美國銀行 (BAC) 2005 Q1 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to the Countrywide Financial Corporation First Quarter 2005 Earnings Conference Call.

During this teleconference, Countrywide's management may make forward-looking statements within the meaning of the Federal Securities Laws regarding their beliefs, estimates, projections and assumptions with respect to, among other things, the Company's future operations, business plans and strategies, as well as industry and market conditions, all of which are subject to change.

Actual results and operations for any future period may vary materially from any past results discussed during this teleconference.

Factors which could cause actual results to differ materially from historical results are those anticipated, include, but are not limited to those items described on the last slide in the written presentation that accompanies this teleconference and other risks detailed in documents filed by the Company with the Securities and Exchange Commission from time to time.

The Company undertakes no obligation to publicly update or revise any forward-looking statements.

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.

[Operator Instructions]

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

Please go ahead, sir.

Thank you, Kathy.

Good morning and welcome to Countrywide's earnings teleconference call for the first quarter of 2005.

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

The presentation will be found on our website, www.Countrywide.com, on the Investor Relations home page.

Turning to slide two of the presentation, we'll see today's agenda.

First, I'll give you an overview of our recently completed first quarter.

Next, I'll provide a review of our mortgage banking segment and key diversified businesses.

Then, I will conclude with presentation with our revised 2005 earnings guidance.

After the presentation, we'll open the lines to take your questions.

Let's begin with a discussion of our first quarter performance.

The chart on slide four shows our operational highlights for the quarter.

Total loan fundings were up 21% over last year's first quarter, fueled by a 30% increase in purchase fundings and a 13% increase in refinance fundings.

In addition, adjustable-rate fundings rose 45%, home equity fundings were up 66% and nonprime fundings advanced 42% compared to the first quarter of 2004.

The strong loan pipeline of 59 billion bodes well for the fundings as we enter the second quarter.

The servicing portfolio continued its uninterrupted growth advancing 31% year-over-year.

Bank assets growth remains robust, surpassing the $50 billion mark, which was more than double last year's assets of 24 billion.

Securities trading volume is up 20%, primarily due to the growth of our US Treasury trading business.

In the insurance segment, the net earned premiums increased by 2%.

The chart on slide five shows our consolidated earnings highlights for the first quarter.

Net earnings rose 27% from last year's first quarter and were more than double at first quarter of 2003.

Earnings per diluted share were $1.13 in the quarter, up 26% from a year ago and up 85% over the first quarter of 2003.

Annualized return on average equity was 26%, remaining at the high level achieved in the same period last year.

Financial results for the first and fourth quarters of 2004 include the effects of the earnings restatement related to the timing of gain on sale for certain securities, as previously announced on February 22nd of 2005.

Slide six shows the breakout of earnings between mortgage banking and our diversified businesses.

Mortgage banking pre-tax earnings increased 38% from the first quarter of last year and were up 118% greater than the first quarter of 2003.

Diversification earnings increased 17% year-over-year and were more than double first quarter earnings of two years ago.

Diversified earnings as a percentage of total pre-tax earnings were 33% in the first quarter, down slightly from last year's 36%, given the significant increase taking place in the mortgage banking business.

Now, I'd like to review our key business lines.

Turning to slide eight, let's take a closer look at Countrywide's first quarter 2005, beginning with the mortgage-banking segment.

Production pre-tax profits for the quarter were 735 million, up 5% from the first quarter of last year.

This increase primarily resulted from a combination of higher sales volume and increased gain on sale margins for prime loans.

In the servicing sector, the pre-tax earnings improved by 175 million compared to the first quarter of 2004, primarily as a result of a higher average portfolio balance, which generated increased fee income.

In addition, higher interest rates resulted in increased escrow balance benefits, lower net impairment expense, and a lower amortization rate.

In total, mortgage banking pre-tax earnings increased $211 million or 38% from the first quarter of 2004.

Next, let's take a closer look at the mortgage banking segment beginning with the production sector on slide nine.

Total gain on sale for the segment was 1.24 billion, up 7% from the prior quarter despite 10% less loan volume sold.

This chart does not include fundings from Countrywide Bank, nor does it include Capital Markets fundings or gain on sale from Capital Markets.

Prime sales volume was 13% lower, yet, gain on sale increased 20% as a result of higher margins.

