美國銀行 (BAC) 2004 Q1 法說會逐字稿

Good morning and welcome to the Countrywide Financial Corporation first quarter earnings conference call.

At this time, all 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. (Operator Instructions).

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

We ask that you stay online at the conclusion of today's meeting to receive the replay information.

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

Please go ahead, sir.

Thank you, Shelly.

Good morning and welcome to our earnings teleconference call for the first quarter of 2004.

I strongly recommend that all of our listeners view the presentation which accompanies this discussion.

The presentation can be found on our website, www.countrywide.com, in the investor relations section under presentations.

Turning to page 2 of the presentation, you will see today's agenda.

First, I'll give you an overview of our recently completed first quarter, including operational highlights, financial performance and a breakout of earnings.

Next, I will discuss our mortgage banking segment and diversified businesses.

We will conclude the presentation with a look at our earnings guidance for 2004, which has been revised upward.

This section will include key assumptions behind the earnings guidance.

By any measure, the first quarter of 2004 was a strong one.

On page 3, you will see a list of key operational highlights from the quarter.

Earnings were 76 billion, essentially the same as the previous quarter.

However, this included quarterly funding records in numerous product categories, most notably home purchase volume of 32 billion, up 32 percent from last year’s first quarter and adjustable-rate volume of 34 billion, up 143 percent from the same quarter last year.

We are also -- we also established volume records for sub-prime and home equity loans.

In addition, based upon our reading of press releases from our major competitors, we believe Countrywide is the nation's mortgage originator for the second quarter in a row and that our lead has widened.

The pipeline of loans in process at quarter end was 57 billion, up 74 percent from last quarter.

This is a leading indicator of strong funding performance in the short term.

The surging portfolio as of March 31 was 683 billion, which represents a 181 billion increase from one year ago.

In our diversification businesses, bank assets are now at 24 billion, up 166 percent from a year ago, and securities trading volume in our capital markets subsidiary was 690 billion, up 8 percent from last year’s third quarter, despite lower industry mortgage origination volumes.

The chart on page 4 shows how these operational milestones translate into financial performance.

As you view these numbers, please remember they reflect the 3-for-2 stock split effective this month.

Net earnings in the quarter were 691 million, up 112 percent over last year’s first quarter and more than the Company earned in any full year before 2002.

Earnings per diluted share were $2.22, or $3.33 before the 3-for-2 stock split in April of '04, which is 82 percent higher than the first quarter of 2003.

Diversification pretax earnings were 322 million, up 89 percent from their first quarter of last year.

Return on average equity was 33 percent, substantially higher than the 24 percent return for the first quarter of 2003.

The table on page 5 shows that the earnings growth was broad-based with significant growth in both our mortgage banking sector and our diversified businesses.

Mortgage banking pretax earnings rose 126 percent from the first quarter of last year.

I mentioned a moment ago that diversified businesses increased by 89 percent.

Diversification now accounts for 29 percent of consolidated pretax earnings, down slightly from the 32 percent for the same quarter last year.

It should be noted that this percentage decline is strictly driven by the tremendous profitability in the mortgage banking side of our business.

To better appreciate this performance, note that the contribution from diversified businesses this quarter, 322 million, nearly equaled the pretax earnings from the mortgage banking sector in the first quarter of last year.

Let's take a closer look at the mortgage banking side of our company on page 6.

Production pretax profits for the quarter were 942 million, up slightly from the first quarter of last year in spite of lower fundings.

Purchase volume growth and focus on products whose demand remains high in a raising rate environment, such as adjustable-rate, mortgages, home equity and sub-prime loans, enabled this growth.

In addition, first quarter inventory sales exceeded the volume of loans originated in the mortgage banking segment by 4.4 billion, a differential similar to the fourth quarter of 2003.

Margins were also bolstered by a shift in the mix of inventories sold compared to last quarter as the Company's loan sales included more higher margin products, such as sub-prime and home equity loans.

The additional high margin inventory has been accumulated during recent periods of heavy origination volume.

By selling a portion of this inventory during the first quarter, Countrywide accomplished three objectives.

First, the sale enabled Countrywide to capitalize upon favorable marketing conditions for selling these products.

Second, the sale helped offset net MSR impairment expenses, resulting from declining interest rates during the quarter.

Third, the Company created greater capacity to help manage the anticipated increase in funding volume next quarter stemming from the higher and from the larger pipeline that we currently have.

Servicing margins also improved significantly from the prior year.

The pretax loss was 158 million, an improvement of nearly 400 million resulting from lower levels of net impairment.

Overall total mortgage banking profitability improved by 126 percent over last year's first quarter.

All of our diversification segments also turned in strong results, as shown on page 7, demonstrating the solid foundation built for future growth.

Capital markets remains the most profitable of these segments, with pretax profits of 153 million up 59 percent from the first quarter of 2003.

Banking recorded the highest growth rate of the four, increasing pretax profits by 144 percent to 106 million.

The insurance segment made a pretax contribution of 52 million, up 110 percent from the prior year's first quarter.

Global operations also increased profitability from the first quarter of last year, reaching $12 million.

Page 8 addresses our capital markets segment.

Earnings from this segment are primarily generated by Countrywide Securities Corporation, a broker-dealer that generated 78 percent of capital markets pretax profits.

As you can see, securities trading volume rose by $50 billion, or 8 percent.

While this is significant, the primary drivers of growth during the quarter were increased conduit and underwriting activities.

During the quarter, Countrywide Capital Markets launched a new business line -- commercial mortgage-backed securities.

Earlier this month, we hired a team of experienced executives to run this area whose credentials include previously building a CMBS platform for another major investment bank.

Entry into this market supports the capital market strategy of product diversification.

Growth in the banking segment's profitability continues to be driven by balance sheet expansion.

The chart on page 9 shows total assets for this segment, which includes not only Countrywide Bank, but also Countrywide Warehouse Lending Inc.

The bank accounts for 24 billion of the 26 billion in assets for this segment, as well as 89 percent of the pretax profits for the quarter.

As we have previously stated, our goal for the bank is to grow total assets to 120 billion by 2008.

Within the insurance segment highlighted on page 10, top line growth as measured by net earned premium helped drive increased profitability.

Within this segment, reinsurance accounts for 63 percent of the total pretax profits.

In addition, the property and casualty business recorded significant growth, increasing its pretax profitability by 166 percent over the first quarter of 2003.

In our global operations as shown on page 11, profitability increased substantially, facilitated by a 22 percent increase in the UK subservicing portfolio.

Our Global Markets Division is also overseeing the Company's establishment of a processing center in Mumbai, India.

Let me again state that the first quarter was a highly successful one for Countrywide.

Turning to page 12, now let's look forward toward the remainder of 2004.

Countrywide's management is revising its previous earnings guidance upward. the new range is $7 to $8.25 per diluted share compared to our prior guidance of $6-$8 per diluted share.

Before the effect of the 3-for-2 stock split completed earlier this month, the current guidance equates to $10.50 to $12.38 per diluted share versus prior guidance of $9 to $12 a share.

We believe the average 10-year U.S.

Treasury rate for the remainder of the year will be within a range of 4-6 percent.

With this range in mind, we believe the relevant range for the size of the mortgage origination market should be 2.1 trillion to 2.5 trillion.

