美國銀行 (BAC) 2003 Q3 法說會逐字稿

Ladies and gentlemen, good morning.

And welcome to the Countrywide Financial Corporation Conference Call.

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

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

To cue up for a question, press "*1" on your touch-tone phone.

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If there are questions or comments later in conference, please queue up by pressing "*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".

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

We ask you stay on line at the conclusion of the meeting to receive the replay information.

With that being said, here now is your host with our opening remarks, Countrywide's Chairman, Chief Executive Officer and President, Mr. Angelo Mozilo.

Please go ahead, sir.

Thank you very much.

Good morning, and welcome to Countrywide's Earnings Teleconference For The Third Quarter Of 2003.

We strongly encourage all participants to view the third quarter earnings and performance report while listening to this call.

This report can be accessed at our Web site www.countrywide.com and by clicking on the investor relations on the home page and then clicking on the reporting slide show text link for the third quarter 2003 earnings teleconference.

On page 2 of the earnings and perform report we provided agenda did for today's teleconference.

We'll provide a beef overview of our actual results for the third quarter and the first three quarters of 2003.

The next topic is the highlight of the presentation, a review of Countrywide's2004 earnings forecast.

Including in the earnings guidance are forecasted ranges of earnings for mortgage banking and diversification as well as ranges for key assumptions in the production and servicing sectors.

The theme throughout this presentation is Countrywide believes the company is well positioned for strong performance in the near term as well as the refinance boom has ended.

Turning to our first topic on page 3, review Countrywides operational copiousness to the first three quarters of 2003.

Numerous annual records have already been established even though we have only completed the first nine months of the year.

Total funding is $359 billion year-to-date, nearly matches the prior two years combined, each of which were new records at that time.

More importantly, purchase funding reached95 billion for the first three quarters and it clips the previous full-year Mark.

The purchase market remains our strategic focus in production because of the relatively consistent consumer demand for this product irrespective of the movement of interest rates.

On the serve serving --servicing front, portfolio cross the $600 billion threshold.

The portfolio up $154 billion, 34 percent year-to-date.

Countrywide's strong growth is in sharp contrast to the top 10 services where the group have lost market share on average recently.

Remarkably, Countrywide has more than doubled its servicing portfolio during this refinance boom.

Diversification businesses have also enjoyed significant success.

Our broker dealer has already traded over$2.3 trillion year-to-date.

And bank total assets are up to $16.3 billion, up from $5.1 billion at the beginning of this year.

Countywide year-to-date earnings accomplishments are highlighted on page 4.

Driven by strong third-quarter performance, earnings per diluted share reached $13.05 through nine months.

In just three quarters earnings have more than doubled last year's result and over four times the total amount earned in fiscal year 2001.

The through nine months, diversification pretax earnings are $648 million, up 73 percent. over full-year 2002.

The importance of our diversification efforts are best evidenced by the fact that the first three quarters earnings already exceed the company's entire full-year pretax earnings from just three years ago.

Countrywide's return on equity for the first three quarters was 47 percent compared to 19 percent for the same period last year.

In concluding this review of our accomplishments, it is clear that the refinance boom has provided numerous opportunities for Countrywide.

As we have professed in the past, our business model was designed, has always been designed, to capitalize on such opportunities.

We believe that our performance over the last nine months reflects quality of our business model and the outstanding effort the your of our employees and its executives in successfully executing the plan.

On page 5 we provide an overview of our performance during the third calendar quarter.

Earnings per diluted share increased 343 percent over the year to $7.70.

This marked Countrywide's tenth consecutive quarter of record earnings.

This was also the 87th consecutive profitable quarter for the company dating back to 1982.The first stationaries grew 146 percent over the prior year to $258 million and were a key driver of consolidated earnings growth.

Operationally, our mortgage banking business continued to excel.

Consolidated funding remain strong at $126 billion for the quarter, nearly double the same quarter last year.

The pipeline of applications and processes has declined as expected with the recent rise and rates but remains robust at $47 billion.

In recognition of our outstanding performance during the third quarter, the board of directors raised our dividend to 20 cents per share, the fifth increase in the last six quarters.

The board also declared a 4 to 3 stock split that is to be affected as a stock dividend.

We provided overview of our performance during the first three quarters of 2003 on page 6.Earnings per diluted share increased 187 percent over the prior year to $13.05.

Earnings per share for the first three quarters were almost $10 higher than the same period two years ago.

Diversification earnings grew 152 percent over the prior year to $648 million.

Total funding reached a record $359 billion for the first nine months,139 percent higher than the last year.

On page 7, we move to the highlight of the presentation.

Countrywide's earnings forecast for 2004.

We first draw your attention to the list of factors affecting this forecast on page 12 of this presentation.

We also remind you that these disclosures should be considered forward-looking statements as described in the disclaimer at the end of this presentation.

The key driver of the forecast will be origination market size, which management believes will be in a range of 1.4 to $2.4 trillion for2004.

The most important factor affecting market size will be the level of interest rates.

Our forecast contemplates a range of 4 percent to 6 percent for the10-year treasury in 2004.

Given these rates, and market sides, we expect mortgage banking pretax earnings to be in a range of $2.2 to $3.0 billion.

Management believes diversification pretax earnings will fall within a range between $800 million to $1 billion.

The weighted average diluted shares outstanding estimate has been adjusted for the impact of our convertible debt, which receives if converted accounting treatment if our stock price is over $88, subject to certain other conditions.

The bottom line is that Countrywide's forecast for 2004 earnings are expected to be in a range of $12 to $16 per diluted share.

More insight into expected production sector performance is provided on page 8.

Management expects Countrywide's production market share to be between 13 and 15 percent in2004.

Production market share currently stands at13 percent.

Based on the aforementioned Countrywide's spending should range from 182 to $360 billion.

Interest rates among other factors will have a significant effect on these estimate.

Production margin is forecasted to be35 to 70 basis points in 2004.

Price competition funding volume, product mix, and divisional mix will be important factors in the determination of the actual margin.

Perspective on the servicing sector is provided on page 9, depending on the impact of rates on funding volumes and prepayment fees, Countrywide's average own portfolio balance is forecasted to fall within a range of $700 billion to $740 billion in 2004.

Servicing margin guidance is provided before and after MSR impairment or recovery.

The gross servicing margin is expected to range from 11 to 16 basis points.

A rising interest rate environment in 2004 could cause as much as $3 per diluted share in net impairment recovery that would boost the servicing margins by as much as 11 basis points.

In contrast, it is conceivable that rates could decline enough that as much as seven basis points of net impairment could be recorded.

That's the gross servicing margin expected to range from11 to 16 basis points while the net servicing margin could range from 4 to 27 basis points.

The actual servicing margin for the first three quarters of 2003 was a negative33 basis points.

We caution observers not to expect that the end points of the assumption ranges will necessarily correspond precisely to the end points of the forecasted earnings per share range.

The ranges for production and servicing assumptions are intended to provide general guidance.

The impact of MSR impairment are addressed further on page 10.

Net impairment recovery occurs when rates rise and the gain exceed the corresponding loss to the servicing hedge.