I think this talks against the continued concern on the part of the investor community over the last two years that we would have a price war.

It certainly didn't demonstrate itself in the prime loan space for this quarter.

This margin increase resulted primarily from a reduction in mixed shift, as the Company originated growing volume of higher margin product, as well as from pipeline hedging gains realized as a result of interest rate activity during the quarter.

Non-prime sales volume increased as loans that were originated and securitized in the fourth quarter qualified for gain on sale accounting for the first quarter.

This relates to the restatement issue of '04 into '05.

Non-prime margins were impacted primarily by aggressive pricing in the market, and in this particular space, this is primarily an Ameriquest issue, where they've been very aggressive during the last part of '04 and certainly the first part of '05 in the non-prime space.

Total first quarter non-prime sales of 12.5 billion includes 6.5 billion securitized in the previous quarter.

It is also important to note, however, that 3.5 billion in loans funded in the first quarter were not yet sold at quarter end.

On the home equity side, sales were down as the mortgage-banking segment retained a significant portion of its production.

Margins improved primarily as a result of increased spread over prime, better secondary market execution, and the effect of subsequent clause on HELOCs.

The servicing sectors first quarter performance is outlined on slide 10.

Pre-tax servicing income was 17 million, an improvement on a sequential basis of 295 million.

Further improvement was limited primarily for two factors, lower-of-cost-or-market accounting, known as LOCOM and impairment of other retained interest.

During the quarter, the servicing sector experienced hedge losses of 552 million, which exceeded net recovery of MSRs and other retained interest by 237 million.

Including the hedge losses were budgeted decay of optional positions totaling 119 million.

The net recovery amount of 315 million reflected 150 million in MSR recovery, less 137 million impairment and other retained interests, the increment of MSR market value over carrying value increased by 160 million during the quarter, since further recovery was constrained by LOCOM.

MSR recovery of 452 million reduced the impairment reserve to 638 million at March 31.

For the second quarter of 2005, Countrywide has implemented hedge accounting on approximately 30% of its portfolio, which could mitigate the LOCOM constraint in future periods.

Next, let's look at our diversified businesses on slide 11.

Banking is the greatest contributor to these segments.

Pre-tax banking earnings for the quarter were up 216 million, up 104% over the first quarter of 2004.

Pre-tax earnings for Capital Markets segment were 122 million, a decline of 20% from last year, primarily as a result of lower MBS security trading volume and related revenues.

The insurance segment saw a year-over-year increase of 6%, primarily due to increase in earnings from Balboa Reinsurance.

Now, let's take a look at some of these businesses in little bit more detail.

On slide 12, we see that the assets growth in the banking segment has translated into earnings growth as well.

During the first quarter of 2005, Countrywide Bank exceeded 50 billion in assets, which ranks among the 20 largest national banks in the United States today.

Total assets for the banking segment reached 55 billion.

Banking segment pre-tax earnings accounted for 19% of Countrywide's consolidated pre-tax earnings.

During the first quarter, the bank achieved a yield on interest earning assets of 4.99% and net interest margin of 2.27%.

This compares to a yield of 4.43% and net interest margin of 2.29% in the first quarter of 2004.

Let's take a closer look at the Capital Markets segment on slide 13.

As you can see by this chart, conduit activities remained the largest component of Capital Markets revenues.

The overall year-over-year revenue declined primarily resulted from decreased contributions from securities trading underwriting and conduit activities, which offset first-time contributions from commercial real estate.

In addition, Capital Markets had a 15% increase in operating expenses due to startup of new business lines, such as, US Treasury Securities Trading, Commercial Real Estate and our new Tokyo office.

On April 1, 2005, the Tokyo office was approved as a perfect deal by the Financial Services Agency of Japan.

This branch was approved to officially start conducting business as of April 11.

The commercial real estate business continued to develop -- funding 564 million in the first quarter, up 59% from the fourth quarter fundings.

The commercial real estate pipeline at the end of the first quarter stood at 393 million.

Now, let's take a look at our 2005 guidance.

On slide 15, we see that Countrywide's revised 2005 consolidated earnings guidance is $3.60 to $4.60 per diluted share.

The assumptions behind this guidance include the average 10-year US Treasury yield for 2005, which will be within a range, in our judgment, of 4 to 5%.

