行 (BAC) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Countrywide Financial Corporation first-quarter earning conference call.

At this time all phone lines are muted or in a listen-only mode.

After today's presentation we will be taking questions and we certainly encourage your participation at that time.

To queue up for a question, press the 1 on your touch-tone phone.

You will hear a tone indicating that you have been placed in queue and just as a note, you may remove yourself from queue at any time by pressing the pound key.

Once again, ladies and gentlemen, if there are questions or comments later in the conference, please queue up by pressing the 1 on your phone keypad.

Also, should you require assistance during today's earnings report, you may reach an AT&T operator by pressing 0 and then star.

As a reminder, today is being recorded for replay purposes.

Stay on line at the conclusion of today's meeting to receive that replay information.

With that being said our host with our opening remarks.

Countrywide's Chairman, Chief Executive Officer and President, Mr. Angelo Mozilo.

Thank you very much.

Welcome to Countrywide's earnings teleconference for the first colander quarter 2003.

We strongly encourage all participants to review the first-quarter earnings performance report while listening to this call.

This report can be found on our web site at www.Countrywide.com by clicking on Investor Relations on the home page and then selecting presentation and quarterly earnings and performance reports.

On page 2 of the earnings and performance report, we provide an agenda for today's teleconference.

First, I will provide a brief overview of our results for the first calendar quarter of 2003.

The next topic is a brief review of our core Mortgage Banking business that continues to establish many new major milestone.

The strength of the market will be addressed as well as the industry expert's forecast for 2003.

A discussion of the operational and earnings performance of our diversification activities follows.

These diversification businesses are now a key driver of Countrywide's earnings growth.

The presentation will conclude with earnings guidance for the full-year 2003.

Let's begin on page 3 with our first topic, an overview of the performance during the first calendar quarter.

Earnings per diluted share increased 85% over the prior year to $2.44.

This marked Countrywide's 8th consecutive quarter of record earnings.

Diversification earnings grew 127% over the prior year and were a key driver of the consolidated earnings growth.

Operationally, our Mortgage Banking business continued to excel and establish numerous records.

Consolidated fundings reached a record $102 billion for the quarter and increased 133% for the year.

According to inside mortgage finance, Countrywide's first-quarter production market share grew to 12.5%.

The pipeline of applications and process remained at a strong 59 billion. 176% higher than last year.

This indicates that fundings are likely to be robust again for the next quarter.

The servicing portfolio reached a new milestone of $502 billion as of March 31st with growth of 41% over last year.

Countrywide continues to lead the industry in organic portfolio growth.

Moving to our next topic, Mortgage Banking operations and earnings performance as summarized on page 4.

Mortgage Banking pretax earnings were $354 million up 85% from last year.

Production earned $882 million based on record fundings of $97 billion and margins of 91 basis points.

Purchase funding volume was $24 billion for the quarter.

As would be expected this low-rate environment, servicing posted a significant loss during the quarter.

As prescribed by GAAP, Countrywide significantly amortized and repaired its MSRs.

Ammorzitation was 363 million during the quarter and impairment was $662 million.

The bottom line for our Mortgage Banking business is that the macro hedgeness to operate as it was designed.

An unusually low rate environment has resulted in strong production earnings driven by record fundings and high margins.

These production earnings subsidized our servicing operation that will provide a significant share of the earnings mix when rates ultimately rise.

The most compelling evidence that the macro hedge is working effectively is that Countrywide has achieved eight consecutive quarters of record earnings.

We examined performance of the macro hedge more closely on page 5.

The macro hedge is the first line of defense in our interest rate risk management strategy.

Funding volume must be ramped up faster than prepayments in a low rate environment in order to sustain portfolio growth.

The chart on the left on the left-hand side of page 5 shows Countrywide has enjoyed its greatest success in growing its portfolio during periods of highest risk.

The last 12 months.

The chart reflects portfolio growth of 147 billion in the last year, almost 2.5 times faster than the prior year.

In fact, Countrywide led the industry in servicing market share growth in 2002 while four of the top six servicing leaders actually lost market share.

Concurrent with the accelerated portfolio growth, higher production earnings from the increased funding volumes more than offset the loss in servicing.

The second line of defense is the servicing hedge that is designed to moderate the earnings volatility caused by impairment.

Countrywide has a prestigious 12-year track record in hedging its MSRs.

Perhaps a more important question is how the macro hedge will perform after the refinance boom.

In simplest terms, a larger portfolio produced greater earnings.

Countrywide's portfolio growth is depicted on the chart on right-hand side of page 5.

The portfolio now stands at $502 billion, more than double its balance at February 28, 2000.

Another key factor is that a lower MSR valuation will result in higher returns on servicing the future.

In accordance with GAAP, Countrywide has cumulatively impaired its MSRs by $6.1 billion and amortized 2.5 billion during this refinance boom.

The end result is MSRs are currently booked at the low value of 115 basis points as shown on page 5, down from over 200 basis points in the past.

I will discuss Countrywide's post refinance performance in greater detail later in this presentation.

On page 6, we provide the perspective.

On significance of MSRs at Countrywide.

The MSR book value is down $5.3 billion on a $74 billion balance sheet.

And concentration in relation to equity has declined over time.

I will first address the topical issue of MSR valuation.

Countrywide management to evolve its corporate governance process over MSR valuation to ensure MSRs are always reflected at fair value.

Countrywide only includes contractual cash flows in MSR values.

Nonsignificant recapture, cross selling or MI insurance are excluded even though they are routinely contemplated in the market during the sales of servicing.

The end result is that the entrensic value of Countrywide's MSRs are significantly higher than the value on the balance sheet.

Observers should be aware that competitor comparisons of MSR values can be misleading.

A consortium of regulators agreed with this point in a bulletin issued in February.

Many different factors affect valuation and specific portfolio attributes must be considered.

Key factors are the weighted average servicing fee, repayment fees and MSR presentation on the balance sheet among others.

In other words, MSRs are not generic and, therefore, must be valued based upon their individual merits.

Page 6 clearly reflects that the concentration of MSRs to equity continues to decline at Countrywide.

Despite the significant portfolio growth discussed earlier, the MSR balance has declined due to impairment.