The actual net impairment recovery recognized during the third quarter just ended was $231 million before tax, which equates to $1 per diluted share.

The remaining impairment reserve as of September 30, 2003, is $1.7 billion.

Continuing on this topic on page 11, we discuss the amount of timing of net impairment recovery.

Net impairment or recovery in future periods will depend on the amount of rate increase during that period and the hedge position.

Based on the current hedge position, if the ten-year treasury rises to 6 percent from the actual level of4 percent as of September 30, 2003, expected net impairment recovery could be roughly $800 million before tax.

This equates to over $3 per diluted share.

The net recovery would be realized during the period the rate increase actually occurs.

This could happen during the fourth quarter of 2003 or any time during 2004 or even later in 2005.

Our 2003 and 2004 guidance reflects a range for the expected possible outcomes.

Net impairment recovery should not be considered a recurring earnings item, and is dependent on the continued success of our time-tested hedging strategy.

Keep in mind that impairment would be recognized if rates fell during a period from their starting point.

Factors that could affect the accuracy of our 2004 earnings forecast is discussed on page 12.

Perhaps most importantly interest rates may move outside of the expected range of 4 percent to 6 percent for the ten-year treasury.

Forecasted results could be affected accordingly.

In addition, volatility of interest rates will be a key factor.

Fluctuations and interest rates could have a material positive or negative impact on short-term earnings.

This is due to MSR recovery which may not be fully set during the same period.

The counter balancing effect may occur over a longer time than the more immediate Mark to market affect effects of MSR accounting.

Management remains optimistic about price competition after the refinance boom.

Top landers have a significant concentration which gives them greater control over their destiny.

In addition These are large publicly trade and regulated entities which understand their responsibilities to their shareholders.

Nonetheless, price competition could have a significant effect on production margins, market share or both.

These are the factors including but not limited to those listed in CFC's SEC filings and a disclaimer at the end of this presentation.

Having shared our earnings forecast, we now provide some historical perspective on earnings trends.

On page 13, we graphically portray Countrywide's earnings per share for the five periods including our 2003and 2004 earnings forecast.

The dotted blue line indicate that our earnings per share come bound annual growth rate over this weird period is expected to be at least 40 percent.

Note that the 40 percent rate is based on the low end of our 2004 guidance.

This is more evidence of the success that Countrywide has enjoyed during the finance boom that is expected to continue afterwards.

While 2004 earnings per share may in fact end up lower than 2003,this impressive earnings growth record speaks for itself.

The current year is quite simply an extraordinary year that is unlikely to be repeated.

Countrywide's business model is designed to capitalize on such opportunities.

Countrywide's culture seeks to aggressively seize these opportunities and improve the company's competitive posture.

Our organic growth strategy and unparalleled focus empower us to achieve the results that we have.

Quarter earnings of $3 per share before the boom are significantly higher after the boom.

That completes our review of 2004 earnings forecast.

Before concluding, I want to advise you about a few of the many initiatives we are proactively pursuing to promote growth at Countrywide.

First and foremost, our both goal to grow production share by 2008.

Remain focused on the purchase market and grow our sales force to almost 7,000people today.

We also have expanded our product menu with new products.

Countrywide bank continues to expand both its infrastructure and its balance sheet.

The bank now has 25 financial centers spearheading our retail deposit generation efforts.

We are formulating our new bank business plan and are in consultation with the regulators on this matter.

Our broker dealers are expected to become a primary dealer in U.S. treasuries securities soon.

These are only a few of the many initiatives currently under way at Countrywide.

We now turn your attention to the disclaimer on page 14.

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 the number of factors included but not limited those listed in the disclaimer on page 14.This concludes my formal remarks.

The operator will now provide instructions on how our questions and answer period will be conducted.

Thank you very much.

Thank you.

Once again it's "*1" if you have any questions.

Our first question is from the line of Mike Vinciquerra with Raymond James.

Please go ahead.

Thank you.

Good morning, guys.

The question is actually kind of off one issue that didn't seem to be as robust in the quarter and that's on the insurance side of things.

It looked like your premiums sky rocked but your losses also sky-rocketed.

And on the other operating expenses, just curious what was going on there because that one jumped up quite considerably as well.

Otherwise, great quarter.

Thanks.

Figure what out what you're looking at I don't think our premiums did pick up substantially.

The loss part of it we're not certain --

The insurance operations enjoyed in the previous quarter a little bit higher net earnings as a result of some sales of securities.

We did have reserves that were taken while -- fairly small for the hurricane issue but the premium business continues to grow strongly, and we anticipate that that will reflect a higher net earnings in the future.

Angelo Mozilo Let me give you an overview of this.

I think what you may be looking at are the reserves.

We have substantially increased the reserves of that entity.

They are have made great progress at increasing the customer base, the institutional customer base, in Balboa Life and Casualty.

They have also enjoyed the ability of substantially increasing insurance premiums in each and every state which we operate.

Although we won't feel the effects of those increases immediately, we will in 2004 and in the future.

So that's our view of it, Mike.

I don't know -- unless you're looking at reserves instead of reserve for losses that has increased.

But our losses have not.

Yeah, I was just -- I was actually just looking at claim expenses quarter over quarter.

Looked like they went from $86 million up to 103 and then the premiums looked like they jumped from 157 to 192.

Those were the 2 numbers I was looking at.

Our actual loss ratios are -- you know, trending very nicely down.

For example, our combined ratio is at 94.5,which is down from the beginning of the year at around 97.

And our loss ratio has also trended nicely all during the year at about 50 -- 56 percent.

That's down from last year, where we were about 58 percent.

So in that regard, the -- with that regard, the insurance company is doing very well.

Yes, we're very pleased with the progress that made, the new leadership is now entrenched into the operation.

We have seen substantial improvement there We expect them to have a very, very good 2004.

OK.

Very good.

And if you could just provide the components of other operating expenses that seem to pop up in the quarter other than that.

Thanks very much.

Thank you.

Our next question will come from the line of Jonathan Gray with.

Sanford Bernstein.

Go ahead.

Yes.

Can you give us the gain on sale of heelox and gain on the sale of sub-prime and also the volumes of each that were sold in the quarter, please.

Thomas McLaughlin is going to answer this, Jonathan.

Sure, Jonathan.

We didn't sell any heelox in the quarter.

We sold about a billion dollars of sub-prime and recognized a gain of roughly $50 million.

It if I could ask another question then.

It would appear that the profitability of the plain old vanilla, you know, single family mortgage production operation was quiet high in the quarter maybe higher than it's about been at any other point in the year far and away -- quite separate and apart for many kind of price pressures.

It would appear that pricing had strengthened in the third quarter.

Is that accurate?

Thomas McLaughlin Yes, Jonathan.

This is Thomas again.

There's actually several factors that drove the margins in Q3.

Number one, margins actually reached their zenith probably at the end of the second quarter and those related profits were recognized in third quarter when those mortgages were sold.

Plus, as you probably notice, we had a pretty big increase in our net interest income.

About $70 million.

That's attributable to both higher inventory and, as I mentioned, we haven't been selling our heelox and so our heelox portfolio is up to $9.4 billion.

So that's throwing off increasing amounts of managed income and that drove up the margins.