With this in mind, our guidance assumes a relevant range for the size of the mortgage origination market should be between $2.3 trillion and $2.9 trillion.

In addition, our guidance assumes Mortgage Banking pre-tax profits will range from 2.0 billion to 2.8 billion, and pre-tax earnings contribution by businesses will range from 1.7 million, to 1.9 billion.

Slide 16 shows more detail behind the guidance.

Average consolidated production market share is expected to be within a range of 14.5 and 15.5%, declining volume for Countrywide of 330 billion to 425 billion.

The range for pre-tax production is sector margin is 40 to 70 basis points, up from the previous bases range of 35 to 55 basis points.

The primary reason for the change was the outperformance in the first quarter when the actual margin was 93 basis points.

On the servicing side, the estimated average servicing portfolio balance is 950 billion to 980 billion.

The net pre-tax servicing margin, after impairment or recovery and hedge gains or losses, is expected to be between 1 to 8 basis points, down in the previous range of 3 to 12 basis points.

The primary reason for the change was the first quarter underperformance when the actual margin was 1 basis point.

Risk factors, which could affect the accuracy of this guidance are shown on slide 17.

The first risk factor is the level of interest rates.

As we've seen in the past, average rates outside our forecast range can generate results that are not consistent with our forecast.

The second important factor is the 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 market can also be significant factors 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.

The final slide contains a disclaimer regarding the forward-looking statements, including the presentation, which I encourage all listeners to review.

Before opening the lines to your questions, I'd like to emphasize a few more of the many positives as we move forward into 2005 and beyond.

Within Mortgage Baking, today's mortgage rates are back to within 10 basis points, where they were on December 31st of 2004.

Furthermore, and as expected, we are beginning to see a seasonal pickup in purchase mortgage activity.

At March 31st, our pipeline was a robust 59 billion and our servicing portfolio carries a 5.9% weighted average coupon with MSR assets booked at just 1.22% of the portfolio balance.

In our banking segment, segment assets grow continues to drive earnings growth.

Within Capital Markets, new business lines such as commercial real estate are emerging.

Against this backdrop, the company raised its dividend for the 11th time in the last 12 quarters.

We will now take your questions.

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

Thank you very much.

Thank you.

[Operator Instructions]

And our first question comes from Mike Vinciquerra with Raymond James.

Please go ahead.

Thanks, and good morning guys.

Mike, you look good on TV.

Thanks.

I just wanted to ask on the margin.

It's been, particularly on the prime segment and the gain on sale, I've heard some anecdotal evidence through other players that there has been some pressure on margin, there is some pricing competition.

You guys, obviously, did not see it in the first quarter, but anything in particular we should be looking on as far as industry dynamics and where margins are going from here, because I'm seeing different things on your books than I'm hearing from other folks?

Yes.

But I think it's -- I'll let Stan talk to this, but I think two things come in mind.

One is that the product mix is very important.

We're doing a lot of pay options, we're doing ARMS, we're doing IOs, and in those products you have higher margins.

We have not seen the pricing pressure that others have seen for whatever reason, I don't know, on the pure prime side.

But, as I said in my presentation, that's certainly on the subprime side, and Ameriquest just to -- not to demean them anyway, but they're clearly the aggressor, they're the standard setter on pricing, and we've seen some squeeze on the margin on the subprime size.

As I can't speak for anybody else, Michael, but I can tell you we enjoyed a very good quarter.

When you blend all of the margins, this has been one of our best quarters.

You can see by the 93 basis points.

And you gave the overall cap rate at 122% on the portfolio, what was the cap rate on the new production, if you could share that?

It was 1.31%, and that was -- primarily, there was about 5 basis points of additional service fee that was held which is -- that makes up the major difference in the slight increase that we had quarter-to-quarter.

The types of securitizations and best executions of mortgage products has moved away to more private labeling ABS transactions, greater levels of ARM production, which moved up the service fee retained slightly, but on a service model its very consistent.

Let me also point out that it is important for you to note that Countrywide, for a variety of reasons-- one is that we have offices in almost every local community, village and hamlet in this country, so we're providing extraordinary service right in the communities in which the builders and real estate brokers are operating.

We have we believe -- continue to maintain the best technology, and therefore gain high-quality service, and when you have those things, when you have a local presence, when you have a high level of service and execution, that takes pressure off of price.