The chart on page 6 properly adjusts MSRs by deferred taxes to make a fair comparison to equity that has already been tax affected.

These tax also not be payable until the MSRs are realized.

In contrast to the MSRs, shareholders equity has been growing quickly to the performance of the business model.

The bottom line is tax adjusted MSRs to equity ratio has declined by 57 basis points down from 1.5 times in the past.

Prospects for the mortgage business remains strong as application activity has remained vibrant.

On page 7, we present the MBAs purchase refinance and total application indices back to 2000.

Calendar 2000 is included because it predates the current refinance boom.

The first column of the chart on the left side of page 7 is the average purchase application index.

While 2001 was flat to 2000, the index jumped significantly in 2002 and matched that level during the first quarter of 2003.

This trend in the purchase application market is discernible in the graph at the top right side of page 7.

Despite the adverse seasonal effects normally observed this time of the year, the purchase market remained very vibrant in the first quarter.

Also keep in mind that Countrywide grew its purchase market share to 11% for the first-quarter 2003 according to the current industry figures published by the Mortgage Bankers Association.

The second column in the chart on the left is the refinance index.

Calendar 2000 was a normal market that had a typical average refinance index below 450.

The refinance index soared to 2500 on average in 2001 and even higher to 3400 in 2002.

The index was over 6500 on average for the first quarter, and the last reported level was 5104.

The refinance index graph is on the bottom right-hand side of page 7.

In conclusion, application activity remain strong, and the refinance boom seems to have significant steam left in it.

Looking at the big picture for the mortgage market, forecast by industry experts for the total market size in 2003 are reflected on page 8.

While forecasting total market size in 2003 is a daunting task, certain interesting trends can be discerned among the experts' forecasts.

All three forecasters agree that purchase fundings for the total market will be over $1 trillion in 2003.

This level is roughly comparable to 2002 and likely creates a softer landing the post refinance boom environment.

Opinions vary significantly among the experts refinance fund information 2003.

The average estimate is over $1.7 trillion.

The total market of 2.8 trillion indicates another robust year for our production sector in 2003.

Our next topic is the operational and earnings performance of our diversification businesses on page 9.

For many years, Countrywide management strategically focused on diversifying the company's earnings and reducing their sensitivity to mortgage banking cycles.

The strategy of the company is to leverage our world-class mortgage lending platform to grow our other businesses.

The chart on the left side of page 9 shows our consistent growth in diversification earnings.

First quarter, diversification earnings were up 127% over the prior year.

The pie chart on the right side of page 9 reflects 32% of our consolidated earnings came from diversification in the first quarter.

This percentage is note worthy since our core Mortgage Banking business has experienced dramatic earnings growth.

On page ten, we address our Capital Market business that provided 18% of consolidated earnings during the first quarter.

Capital Markets pretax earnings were $96 million, up 140% from 2002.

The primary driver of Capital Markets success is our securities broker-dealer.

Countrywide Securities Corporation.

CSC has capitalized on historically high level of trading in the secondary mortgage market.

Securities trading volume for CSC for the quarter reached a record $640 billion.

CSC currently ranks in the top ten of all of its major trading areas.

Other capital market subsidiaries, Countrywide Asset Management Corporation requires nonconforming loans from third parties and rehabilitates them for eventual sale and Countrywide Service Exchange, a broker of mortgage servicing rights.

We profile our Banking operations on page 11, which contributed 8% of consolidated earnings during the first quarter.

Banking pretax earnings were $43 million, up 324% from 2002.

Our Banking strategy is designed to leverage our Mortgage Banking platform.

Our goals is to diversify our earnings and our funding structure.

Portfolio lending capability recharacterizes the gain on the sale of loan -- sale of a loan in the current period and to spread income in future periods.

The bank also affords access to new liquidity sources such as the FHLB advances and retail deposits.

Countrywide has developed a prudent control growth plan for the bank that has been approved by its regulators.

Total assets was $115 million in may of 2001 whenTreasury Bank was acquired.

As you can see on page 11, total bank assets reached $8.8 billion on March 31.

Our goal for the bank remains to reach $17 billion at the end of this year and $22 billion by December 31, 2004.

Countrywide warehouse lending is included in the Banking segment but is separate from Countrywide Bank.

CWL a warehouse lender that finances the mortgage industry of smaller lenders and mortgage brokers.

Outstanding balance as of March 31 was $2.4 billion.

Moving forward to page 12, we next review our insurance businesses that provide 5% of consolidated earnings during the first quarter.

Insurance pretax earnings were $25 million, up 4% from 2002.

The insurance sector is comprised of three separate companies, Balboa Reinsurance which exclusively reinsures primary mortgage insurance on Countrywide originated loans.

Balboa Life and Casuality is our national insurance carrier that emphasizes property and liability insurance.

Countrywide Insurance Services, a national personal alliance insurance agency that focuses on its core product and service,compensation,homeowners and life insurance.

Balboa Reinsurance earnings increased significantly compared to last year as its book of business grew in line with the servicing portfolio.

The business plan for carrier underwent significant revision last quarter as we terminated Reinsurance contracts with -- and renegotiated certain other contracts.

The agency was also restructured during the fourth quarter in order to streamline its operations and focus on profitable activities.

Management believes that the actions taken properly position the carrier and the agency to resume their growth and profitability.

On page 13, we review our Global operations that contributed 1% of consolidated earnings during the first quarter.

Global pretax earnings was $6 million, up from a nominal loss last year.

Our Global operations is an example of leveraging our Mortgage Banking expertise.

Countrywide pride ourselves in being an industry leader in process management and technology.

Our objective through this operation is to provide fee-based origination processing and subservicing to International customers who retain ownership of the loan and the customer relationship.

Thus, Countrywide avoids any significant capital exposure since it is not a principal in the mortgage transaction.

Our Global operations are conducted through our 70%-owned subsidiary, Global Home Loans.

Barkley's PLC is our partner.

The chart on the left side of page 13 reflects the growth in the portfolio sub service.

It is note worthy that we sub service 1.2 million loans in the UK compared to the 4.3 million loans we service in the U.S.

While we expect profitability to improve dramatically during 2003, our best opportunities lie ahead in procuring new third-party customers.

We now turn your attention to the disclaimer on page 14 and conclude our presentation with earnings guidance for the full year 2003.