This range of market sizes is higher than in our previous guidance, largely as a result of the fact that interest rates were below the low end of our expected range during much of the recently completed first quarter. (indiscernible) forecast, mortgage banking pretax profits are expected to range from 2.6 billion to 3.2 billion.

Diversified businesses are expected to make pretax earnings contributions of 900 million to 1.1 billion.

Assumptions for the production and servicing sector are shown on page 13.

Average production market share is expected to be within a range of 13.5 percent to 14.5 percent and client volume of 280 billion to 360 billion.

The range for pretax production margins is 75 to 100 basis point, significantly higher than the 35 to 70 point range we provided last fall.

There are two major drivers behind this change.

First, actual margins realized in the first quarter were higher than expected due to lower rates anticipated six months ago.

In addition, these lower rates are expected to improve second-quarter performance beyond our original expectations.

On the servicing side, the forecasted average servicing portfolio balance remains relatively unchanged at 700 billion to 730 billion.

The net pretax servicing margins after impairment, impairment recovery and hedge gains or losses is zero basis points to 13 basis points.

If we were to have a normal purchase market, we would still expect a range of 12 basis points to 15 basis points for our servicing margins.

Risk factors should effect or could affect the accuracy of these forecasts that are shown on page 14.

The first is the level of interest rates.

As we saw during the first quarter, average rates outside of the 4 percent, 6 percent tenured Treasury range can generate results that are not consistent with our forecast.

A second important factor is volatility of interest rates which can cause a difference in the period in which different rate-sensitive elements of our financials are recognized.

Price competition in the production markets can also be a significant factor in driving market share margins, or both.

Additional factors include but are not limited to those in the disclaimer in this presentation and those found in Countrywide's SEC filings.

Page 15 shows how these new forecasts measure up against our recent historical performance.

Last year's record earnings, adjusted to take into account this month's 3-for-2 stock split, would have been $8.31.

The high end of our range, $8.25, now falls just below that level.

The low end, $7, represents a 45 percent compounded annual growth rate since the beginning of this decade.

The final slide on page 16 contains a disclaimer regarding the forward-looking statements included in this presentation, which I encourage all listeners to read and review.

And before I open the lines to questions, I would like to once again thank the employees, the management team, Stan Kurland and Keith McLaughlin and David Sanbow (ph) and the key players who make all of these numbers happen for their efforts in delivering another outstanding quarter.

After a tremendous record-shattering year in 2003, our first quarter has established a solid foundation that we believe to be an excellent 2004.

I'd like to thank all of our listeners for dialing in.

We'll now take questions from our listeners.

At this time, I'd like to ask the operator, Shelly, to explain our question and answer protocol.

Thank you very much.

Mike Vinciquerra, Raymond James.

Thank you.

Congratulations on the great performance again.

My question is in the capital market sector.

Obviously, you had a tremendous improvement in your pretax income there.

And when I look at the numbers, it looks like the increase over Q4 was driven primarily by gain on sale in that division.

Can you help me understand -- I thought you were doing mostly was principal and agency trading, and I'm just trying to understand how you generate the gain on sale and what else in that group might have driven the great performance?

Thank you.

You know the capital market section, right?

I'm going to have Keith McLaughlin go through that with you and break that down.

Mike, as you know, a portion of the activity in capital markets is a conduit or conduits that they operate.

And when they securitize loans to those conduits, they generate gain on sale.

And that activity increased in the first quarter.

And that was a significant component of the increase in their profitability.

Secondly, a question on the market share, which I think you mentioned you think you were number one again in the first quarter.

I'm just wondering what estimate you're using for Q1 production for the industry and what your estimated market share was in Q1, if you could share that?

Thanks.

On the market share, I'm going to leave someone else if anybody calculated that.

But we're using their press release and looking at their financials, and this is principally we're looking at Washington Mutual and Wells Fargo.

And we used the same basis that we used in the fourth quarter.

And we believe, based upon the numbers that we see, that not only were we number one, but as I pointed out in my presentation, that we're now number one -- we were marginally number one in the fourth quarter, we're substantially number one in the first quarter.

And I've got Stan, who's done some of these reviews, talk to you a little bit about that.

In terms of market share, you know that there is a lot of different estimates made on the total volume of the market.

If I used Freddie Mac's estimates of the market, we would have enjoyed 13.3 percent total market share.

Great, thank you, guys.

Eric Wasserstrom, UBS.

Thanks.

Just a couple of questions about the margin.

It would seem that, even without the excess home equity product sales, the margins seem unusually high.

Was there a reason for that?

Was that a function of the fact that there was restriction in capacity in the industry, or were there other factors leading to that?

I think the primary factor would be the rates dropping the way they did in that quarter.

When you're taking loans in, you're giving a commitment to the consumer at a certain rate and rates drop.

We get the advantage of that to the extent that we have, you know, the hedge is not perfect.

And in that environment, we have our spreads widen.

Stan you want to comment?

Yes.

I think that if you try to reconcile back, first of all, we had a very good market, in terms of the sub-prime and HELOC (ph) markets.

The pricing improved for those products.

And so our sales were timed very well, compared to what our normal expectations would be.

As you note from our information, we have about 140 basis points of profit margin on the production side.

My way that I estimate that or kind of normalize it comes down to about 105 basis points of normalized margin that is after deducting for the effect of the excess sub-prime and HELOC sales that occurred during the quarter.

So I do think that if, looking back across previous quarters, I think it's slightly on the high side, recognizing that margins picked up, given the very favorable market conditions.

Also, from the standpoint of product mix, is very important, the sub-prime and the HELOC particularly, which is a product that is in great demand by the consumer, had very good margins in it versus your traditional 30-year fixed (indiscernible) loan.

And directionally, if that is the case, I know you have kind of guided to that 75-100 basis point range.

But sort of secularly, do you think that you'll get back to that 35-75 outlook at some point, or is that just -- ?

It's hard to tell.

I think that, as you can see how things change from the forecast we gave last fall to where we are today, it is a very dynamic market.

And I would just say that anything is possible.

And that is why we keep you inform each quarter where we believe it is.

I will provide some clarification.

Again, at the margins that we're providing in the forecast are affected by the first quarter performance at 140.

So when you look into the low end of our guidance, it does include much lower margins into the 35 type basis points.

It's just that they've been averaged up when you look at it on an annual basis.

Thank you very much.

Bob Napoli, Piper Jaffray.

Good morning, just a couple of quick questions.

Your efficiency this quarter was very strong and I was trying, looking at the total operating expenses, were down sequential quarter by over by about $100 million.

And if you look at the production sector, even though you had flat originations fourth to first quarter, operating expense is down quite a bit.

I was just wondering why the efficiency was as strong as it was in the first quarter?

I will give you my instinctive reaction to that, and if anybody has anything to add, I'll let them contribute.

If you recall, we had a substantial layoff period, or a period that rates were on the rise.

And we did not anticipate the volumes that we experienced in the first quarter.

So what happens, anticipating lower volumes, we decreased our headcount by about 1300, mostly contract workers.

But the trend clearly was to reduce headcount.

Then the volumes came in.

And in that environment where you are trying to catch up in terms of capacity with the volumes coming in, you're going to see higher but unsustainable efficiency rates.

Does anybody have any other?

It's also important to note that the FAS 91 reclassification of expenses from expenses to gain on sale was not done retroactively to the fourth quarter information I think you are referring to.

You have to take that into account to make numbers comparable.

How much of an effect did that have?