The higher percentage of our production came from retail in the third quarter.

As know, that's our highest profit margin channel.

Retail production was actually up in the third quarter over the second quarter.

The other divisions were down.

In addition, we sold a slightly higher production of -- we sold 98 percent of our total production and in the third quarter we sold 93 percent

I don't want to push my luck asking a string of questions, but let me give it a lot.

How will the company deal with trying to expand its market share at a time when its market may be contracting by a record amount?

In other words, how do you both expand and contract at the same time?

Well, I wouldn't portray it that way.

I think it's a very legitimate question, Jonathan.

The important -- what you have is a smaller pie and so to simplify it, you have to get a bigger piece of a smaller pie.

And the way you do that is you substantially expand your sales force in the field, high-quality people in the field, and provide them with ought the technology to -- all the technology to gain market share to provide them with the ability to have best execution.

Where the contraction will come in for a period of time while we go to this transition will be in the administrative area where the individuals who are underwriting processing loans, pushing loans through the pipeline, that, as you can see, as the pipeline shrinks will have a -- very a very substantial expansion on the top line area where you're trying to grow market share.

Thank you very much.

We now have a question from Robert Huttonson from Goldman Sachs.

Maybe just a little bit of elaboration on that last question.

We have the production margins going down in the guidance but those margins are actually a little higher than they were the last time rates started to move up a little bit.

Do you foresee a little bit more granularity on both the production margins?

In other words is there some kind of built-in expense benefit that you're getting on the production side this time around and maybe just in general a little bit more granularity on the confidence that you've got in those -- in that range on the production margin side?

Let me take two areas.

Let me first talk about production areas question and then I'll address servicing for second in terms of economy of sales.

But the -- we have two factors going for us.

Technology clearly is playing a greater role in the production -- on the production side of the business.

In fact, land safe one of our companies, has a product today, P.D.A. product, that provides field people with the ability to bring down credit reports, inspections, appraisals wireless on a LAN network, wide area network that took days, takes literally minutes.

So we -- the cost of originating loan is going to continue to shrink as technology plays more of a role and the documentation process gets shrunk where we no longer need documents, we can do it on paperless basis.

That's one factor.

The second factor is we saw when the rates went to 3.07 to 4.60, we had a sudden rise, our competition as we had expected behaved very well during that process.

We didn't have what we had in previous periods of time.

We had out liars coming out with irrational pricing, protocols that we had to fight against.

We didn't have that.

And we had a major increase in interest rates.

So I think we have a different competitive atmosphere.

We have the process is being streamlined that's lowering costs.

That's on the production side.

On the origination side -- and that's why we -- you can see the margins that we're projecting.

That's the basis for it.

On the servicing side, those servicing margins again are being impacted by the economy's scale.

Talking about 2004exceeding the 700 billion in servicing, what basically happens there is you're able to put on more loans per person at each incremental level.

So we get -- we get a tremendous result, able to extract greater margins on the servicing side of the business.

Those are the basic elements that are solved on both sides.

That's great.

Thank you.

Our next question comes from Bob Napoli with Piper Jaffray.

Please go ahead.

Good morning.

On the servicing margins.

The -- what we have in the presentation, the growth servicing margin 11 to 16 basis points.

On the 16 basis-point range, it looks like that may be a conservative number.

I don't know if you've changed the formatting at all.

Looks like maybe you've moved the gain on sale from re performing loans out of the servicing business.

Is that correct?

Looking at your presentation.

No, that's not the case.

But we would expect, you know, those profits to decline in keeping with the market.

OK.

Let me ask a question about interest income then and your balance sheet.

Now, you had a huge increase in loans held for investment.

As you've continued through the year, now, the profitability --first of all, I would assume that most of those are the heelox that you mentioned earlier.

Are these going to beheld permanently now?

Are you no longer selling home equity loans, and does the profitability from that business go into the production sector?

Obviously, the loans held form the estimate are increasing with the growth of the bank as well as on Countrywide home loans balance sheet as well where we moved a portion of the heelox to help for the sale.

It is our intention to continue to grow the balance sheet of the bank and to grow the loans that we're holding in terms of heelox and in terms of adjustable rate mortgages.

That should continue to grow.

It has -- you know, it's a -- the heelox are great asset for the company.

Has a very low risk of margin contraction because the rates are adjusting with the adjustment in short term interest rates.

We'll continue to evaluate our opportunity and our balance sheet in terms of our ability to continue holding heelox and this time it's very favorable for us to expand the balance sheet with those loans.

Last question.

On the bank itself, you're almost up to the maximum amount that you -- of assets permitted for 2003.

The growth trend you've been on is much greater than what your current agreements permit.

Can you give any update on discussions on expanding, and if you did -- were able goat an expansion of the growth rate of assets what kind of expansion are you hoping to get?

Well, first of all, I -- you have to understand that wear partners with the regulators here, and so our growth will be in concert with what comfort level the regulators have, bone both the fed and the O.C.C. with the growth of the bank.

They have to date agreed for a modest expansion of the original numbers because they're pleased with the progress we've made both in 2003 and 2004.

I'm a little uncomfortable, frankly, discussing specific numbers, but they have been agreeable in expanding the original business plan for us because of the manner in which we've conducted ourselves.

OK.

Thank you.

We now have a question from Eric Wasserstrom from U.B.S.

Please go ahead.

Mr. Wasserstrom, your line is open.

Oh.

Sorry.

I couldn't hear.

Angelo, one question about the hedging.

I think you lost only 114 on the hedging this quarter.

Was that because -- was that simply because you hedged less during this period?

Can you just sort of update us on what your hedging philosophy is going to be going forward in terms of macro hedge versus specific financial hedges?

Thanks.

I'm going to turn this over to Stan, who leads this part of the operation.

You know, first of all, it's important to reflect on the fact that much of the hedge that we have in place and as we've disclosed is asymmetrical.

We use a significant amount of optional coverage on the servicing hedge.

That optional coverage, by the way, has a cost, which is built into and imbedded in our forecasting for the servicing segment.

And the costs are what you would -- you know, what you see as a loss is actually part of the cost of the decay of the value of our options, a part, or a significant part of that.

Hedge going forward will look at this point as we've examined it very much like it does at the end of September.

We look to protect the asset against dramatic movements as a result of declining interest rates, and we look for the macro hedge to give the macro hedge time to engage and to generate origination profits to offset impairment.

On the rising rate side, again, we have optional a big part of our coverage is optional coverage, so what we will incur, you know, hedge losses as we indicated in the contents of our presentation, there is abasic opportunity that will have a net recovery that exceeds the actual losses from the hedge.

Thank you

Thank you.

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

Please go ahead.

Thanks.

Angelo, I wonder if you could commend comment on what is probably your remaining disadvantage I with respect to leverage map are the prospects for releasing the leverage of your asset certainly in the context of growing the bank?.

I would say that because of the -- all of the issues surrounding MSR's particularly the last 18, 24 months, that I don't see any great prospects of having any substantial additional leverage relative to that many MSR asset.

That is becoming less and less of an issue for us as we continue to build capital in the company.

We have very substantial amount of capital.