Since the advent of the regulation FD, Countrywide has provided quarterly guidance to the investor community.

Beginning this quarter, management will provide annual earnings guidance to redirect investors' attention to our long-term performance.

This guidance is included in our earnings press release and intended to facilitate analysis of the company by third parties.

Management believes the company will report diluted earnings per share within a range of $10 to $11 in calendar year 2003.

Total origination market size for 2003 is expected to be between two and a half to three trillion dollars.

The estimates discussed in this presentation are subject to certain risks and uncertainties which could cause actual results to differ from those anticipated due to a number of factors included but not limited to those listed in disclaimer.

In closing, I would like to focus on Countrywide's prospects after rates rise and the refinance boom ends.

The environment should be more favorable than prior post refinance booms, since we are likely to have a softer landing this time.

Prior booms were ended abruptly by fed tightening, which is unlikely until past stimulation efforts gain traction in the U.S. economy.

Also,the industry is dominated today by large publicly-traded lenders with major market share that should price more rationally than the outlines that affected pricing in the past.

Our production operations should ramp down more efficiently.

Extensive use of technology reduce the need to hire processing personnel.

Up to 3,000 temporary personnel have been used and are already -- and are easily downsized.

Also, our funding mix skewed toward correspondent lending during this boon which has tremendous operating leverage and is easy to ramp down.

Market share gains already achieved in the purchase market will post boom funding levels.

In addition, 6,000 sales personnel that will improve our opportunity for market growth after the boom.

The cost of these sales personnel are highly variable.

Our large servicing portfolio already over $500 billion today is expected to provide 12 to 15 basis-point margin after rates rise.

Today's portfolio will provide 6 to 750 million of annual servicing earnings.

Compared to a servicing loss of 1.5 billion last year, this year producing earnings improvement of 2.1 to 2.25 billion in servicing alone.

Rates on $13 billion of debt have been fixed at historically low levels to optimize our earnings potential.

Variable rate debt, historical method of financing would increase in cost in a rising rate environment and mute earnings growth opportunities.

Since it is fixed, that won't take place this time.

Diversification businesses provide $170 million or 32% of consolidated earnings this quarter.

These businesses, especially bank are poised for future earnings growth.

Last, but certainly not least, our balance sheet is conservatively valued.

In addition to valuing MSRs with 115 basis points far below their intrinsic value we have delayed the sale of loans to convert gain of sale on loan into spread income in future periods. $6 billion of home equity loans are currently in our Mortgage Banking inventory separate and apart from our bank portfolio.

All of these factors position Countrywide to perform effectively after rates rise and the boom ends.

This concludes my formal remarks and now ask the operator to explain how to conduct the question and answer period.

Thank you very much

Ladies and gentlemen, once again, if you would like to ask a question, please press the 1 on your touch-tone phone.

You will hear a tone indicating you have been placed in queue.

To remove yourself from the queue, press the pound key.

If you are using a speakerphone, please pick up the handset before pressing any numbers.

The first question comes from Mike from Raymond James.

Please go ahead.

Caller: Thank you, good morning.

Fantastic performance, guys, as usual.

I was curious on your impairment charge, can you break out for us the split between the servicing impairment and the other components, whether they be the sub prime residuals or the IOs or whatever else is incorporated into that particular number.

I will do that.

This is Keith McLaughlin.

MSR impairment was 603 million and the other retained interest was 59 million.

Okay, just a second thing on the Capital Market side and I will jump back in queue.

Can you help us -- help us gain a comfort with what you guys are doing in the Capital Markets.

Obviously the performance has been fantastic.

Most of the income is coming from the interest income side, but I have gotten some pushback from investors who are a little worried about the amount of trading you are doing there and the potential, you know, interest rate risks and so forth you might be taking.

Give us details on that and some comfort.

This is Stanford Kurland.

You know, basically we have run a fully hedged position in the Capital Market so there is diminimus, frankly no interest rate risk exposure in the -- in the Capital Markets area.

The trading is particularly done with brokering of transactions with the acquisition and sale of -- of collateral done basically, you know, simultaneously in much of the volume that exists there.

But in terms of credit risks or interest rate risk, there is virtually no risk being -- being taken or absorbed by the company.

Could we kind of call that risk with principle trading in this operation?

I would say that is very close to riskless principle trading.

Okay, thanks, Stan

Our next question from the line of Bob Penepoley from Bancorp Piper Jaffray.

Please go ahead.

Congratulations on great performance, not only for the quarter, continuously.

Now you said 12 to 15 basis points on the servicing business your outlook for profit margins as the refi. market dissipates.

As you sit here today and look historically at the production margins that, I guess, if you go back to 2000, they were around 30 basis-point range much better than maybe in the early '90s when you will negative margins when you had a number of thrifts aggressively pricing product.

What would do you think the outlook would be for production margin as you move forward kind of the level you had in 2000?

Is it a reasonable level?

Bob -- we want to try stay away from any major speculation here.

You now, it's hard to determine that.

We believe that, as I stated in my presentation, that the players today, wells Fargo, WHA, Chase, are very responsible and have the same mandate we have, to provide maximum value to our shareholders.

With the thrifts, you don't have market share at any price, and we think we will have a -- a very healthy spread in -- you know, going forward after the boom, but one that I am not -- I would hesitate at this moment to -- to give you any hard number on.

So that's -- you know, that's our view of it.

I would love to give you a hard number so you can go ahead and put a pencil to it, but I think it is too early.

But our feeling is, again, when it tightened up, we had a little blip here in -- in I think the first part of this quarter, and when it tightened up, we saw margins contract a bit, but only a bit, and we did see the same kind of reaction we saw back in the thrift days.

Anybody else have any comments about that?

I would just like to echo the fact that the market is just so much more rational today given the players that we have.

Also,, you know, reflecting in our margins today, we are not -- or in the last several quarters, we haven't sold home equity lines of credit that also have a higher margin.

So, in one respect, our margin on profitability today is actually, you know, smaller than it would be if we were selling all of the production.

So it is -- you know, we are -- we remain, you know, hopeful that margins are sustainable at very respectable levels in the post refi. markets.

Another way to look at it is the market share is the key driver to that and your market rate spiked in the first quarter around 12, 13% or so.