So, to look at the business in a monolithic way and say, well, pricing is tough for one versus another, you have to look for other factors, and I believe one is the quality of our execution takes pressure off the pricing.

Much appreciated guys.

Thank you.

Your next question is for Bob Napoli with Piper Jaffray.

Go ahead please.

Good morning.

You guys said on the expense side;

I looked its all upon the margins, your expenses were down about $100 million quarter-over-quarter.

You grew personnel pretty significant margin through the quarter, what -- have you changed some of your incentive compensation calculations or, you know, why were the expenses so well-controlled?

Well, there's a couple of issues.

And again, Stan is the one that has worked on this diligently for the last four or five months.

This is an issue that was raised in the last quarter.

We've have done a couple of things; one, we have adjusted the commissions; secondly, we have looked to where we have redundant expenses, we've consolidated some of the operations where we have redundancy.

So, it's an issue that we have been focused on for about, let's say, at least, the last six months and is driving down expenses, ridding ourselves of redundancies that creep up from time to time as you grow your businesses.

And thirdly, it was a reduction in the commission protocol paid to our outside sales forces and to our call center people.

Right.

I think, again, we've gone through modifications to compensation programs which is the lion's share of the compensation decrease offset it -- offset by the way by a very significant increases in payroll taxes that we incurred in the first quarter of the year as other companies do when you reach your payroll limits.

The other item, which was a positive, is the catastrophe losses in the first quarter for the hurricane, were about $40 million of the difference.

But, again, we're growing and expense management is a major focus.

And I think it shows up very well in the first quarter.

Then, on the bank, can you make a comment on the use of introductory rate margins?

When your margins were flat year-over-year but down from the fourth quarter, just wondering what the thought process was there?

If you could talk a little bit about what you're doing on the introductory rate margins and what the outlook is for the net interest margins for the bank?

On the bank, the bank is continuing to grow, and it's just the accounting for adding loans that have -- low interest rate introductory periods is not on a yield level basis, so that first period of growth tends to eat into the accounting, net interest margin that you're seeing.

And, that was the purpose of the comment is just to advise that as those loads reset, we would expect interest margins to expand, although, again, we'll see some offset by the continued growth in those assets.

Great.

Thank you.

Thank you.

We'll now go to the line of Ken Bruce with Merrill Lynch.

Please go ahead.

Good morning.

Couple of questions.

Stan, could you give a little more clarification as to -- on interest rates?

It sounds like you're expecting over time that the margins will actually expand once you get to a, kind of, a steadier state within the portfolio itself.

And then, if you could also comment on or give us some additional guidance on how you may implement the hedge accounting into the MSR portfolio, please?

Sure.

Again, as we -- there's a lot of moving parts in terms of the bank and changes that can occur in both interest rates and the product that they're adding.

But, just as a way of giving you an estimate, if all the teaser loans were reset, the net interest margin we would anticipated to go up about 8 basis points, so I hope that's helpful.

In the case of hedging the servicing assets and employing FAS 133, basically what we rely upon it is the impairment reserve until we get to a point that the impairment reserve is reduced and inhibits our ability to offset hedge costs with the increasing value of the servicing assets.

So -- we have in the past, employed hedge accounting and at the and of the first quarter, really during the first quarter as well, we've looked at the necessity to employ a hedge accounting.

It has also some benefits in terms of reducing the need for at to some extent for optional positions, so it actually can lower our hedge costs as well.

But we -- you know, plan through actually all during the first quarter updating our models and our capabilities and then initiated hedge accounting on a portion of the portfolio where the correlation is very natural and strongly correlated.

We employed that as of April 1, let say, if you go through a daily test to make sure that that correlation is in place.

The benefit, again, of hedge accounting is that in a rising rate environment where the value of the servicing asset is going up, we have the ability to, as we mark that asset, to market to write it up to offset the cost of hedging.

Okay.

So, you would look at trying to put into a hedge accounting relationship that portion of the portfolio were you feel you've the best correlation in terms of the ability to hedge away some of the volatility in that asset.

So you can be a little bit more specific about how you can look it your hedge strategies so you get the benefit of any rate increase in terms of the earnings factor?