So from -- two answers to that.

One is from a rating age perspective, although we continue to strive for a higher rating from --particularly from moody's.

I don't see them changing their attitude on that asset anytime in the near future.

But as far as Countrywide's concerned, it's -- I wouldn't consider it a competitive disadvantage any longer.

Do you still consider the possibility of moving the MSR into the bank?

I think over time, I mean, it's a longer range perspective, I think that -- not necessarily for the --frankly, for the capital issues or for the leverage issues but for all the other issues that a bank provides shelter for, for example, the predatory lending laws and other types of preemption that the banks enjoy, for that reason, it's the goal of this management team to ultimately put the mortgage company or a portion of the mortgage company under the bank -- that part of the company that is strategically advantageous for us to do so.

Great.

Separate question just on market share.

What was your production market share in the quarter, and are you still expecting to be at 15 percent by year-end?

And then your guidance for next year is indicating a range of 13 to 15.

Are you thinking that you are at risk of potentially losing market share next year as the overall market --

Not at all.

I think we ended around the 13.5 percent level.

We will be, I believe, 15 percent by year-end or very close to that.

I believe that the -- we've tried to -- you know, we have a pattern of under promising and over delivering.

And I think that if you look at our plan carefully, if you read in between the lines, you'll see that we are well on our way to achieve our 20003projection of 30 percent.

We're going to substantially support our armed troops out in the field, armed with the best technology in the world.

And that's all designed to substantially accelerate our market share market-share growth.

So.

No, we are going to grow substantially in 2004 and 2005.

Thank you..

Thank you.

Our next question is from Paul Miller with FBR Research.

Great quarter, Angelo.

On your earnings guidance for next year, you gave a diversified income breakdown -- range of between $801 billion.

I was wondering if you could break that out for us a little bit.

And secondly, on the 35 basis opinions on the low end of -- points on the low end of projection, I've never seen your gain on sale on production go below 50 basis points.

Is that almost like a worst-case scenario on a price war scenario?

Well, I go back to my statement I just made a few minutes ago.

When we look at this company, we don't want to raise either unreal or accelerated expectations for Countrywide.

We want to -- we want to keep the expectations of the investor community to be within a range that we think is achievable.

And the whole presentation is gated in that manner.

How you translate that is really up to each of you individually.

As to the -- as to the diversification earnings, you want to address that issue, Keith?

Sure.

We don't want to get into the specifics.

But just generally speaking, you should expect given the range of markets that we're forecasting for next year that the capital markets operation, which has been operating at an incredibly high level of profits, you know, in part due to the more securities market and the size of it.

As you know, they generate $135 million of earnings this quarter.

You shouldn't expect that to be sustainable.

So given the market of 1.4 to $2.4 trillion, you should expect capital markets profits to decline.

On the other side, the bank will continue to grow its assets, as we've indicated, and as those assets glow, you should expect profits from the bank to increase.

Likewise with the insurance sector.

As Angelo's pointed out, we expect profitability from the insurance sector to grow significantly next year.

So those are the general moving parts.

On the bank, are you still -- I mean, are you shooting for like an R.O.A. goal?

Yes, we have R.O.A. goals.

The issue that we have both in R.O.A. and R.O.E. is because it's a noble bank, we have -- you have sort of adjust for this.

We have -- we have capital requirements which far exceed that of a bank that is deemed to be mature.

And so we're carrying almost 9 percent capital today, which is impact our returns.

But I think if you as an analyst normalize that, you'll see that our returns are very good on both the -- now, on the equity side.

On the asset side.

If you use it, in comparison with other institutions, you're going to find that R.O.A. is lower.

R.O.A. is lower.

And the reason why it's lower is because it's very low-risk assets.

We're making single-family loans that have an average FICO score of 728 that have a delinquency ratio of 1 percent.

So the return on assets reflect that.

And again, when you're doing your calculations, you have to consider the quality of the assets in that bank.

And one last question.

Your R.O.E., I think, on a quarterly run basis is way above 40 percent.

Going forward, going at -- I mean, this was an extraordinary year.

But going forward when we get to more normal timeframe, what type of R.O.E.'s can we from the overall business -- can we expect from the overall business?

This is Keith again.

We would contemplate an R.O.E. of somewhere between 20 and 25 percent

Thank you very much.

Our next question is from Vincent Danielle with KBW.

Go ahead, please.

Good morning.

It seems like you retained a little bit of excess servicing this quarter.

Is that something we should expect going forward or was that more opportunistic?

Our excess servicing declined during the existing quarter.

We used very good and developed test execution models, and we were actually able to sell them to more quarter coupons and actually do some alternative servicing securities that we had started several years ago during the quarter.

So we -- actually, our --retained excess during the year on new -- I mean during the quarter on new production was lower.

And so going forward, are you going to -- is that your plan to retain less or is it just really

It's an opportunistic issue.

It depends -- really it's a compression issue that takes place on that excess and it's a -- it's based upon economics.

The compression is so great it doesn't make sense -- so great it doesn't make sense to sell it.

We will wait for opportunities to secure that excess and sell it out as the market permits us but --market permits us.

But it's strictly based on economics.

Thanks.

We will move on to Mike McMahon with Sandler O'Neill.

Thank you.

You mentioned at the start of the presentation in New York you're not a Delta hedger.

You had very strong gains this quarter.

Others did not.

Can you elaborate a little more on why we should continue to be comfortable with your hedging in volatile environment?

We had a hedging strategy for the pipeline that is first of all based on looking at the profile of how mortgages perform over different interest rate shocks.

And that is very well developed and a very well controlled process.

Now, we tend to cover the wide movements in interest rates both up and down with optional coverage, puts in call.

And that strategy, while appearing more expensive than, you know, appear Delta hedger, provides less of an impact when you have the type of moves that we've seen with rates rising in the third quarter.

We were, we had a very good position management during the quarter and resulted in slightly better results than we had anticipated and clearly a lot better than some of the things we've seen in the industry.

But our, you know, our team that helps to manage this is very experienced and dedicated.

And I would not anticipate that we would ever see any type of hiccup in that activity.

Michael, I think the important thing that Stan said and I said at my presentation that we have a user.

And well-documented, Tu Pesh and well -- superb and well documented track record with hedging.

You've never seen a hiccup in Country wide's hedging in 36 years, and we don't believe you'll see that.

It is extremely well managed by Stan, and it's a world-class team that manages this on a daily basis.

There's no secret to this.

There's no, to this.

There's no handle you pull to resolve it each day.

It requires intense work ethic and scrutiny and surveillance and management, and we've done that successfully year after year at Countrywide.

Well, I followed you for 17 years.

And I haven't seen a hiccup.

And I think if I'm correct, the optional commitment coverage, which at times is expensive, is your insurance policy.

Is that correct?

That's how we view it.

We view it, we'd rather pay for the insurance than take the risk.

Great.

Thank you.

Our next question is from Ed Groshans from Moors & Cabot.

Go ahead, please.

Hello.

Just two issues.

You mentioned that you spoke with the fed and the OCC and they did give you some lift.

I'm just wondering under this revised plan or revised agreement, is it open-ended?