Do you think as this refi. boom ends you can maintain that market share or it starts to fall off before it starts to grow again.

No, I think it increases.

Our plan -- you know, it doesn't happen by itself.

We will -- we are taking the appropriate steps to make sure that our market share will continue to increase by expanding our sales force and making sure that we have all of the technology in place to provide our sales force with contemporary tools to compete very effectively.

So, no, we are going to continue to grow.

We have grown -- as you see, we have grown the sales force through 6,000.

And we will continue to grow that through the balance of the year.

I think it is certainly possible we will achieve the 15% market share by the end of 2003.

Certainly that's our immediate goal and to continue on our quest for -- to be number one and to have the primary market share position.

Thank you.

Our next question comes from Ken Posner with Morgan Stanley.

Please go ahead.

Hi, I have a very simple question.

Could you review book value per share?

And my question is, was there any contribution of comprehensive income to book value per share or did the increase just -- just represent the effective earnings flowing through into book value?

Do you want to take that, Eric.

Yeah, I can -- there was an increase in other cumulative comprehensive income this quarter, I believe, yeah, from December to March it went from 187 to 255.

The book value per share ...

44.

Based on diluted shares is 42.

Based on outstanding it is --

$44 based upon outstanding.

Okay and -- thank you very much then.

You are welcome.

Our next question is from the line from Johnathan Gray with Sanford Bernstein.

Please go ahead.

Yes, can you break out the amount of gain on sale from home equity loans, sub prime, and the Capital Market groups from the total.

Jonathan, how are you feeling?

I am feeling great.

Good.

Do you want to go through that.

Gain on sale from sub prime mortgages, Jonathan, was $66 million in the first quarter.

As Stan mentioned, we really didn't sell any home equity loans so the gain on sale was only a million dollars.

Capital Markets was $48 million, $40 million from their conduit activities and the balance from their trading.

I should point out as you may know we change our presentation effective last year, and we combined origination fee income with gain on sale.

And so, if you wanted to break that apart, in sub prime of roughly $17 million of that $66 million was origination fees.

In the past they would have been separate.

I see.

Also, I wonder if I -- if could you give us an idea of when you might be able to make available the very detailed useful information you now publish on your interest earning assets and securities and interest costing liabilities.

I would expect that to be out in the next couple of weeks.

Thank you.O CF1O

Our next question is from the line [ Inaudible ] From J.P. Morgan.

What is the rate of new MSR capitalization during the quarter and did you take any MSR reserve breakdown like you did last year several times?

In the quarter -- the impairment in the quarter was $600 million.

The AMORT was close to $4 00 million, so about a billion dollar writedown of the MSRs.

The first part of your question was --.

The cap rate in Q1.

156.

156 basis points.

My question regarding the writedown, Angelo was, when you -- when you permanently have written off some of the reserves.

It was 655 million of permanent impairment recorded in the first quarter.

Great.

I'll come back -- I will put myself on the queue for another question.

Thanks.

Next to the line of Mike McMan with Sandler O'Neal.

Good morning.

Good morning.

I was a little surprised at the amount of impairment in the first quarter given that the ten-year -- from the end of the year to the end of the first quarter moved one basis point.

Can you give me some color?

Why am I surprise at that?

First of all, what happened is it is a case that the treasury market moved up slightly, but there was a tightening in mortgages so mortgage rates were actually down about 7 basis points.

That was one of the factors that influenced impairment.

We take into consideration several others factors in valuing the MSRs and in terms of coming up with the impairment.

And basically we are trying to calibrate the value to fair market value based on a variety of -- of indexes and market transactions that were observing.

In the first quarter, we actually observed basically what would be about a 65 basis-point increase to our OAS -- and if you and looking at trading activity in IOs and example.

They went up as well shop, you know, pursuant to the methodology we use along with the -- the methodology that we use, along with the slight decline in mortgage interest rates, we resulted in impairment.

All right, thank you.

You are welcome.

Our next question is from the line of Brad Ball with Prudential Securities.

Yes, high, clarification on your guidance.

Are you assuming that your production guidance, 91 basis points in the first quarter that that remains for the balance of the year and your market share stays at 12.5%?

Keith.

Well, you know we are not -- you know, we are not prepared to talk about 9 margins through the -- about the margins through the entire period.

We are looking at activity between the 2.5 and $3 trillion level for the year, and we should anticipate strong margins in line with what we have seen over the last year.

The guidance does contemplate some reduction in volume as volumes begin to happen.

Okay, and similar market share?

Or I know Angelo mentioned targeting 15% market share by year end.

Right.

We should be able to continue picking up market share because of the -- you know, the strategy that we have in place in terms of continuing to grow and spread the sales force throughout the country, and deeper into these communities.

So we should experience continued growth in market share.

But our -- our guidance does not contemplate growing market share.

It does not?

Okay.

Just separately, real quick, on the FICC guidelines released in the quarter, any adjustments made in your MSR valuation in reaction or response to those guidance and perhaps did that have anything to do with the $655 million of permanent impairment and separately, can you just update us on the Fitch review that's going on right now?

Well, with respect to the guidance on MSR valuation, we had, you know, been in dialogue for almost a year about -- you know, regarding what those guidelines would look like, and so, our valuation did not require any adjustment when those guidelines came out.

We are, you know -- we've made certain advances in our governance of practices that were pursuant to the best practices that they were calling for.

And that was the main, you know, issues.

I will comment -- I will comment on Fitch.

The -- we had met with Fitch.

We have a dialogue, an ongoing dialogue with Fitch.

And you are know, we continue to work with them.

Obviously, you can see the results of the company, the strengthening, the balance sheet, the lowering of the values of the MSRs, the transitions to the OS model, a lot of things have been done over the past month or so, and as I said, we will continue having our dialogue with Fitch and it is a constructive one.

And we will see if we should know, you know, in the next month or two the results of that discussion.

In addition to that, you know, we clearly, their issues surround capital, as an example, and we did raise $500 million of trust preferred during the quarter.

And, you know, that also helps to shore up our -- our balance sheet and, you know, hopefully go a way in assuring Fitch that we are very much want to do what is necessary to maintain our ratings.

Great, thank you.

Our next question is from the line of Paul Miller with Friedman Billings and Ramsey.