I think, that you know, most important, is the fact that we do have impairment reserves to the extent that the value of the servicing asset goes up, we're able to recover the impairment reserve, but that reserve, as we discussed at the end of the quarter, was down to about 600 -- somewhat to $638 million.

This simply allows on servicing, for example, that has no impairment reserve or very little impairment reserve associated with it to realize it's improvement or increase in market value to offset the decline in the value of hedges that are associated with that asset -- with hedging that asset now our -- you know, we hedge that value whether or not we have -- we're using hedge accounting or relying upon the impairment reserves, it's just natural at a point where the impairment reserve declined to employ this methodology.

It doesn't change dramatically, our hedges or even the cost of hedges, except to the extent that when you're not employing hedge accounting, the limit, the low limit, will steer your hedging activity to greater levels of optional coverage, which have a -- the K cost.

So, it is a, you know, it's really ancillary benefit to hedge accounting.

Also give the asset -- so it would be the instruments election maybe over...

Yes.

...overall versus, say, the amount of hedge ratio itself?

Yes.

Better said.

Okay.

Thank you.

Thank you.

Your next question is from Brad Ball with Prudential.

Go ahead please.

Thanks.

Stan, I also, on the servicing market, we saw an up tick in the weighted average servicing fee book and is that a direct reflection of the interest-rate environment?

What's driving that that's has been steadily rising over past several quarters?

You mean the -- you're talking about the..

The 38 -- the 37 basis points.

You know it's really just a reflection for us of best execution and the mix of production and the very strong markets that exist in -- to create private label securitizations bigger on a market, you know that they results in greater ability to hold excess.

And, then also one of the items that's impacting the view on this quarter that exactly had the $6.5 billion of prime that was sold in and that got gain on sale treatment in the first quarter.

And that, as you may know, subprime mortgages have that higher service fee, then basically a minimum of 50 basis points service fee.

And so that's also waiting this quarter as well but there's really nothing -- there really is no other fundamental change.

And the way that there are determination for securitizations or the overall values are being determined.

Okay.

And then a follow up on the nonprime, you said that 6.5 billion of the 12.5 that you sold in the quarter was actually sold at the end of the fourth quarter.

Was the gain on sale on that higher or lower versus the gain on sale saw in the first quarter?

I'm just try to gauge the 282 gain on sale that you report toward the quarter obviously, is the blend of that sold at the end of last quarter and what happened this quarter.

So just trying to..

Eric Sieracki will answer that question.

Brad, if you take a look at the gain on sale that was originally reported for subprime in the fourth quarter, you'll notice that it was about three points.

When the 6.5 billion that was reclassified for the first quarter came out, the restated gain on sale was 2.82 -- I'm sorry -- 3.63 for the fourth quarter, and we had 2.82 in the first quarter, which was lowered by the lower margin sales to 6.5 became out of the fourth quarter into the first.

Let's say that again, we originally had three point margins on subprime in the fourth quarter, they went up to 3.63 because the margin on the 6.5 billion, they came out of the fourth into the first was lower.

That's was perfect.

Thank you.

I like it, you know just make an overall comment on gain on sales margins.

This is something that we've been talking about for many, many years, and that is when you have a shift in the yield curve, such that there is less income during the inventory period, our pricing models are going to afford an increase because we are looking at net economic contribution from a -- the origination of mortgage, in the case particularly of prime, you're going to see greater gains on sales and offsetting that will be lower net interest income.

So, part of the margin change that you're looking at as the result of a shift from gain on sales to interest income.

To confuse that a little bit more, in the case of the subprime mortgages, the timing of our sales during the quarter can also influence, what is gain on sale and what is net interest income?

In the securitizations that we did sell, in those first quarter, were sold later in the quarter, which results in -- actually lowering gain on sales as we enjoyed a longer period of net interest income spread.

So it's important that we look at these things, including both gain on sales and the effect of net interest income.

Thank you.

We will now go to Mark Patterson with NWQ Investment Management.

Go ahead, please.

Hi.

First, I would like to congratulate Eric Sieracki, for his new position.

Eric, I've greatly appreciated your perspective over the years and I think it's well deserved.

Thank you.

You bet.

Regarding the production margin, the guidance going to 40 to 70 basis points from 30 to 50, is there any change in the overall mix that you're thinking about, which the home equity or subprime portions that would be included in that or is that more just your new outlook on the overall market, where you stand?