That was about $100 million.

Okay.

So the gain on some margins were even stronger than they looked on a comparative basis, given that?

The home equity loans that you sold, you had originated, you still sold less than what you originated on the home equity loan side for the quarter?

Right.

We sold about 51 percent of what we originated.

What is your theory, strategy on the home equity loan originations?

What are you going to do with that production going forward if you can speak broadly?

I understand that can change quarter-to-quarter.

One issue is the bank.

The bank absorbed some of that because it's a good product for them, in terms of asset liability match.

Thirdly, it provides good spreads on our the balance sheet and it provides opportunities for us as we did in the first quarter where the market becomes very favorable for us to sell into that market from time to time.

So that is basically the three things we would do with it.

Is that correct?

Absolutely.

Our hope is that, ultimately, we can drive all of the home equity lines into the bank.

And then we are holding on the balance sheet enjoying the spread and enjoying the opportunity to hit the markets when opportunistically it makes sense.

Last question on the insurance business, a very strong quarter.

Would you suggest extrapolating the income level that you saw in this quarter, or is there something unusual?

There's nothing unusual.

I think that the thing to look at there is that if interest rates rise, that's very beneficial to that entity because of the billion dollars it has in investments now that is getting a very low return because of our very conservative investment protocol.

The higher the rates go, that is an entity that really benefits from it.

But there's does nothing unusual.

It is growing, it continues to grow.

We have a very solid management team in place now.

We are expanding our product lines, we're bringing on more customers.

We re-signed a transaction that we thought we would not be able to re-sign.

We did this quarter.

So that entity is looking very good to us.

Thank you.

Ken Posner, Morgan Stanley.

Good morning.

I have a couple of questions, one on the production side, one on the diversified side.

On the production side, taking Stan's comments into effect, the margin was 105 net of those sales and it is still up substantially year-over-year when I noticed that the servicing value booked is down from 1.66 to 1.23.

So that to me looks like a positive.

It looks like it has a more conservative value.

But how do you offset that 40 basis points of revenue headwind and still come out with more revenues than a year ago?

On the servicing side, in terms of how servicing is booked, remember that interest rates had declined.

And so as the inventory is closing and there actually is a decline and the value of that servicing, in our operations, that value change is hedged as part of the pipeline management.

And so there is at offset to that decline in value.

So the servicing value booked at 123 is unusually low, given what happened in the quarter, and that there is an offset in the revenue area, in terms of some hedging benefits?

And also, the other thing that I think is very noteworthy in our production is the fact that our adjustable rate mortgage production has grown very significantly over the year and the servicing value for our loans is typically lower, in terms of multiple is another issues that -- item that affects how are we recording services.

Is there anything else that would explain the strength in the production revenue net of the sales, net of the onetime sales year-over-year?

A very strong market.

Very strong purchases.

Strong purchase market, and then the declining rates resulting in refinance, increase in refinance activity.

And again, we have been stressing the point that the market's very irrational.

We have been seeing a lift and our home equity lines of credit, which you know, have a higher margin for us.

And we have sales that otherwise we have not seen in the last quarters or the comparable quarters.

If I could, quickly on the diversified businesses, I noticed where the capital markets and the insurance business is, the revenue growth year-over-year was modest, 8 percent to 14 percent.

And when I say modest, I mean that's actually (indiscernible) very impressive given the decline in the market.

But I think the trading volumes are up 8 percent in the capital markets side.

The revenues for the insurance business were 14 percent year-over-year.

But in both cases, the profits doubled.

So I'm trying to understand why the margins would have increased so much year-over-year?

(inaudible) capital markets we have spent the year trimming the expenses of the insurance operations from two factors.

One is, we have applied a lot more technology to that area, thereby lending greater efficiency to the operation and we have cut headcount substantially in the insurance group, which includes the agency.

So we have had a substantial reduction in headcount.

Stan, you want to?

On the volume in capital markets, overall, its volume is a very affected obviously by the mortgage market, which had started to decline.

So we were, as rates were rising, into the -- prior to the first quarter.

And so their business has improved and their ability to hold on to and increase their volume really shows you the value of the diversification of their product lines and the efforts that are underway and the growth of their sales force.

I think that the profit margins are really a result of the conduit sales that took place, which had higher profit margin.

Can you give us a sense of how big the conduit sales were?

Because we have a $56 million increase in the capital markets profits year-over-year.

I presume that's not all the conduit sales.

That would be an awfully big number, wouldn't it, for conduit sales?

Revenues from conduit activities increased approximately 44 million year-over-year.

Okay, so that is most of it then?

Right.

Thank you very much.

John Grey, Sanford Bernstein.

I wonder, could you tell us first please, what is the gain on sale generated in the quarter by the sale of the 2.8 billion in HELOCs and the 9.6 billion in sub-prime, in dollars?

Jonathan, how are you?

I'm terrific, and you guys are really fantastic, really exciting.

Thanks for the book, by the way.

Read it, it's a fantastic book.

Will do.

Keith?

Sure.

In the quarter, we sold approximately 2.8 billion of home equity loans and fixed rate seconds, and that generated a gain of 115 million, Jonathan.

And then we sold 9.6 billion of sub-prime loans within our mortgage banking sector, and that generated a gain of approximately 533 million.

Can you help us understand how it is that the Company is booking -- you appear to be booking your MSR at the margin at less than 120 basis points.

On what basis are you using such an extraordinary -- what seems to be an extraordinarily conservative evaluation?

Keep in mind, we are driving down the net servicing fee we are retaining.

And so that goes to the previous question about how we're maintaining the high level of revenues, despite the lower cap rate.

That's because we're selling a larger portion of the servicing fee for cash, as opposed to retaining it.

So the multiple, the servicing fee we retained was about 3.8, which is comparable to prior periods.

I wonder as a final question, since folks seemed to be inclined to ask multipart questions, if you could discuss with us how you visualized the change in your headcount over the course of the year, in terms of the reduction in salary, staff, and the growth of commissioned salesmen and how that might connect to some understanding of how your market share is likely to evolve and expand?

John, I think those are, from what I understand, you asked I think two different issues.

One, let me take the last part of it, the B part of it is, in terms of the market share, you can see the dramatic change in market share is a result of shift in strategy to a commissioned sales force, an expanding commissioned sales force.

We are aggressively continuing to grow that commissioned sales force being driven by our desire to get to that 30 percent market share by 2008, but more importantly, by the fact that we're being recognized as the place to be at for well-established account executives.

And so we now have a much easier time bringing people into the organization to expand our sales base.

So we're going to continue to grow that.

In terms of headcount, we have -- Stan has a full-court press going on and has had for a last six months on headcount, on making sure that we are applying technology to every single area of the company where it can be applied, thereby making our operations more efficient and keeping our headcount down to levels that we believe to be appropriate for the amount of servicing that we have, the amount of transactions that are going through the organization.

So you will see continuous pressure in that area to keep our headcount down to what we believe to be appropriate levels.

Stan, do you want to comment on any of that?

Not really on that question, although you can imagine that the management of headcount, given how volatile the market has been, is one that is challenging, but one that I think we've managed very well.

So I as interest rates decline, we manage back up some of the staff relating to origination processing.

And the increase in interest rates most recently, we will damage down appropriately as well.

I just wanted to also again clarify the issue on booking of new servicing.

It is very -- at that level, it is very dependent on where interest rates are at the end of the period.