Go ahead.

Thank you, good quarter, guys.

The home equity loans -- the loan assessment on your balance sheet is 7 and 8 billion dollars, but my calculations is only about 4 to 4.5 billion and that's in the bank.

Are you holding loans at the bank company level?

Within the mortgage bank, we are holding about $6 billion of home equity loans of which $5 billion have been securitized and you see that in the investment and financial estimates of security.

Of the $5 billion securitized, are those loans you are talking about as being able to sell them sometime in the future?

Yes.

And then the other quick question I have on the new production you put on at 156.

Can you tell me what the weighted average servicing fee is of the new production is?

It is 38 basis points.

Thank you very much.

Roughly four multiple.

Our next question from the line of Joanne Yurman with Lehman Brothers.

Go ahead.

Hi, it is Bruce Harding.

Fabulous.

As the bank goes from 9 to 17 to 22, will the mix of loans that you have in there continue along the lines of the assets that you are holding at the end the quarter?

And what's the funding strategy on -- on the Banking business going forward.

And then also, what are you seeing on the other side in terms of buyer interest across the various stratum or categories of loans that you are selling, and are you finding that -- you know, without sort of commenting on competitors' strategies for holding mortgages, can you share with us any changes in the behavior of buyers for your product an what would likely happen in a rising rate environment and would you be looking at that as opportunity to build the bank even more if we start seeing, you know, loans sold at significant discounts.

Thanks.

Let me work backwards because I have a very -- I have a good memory but it is very short.

So let me -- in terms -- we would expect that if rates rose, the consumer would go more toward an arm environment.

We expect the bank to be very helpful to the Mortgage Banking operation, providing us product, you know, which was truly a disadvantage for us before.

It was exactly one of the primary reasons why the bank is going to pay -- play a major role and why we created it.

The second is, I don't -- I don't believe -- although the composition of E locks to prime firsts to fixed seconds.

My change in terms of mixture require don't foresee any change, even to the $22 billion in a strategy.

It will -- it's assets will be basically those kinds of products.

They will be nothing different than what you see today.

In terms of the -- the institutional investors of the mortgage-backed securities that were selling -- from my perspective at least, I know -- there's been a -- a vigorous appetite for MBSes, for ABSes, and we frankly can't produce enough product for that market to be satisfied.

So I don't see any back up, and there hasn't been over the years, whether we produced whether it was a $1 trillion market or $3 trillion market, plenty of buyers for the MBSes and ABSes.

Work backwards to your first question.

Bruce, you know, perhaps, if I could share with you our targets in terms of what we are looking for, the investment portfolio to look like over the coming year.

Basically, we have about 30% of the portfolio targeted to be home equity lines of credit and about 30% will be arm loans, that will include, you know, hybrid arms, as well as the, you know, short-term coffee-type arm product.

And then 35 to 40% will be securities that are invested in.

And in terms of, you know, the -- the arm activity and the HELOK [Phonetic] activity are loans that are being sourced through Countrywide home loans, and, you know, provide, you know, both high returns, but we only will require loans within the bank at marketable levels.

Thanks.

Bruce, I would also like to point out something else on the liability side.

We have been extraordinary successful with the concept that we created by taking about 300 square feet of our existing mortgage branch of Countrywide that's been, you know, in a particular location for 15, 20, 30 years.

Taking 300 square feet and putting a little kiosk in and use that as a resource to bring in -- create CDs, bring in depositors in that community and to sort CDs.

It has been incredibly successful, in the widest type of demographics that you can imagine.

And each and every one that we opened and there is 13 open today are performing almost exactly the same.

The advantage we have is it is only 300 square feet.

Our cost of that branch is five times less than would cost a typical commercial bank branch, which is about 5,000 square feet.

Branches after eight months on average have $60 million per branch.

The average for commercial branch, 5,000 square feet, you know, there are all kinds of commercial and community banks is $55 million.

So our cost of acquiring those liabilities is extraordinary low and gives us a big advantage in bringing in liabilities at low costs.

Thanks.

I am sorry, after how many months?

What was the dollar amount per branch?

Eight months.

Eight?

Thank you.

Our next question have Salomon Smith Barney.

Matt Veto with Salomon Smith Barney.

Please go ahead.

When we get an environment where the full-year evaluation comes in between $2.5 trillion to $3 trillion, could we see comparable rates comparable to what we have seen this quarter.

The revenue line item up a bit year-over-year was down a bit sequentially.

I wonder if you could talk to what's driving that.

Let me take the first part.

I don't think you will see comparable amortization rates because first you are going to get in the -- what appears us to in the first two quarters, you are going to have close to $2 trillion done.

So the last $2 trillion, you know, anywhere between $750 billion and trillion are going to be done in two quarters.

So it seems to me with less production, you have less amortization, but that's speculation on my part.

You about it seems to me the thrust of the volume is being done in the first two quarters, at this moment.

Now if rates go down a bit, and anything else can happen.

What was the second part of that?

Second part had to do with the commission fee line item.

What about it?

The question was it was up a lot year-over-year and seemed to be down sequentially and I wondered what contributed to that.

Probably haven't paid them yet.

Do you have that line?

Year-over-year is up because --.

He says it is down.

Year-over-year is up because of growth in the activity in LandSafe, the appraisals and credit reports and et cetera.

You are saying it is down?

Sequentially.

Oh, I see.

During this call we will get back you two an answer on that.

Okay, thanks.

Our next question comes in the line of Jimmy Page with Raymond James.

Please go ahead.

Jimmy Page, do you have a question.

Possibly take yourself off mute.

My questions were answered.

Thanks

Thank you, to the line of Vincent Daniel with KBW.

Please go ahead.

My questions have been answered too.

Thank you.

Thank you.

We will go to Christina Clark, Banc of America.

Thanks so much.

Fantastic quarter.

I was wondering if you could just touch on a little bit the sub prime residual securities.

I know that it is still a rather small portion of the total, you about it did increase over the quarter.

I was just wondering if could you comment on that.

Yeah, there was -- there was a transaction that we did that -- that involved mortgage insurance, which, as you know, we have been utilizing mortgage insurance in our sub prime securitization for some time now.