Can you go back to them and get another lift further on down the road?

Are you talking about the bank?

Yes, at the bank.

Yes, it's a, it's a day-to-day work in relationship with the regulators.

They're concerned o of safety and soundness and rightly so.

And so it's providing, constantly providing them with a comfort level, both in terms of compliance, financial stability, documentation, all the issues that they're concerned about in terms of their responsibility relative to the surveillance at the bank and oversight of the bank.

And so it's an ongoing dialogue.

I wouldn't say it's open-ended.

I would say more it's a solid working relationship where together that that we, on a quarterly basis talk about where we're going to go with this bank and what's their comfort level and that, that's what will be for the life-long relationship that we'll have with them.

How you describe that, you know, open-ended or just an ongoing, it's an ongoing working relationship.

That's what we have with them.

And so far, I would say that it's been a very comfortable, very positive and constructive relationship.

And I think the bank is demonstrating that in term of its overall performance.

Another question I had is, you are talking about in '04 in the plan you have outlined, I'm wondering, you know, due the products that you're going to emphasize, average margins you look for and then, you know, if you can give us some color around the growth rates, maybe like you looked at the arms and sub prime in '04 under the scenario you've laid out with the treasury.

Talking about country, the mortgage company or the bank?

The mortgage company now.

Sorry.

Well, the product -- let me take the product and I'll turn this over to Stan and Keith.

But the product really is dictated by the Connell super consumer.

You condition, the consumer is going to dictate whether there's a 30-yearfixed, going to be a strict arm.

You know, depending up on interest rates, they will go down certain channels.

And we're prepared with almost 184 programs today to accommodate whichever direction they want to go.

But that will be determined by them.

And our goal is to be indifferent.

Whether it's a hybrid, a 30-year fixed, pure arm, to be indifferent to where they go in terms of the profit margin on that product.

The second, what was the second part of your question?.

Yes, this is Keith.

In terms of the other products sub prime and heel looked.

If you look at our current run rates, that will give you some indication where we think we're going to go here in 2000 pore 20002004.

With respect to margins we gave you the guidance of 35 to 70 overall.

Obviously, the bulk of that margin compression is going to be felt in our core prime mortgage production.

Sub prime and heel OK although we would expect margins to compress a little bit will be less sensitive than our prime production will be.

Thank you.

We'll now move ton on to James Shanahan with Wachovia.

Thank you.

My questions have been answered.

OK.

Then we will move on to the line of Bruce Harting with Lehman Brothers.

Go ahead, please.

This seems like a hugely significant fraction point that you've achieved here and in the world of mortgage finance, you know, taking premiere mortgage bank into this diversification track and I just wonder in terms of, I don't think I heard you discuss this, but, you know, from a bigger picture perspective going out to '05, '06, you know, if this inflection point into '03 to '04 is really the trough year, can you talk a little bit about what opportunities you have now that you've gotten through this window or tunnel, market cap up the way it is, $13, $14 billion, and, you know, what incremental opportunities that may give you to accelerate the diversification, and what over the next two to three years should we, how should we really, I hate those this word, categorize, you know, how would you like to see the street categorize your company from a sort of a trying to get handle on a PE?

I mean, it seems tome that you've really accomplished, if you've really accomplished, and it looks like you have come through the other side from being a mono line company to diversified, seems like you have a good shot at getting a much higher sustainable P.E longer term.

And given your size and saying that looking out to 2000 2008, you know market share of 30 percent, you know, is it crazy to think that the kind of multiples that Fanny and Freddie have achieved in past are achievable for your franchise or -- and the final part of that is, you know, are you going to be de-emphasizing mortgage as a discussion point, or are you going to embrace it and really use that as your foundation as you diversify and say, hey, we're the best in this business or, you know, in terms of we're state in the art in terms of efficiency rates et cetera, or will you kind of abandon that as others have done?

Thanks.

Well, I, let me take the last part first.

This is the part I remember.

The, in terms of what this management team's about and our culture is about is that clearly, the forefront what we think about every day is mortgages.

And that focus is really why we are where we are and why, if you look at the performances particularly in this quarter of our chief competitors versus Countrywide, can you see the performance is far superior in every single category.

So, it will remain as far out as the eye can see the foundation and the focus of Countrywide for everything that we do.

And we'll feed everything, and will feed everything that we do.

In terms of whether you, whether this is a breakthrough or not breakthrough and where the P.E should be and where it shouldn't be, I look at this way, that our responsibility as management here is to build the best company that we possibly can, a company that's built to last forever.

And to build it on a solid foundation.

And to utilize all the technology available to have best execution in all the businesses that we're in.

And if we pay attention every day to every single detail, we don't have to worry about the P.E.

The market will take care of that over time.

Are we disappointed in the fact that the market has either ignored us or misunderstood us?

Absolutely we are.

But we can't do anything about that except perform.

And so we will continue to perform.

And in the style that you've seen historically.

In terms of other opportunities that we may seize, I think we'll look at things differently.

We have grown organically, and we think that's very important.

We think there's fundamental advantages to growing organically.

But we now have the strength to, and the power and the flexibility to look at opportunities.

I'm not talking about anything large.

But lot of this, there's going to be a lot of stuff on the street over the next couple of years relative to the mortgage business.

When I say stuff on the street, lot of things are going to fall apart, beginning to fall apart now.

That's an advantage for us.

Our history is one of being an Tunis company.

And a management team.

And we will seize opportunities that we may not have seized a few years ago in our core business of mortgage banking.

As for the other businesses that we're in, I believe we'll continue to grow them organically and less some unusual opportunity comes along.

But that's sort of where we're at today.

Thank you.

Our next question is from Matt from Smith Barney.

My question's been answered.

Thanks..

We'll move on to the line of Christina Clark with Banc of America Securities.

Thanks a lot.

Can you give us an update on excess liquidity at this point including avail capacity on the Park on our facility?

Production volumes are down from their peak.

And we have special equity debt operating a $50 billion dollars funding environment so we're sitting here with excess liquidity the at current time and looking at ways to prudently pair pare that down.

So, I would say, I would characterize our liquidity situation at this point to be, you know, very, very adequate, more than adequate and going forward we'll manage it so that we can be prepared for the next re (inaudible) when it comes.

How about the Parknata? .

That's a good facility for us.

And I think today it's about $17 or $18 billion.

And our plan would be to keep that particular facility in place, because, again, it's a cost-effective one for us.

But the other financing that we've been using or have used recently that was more expensive is going to be I think eliminated as we go forward here.

Is there sort of a target level you're looking to get to?

In it terms of our liquidity management?

Yes, we want to at all times have at least, I would say, $5 billion of committed available lines of credit in place for us.

But in reality, we manage, that's a minimum.

In reality we manage, excess liquidity.

In reality we maintain a much larger amount than that.

I would say today it's around $20 billion or so of excess lines available to us.

OK.

Great.

Thanks a lot.

Thank you.

We now have a question from the line of Garush Haku(ph).

Please go ahead.

Hello, guys.

Fantastic quarter.

Couple of quick questions.

The ranges you provided were very helpful.

I was just wondering if you could give us a range of MSR caprate that you're assuming behind the production margin ranges.