So that if we had a period of rising interest rates, that there is going to be a gain in the value of the servicing on loans that are originated.

And then you would expect that multiple to go up in a rising rate scenario.

And in a declining rate scenario, you would expect it to go down.

And then, again, we are increasing our percentage of ARM loans to a very dominant and considerable percentage of our production.

I heard Angelo and others at the Company indicate that the capacity to service, that your servicing capacity was far in excess of your current volume, even though your portfolio is growing very rapidly.

If that in fact the case, and does that imply declining or improving operating efficiencies in the servicing sector on an ongoing basis as well?

It is correct that our capacity, particularly -- when I talk about that, Jonathan, it is primarily related to the protocol that we use, our single platform AS/400 proprietary application system that we've had since the '70s that can take on double what we have in our portfolio today without a blip.

Obviously, we've had to put some additional people on and take some space to do that to get double, but where our capacity is -- and continues to grow, by the way, as technology continues to improve.

And I believe that as that -- I know, by the way, that as the portfolio grows, our efficiency, just by virtue of scale, will grow with it.

Our cost per loan, our loans processed per employee, will increase.

Those are sort of axiomatic if you have a single platform, type of platform, we have, it's axiomatic in our type of operations.

So we look forward to the opportunity to aggressively grow that servicing portfolio because of what we have in place.

Finally, what is the meaning of all of these joint ventures?

The company seems to announce one every 48 hours?

How are these businesses relationships structured, in terms of their potential to produce incremental earnings growth or market share for the Company?

Obviously, it does increase market share because what you're doing is capturing, through these relationships, capturing more business.

Basically, it is a partnership between us, a very defined partnership between us and, particularly a real estate, a large real estate broker who wants to participate in the earnings from the mortgages that they basically feel that they are generating through their real estate sales.

And that's what it is designed to do, to have them participate in the revenues from the mortgage side of it.

Our benefit is that we get assured business from these accounts and they get a benefit of a stipend from every loan that is originated under RESPA.

It all has to conform with RESPA.

But that was the nature of the relationship.

You will see more and more of those.

It certainly is a trend in the industry there large real estate agents feel strongly that they are the basis by which a mortgage is born, and therefore, they want to participate in the birthing process.

Think very much and congratulations once again.

(Operator Instructions).

Bruce Harding, Lehman Brothers.

Do you mind going through your expected margin numbers through the course of the year and into an environment where we get back to what we thought this year might have looked like, or normalized?

And then just a quick thought -- as you go out to 2008 and your 30 percent market share, do you the still see the broker community originating, the independent broker, originating about 70 percent, or do you see that changing over time.

And do you see other companies anywhere near 30 percent, or does everyone just kind of stay stagnant?

Thanks.

Let me try to work my way back, and I'll turn the margin over to Keith and to Stan.

No, I would expect that we're going to have -- Wells Fargo is a hell of a company and I would expect that we're going to be going head-to-head with Wells Fargo.

And I think that there will be three or four players that will dominate this business.

We would have 30 percent and then the second player could have 20, 25 percent.

So certainly they're not going to remain stagnant.

Particularly as I said, Wells Fargo is very aggressive and a well-run company.

In terms of the first question you had, I just want to lay the groundwork for you, is that I think to try to look at that this without applying the dynamics of the industry, we're going to lead you down a bad path.

I think your question was -- when do you get back to normalcy, when do you think you can get back to the margins that we predicted in the fall?

I think those who have been following this company for any period of time, like Jonathan and Mike and Bob, know that this is a very dynamic business.

And that is why you new management advice to watch this thing every hour of every day.

So I would be hesitant to tell you what normalcy is and if we get back to those margins.

Maybe we will never get back to those margins.

If we don't, they'll be higher.

But what I want to do is to put some meat on those bones.

Let me ask Stan and Keith to contribute to those comments.

First of all, you know that historically margins going back to 2001, were at the 70 basis point level and we got as high as 1-1/4.

And we've tended to see margins in many of the periods ranging in the high 80s to low 90s.

And that was without the sale of home equity lines.

And then I can explain to try to normalize the margins that we experienced in the last quarter.

It is still our view that, within the guidance that we have given you, there are markets that can produce margins as low as 35 basis points.

Although we think those are very extreme markets.

And that the kind of high-end expected margins in a normalized market are probably going to be around 100 basis points without the sale of HELOCs and a little bit, you know, if we were selling HELOCs probably in 115 basis point level.

So I would -- I think that the history of our margins provides a very good estimate for how we look going forward, although we do try to provide a range that provides for those rare markets that become very, very competitive.

Again, we see the conduct of the major competitors as being extremely irrational and much different than what you would have seen out of the industry just five years ago.

Just to put a little more historical context on the margins, in 2002, we had a $2.5 trillion market, which is comparable to the upper end of our guidance for '04.

In that year, our production margins were 99 basis points.

In terms of the servicing margins, we've said that we think that in a normal market, which when we say normal, we mean a purchase market, which we would estimate today to be in the $1.4 trillion range, would generate margins of 12-15 basis points.

So it is really anybody's guess to when and if we ever see that kind of a market again.

And that's what that is based upon.

Brad Ball, Prudential.

In your servicing margin forecast for '04, the zero to 13 basis points, what are you assuming, in terms impairment reserve recapture?

What is the total on your impairment reserve at the end of the quarter?

The reserve at March 31 is about 1.7 billion.

Obviously have recovery.

You've a total reversal, in terms of interest rates, so we will have recovery if interest rates stay at this level, obviously.

I think one of the questions or relative points -- are there cases where we might have recovery which is in excess of hedged losses?

And there are opportunities where that can occur.

They're very dependent on certain financial accounting restrictions, in terms of applying hedge counting and whether or not you have correlation, what is permanently reserved for versus just valuation reserves.

So it is very accounting-dependent, even though the value of the asset may go up to well over what the book value, what we can report on a book value perspective.

But with the high end, the 13 basis points, are you assuming any net recoveries in excess of hedged losses?

That does not include net recovery.

Separately, I noted today that Fitch changed their rating outlook to stable from negative.

I was waiting for someone to mention that.

I guess the review took from May of last year, they finally got around to it.

Could you update us on what the other agencies are doing right now with your ratings, if anything, and whether there any implications around this move for your funding costs, liquidity in the face of a potentially rising interest rate environment?

First of all, I don't think the other -- at least on the surface -- the other rating agencies are impacted by that because they weren't impacted, they did not react to Fitch's downgrade of us.

So there are no reviews right now?

We have a continuous dialogue, particularly with Moody's and S&P attempting to get, with their objective of getting a higher, getting rid of the split rating on the commercial paper side.

And we are hopeful that that objective will be achieved over time.

So we have a continuous dialogue going on with them.

But we are very pleased that of the change in the Fitch rating, reaffirming our rating and taking us from negative to stable.

So that certainly is a positive impact.

In terms of costs, our cost of borrowing was not impacted.

It was just for a day or so when they first came out in February, I think it was, with their changed downgrade.

But it did not over time, there was no change.

It did not affect our borrowing costs.

So we don't believe that this will affect our borrowing costs either way.

Finally, in terms of the bank, I guess in May you become a mature bank, as opposed to an immature bank.

The implication is that you can carry less capital.

Should we expect to see a quick adjustment in your capital position at the bank, or will that be gradual?