In lieu of the corporate guarantee on top of the M.I., we did put in some amount of excess spread as additional credit enhancement and that resulted in the little resid wall you see there.

Okay, thanks so much.

To the line of Bill Roy with Merrill Lynch.

Having a little trouble balancing the MSR.

Did you sell what looks like half million dollar of SS IO.

Yes, we did, about a $300 million transaction.

Do you have the metrics in terms of how much spread was sold at what multiple?

And whether there was any gain or loss on it as well?

I think you know Jennifer has the metrics.

There was -- there was a mall loss on that, Bill, which was part of the rationale for increasing the OAS in the first quarter and we observed that.

You know, basically, the deal had a notional amount of about a billion fix and loans were covered with the proceeds from the transaction of $307 million, and the excess sold on the loans were about 19 basis points.

As Keith indicated, we had a small loss on -- on sale which is also, again, reflected in our impairment charge during the quarter.

Okay.

So what did the average servicing fee drop to, 38 BIPS last quarter.

Where are you now?

I think we are right about the -- about the same.

Very small.

Yeah, --

Tiny impact.

Such a small -- what was the notional on it, a billion six?

Bill, it is at 37.9.

Okay, so you didn't drop off much there?

37.2.

37.2.

That's correct.

Versus -- is 38 right for the last quarter?

Did I have that -- the fourth quarter?

It was 38.1.

38.1.

Okay.

Thank you.

Our next question is from the line of Don Meter with Bear Stearns.

I appreciate your comments on the Fitch review.

I was looking forward to that.

On the dividend, Angelo, when was the last time it increased.

With the guidance you are talking about could this be the start of more dividend increases.

We are not a bond, Don, we are stock.

It was -- I think the last increase was not too long ago.

Two quarters.

Two quarters ago.

That's what I thought.

Two quarters ago, and -- and I -- you know, I don't want to project out what our plan is relative to, you know, the future increase in dividends, but, you know, we are a growth company, as you can readily see, and so we don't perceive ourselves, you know, as a fixed income security, and so I -- you know whatever increases there are in the future, Don, I expect them to be modest.

Right, right.

That's fine.

The dividend increases are certainly appreciated by all the clients.

Thanks, Angelo.

Next the line of Mekika Coakley with Endeavor Capital

Hello.

Hello.

Yes.

I am trying to find out the some rates in stabilities that still remain in your operating fundamentals.

And can I assume that your guidance of [INAUDIBLE] -- it will be $10 for origination if it would be 2.5 and $11 if it was 3 trillion?

No.

No?

Don't assume that.

We have a lot of moving parts, and you can't nail it down that close, and so we want to give a reasonable range that we think we are comparable with but not based upon 2.5 and 3 trillion.

That's not -- the first part of your question -- I am sorry, we couldn't get that.

What was your first --.

I was just thinking if the 500 billion of origination is equivalent to one year of earnings.

No --

No?

No, that would be too easy.

Right.

No matter where the origination between 2.5 and 3 trillion, you are comfortable earning anywhere between $10 and 11 dollars?

That's correct.

Thank you

Walter from UB PaineWebber.

I am sorry.

Did I not have a question.

I did not.

Do you need a loan?

Yeah

And next from the line of[ INAUDIBLE ]

Hi, guys, great quarter.

Just paperwork to clean up.

On the gains of the sales of sub prime home equity.

What was the notional amount that was shown?

Home equity.

The home equity sales in the quarter.

The home equity was nominal.

And sub primes.

And subprimes?

About 1.2 billion of subprime loans were sold in the quarter.

Okay.

And -- I noticed that the mortgage loans held for sale have gone up dramatically over the past six months or so.

Should we expect that to continue to ramp up or will that decline in the coming quarters.

I think from this point forward, you should see it -- you should see it track reasonably closely with the level of production.

Okay.

One last question.

What is the composition of the AOCI.

Is it mostly on the home equity senior security or PO securities from the servicing hedge?

We might have to get back to you on that one.

Okay.

Our next question is from the line of Charlotte Chamberlain from Jeffries & Company.

Can you answer that question now?

Good morning.

Charlotte, hold on for a second.

We will try to answer that question now.

The amount accumulated other comprehensive income is primarily the senior securities.

Senior securities.

The E locks we have secured but have not sold.

Those deferred gains are in OCI.

Charlotte, you are on.

Okay.

Inquiring minds want to know.

Given what a superlative job you have done in this quarter and quite frankly eye-popping guidance, what would you say is the probability that's 04 comes -- assuming a midpoint for this year of 1050, what would you say the probabilities are that's 04 comes in above or below 1050?

And the other issue is, how much of the impairment that you currently have, in fact, could be brought back into income if prepayment is slow.

The answer to question one is a good try, but we will not go down that path, Charlotte.

We brought back, I think, -- 2 million.

2 million.

Okay, let me try -- let me take another swing at the first question.

Your answer to Kako's question that the 10 to 11 billion -- sorry, the $10 to $11 was not dependent on whether it was 2.5 or 3 billion.

If originations in '04, say, fell back to, I don't know, say a 1.5 billion level, is it reasonable to assume that you could do better than 1050 -- that you can do 1050 and better in '04?

Again, Charlotte, let me give some metrics to play with for a moment.

I think your estimate of 1.5 is pretty much where, you know, you have to look at the refi. going away and look at the purchase market.

You look at 1.3 and 1.5 trillion.

You know, that's certainly a -- you know an environment that could be possible in '04.

And -- because it is primarily purchase transactions.

There will be some HELOX [Phonetic] a product consumers are going after. 1.3, 1.5.

Hard costs, 1.1, 1.2.

The bank in '04 will be $22 billion.

If you can calculate the return on assets on that $22 billion, it is a whole different company than in '04 than it is in '03.

We have given you the servicing margins of 12 to 15 bips.

The -- and we will have over in excess of $600 million in3 servicing that will be kicking in.

Some of the numbers I gave new my presentation as rates -- if you have a 1.3 to 1.5 trillion, means these rates have gone up.

So I think you have numbers that you can work them out yourself and then when we -- when we get comfortable with forecasting '04, you know, we will certainly come out and tell what you we tink.

I mean, it is very important for us, Charlotte not to speculate here and our credibility is important to us.