I'll give you a general comment.

Of course, the caprate, you know, will depend upon the range of interest rates to great extent.

We had an increase in the cap rate from the 92 to 109.

So although the increase was much less than anybody else reported substantially less, which we would expect because of the nature of our servicing portfolio, but it is a -- in one sense a moving target that is based upon where the ten-year is at the end of any particular quarter.

So what do you think -- I mean, you gave ranges for the production margins.

What do you think is the top end of the range of MSR cap rate behind those?

Our overall cap rate on new production in the third quarter was 154 basis points, I believe.

And we should expect that going forward to approximately at that level.

It could -- one thing that has been depressing servicing values of late is the very low interest rates, which reduces the amount of earnings on your escrow balances.

So if rates were to rise significantly, that benefit would increase, and that would have an impact on capitalization rates.

So they could go up a little bit from where they are now.

OK.

And the second question is, it looks --it was great to see the excess service fee coming down over the quarter.

I wasn't expecting it.

And I assume that that's part of the reason that the margins were so strong and in the production segment.

Is that part of the reason, would you say?

One of the -- one of the things that takes place in --when interests rates rise and you have production that was a pipeline that's closing from a lower interest rate environment is that the servicing value of the loans that are closing has increased.

And so you have part of the margin improvement arises from the improvement and the value of the servicing that -- on new loans that are closing.

I see.

And in terms of the -- your ability to sell the excess, just from fiddling around with Bloomberg, it looks like Fanny or Freddie will only give two multiples or something like that on excess service.

Are you able to get better execution?

It depends -- yeah --

However, I don't know who you're selling to.

What kind of execution are you able to get on that the excess servicing?

It depends again on market conditions.

On the initial sale, if the market -- if they will accommodate us on the -- and have de minimus compression on the excess, we'll sell it -- we'll secure it upon the sale of the loan.

If they're compressing that excess to the extent we're -- our returns would be higher by retaining it rather than selling it, we'd retain it until such an opportunity comes along, which it has, where rates rise, that becomes a desired product, we securitize it and sell it.

Just sell the excess separately.

I don't -- I'm not comfortable disclosing to you what kind of arrangements we have with the GSE's in terms of guaranty fees and what they pay for it.

That's between us and the GSE's.

Who bought the excess that you sold this last quarter?

There's a small handful of buyers out there.

It's not a big universe.

The GSE's have been buyers and there have been others, hedge fund.

And in terms of where we can execute in that market, it parallels to trust IO market -- trust IO market very closely.

Thank you very much.

Our next question is from Mark Agah from Portales.

Please go ahead.

Thank you.

I think I might have missed the number.

But Keith can you give us the impairment reserve currently in the MSR?

It is $1.7 billion at September 30.

Thanks.

And Angelo, I just had sort of a philosophical question for you given the news that came out at Abernathy yesterday talking about the lines of GSE potentially being pulled.

Just your thoughts on that, good, bad, indifferent, etc.?

My thoughts on it is it's disturbing not so much from Countrywide's point of view, but from the, since you're on philosophical basis, the mission of this country and the mission set form by this administration was to narrow the gap between white home ownership and minority homeownership, and the GSE's are an incredibly important weapon in that battle.

And to the extent that you may weaken them by removing their access to the, or their implied federal guaranty, I think overall, you heard that mission substantially.

And you'd have to think about, you know, how did the GSE's structure themselves --what happens if they're forced to privatize, what happens to the industry?

What happens to the GSE's?

You could lay out a variety of scenarios, some good, some bad, some indifferent.

But I think on balance it's a bad track to go down, and I think it's a, it's frankly irrational, and it's in clear conflict, the Administration is in clear conflict with what the president announced just a couple of years ago in terms of how he wanted the direction of this country to go relative to lowering the barriers to home ownership for all the American people and at the same time attack the very entities that make that possible.

So we're obviously, I personally am opposed to it.

I think you can lay out again scenarios where it might be financially advantageous overtime for Countrywide, but I think that that is it does disadvantage the American people.

Thank you.

Thank you.

Our next question is from the line of Jordan Heimowitz wit with Level Global Advisor.

Hello, Angelo.

Congratulations on a good quarter.

Thanks.

Quick question.

In your guidance next year on the optimistic side, you have I think 700 million in MSR recovery.

Why wouldn't the entire MSR recovery be done next year if rates go to, you know, 7 percent and hence could the earnings be another $3 higher?.

You know what, There are guidance providence from that recovery which is net of

Hedge costs.

(Inaudible).

So you can't look at just the $1.7 billion as the recovery.

There's, that's how much the asset it's written up, but there's offsetting costs in that environment.

OK.

Makes sense.

Thank you.

Thank you.

Our next question is from Barry Cohen with Maverick Capital.

Please go ahead.

It's been answered.

OK.

Thank you.

Then we'll move on to the line of Bob Napoli with Piper Jeffery.

My questions were answered.

Thank you.

OK.

Thank you.

Then we will try Robert Huttonson with Goldman Sachs.

Maybe just a follow-up to Jordan's question.

In the investor day, you showed an interest rate shock analysis that looks at the change in interest rates and then the corresponding write-up of MSR's versus the hedging losses.

You know, with a 50-basis point shock, you show about 24 percent of the benefit of MSR's being reduced by hedging losses.

This quarter, if my calculations are right, maybe it was around 33 percent,should we assume that you were either conservative in how you wrote up the MSR's or that somehow you either front-loaded servicing hedges or reduced hedges opportunistically during the quarter to in effect reduce the hedging costs in future quarters?.

I think, you know, first of all, we did, our hedging activities went very well during the quarter.

In addition, you know, our sensitivity looks at just interest rate moves as a guidance for servicing valuation changes.

But servicing values also change independently, and as we value servicing, we go through our exercise at the end of every quarter.

We take into consideration considerable facts and data about where we believe the fair market value of servicing is at that point in time.

So it's very difficult, and I don't think you can totally rely upon the interest rate sensitivity, you know, schedules more servicing values are subject to changes in market value.

We've seen over the course of the last several years considerable shifts in the value of servicing at the propensity for refinance has increased and we, from the way that we look at servicing values and as a approximately for discount, proxy for discount rate we use an OES valuation technique, and we have seen OAS spreads go over the quarter.

Does that answer your question, Mr. Huttonson.

Mr. Huttonson?

That's good.

Then we'll move on to Charlotte Chamberlain with Jeffery's & Company.

Good morning.

If I could be so bold as to suggest an answer to Bruce's question, what I would advise, Angelo, is that you start cheating hedging on line to other mortgage companies and change the name of your company to some Greek God philosopher or architectural column.

You're talking to the Greek God.

Holland (inaudible) trade at 30 to 50 times.

That would be a fabulous result for you, I think.

But more seriously, just a couple of housekeeping things.

You want to run that division, Charlotte?

Yes!

Absolutely.

You're on, Angelo.

Absolutely.

Moving on to more mundane issues, first of all, are you, is it likely you're going to pay cash taxes this year and the other thing is what are the deposits at the bank?.

We're going to pay cash taxes this year.(inaudible) Keith, want to comment on that tax line?