It's the production margins are based -- really on a consistent mix of production over the remainder of the year.

Okay.

A question on the servicing, when you're talking about the applying the hedge accounting, and you mentioned that the reserve -- the impairment reserve balance was a little over 600 million in the 5th of March.

Would you -- would we be reconsidering applying the hedge accounting on areas of the portfolio, where the reserve has been fully depleted, or does that not make a difference in the approach to where that gets applied?

We really do look for those areas, where there is less impairment reserve remaining.

Right.

Okay.

That makes sense.

One final question, on the quality of the assets going into the bank, you guys have been very high-quality assets, prime quality assets going into the bank, I assume that continues.

But has there been any changes in the underwriting metrics with the current origination levels or you're expected origination during 2005?

In terms of FICO or combined loan-to-value or debt-to-income or any of those kind of underwriting metrics?

I think they will remain serious consistent with the first quarter and most of what we did in 2004.

We don't see any change in our protocol relative to the volume loans that we're originating.

Right.

Great.

Its good results, I appreciate all the good performance.

Thanks a lot.

Thank you.

You will now go to the line of Jonathan Gray with Sanford Bernstein.

Go ahead, please.

Hi, guys.

Angelo, I noticed (inaudible) that the production head count has been fairly stable for the last several months.

At least the overall production head count is -- does this reflect some kind of sensation in terms of the expansion of your commission sales force or some attempt to -- what is going on?

I mean, head count growth seems to have changed.

No, there is no -- we are continuing to grow and I'm glad to see that you are online, it's terrific.

Where as we continue to on our plan to continue to grow that sales force, both the call center sales force as well as external home loan consultant sales force.

There has been -- as volumes that we go from the highest of our volume -- volumes have been less than they were certainly in 2003 in the first half 2004, and I think that makes your reflection of our direct downsizing in some of the personnel in the production area, which we told the investors in the house that we would be doing that we would keeping in line with margins but in turns of the, if you look at the mix of employees of the production side, you'll see that the sales people -- sales force continues to grow at a relatively healthy pace.

Stan you want to comment on that.

Yes.

I think the -- one of the kind of operational ships, Jonathan, I think it's going to be very valuable for our production entities as a more qualitative.

The hiring methodology for the sales force selections methodology is one, that is designed to reduce turnover and so they're being much more selective and careful and the end result is that we believe that the productivity of the sales force per higher is going to go up and at the same time, the cost of turnover, which is very significant, will go down.

And, that is a very conscious effort and one of the strategic priorities that the production division has as addressing the quality.

So you might just see that the net numbers, are slowing, but we believe that they're going to -- that the retention rate will be much greater.

Thank you.

Thank you.

Our next question is from Moshe Orenbuch with CSFB.

Please go ahead.

Thanks.

I was looking at the information from your forecast and specifically on the production side of the business and it seems that with margins this quarter to get to the low end of your forecast that has to be pretty low beginning in the second quarter and continuing throughout the year.

And, given your comments that lack of a price war and at the same time looking for the industry volume of 2.3 to 2.9 trillion, it seems like the low end is probably, going to be lower than you are likely to see.

I'm just wondering if you have any thoughts on that?

That's a good observation.

Frankly, all we did in revising the production margins to the 40 to 70 basis points range was reflecting actual out performance in the first quarter when we had margins of 93 basis points.

Just to put your thought in more perspective, if we average 22 basis points over the last three quarters, we would hit the 40 basis points below end of our range.

Even on the higher end, we would have to average about 60 to 65 basis points and we would still hit the low end of our range.

So, it is pretty conservative.

We don't reflect any improvement over our original thoughts about production margins in the second, third and fourth quarters.

All we did was just for the out performance in the fourth quarter.

So just a follow-up on that.

Essentially, there's nothing that you're seeing it would suggest that, otherwise that that the quarters margins were overstated?

No.

Thank you.

Our next question comes from Ken Posner with Morgan Stanley.

Please go ahead.

Good morning.

Good morning, Ken.

I have just one small concern about the FAS 133 hedging.

And it would appear that the FAS 133 maybe an evil accounting standard that seems to have gotten a lot of companies into trouble or maybe it is just a curse or bad luck associated with it.