So we want to make sure when we do come out with a number, it is a number we are comfortable with.

And I am not comfortable talking specifically talking about where we are going to be in '04 at the moment.

I can certainly understand that.

Then with those metrics, what could we assume if it went back to a billion five how much you could shave off expense as soon as.

Well, I would say first of all that, you know, we have been at this for 35 years.

I think we got it now, and Stan has been working -- Stanford Kurland has been working vigorously with all of our managing directors on a very careful program, well described, well understood, well articulated of how we are going to be ramping down as volumes dick -- dictated.

We are positioned better in our history to do that.

The large servicing portfolio, we will have businesses that will be expanding for the first time in a higher-rate environment.

For example, the insurance operation, Balboa Life and Casuality does much better than the higher interest rate because that's what it lives off of, return in investment.

The bank will continue to grow.

We believe the Capital Markets will be picking up substantial market share although it may initially take a little hit as far as lower volumes, but we believe it is going to take greater market share. 70% of its business in Countrywide Capital markets is away from Countrywide.

We are much better balance today than we have ever been, but in any event, in the core business which you understand very well, Charlotte, you are involved with it, and in the mortgage processing business, if the volume decreases your number of processes have to decrease.

And, therefore, that's where -- that's where the focus will be and Stan is on top of it.

And I have unconditional, unlimited faith in Stan.

Okay.

All right.

Okay, thanks.

And we have a follow-up from Mike Vincequer.

This is actually I guess a good news story here.

With the stock in the mid- to upper 60s.

I recall you did an offering of some zero coupon converts a few years ago.

And I was wondering if you could remind us what the convert price -

84.

Two strike prices. 65 or something like that.

Mike, at a CFC price of $86, investors in that security can convert at $64.

So there is no dilution until $86.

And the number of shares, just as a reminder?

Um ...

I would have to get back to you on that one.

Okay.

That's fine.

Thanks.

I am going to guess, Mike, that it is about 8 million shares.

Okay, thank you.

We have a follow-up from Bob Napoli.

Please go ahead.

Most of my questions have been answered.

I did notice that your deposits almost doubled on the balance sheet in the quarter.

I was wondering how much of that was retail versus whole sale.

We have no wholesale, no wholesale deposits.

Retail and escrow balances and FOB advances.

We don't have wholesale deposits.

You were able to increase by 2.6 billion.

We have escrow balances we put in there escrow of 4.5 billion that are in the bank that we are transferring over as we are able to.

And I think that's the number, 4.5 in escrow balances.

What's the breakdown on CDs?

One billion in time deposits one billion in CDs either came through telemarketing or our micro sites.

And 17 million.

And 17 million, money markets.

Okay.

So that 4.5 billion of escrow is in the 5.6?

That's correct.

Okay, thank you.

You are welcome

A follow-up from [ INAUDIBLE ]

Couple of questions. 12 to 15 basis points servicing margin that you say you would get to when things turn, does that factor in -- that would seem be including any reversal of impairment reserve because you have a servicing fee of 38 basis points and some amortization and that, alone, will get you at least to that on an after tax basis?

That's correct.

Okay.

So that is over and above that.

Second question, this quarter on -- in your servicing segment, you had $66 million on gains of sales on loans and securities.

I note $21 million you talked about from the asset.

Where is the remaining coming from, for one.

And the other question I have, you had a loss of $32 million in the other segments.

If you could explain that too.

The $66 million in the servicing segment relates to reperforming loans.

Government loans that were in default, and we purchased out of securities.

They subsequently reinstated so we resecuritized those and sold them at a gain and reallocated at a servicing segment.

What's the loss?

And the loss is what?

The $33 million loss in other.

What were you looking at sunset.

Looking at your segment analysis.

If you go to the -- oh, actually, it is not -- it is the 33 -- yeah, 33 million -- yes, that is -- it is 32 million something.

Commission fees and others?

Yeah.

Notice the other -- the net bottom feline there is $288,000.

Those are eliminations and consolidation.

AH, okay.

Our next question is from the line of Craig Picarello from Fairhaven Capital.

I have a quick question because I think I missed it when you were talking about it.

What is the composition of both portfolio of held investment loans and of the held -- sorry, held for sale loans as far as, you know, fixed versus a arms and home equity versus mortgage.

Yeah, I don't think we have the fixed arm.

We don't have any arms.

I don't have it in front of me.

No, no, he's asking -- are you asking on the consolidate or --.

I am looking for individually the held for sale portfolio and held for investment portfolio.

How are they kind of broken up?

I know that you gave the composition of the held for investment portfolio going forward.

I just want to know if it is similar right now.

Today we've got -- call it $7.8 billion of loans held for investment. $4.5 billion are mortgage loans.

And I don't have the arm fix split there in front of me.

Is it mostly arms?

No.

No.

Well, it is HELOX [phonetic].

They are mostly arms.

These are bank loans.

Yeah, most of the loans on the -- in the bank are adjustable rate.

These are mostly arms and -- these are secure loans that we have made to other mortgage bankers, short-term loans to finance their mortgage inventories.

And then roughly $1 billion of those defaulted government loans that we purchased out of securities and we haven't yet -- they haven't yet reinstated or resecure advertised and we are holding them and makes up the 7.8.

Okay, 4.5 in mortgage and 1 billion in the default of loans that you repurchased.

What was the other one?

Those are warehouse lending advances.

We have an entity that -- that on a Secured bases lends money to small mortgage bankers where ultimately those are sold and paybacks CF O involving a line of credit for them.

Okay.

And as far as the -- the held for sale portfolio, that's mostly mortgages?

That's all mortgages.

Mortgage-based securities.

Oh, okay, are the MBS fixed rate or floating [INAUDIBLE].

They are primary -- Fixed rate.

They are predominantly fixed rate.

Okay.

Those mortgages are basically sold.

Yep.

So -- as far as the -- and your strategy through the cycle is obviously to grow the health report -- the held for investment portfolio.

Is that primarily going to be on -- on an arms basis?

And, two, are you going to add any securities to the held -- to the held for investment portfolio?

Our strategy is to -- as you know in the bank, to grow that portfolio as we previous talked about.

You are talking about the bank right, not the consolidated.

Yeah, the bank.