It will be substantially, we've been a taxpayer for the last few years, and this will be a big check to the treasury this year.

OK.

So in trying to estimate in cash votes.

The deposits at the bank?

We have about $9 billion in deposit it's at the end of September, about $2.3 billion, time deposits, retail deposits and about $6.8 billion our ESCROW and in money market accounts.

So you really haven't seen any, even with the fall-off and pipeline, you really haven't seen a big drop in those deposits?

First of all, our servicing portfolio continues to grow, Charlotte, so our escrow deposits that the bank enjoys will continue to grow.

The, in so far as the retail deposits that Stan talked about, the CD's, again, this is a very unique model.

This is really a CD factory.

Our costs of operations are about 120 basis points below that of the average commercial bank.

Therefore, we enjoy the ability of being able to pay 20 to 35 basis points more on CD's to the rate-sensitive depositors through out this country, and, therefore, have had no problem in everyone of these entities, these financial centers we opened up and immediately drawing in deposits and having them grow at a very robust pace.

Give you an example.

The average commercial bank in this country holds deposits of about $60 million.

These are big, small, indifferent.

In deposits.

Have about seven people in the branch, have about 5,000 square feet.

Our average branch is 300 square feet, one person.

And holds now the oldest one is here in California, southern California, about a year and a half old.

Holds almost $90 million in deposits.

So we're able to exceed the average of deposit it's at a substantially lower cost and have a more positive net spread than the average commercial bank.

So everything with this bank in terms of the business model that we have is very, very positive.

And the final housekeeping.

Can we assume that the servicing strip is still 37.5 basis points?

What is it now?

No, it's down to -- it's slightly under 34 basis points now, Charlotte.

OK.

Great.

Thanks again.

Thank you.

We now have a question from Jason Moment with Fair Line Capital?

Hi there.

My question is on the caps market line.

The sequential increase there.

I was just curious, you know, how do you think that stacks up against your peers in terms of what they saw from the second quarter, the third quarter, and what caused the increase?

What's going on in this line?

Thanks.

The capital markets is becoming a very powerful entity within this diversification effort.

Just to give you again an overview, and I'll have Keith and Stan talk about the specifics.

But we recently -- we expanded our operation in Florida.

We recently opened up Chicago.

So we have Chicago, New York, Florida, California, and now also looking at Asia as a distribution point for our products.

And so we are becoming a -- we are becoming a clear leader on the leak tables.

You can see the amount we traded over $3.3 trillion so far.

Probably end up close to $3 trillion.

So I'd say we're taking market share as part of it.

But you want to go through --

Yeah.

You know what?

I totally agree with Angelo that we're taking market share.

I just want to also point out that the third quarter saw very robust closing and a lot of the activity that capital markets is engaged in relates to the funding and sale of mortgages, which was still, again, very high in the third quarter.

Additionally, they're involved in underwriting, ABS transactions, and those -- again, those transactions are -- have a delay factor to them.

A lot of the production that we see in the third quarter and into the fourth quarter will relate to the very high Volume of loan transactions that occur in the second and in the third quarter.

So that's --

Can I just ask a detailed question along those lines?

What was the trading volume in NBS agency debt and asset backed?

Sort of the breakdown on the third quarter.

They're looking that up.

While I have a pause, Angelo, what would you say are the biggest macro drivers behind the volumes of trading in each of those?

Is it volatility in rates?

Is it level of rates?

I mean, if rates kind of gradually creep up to --

I think it's both from my observation.

Obviously, the lower rates created enormous amount of activity in creation of ABS, NBS's.

Including a lot of dented product came as other institutions try to clean up their balance sheet, we were able to buy their product, clean it up and sell it.

But clearly the interest rates had had a major factor on the overall volume.

In terms of where you get these floods coming through, volatility is the second factor.

Clearly, you know, that business needs volatility to continue to be a very vibrant part of our family of companies.

So I -- it's both.

Level of interest rate sand the extent of volatility that we experience.

Did you notice any difference in volumes month through the quarter?

Was it any different in the first couple months than it was in the last --

In the last month, it -- just over -- a little bit again -- a lot of the product, as stand pointed, out, there's a delay factor.

They didn't really feel the impact really at all in the -- in fact, I just met with a whole team and in the last -- end of September month quarter was very, very active and vibrant.

I think the fourth quarter will be more indicative of what we've experienced in terms of interest rates and the slowdown in the refinance activity.

I think we'll see that in the fourth quarter.

You know, unless they surprise me again, and it's possible they can .Stan?

You know what?

My colleagues point out to me here that we don't provide public data on the trading we don't provide public data on the trading activity by guess but I will try to help you out and point out that our paths that we -- our activity includes pass-through desk that primary volumes come through pass-through trading desk, agency security, fixed rate CMO, operation, and arms desk and then some other ABS activity.

And you know, as you can imagine, the -- you know, the pass-through desk will be affected by lower volumes in.

The future.

Arm activity is up in general.

So that that probably remains strong.

The agency desk should continue to move along with -- at about probably the same levels or, you know, it will be less affected in any case.

So we -- you know clearly, as Keith pointed out, we anticipate that our activity in capital markets should come down because it does correlate a lot of our activity correlates with the mortgage market.

We do have the beginning of the our -- the beginning of our government trading does and our application underway to be a primary dealer.

And that should add another nice line of business for growth in the future.

Thanks a lot.

Thank you.

Our next question is from Lawrence Kem with Fonic (ph) Capital.

Please go ahead.

Looks like you had a decent quarter there.

Stan, I have a question for you.

Anybody accuse you of being the master of underestimate?

I'm not that smart, but when I look at your balance sheet, I see like you can probably run the company right now on a probably two-thirds the capital base and maybe less of that in the future.

And if I was a smart guy running a money-center bank, I would feel very tempted to steal the company at 12 times earnings, say, and use some of that excess capital to help pay for a deal.

One, would you like this company to get stolen?

And, two, if not, shouldn't the company quickly deploy the excess capital?

You sound a lot as a matter of smarter than you give yourself credit.

Yes.

I'll just take the first part.

Obviously, the answer to your second question is obvious.

We run -- as I said, we build a company here to last.

We think if25-year increments here.

So I can tell you for the next25 years, we have no plans to see the company go anyplace.

And I'll have Stan answer the financial part of it.

Look, we've -- obviously, we've done, you know, very well in this period.

And we've amassed excess capital at this point.

And we certainly appreciate your pointing that out in case the rating agencies are listening in.

But we -- you know, we have grown this company successfully, and it was significant organic growth, and there's enormous opportunities in the activities that we're engaged in mortgage banking we're in a consolidating marketplace which is very advantageous for us and lots of room for growth.

You know, we talk about overall -- you know, the market share8 growing to30 percent.

A lot of that growth is going to take place in channels, our retail channel and our wholesale channel that have enormous room for growth.

And that will take capital to grow.

And then in addition, the other activities of banking and insurance, those are entities that are just at the very early stages of their growth.

And again, they'll take capital.

And we hope to show you that we'll successfully deploy that capital and the growth of the company if we look back over time and we see that either, we're generating capital too fast a pace, and we can't re-deploy it we'll look at the other opportunities for managing excess capital.