And I should we look at it?

It will be gradual.

First of all, we have to make sure that -- we're going through a couple of transitions.

One is that I prefer using a word other than immature, but we are going from a small bank to a large bank.

And therefore, there is a point at which when we come out of the small bank or the di novo role, which is in May, that the regulators will -- though it is not guaranteed -- will lower the capital requirements.

If that happens, and certainly there's every indication that the bank is being run in a highly professional, very efficient manner, that we would then slowly grow into the new capital requirement.

There would be no quick adjustments.

Okay, thank you.

Paul Miller, FBR.

Thank you.

On the bank, you guys recorded about $106 million in revenues.

On an R&A basis, I don't know what their taxes are against that, but that is probably well north of a 130, 140 ROA, which is a very strong profit metric.

What do you think -- is this level of return on average assets sustainable after taxes, or do you think it's going to come in closer to 80 to 100 basis point level when you guys really start ramping it up?

Stan and Keith are commiserating on this.

(indiscernible) guidance.

The bank, first of all, the gains that you are seeing I think are partly from our warehouse lending activities, which are outside of the regulated bank and -- (indiscernible) the breakdown of that.

About 15 million in profits (inaudible).

About 15 million came out of warehouse spending.

We have given guidance at about a 1.2 percent return on assets for the bank and the net interest margin at the 228 level.

You guys are running higher than that right now, am I correct?

When you combine those two, (multiple speakers)

When you combine warehouse lending in there, it does run higher.

I think you have to separate those two out, because although we look at it as a banking sector, for internal purposes, obviously on a regulated basis, it's not.

They're separated.

They're not a true activity of the bank, although it is a banking activity.

You understand that distinction?

Okay, so the warehouse, the lending that has taken place under the bank is not, under the regulatory (multiple speakers) it's not (multiple speakers).

That's correct, that's correct.

Can you real quick -- what is your inventory of home equity loans on the balance sheet right now that could possibly be sold going forward?

It is approximately 10 billion.

Thank you very much.

Ed Groshans.

Looking at the sub-prime sales versus production, the sales were a little higher than production.

So I was wondering -- what is Countrywide's comfort level with maintaining the sub-prime product on balance sheet?

And is there a timeframe that you're looking to keep it there, or are you looking to portfolio some for (indiscernible) timeframe?

Stan will be responding to this question.

We don't intend to maintain as an investment sub-prime mortgages on our balance sheet.

What we do is when we high, experience a period of very high production, we let the inventory accumulate so that should there be a drop in interest rates, we have the ability to offset that impairment because we don't recover every dollar of impairment on the servicing asset through our financial hedges.

It is simply to the extent of the deal with that level of volatility.

And so what we have been able to accomplish over the last several years is the buildup of certain assets on our balance sheet that were able to sell when.

And interest rates drop, it is very likely, if the opportunity presents itself, that we will reinstate the kind of rolling excess on our balance sheet.

But there is no intention at all to half a permanent investment in a pool of sub-prime loans.

Okay.

And then Stan, you also mentioned putting most of the HELOCs into the bank.

And I just wanted to clarify that putting -- I was under the understanding that the bank is mostly prime or better type or product.

And does Countrywide's current production of HELOCs fit those standards?

Absolutely.

It is well over 720 FICO average on HELOCs that we are originating.

Thank you very much.

James Shanahan, Wachovia Securities.

Good morning.

A couple of related questions, actually, to those just asked.

The sub-prime inventory, do you care to comment how large the sub-prime mortgage inventory is today?

On our balance sheet?

Yes, sir.

2-3 billion.

And that would be held in the held for sale?

That's correct.

And the HELOCs are held for investment -- is that also accurate?

Again, we've put the HELOCs in the bank, we hold some on our balance sheet and we hold some for sale.

Thank you very much.

Matt Vetto, Smith Barney.

hi, thanks.

Just wondering if you could remind us on the mechanics of how the amortization rate is set and adjusted on the MSR? is that something you look at monthly or weekly, or is it something you do sort of at the beginning of the quarter? just how does that work?

The rate is established at the beginning of each quarter, so it's very dependent on the interest rate environment at that point in time.

It's basically based on a ratio of cash flows method where you estimate your cash flows for the quarter and you divide that by your expected remaining gain cash flows again given the interest rate environment that exists at that time.

So in a low rate environment, you will see higher levels of amort and in a high rate environment, you would expect that amortization to decline.

So there is no intra-quarter adjustment to that?

No, there is not.

Ken Bruce, Merrill Lynch.

Thank you, good morning.

Quick question on the capital markets business.

I know that you have recently entered as a primary dealer the Treasury market.

And could you discuss some of the dynamics associated with that business?

Specifically, expected volumes, levels of margins, if we would expect to see that in terms of net interest income or gain on sale?

(indiscernible) but we just reviewed that actually yesterday and the we are doing very, very substantial volume.

So I think we're now the major player, at least we have been the last week or so in the Treasury market since we have got on trade web, at least for a portion of the Treasury for the bonds.

We just brought in a build person just yesterday and we'll get active in the build side.

So we are doing very, very substantial volumes.

The margin at the moment is slim on those.

In order to establish our position, we expect that margins will increase substantially as the year unfolds, and particularly in '05.

We're looking for a very big contribution from that area in '05.

So it is a terrific business for us, it fits well, it is very synergistic into our overall operations.

We have, as I said, we have positive margins but thin at the moment as we established ourselves.

But those margins I would estimate are going to increase as we go through the balance of this, but particularly into '05.

Where does it fall on the income statement, which line item?

It is going to be a combination of spread income and gain on sale, and it is going to depend on (indiscernible) environment and the slump of the yield curve, how that mix shakes out.

Would we look at that very similarly to the rest of the capital markets business on the mortgage side, in terms of where you would be seeing a majority of that income to coming into net interest income, versus, say, gains?

I think that's fair to say.

Thank you.

Brian Charles, Banc One Capital Markets.

Hi, good morning.

Just a quick question about your -- let's see, your servicing margin for the year.

Your net pretax margin forecasted zero basis points, or 13 basis points.

I guess I am assuming that that will entail some recovery over the second of the year, at least the last three quarters.

Are you projecting higher interest rates?

Yes.

I'm going to ask you if you have some sort of guidance on the correlation between your forecast of 4 percent and 6 percent, and what kind of dollar value net recovery you could realize, based on the $1.7 billion net impairment you have right now?

Did we do a correlation as rates rise and basis points that have cracked (indiscernible) recovery?

I think it is fair to say that if rates were to go all the way to 6 percent, that you should expect us to recover substantially all of our existing impairment reserve.

Was that the 1.7 billion, or would that be offset by the hedge losses?

That would be the $1.7 billion that exists.

Keep in mind that we recorded close to $1 billion of impairment in the first quarter.

So you'd have to net that against the 1.7 to get the amount for the year.

Okay, fair enough.

Let's see, netting that against, that would be about 800 -- I'm sorry, 8-900 million.

Is there some way I could come up with a correlation (indiscernible) weak forecast rates to be in the five percent range or 5.5 percent range?

Or do we see a linear relationship between how much dollar value you could recover on the impairment reserve?

I would suggest you refer to our disclosures in the upcoming 10-Q, which is going to give you some sense for that.

Good enough.

Thank you.

Matthew Lindenbaum, Basswood Partners.

Great quarter, guys.