They are, again, the combination of assets are home equity lines of credit, arms, and of some securities and a very small percentage of their -- of what they sold fixed rate seconds, all of which are basically match-funded within --

The held for investment.

They all -- and the bank.

The goal is for held for investment from $17 billion to $22 billion in 2004.

We have allowed within the mortgage company, we have grown the inventory of HELOX that we are holding for ultimate sale, and, you know, that's more than opportunistic sales opportunity that -- and until that point that we saw that, we enjoy a nice bread on that income.

And from time to time the inventory, you know, will go up and down just as a function of -- you know, again, the opportunistic, you know, sale of the mortgage-backed securities.

Where are those home equity loans on the balance sheet if you looked at the consolidated, the ones that are held by the mortgage company?

The ones that have been securitized, the $1.5 billion, the prime home equity senior security.

Yeah.

On top of that, a billion dollars of fresh HELOX that we just originated held in our mortgage loan held for sale.

Okay.

And at this juncture, will to be securize and hold those as well.

In the bank of the 4.5 of the mortgages held, in the held for investment portfolio, how much of those are home equity or are they straight firsts.

I think it is approximately 2 billion of home equity loans are included there.

2 billion.

1.7 billion.

1.7 billion?

Yes, of HELOX and fix rates, there is another 400 million dollars.

So 2.1.

Okay, thanks very much for the help, guys.

You are welcome.

And ladies and gentlemen, just a quick reminder, if you do have a question, please press the 1.

We have a follow-up from Lawrence [INAUDIBLE], please go ahead.

I forgot to say I really appreciate the guidance that was very helpful.

I was thinking my models were all wrong.

One follow-up -- [ LAUGHTER ] -- one follow-up, for the last two quarters you sold a lot less sub prime and home equity loans that you have produced and I presume that most of that stayed in the held for sale line.

Would it be fair to say that the mix of those loans is richer than the mix of the loans that were sold this quart .

Yeah, absolutely.

Sub prime and HELOX has considerable gain on sale, and we provided those particular gain on sale for a sub prime loan is about 4 --

4 to 5 points.

4 to 5 points.

And HELOX is typically around 3.

So much -- much higher, you know, profit levels.

That's -- that's -- fantastic news, thanks, Stan

Our next question from the line of Jason Pacorni [ INAUDIBLE] -- Do you have a question?

We have a follow-up from Bob Napoli.

Sorry.

Last question.

On the subprime business.

What are you seeing as far as profit margins on the subprime business and the competition in the subprime business.

Are you seeing stable margins?

Or are you seeing any pressures?

The -- you know the market is, you know, very different than it was, you know, several years ago.

It's very rationale market now, and, you know, there are -- the players in that are primarily large and well-respected companies.

The margins there, I have held up very well.

I mean, I would say there's some very slight increases in our securitization cost particularly in the area of MI insurance and those costs are adjusted in our pricing models, and so we have been able to see margins hold in, you know, fairly steadily.

In terms of competition, I think that unlike the prime business, we are very disciplined on our market share goals for subprime.

It runs about 3% to 4% of our business, and we try keep that very disciplined.

So we -- from a competitive viewpoint, we don't see the kind of competition that we have on the prime side.

What about credit quality in that business?

Again, we limit ourselves.

You know a lot of it is done out of our own portfolio.

Our product is more of an A-minus-type product and that has been pretty, very consistent in terms of the average FICO scores of that product.

We haven't seen any deterioration in our credit quality.

The servicing portfolio, overall FICO is well over 700.

Okay, thanks.

And, again, ladies and gentlemen, if you do have a question, please press the 1.

Next go to the line of Jim Reilly with Reilly Capital Research.

Go ahead.

Jim Reilly, do you have a question?

And we will move on to Richard Diamond from Capital Partners.

Please go ahead.

Yes, good morning.

Can you provide indications what percentage of your MSRs came from CFC-originated loans?

What percentage came from wholesale originated loans?

And what percentage came from correspondent loans?

Well, it is probably 40 to 50% -- 40% correspondent, 30% wholesale, 30% CMD -- consumer markets.

Okay.

Secondly, page 6, going back there, you changed your methodology in the past quarters for valuing mortgage servicing rights.

Do you have historical numbers that reflect the change of methodology so we can compare like to like?

And if you could provide some color on that.

You know, basically, we -- you know, what we -- when we are approached in valuing servicing something to -- is to have a methodology that projects -- predicts what the fair market value of that asset is, and there are different approaches in terms of what cash items are included and what aren't, but -- but the fact is, in any period, the -- we are producing what we -- what we believe to be the fair market value of that asset.

And with regards to changing or taking out certain cash flows, that is a -- we are now using cash flows that are only the contractual cash flows, and our value based on a OAS methodology; however, it isn't -- it wouldn't be appropriate to -- to look back on that method as being different from the -- the results.

If we employed the same methodology we would have the same results as to what fair market value sue in the past.

So a long-winded way of telling you can rely upon the fair market value calculations that we presented in the past as being comparable.

So in other words, you have changed your methodology, but really, if I look to do like to like, the results haven't changed.

I wouldn't come that conclusion.

I think we have assessed -- that the industry has assessed that the market value servicing has declined through this period.

And I think one way for you to get some sense of that if you look at where we are capitalizing new servicing now at about 160 basis points and you compare that to where we capitalize new servicing and carrying our servicing prior to that refi. boom, there has been a decline in servicing reflected in our balance approach.

I wish there was -- is there some other measurement that you can point to that will give me a good feeling of like-to-like comparison.

I am just thinking --

Why?

There's some noise.

Why?

Well, because basically, I -- it is sort of like comp store sales for mortgage servicing rights.

I would like to know, you know, what they are today and what they have been in the past since you have changed your method for calculating them.

I think I have given you a reasonable way to do that is by looking at where we are capitalizing servicing now and where we have capitalized it in the past and adjusting for the net servicing fee we retained.

We did retain net servicing fees in the past.

But you can come up with a reasonable estimate that way.

Okay, thank you very much.

And that will conclude our Q & A section.

I'd like to turn the call over to Angelo Mozilo.

Thank you very much.

Since there are no questions, I will speak to you at the end of the next quarter, and I appreciate -- we all appreciate very much your participation and your following of the company.

Thank you and good morning.

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