So my question is just, what happens if you don't get the perfect hedge correlation during the quarter and you fail the FAS 133 test?

What happens to the results if you encounter that kind of problem?

Laurie, do you want answer that question?

Well this one only.

You don't need perfect hedge correlation in order to get FAS 133 accounting.

You need to get that hedge need to be effective in its design in the statement where that is.

And, to the extent that the hedge is not perfectly effective, any gain or loss, any ineffectiveness of the hedge will run through P&L.

Again, it doesn't have to be a perfect hedge.

And I think the other point, Ken, is that something that is done daily, so you could have a failed test on a particular day in which the situation you're trying to avoid is the inability to write up the hedge assets the servicing.

But, you have the ability to rebalance and reconfigure the hedges.

And, we have the systems and processes automated and we have even before employing hedge accounting the responsibility to demonstrate a level of correlation, which has been done.

So I don't know that it's so evil, I think what's unfortunate is that if we just simply went to a market value accounting methodology, we would have to be jumping through hoops like this.

Yes, and that eventually will be helpful.

And but if I -- let me understand you, basis risk for example would still be an issue, but by rechecking your hedges everyday, if you had basis risk problems, you might have some ineffectiveness for a few days or a week, but you could change things that doesn't imply which you had been affected as for the whole quarter?

Yes.

That's correct.

And again, it's daily.

For those things to occur, continuously, it's very difficult.

And remember that primarily what we're looking for is the impact of hedge accounting in a rising rate environment.

And when you have a declining rate environment, everything is marked-to-market anyways, so you are marking, but you are always marking the hedge instruments and derivatives to market, but in the case of servicing, when it declines in value you mark it to the lower of cost or market.

So, it's really that direction presents very little issue.

It's really a rising rate environment that provide the challenge and we have employed very effectively in the past, and I would say through this time period in first months of the application, hedge accounting without any difficulty.

Ken, to further go on a little bit more on Laurie's point where there is a fairly wide range to achieve effective and that's 80 to 125%.

Stan's point was we get to qualify daily.

Remember, there were only applying hedge accounting to 30% of our portfolio, and Stan also mentioned that we have not significantly changed our hedge strategy even though we have applied hedge accounting.

So there's not really lot of risk here.

Thank you.

So our next question comes from Eric Wasserstrom with UBS.

Go ahead please.

Thanks.

Just a point of clarification on couple of questions that were asked earlier.

In terms of the expenses, Angelo, did I understand you to say that you changed the commission rates that you're paying to certain of your employees but not to other employees?

No, we change them across the board, but they were not -- the changes were not equal as some adjustment made for the internal or the call center people, and adjustments made to the external people, but they want the same adjustments.

Okay, but that those adjustments have not impeded your ability to continue to attract new people into the organization?

They have not.

I mean, they asked you we -- it's not only the commission, but we have a business model that's unequal for the sales person and no other company figure out primary competitors have our business model which gives the sales person an opportunity to close many more transactions then they would under our competitor's business model.

And that's what their focused on.

To put some numbers to this, fundings were down in sequential quarters from the fourth to the first by $4 billion.

Production expenses were down about $120 million, $80 million of that $120 million declined was bonuses.

Particularly we have not -- as Stan pointed out, we are looking for quality people who understand what Countrywide is about and what we offer and so the observation that it slowed down in terms of numbers coming on board in terms of sales people, yes, it is.

But, it's not slowing down as you can see our production because the people we are bringing in are very high quality people who understand the entire package that we are offering which in total is far superior than what anybody else offers.

Thanks very much.

We'll now go to Mark Devries with Lehman Brothers.

Go ahead please.

And Mr. Devries your line is open.

Sorry.

Good morning.

I just wanted to make sure I understood all the comments around the subprime economic.

Based on some of the comments Eric and Stan made, it sounds like the ones that were shifted from the fourth quarter to the first quarter because of the restatement were lower margins.

And if you factor those out, the incremental subprime loans that were originated and sold in the first quarter were, kind of, in line with the 300 basis points of margin that we've seen over the last several quarters.

Is that accurate?

That's fair to say.

Okay.

Remember, the point that Stan made which was, because those sales that were transferred out occurred later in the quarter, they had more net interest spread.

So you'd expect a lower gain on sale because you're benefiting from more than interest spread.