Before I ask my question, I just wanted to correct a misstatement from a question earlier.

It looks to me like your ROA in the bank was about 1.1 percent, which is right in line with your guidance.

So I don't know where the 1.4 percent or whatever is coming from.

Second, my question is, with the ARM market share increasing in your business, and it looks like it's going to be that way for a long time because you have to expand your capacity in that area on your product mix.

Can you explain where -- aside from the product that goes to the bank, where do you sell this stuff?

Who do you sell it to?

How does that work?

And how will that effect the normalized margins going forward, or I should say the kind of servicing value of (indiscernible) going forward compared where it has been in the past?

Two things.

One is your 1.1 percent is correct, the second is -- define stuff (ph).

What I'm saying is these ARM loans that you -- (multiple speakers)

Your ARM loans, I'm sorry.

ARM loans -- I know the pace rate stuff, I know how that works (multiple speakers) Fannie, Freddie, whatever, but with the ARM market, I'm just curious, if you could just explain how -- what is the process, who buys this stuff from you?

And then obviously, the servicing value booked on that is lower than for fixed rate.

So looking at your past servicing value book numbers is maybe not a good guidance going forward because the mix of your business has changed.

And again, these -- again, very dynamic. 50 percent of our intake in the last month was ARM loans.

It just shifted, consumers shifted (multiple speakers).

So it moves back and forth very quickly.

So you can again take what is happening now and project it forward because the chance of that happening is not going to happen.

The stuff, the ARMS, go down several tracks.

One is the bank.

It is a great product, a prime product for the bank, as long as it fits within the regulatory bounds that are set for the bank.

The second is that the -- both the GSE's have expanded their product line and have been providing an outlook for us for a lot of this ARM product.

And thirdly, we do structured transactions and securitizers and sold to institutions throughout the country.

Stan, do you want to? (multiple speakers)

We've seen no backup as you would have seen a few years ago when there was a total lack of liquidity for that product, except for the savings and loans.

Liquidity has opened up.

It is a very good, solid market, the backdrop in which we originated against.

There is no question that the addition of the bank to our family of companies has helped us in this regard.

But we are finding that the market, particularly with the aggressive approach by both the GSEs to participate in this market, because they realize in order to have their market share, they have to do ARM loans, that they have opened up a lot of product lines to us.

Just to follow-up.

Is it fair for me to conclude and -- I'm making this assumption -- that even though ARMs are going to be a longer share of your business on a secular basis than they have been in the past, because the appetite of the consumer has changed, the hybrids and whatever, that even though that is going to happen and even though ARMs have lower margins on them, that is going to be offset by the fact that you have more sub-prime and home equity in your mix?

And so net-net, we should still look at your historical margins as a good guide for the future?

I think so.

As long as we continue to grow that HELOC and sub-prime business conservatively, but continue to grow it, you're certainly going to have -- we're setting a record every single month in the sub-prime area.

We should have some sort of an offset.

Whether it would be an exact match, I'm not sure.

But we'll have to see as the year progresses.

Congratulations and welcome to dominance in the U.S. market.

Mekiko Cokely, Endeavor Capital.

Thank you.

You are rumored to be one of the potential buyers of Conseco, the mortgage business, before they change their mind.

Is this something that you'd be interested in?

And do you count on that (indiscernible) to get to 30 percent market share?

You've got the wrong company, it is Cendant.

I'm sorry, Cendant.

That is what I meant.

That was the rumor.

We don't comment on rumors.

Is something (multiple speakers)

I posture it this way.

We are a company that has a solid strategic plan, but we are also opportunistic in our strategy.

If an opportunity came along, because of our capacity, both on the origination and services side, we certainly would entertain that opportunity.

But the opportunity has to be one in which we would -- it would make sense for us to acquire it because the acquisition of the Company would be, the cost would be less than us to manufacture that product.

Remember, we are a manufacturer ourselves.

So if we're not going to pay premium for something that we do ourselves already.

So again, we are opportunistic.

We'll continue to look at opportunities.

And I think that is all I will say along those lines.

A separate question.

On the servicing hedge gains and losses, those are mainly unrealized gain and losses, right?

Or, are they realized?

They're realized.

The losses or the impairment of servicing asset is just a valuation adjustment.

It's not something that is in a sense, realized because it recovers with the rise in interest rates.

But with regard to the servicing hedge assets, some of those are indeed realized in the sense that we have sold those and realized.

And some are unrealized in the sense that we still hold the asset and there's just valuation increases to the assets that are picked up.

So it is a mix?

It is a mix.

And the part that is the unrealized gain and losses, is that more like mark-to-market, or is it mark to model?

Can you say the first part again?

The unrealized gain and losses on the servicing hedge -- is that mark to model or mark-to-market?

In terms of the derivatives or the asset side, that is obviously mark-to-market.

There is a readily available market to sell those assets into.

With regard to the servicing asset itself, we have -- we go through a process that attempts to look at all of the information that is accessible to us about where servicing is trading.

And we use a model to correlate the cash flows to what we believe is our best estimate of the market value of servicing.

From a simplistic point of view, they would both be market values.

Thank you.

Gerrish Baku (ph), (indiscernible).

Hi, guys.

Great quarter and a great many years now.

Just a couple of quick questions.

The first one is short.

On the real estate JVs, I was wondering if the margins are more like retail or wholesale or correspondent?

And over time, Stan and Angelo, do you think you are giving away some of the economics through these JVs?

Well, let me answer both questions, and I will have Stan comment, if he wishes.

In terms of the margins, it's probably hybrid.

It's probably in between retail and wholesale because it basically -- it starts out as a retail product.

And the margins are better than they would be in wholesale.

It's sort of, again, a hybrid between retail and wholesale.

The second part of your question was what?

Over time, do you think you're giving away the economics to real estate agents?

I think you have to go with the flow.

It's a concept that has taken hold.

It's the way business is done.

And therefore, as I said, Countrywide is an opportunistic, resourceful company and we're going to have to participate again.

As long as we're within the law, within RESPA, we will participate to take that share of that business.

It is hard to say what is going to happen over time.

You have to remember that it doesn't block up all of the business; in fact, it probably doesn't even lock up even the majority of the business within a real estate operation because real estate salesmen, as you know, are independent contractors.

And they have a choice as to who they deal with.

And so in many of these cases, the real estate agents within an arrangement that we have with a company, that real estate agent will deal with us directly, rather than go through the real estate broker because of whatever concerns they may have in doing that.

So the sustainability of this concept, how long it will go on, how large it will grow, is unknown at this time.

But again, I think it is important for Countrywide to participate in whatever channel is being developed in the country we have to be a player in that channel.

The second question is on the credit risk, which some of the people have asked about.

With the bank's balance sheet growing so much, you've talked a lot about FICOs.

But I was wondering if there are other ways in which you control risk for the bank, credit risk for the bank?

For example with HELOCs, do you have the firsts in the cases?

In the vast majority cases, we have the first.

In addition, we have all of the HELOCs that exceed 80 percent LTV combined, first and second.

We have private mortgage insurance on those to reduce the risk to the bank.

So we are taking various steps to make sure that the -- obviously, when we control the first, it makes it easier for us to manage that risk.

But to be honest with you, the delinquency ratio is virtually nonexistent in that product today.

And we've been doing this for two or three years.

On the ARMs, are the LTVs in that (indiscernible) different from your average versus what you retain?