But certainly, you know, we don't want to see the company stolen away from us.

All right.

I just would like to point out that, you know, I guess you're somewhat unfamiliar with being in the place of having excess capital in the company's history so you might be unaware of the positive features of an aggressive share repurchase program to prevent the company from getting stolen.

Angelo Mozilo We are -- look, we study this issue.

We're very aware of our -- of the capital situation.

And we're very aware of the strategic opportunities that we have.

And we will address all sides of it, including managing our equity capital if we deem that necessary.

Thank you much.

That's very responsive.

Our next question is from Brian Charles with Bank One Capital Markets.

Please go ahead.

Congratulations on the quarter.

Thank you.

I have a couple I guess general questions.

And may be I'm missing something on a couple of things.

But first off, in the bank as you talk about holding mortgages in, I know it's a good entity to hold arms.

But I wonder, are you designing that to hold primarily arms or fixed-rate mortgages, too?

Primarily arms.

I'm sorry.

Primarily arms?

Yes.

OK.

Great.

Secondly, in talking about the introduction of the primary dealer for treasury securities, are you expecting that to become a very large capital market over the next several years, is that something that should substantially (inaudible)?

I don't think it will substantially -- maybe over time it will, if you look down through the years.

You know, it's a low-margin business.

It's very prestigious business, low mayor gin, low risk.

But it creates other opportunities for us.

But I wouldn't look in the short term to be the offset for any possible downturn in the more traditional asset backed NBS businesses that we have.

OK.

Thanks.

Finally, a quick math question.

I hope I'm -- again, I might be missing something, but when you talk about your earnings for next year, your EPS based on 155 million of diluted shares, I'm shot not sure how -- I'm not sure how you're getting there.

I'm taking(inaudible) mab the a third quarter and adjusting for a stock split.

I'm coming up with more 155.

I think I gave you an admonition on that.

It's not going to be that -- if you try to match this up -

No, no, his issue is everything that we're giving you on the 12 to 16 is pre the split.

OK.

You have to adjust for that.

Good enough.

Thank you.

Thank you.

We now have a question from Ed Groshans with Moors & Cabot.

Please go ahead Sir.

I'm sorry.

I couldn't pull out of queue.

All my questions have been answered.

Thanks.

Thank you.

Then we will move on to Brad Leonard with ETG.

Hi.

I was just wonder if anything we could get a long-term earnings picture assuming that we're moving higher in rates over the next three to five years until the next refinance boom.

What are do the earnings look like as you now have this huge servicing portfolio?

Well, you know, we've given you up to 2004.

We do --that's about as far out as we want to go.

But I can --let me see if I can generally paint this picture for you.

If you -- if you're talking about ever increasing interest rates, you're going to have a -- Countrywide is going to have a very substantial opportunity to gain enormous market share as more of the marginal players continue to exit the business.

That kind of stress historically drives the marginal players, the fringe players out and there are plenty in the business right now because they came into the business during the refinance boom.

So I can just generally say to you, you'll have a servicing for portfolio which continues to you at least at the -- continues to grow at least at the 15, 16 billion pace.

You have a servicing portfolio that increases in value intrinsically increases in value, and an opportunity on the origination side to pick up market share.

And if you look out at the demographics of this country over the next -- even the balance of this decade, we believe, and I think it's been confirmed that by some of the research people that you're going to have -- today you have almost a $7 trillion market.

We think at the end of decade you're going to have a $12 trillion market, almost double where it is today.

And if you look at our market share, even in a high-interest rate environment, which by the way becomes self-correcting, we're going to be in terrific position to dominate the market and continue to improve profitability.

OK.

Thank you.

Our next question is from Craig Picirillo with Fair Haven.

Go ahead, please.

Hi, guys.

Great quarter.

I just had a couple of questions for (inaudible) purposes.

What was the actual dollar amount of loans you guys sold in the quarter?

As I indicated, it was about 98 percent of the production sector, production during the quarter.

About $110 billion I think

$110 billion, OK.

And on the MSR reserve rollover, there was a - you guys had the write-up of $345 billion.

What's the delta plug in there that gets you down to $1.7 billion.

I guess the starting number would have been about $2.3 billion.

What was the difference in there.

Was there a permanent impairment or?

There was a permanent impairment charge of about $300 million during the quarter.

Now, what gives rise to it - just for modeling purposes going forward.

What gives rise to a permanent impairment in that scenario?

Is it because you sold off servicing, or what's the accounting reasoning for that?

Well, essentially GAAP requires that you make an assessment every period as to the ultimate realizability of your asset.

And if it appears as though it would be highly unlikely that you will ever recover the full amount of your amortized cost, then you write that off.

Then you do that by charging or reducing your impairment reserve.

OK.

All right, thank you.

That was all I had.

Thanks very much.

Your next question is from Don Mader (ph), with Bear Stearns.

Go ahead please.

Angelo, Sam (ph), another milestone's been reached over the (inaudible) of Countrywide, $103 stock.

I remember back when we thought and dreamt that someday we'd see it carry $100 and we're there.

So thanks to your guidance and direction of this company the great earnings you've shown.

Question for Angelo, please.

Total employees now?

Excuse me?

Total employees now?

Total employees, 35,000.

And sales force?

Seven thousand.

Now, in that 7,000, do you count all those managers they have that run the offices, or is that just strictly salespeople?

That's strictly the sales.

That's strictly the salespeople, but we have internal/external salespeople, so there'll be people in the branch that handle calls coming into the office, incoming calls, they're part of the internal home consultants, home loan consultants part of that group.

But not the managers.

So 7,000 includes your Countrywide Home Loans and I'll call it also your Full Spectrum and everything?

You know, if you add in all of the sales force, D&B and then wholesale and then CLD and then Full Spectrum, we have about 8,200 salespeople.

Wonderful.

That's probably the secret, right?

It's not a secret.

We just told you.

What's your total large locations?

We have 7,000 people.

How many locations, now?

The main facilities are with the Calabasas which is about 900.

We have about 4,000-5,000 in our Simi Valley facility, which is primarily serving in IT.

And that's replicated in Plano, Texas, which as about 4,000-5,000 in Plano, Texas.

Those are the three main.

We just completed purchase of a large facility on Fort Worth Texas, about 430,000 square feet.

And ...

And Arizona?

I'm sorry.

In Fort Worth Texas to tap a different labor market.

We're looking at a facility in Austin and Stan just reminded me that we have 2,000 employees in the U.K., split between Leeds in the North and Dartwith (ph) in the south.

What's in Arizona?

Did you purchase a building in Arizona?

We purchased a building in Arizona.

We're beginning to fill that up.

That's only a 75,000 square foot facility.

Really small.

Just a place for us to go in the event of an earthquake so we can operate.

Well don't say that word.

Thanks guys.

Thank you.

You're welcome.

And we have time for one more question.

That will come from the line of Roger Lister with Morgan Stanley.

Thank you.

My question's been answered.

OK, I think that concludes, according to what we have here the people on the line to ask questions.

We thank everybody for their participation and we look forward to the visiting back with you in the next quarter.

Thank you very much.

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