On the Luvs held by the bank?

Yes.

Luvs and debt to income?

They would be slightly higher than the average of what we've produced.

Lastly on the ARMs were you have teaser rates that then go to a go-to rate, do you underwrite those at the teaser, the go-to or something higher than the go-to?

We operate based upon the requirements of the guarantors.

And I think today, it is the first -- the rate that it (indiscernible) for the first time it changes.

I don't think it is at the teaser rate.

I don't think it is at the maximum adjustment rate, because you have a 6 percent life cap (ph) on.

This so it is at an adjusted rate.

It's under an adjusted rate.

But to be honest with you, I don't think any of us can answer what that rate is.

Over time, it would be great to learn more about how you guys control risk of the bank's balance sheet.

Great.

Thank you.

Thank you.

Lawrence Cam (ph), Sonic Capital.

Good morning.

Great quarter.

I see you are still releasing your balance sheet, unlike some companies in this space.

With regard to the interest rate risk, I was wondering what your sensitivity for the market value is to the 50 and 100 basis point rise in rates?

Obviously I assume you know why I'm asking this question.

And the stress test is (inaudible).

You want to repeat the question?

What is the sensitivity of the market value of equity to 50 and 100 basis points up rate?

I would suggest that you review our 10-Q, which will be coming out very shortly, and we have some pretty good disclosures around that.

In the past, you have been pretty asset-sensitive.

I can assume that you are still asset-sensitive?

If you are comparing our sensitivities to the previous 10-K, it would look very similar.

So that our relative sensitivities remain somewhat the same as they have.

The second question -- with regard to your basis risk, I've noticed that the Treasuries are no longer on the servicing hedge.

I assume that you got into the Treasuries with -- when the spreads were tight.

And now that they've wound out a little bit, you have gone back to using derivatives?

You know, we've had adjustments in our hedge profile.

One of the activities, as I mentioned before, is the fact that we do take off positions and realized gains in a declining rate environment, and that is part of the rationale for that change.

I guess I was interested in whether the winding spreads, the change in that spread profile has affected you?

Because other mortgage companies have said that they have gotten an unusual benefit in the first quarter, and then started to get it back in the second quarter.

Well, it was beneficial during the first quarter.

We actually changed a significant part of that position, the Treasury position over to mortgage backs.

So that would -- you know, we're taking advantage of the ultimate spread tightening.

Great, great.

Exactly what I thought you did.

Thank you much.

Joshua Anderson, (indiscernible).

Hello.

I was just wondering -- have you guys ever broken out the amount of revenues and cash flows you get from the sub-prime mortgage, or does this mean like servicing investment banking, the entire (indiscernible) what really comes from sub-prime?

And then just other quick question is that -- three years ago, this was an industry that GE, Wachovia, Bank of America was all exiting.

How do you get comfortable that this is a long-term, profitable business, given the competition between (indiscernible) and the growth that we have seen across this platform?

Are you dealing with sub-prime?

Completely sub-prime.

Let me just comment on the competitive aspect, and I will give out the metrics to Keith.

But in terms of what the competition does, you have had just a sense of history, GE was in the mortgage business and got out of the entire mortgage business.

Bank of America was in the correspondent business and got out of the correspondent business for a substantial period of time.

You know, you have shifts all over the place.

It depends on your ability to manage it.

And we have successfully managed this product for years.

And so I think using what our competitors do as a barometer will put you down the wrong path.

We are a very different focused company that understands this product very well, how to originate it, how to manage it, how to underwrite, how to service it.

And so we look at -- the short answer to your question is -- we look at this sub-prime business as a -- one that has to be carefully manage, but one that has a tremendous opportunity for us long into the future, certainly through the balance of this decade and beyond.

So we don't think it has a short leash on it and that we'll pull it as other companies have.

Again, these companies have been in and out -- all aspects of the mortgage banking business and ones that we've stayed in for 36 years and very effectively and profitably.

You want to get into the metrics side of the cash?

Yes, sure.

We don't disclose the total revenues from sub-prime, but we do disclose the component parts.

So if you refer to our Ks and Qs, if you were so inclined, I think you could piece it together.

We've disclosed what the gain on sale contribution is, we've disclosed our investments in sub-prime residuals and IO securities and we disclosed the yield.

We disclose the quantity of sub-prime loans in our servicing portfolio.

So you can come up with a reasonable approximation on your own of the revenues.

And of course, you have to take into account the expense associated with producing those loans and servicing them.

Which in doing that analysis, you have to take into consideration that it is, in both cases, more expensive to originate sub-prime mortgages and it is more expensive to service both loans.

Are you guys comfortable that, given the compression between conventional mortgage rates and sub-prime rates over the last two years that there's a rationally priced market that you continue to compete in over the next couple of years?

I mean, I understand you're saying that it has been in the mortgage industry many, many years, but the dynamic in the sub-prime industry is very, very frothy right now.

I think it's always been frothy.

Really, if you look at the whole history of sub-prime and again, who's been out of it.

Some public companies who were strictly sub-prime went out of business with it a couple of years ago.

To a company, Argent and Ameriquest today seem to be doing very well with it.

So it has always been a business that has a lot of dynamics attached to it.

I just think that if you go back over the years, you have a product, first of all, that fulfills the needs of a segment of society that has blemished credit, but still is capable of paying debt and needs debt to afford a home.

So it is a very viable part of the market and an important part of the market.

The fact is that if you referred back to periods where there was irrational conduct, particularly relative to the accounting involved in the sub-prime business.

And so you saw a lot of monoline companies fail.

And part of their failure was the fact that larger originators were getting into the business and they had not the smaller monoline sub-prime company, really had not properly evaluated prepayment speeds or credit risk, and they went out of business.

Today, the business is conducted in a very rational manner.

You have S&P and all of the rating agencies participating in developing the loss curves that are appropriate for the securitization.

And for us, most of the credit risk is sold through at the point of securitization or whole loan sales.

So it is a very viable and continuing activity for Countrywide, as it is for the other large originators.

Let me make this point, because I think you raise some very good points.

Sub-prime cannot be looked at generically.

There is very, very good solid sub-prime business and there is this frothy business that you relate to.

And you have to -- when you're doing your analysis, what is the average FICO scored of these.

Because you can get so deep into this marginal credit that you can have serious problems where you are taking 400 FICOs with no documentation; that is dangerous staff.

So think it is very important that you understand the disciplines that the Company had, particularly that Countrywide has, which are very strong disciplines in the origination of sub-prime loans.

And maintaining that discipline is critically important to us.

I don't think, when you look at sub-prime, you have to look at it in various tranches, and we are at the high end of that tranche.

Okay, thank you.

Brendan O'Neal, Deutsche Asset Management.

Hi, great quarter. question on the (multiple speakers)

So enthusiastic about it.

My question is on the deposits that have grown 30 percent during the quarter.

They're about 13 percent of liabilities now.

Is this growth is related to the retail banking efforts?

Two, primarily.

One is retail, primarily the retail.

We have some broker deposits, but it is de minimus and we have some growth obviously in the escrow deposits.

But the primary to the rest of it is retailers.

We continue to open up these branches, these micro sites.

These micro sites have been enormously successful in every area that we operate in from Oakland to Miami to Fort Lauderdale to Los Angeles to Chicago.

It doesn't matter what the demographics are, our model is working in every area we go into.

Could you talk about the cost of funds and the term of the deposits?

Do you know the average term of the deposits? (multiple speakers) 3.2 percent; that's the average turn. (multiple speakers). 3.2 percent, that's the average turn.

I had that number about a month ago, but to be honest with you, they are shuffling through papers to see if they have that it one of our documents.

Why don't you call Eric, and Eric will have that number for you.

We'll call over to the bank.

I think it's like 2.5 years, something like that, was my recollection of what they told me last month.

Okay, thank you.

You will see it in the 10-Q.

Charlotte Chamberlain, Jeffries & Co.

Good morning.

I was thinking my question had gotten outsourced and moved on. (multiple speakers).

When are we going to move on from our next investor conference?

Angelo, even at the top of your guidance at 825, given what you did this quarter, it would suggest that the average for the next couple of quarters is going to be substantially below what you reported this quarter.

Now, coming into the April quarter, you have a huge pipeline.

I cannot imagine that the quarter we're currently in is going to be significantly lower.

So that would suggest that, even at the top of the range, you have some concerns about the second half of the year.

And I was wondering, one, am I reading that right?

Because obviously, you cannot duplicate this quarter and not get over the top half (indiscernible) your $8.25 top of your range.

And I was just wondering, what is it that it is going to go unreversed, so to speak, to get you so far below what you reported this quarter, presumably in the second half of the year?

Charlotte, I think there are a couple of things that come to mind when you ask me that question.

One is that we intend to, this management team tends to the conservative and its view, because the last thing we want to do is first, disappoint ourselves, and secondly, disappoint investors.

So we try to be as realistic as we can.

But we tend to lean on the conservative side.

So I want you to understand that.

Secondly is that the visibility, bringing that term back, to in the second and the third and fourth .

Quarter clearly, the second quarter, we know, but the third and fourth quarter is not as clear as the second quarter is obviously.

You have a lot of moving targets, not -- certainly nothing less than the terrorist element in the equation today, which tends to move these markets dramatically.

And so it's very hard for us to see the third and fourth quarter at the moment.

I think as we go through the second with, we'll get a better view of certainly the third quarter and we will be very up front in our guidance issue as we continue to look at it.

But I think the issue is visibility.

We just don't know where these rates are going to go.

As we said, not only because of the usual issues of complications and particularly interest rates, but also the terrorist part of the equation.

I clearly would not underestimate that as an analyst.

That is a very important factor.

You can have rates drop dramatically if something terrible happens.

Or you could, you know if confidence continues, the American people, we have rates rise.

It's just hard for us to tell.

So this is our best shot at it, but it does have a conservative bent to it.

What I was trying to get to is exactly what you're saying, is that something has to go terribly, terribly wrong in order for you to even make the top end of your range, I would assume.

You have this huge servicing portfolio, you whack Washington Mutual out of the way; something has to go very wrong, it would seem to me.

Charlotte, our guidance, as Angelo indicated, does have built into it a level of conservatism because we're looking at all of the different paths that can occur.

So clearly, there is a set of circumstances that -- and I think you are implying that might push earnings certainly much higher.

But that is all the stars aligning together.

Now what we had in the first quarter was really an event which was very close to what had been at the high end of our guidance in the past, the past guidance that we gave you.

And so that is why you see only a slight increase to the upper end of the guidance because we have incurred a quarter which is very similar to what was likely to occur and produce the upper end of our guidance.

Then, from there, we are looking at all the things that can take place going forward and trying to provide a conservative and realistic view of what are the possible outcomes.

I think you are suggesting that there are a set of outcomes fully aligned that could produce even better results, and we don't debate that fact, but it isn't one that we're going to use to provide guidance of this nature.

Okay great.

Thanks.

Andrew Rookshaven, Greenlight.

Hi, good morning.

I was wondering on your hedging program for the servicing, the first quarter went on as rates began to reverse.

Any steps taken to lock in some of the hedged profits, or is it roughly the same servicing hedge structure in place that was in place for the majority of the first quarter?

I think the best thing for everyone is to wait for the 10-Q to come out, and it provides very, very good disclosure on the positions that existed by the end of the quarter.

It is the case that we did lighten up the position as the market rallied, but it is -- I think you'll get a better understanding, more complete understanding by referring to the information the Q.

One other question.

On your production segment backup information that you provided, it was very helpful on your web site.

Do you think you've changed your disclosure -- I guess it's maybe the second quarter, now you've done that where you've taken out the direct pricing cost line, maybe recategorized certain things?

Is there way we could get the information on the way it was previously disclosed, or is that a permanent change with some other reason behind it?

We view this as a permanent change.

We view the disclosures we're making currently as being the best, in terms of reflecting the economics of what is going in our production divisions.

And we really think it is in the best interest of our analysts, therefore, to view the P&L in that way.

The various components of the revenues are very interchangeable, very fungible (ph), and you can get lost in the trees by focusing on them.

And it's better I think to focus on the total revenues.

Thank you.

William Matthews, Canyon Capital.

The tax rate across the various businesses -- when you talk about the pretax income, what is the tax rate that we're supposed to assume, or is it different across the different business lines?

Our overall tax rate is about 38.5.

And that is very modestly from business to business.

And the other to note about the previous comment about GE exiting the business.

I don't know if you saw yesterday, but they did purchase one of your neighbors, who is in the (indiscernible) A and sub-prime lending business.

Yes, they're spastic.

They are in-house -- and you have seen as throughout the history of a lot of these companies decide they want to get out.

They've sold their mortgage business to I think Washington Mutual and now they're back in it with WMC.

We sort of just run our steady course, keep our head down, keep on working hard and really have no idea what the hell drives the strategies of some of these companies.

Great, thank you.

(Operator Instructions).

Matthew Lindenbaum.

Hi, just another question.

Can you -- in my calculations, and maybe they're wrong, I'm calculating on sub-prime, you're booking 5.5 percent gain and on the home equities, you booked 4.1 percent.

Can you give us a sense of what you think are normalized gains, kind of in a normal purchase market where rates are not going up and down a lot?

What we can kind of assume for sub-prime and home equity?

The home equity sales were good sales, but they seem to be very close to what one would expect in a normal market.

I caution you on the sub-prime sales for a couple of reasons.

One is that you are looking at our gross gain on sales and there are expenses associated with the creation of those mortgages that are significant, as much as 2 percent.

I recognize that, but still, like (indiscernible).

And I think if you look historically at the gains that we've produced from the sub-prime, they kind of range anywhere from 3.5 percent to 5.5 percent.

And it is somewhat dependent upon what is happening in the market.

I would say that the 5.5 percent is on the very high end of what one would expect to see in the sub-prime market.

Is it fair to assume that as the yield curve flattens over time, we should see the sub-prime gains come down to a more normal level?

Closer to the lower end?

I would think that we will see them come back to kind of a 4 percent range.

I think there is a -- remember in this market, there is a lot of stretching for deals in a very low interest rate environment, that there is a lot of institutional home loan interest in investing in this product and it has had the impact of driving up.

Thanks a lot.

Thank you.

David Chamberlain.

Actually that was exactly my question.

Great quarter, guys.

Thanks a lot.

At this time, I'd like to turn the conference back over to Angelo Mozilo.

Please go ahead.

Thank you very much, thank you for your participation.

They were all very good questions and we look forward to talking to again at the end of the second quarter.

Again thank you.

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