Okay.

The next point was you should adjust those for that factor.

Okay.

When I look at the incremental on the fourth quarter, is it safe to say that because the yield curve continues to flatten that you're getting a less carry, and that, even though the gain on sales margin are roughly flat that the economics were still under a little bit of pressure during the quarter?

Yes.

The case is that we will enjoy less than interest spreads as the market flattens.

It's also, you know, should be understood that our pricing formulas, basically, look at the tradeoff between gain on sale and net interest spread.

When net interest spread is very high, you're going to see less gain on sales, typically, all things, health costs...

Okay.

Then one final point, I -- talking to someone at another subprime lender, I heard that at the end of the quarter, at least recently, margins look that they might finally be under -- might get some release at some of the bigger players, and I can only assume that Ameriquest finally started to raise rates, are you seeing that?

What we see in the subprime industry and our competitors is less discipline in terms of moving prices when there is increase in interest rates.

I think as the industry becomes more sophisticated, we'll see that time gap improve.

But that is something that we are observing as pricing is starting to come in line.

Okay.

Thanks.

Thank you.

Our next question is from Paul Miller with Friedman, Billings, Ramsey.

Go ahead please.

Thank you very much.

I just wanted to follow-up on that call a little bit, and Angelo, where do you see the subprime spreads going?

Do you think this will continue to be pressure there or is the industry just maturing to the point where the 2.5 to 3% margins will continue?

And then, secondly, can you follow that up with the home equity market?

I expect most of your home equity sales are 80-10-10 loans, and there's been some reports;

I say some, not a lot, about how some of this asset quality will perform worse than people think, and you could see some pressure in the ABS market on the HELOC spread, could you also touch base on that a little bit?

Okay.

On the subprime -- and a part of this is just instinctive based upon my constant traveling throughout the country and speaking to, both, my colleagues and enemies, with my competitors.

And, I have a sense that overtime, if you have a time in the next 90 days that you're going to see less pressure on subprime pricing, because I think the primary protagonist is coming to the realization that it may not be totally about volume.

And so, my sense is that you're going to see less pressure, and I think that the 300 basis -- what 250 to 300 will probably hold and look healthier as we go further into the year.

That's my feeling.

Everybody else is very sober.

Our other competitors are very sophisticated and understand the economics in this transaction.

So, I think once we have Ameriquest -- they're running out of pace; its just unsustainable.

That's my opinion.

So, we'll have to see, but my (inaudible) that we've seen the worst of that.

In terms of the home equity loans and the 80-10-10, I think that what you have to focus on is the unemployment rate or unemployment rate.

These are going to be -- as long as you have stable real estate values that's slightly increasing, and you have people employed at a healthy employment market, we're going to be okay.

The problems will develop if we began to run its unemployment, or you have virtually no equity in the home, and the people can't get out.

So once they're unemployed, they can't make their payments, they can't sell the house because there's no equity left in the house.

We haven't seen that.

I mean, if anything, contrary to the soft patch that we -- you know, as we said, I'm 90% on the road, I don't see a soft patch, particularly in the housing market.

It's very, very strong.

And I don't know what the new housing numbers were this morning, but I would suspect that they were also strong based on the existing home sales.

So, I think we are okay, but if we do have an increase in unemployment, then you're going to have -- you could have problems; not only in home equity loan area, but throughout the whole mortgage sector, because there is a ripple effect when that happens.

New home sales are up like 12%.

So, you think the HELOC spreads can be maintained out there that...

I do.

...in an appetite form.

I do.

Thank you very much.

I think that's -- yes, very liquid market.

Thank you.

We'll now go to Ed Groshans from Fox-Pitt Kelton.

Please go ahead.

Good afternoon.

I was wondering, in one of the comments, there was a comment on the home equity draws and the impact they have on the home equity gain of sales, and I was wondering if you could just give a further explanation around that?

Yes.

Just in the accounting for home equity gain on sale in residuals, you don't pick up any value initially in the residual evaluation for the projected subsequent draws, which in HELOC is a huge part of the value that you're going to achieve come from subsequent draws.

But that, again, is the accounting for that asset.

In this quarter, because we sold significantly less HELOC production than we produced it, the amount of subsequent draws -- when we do get these net subsequent draws, we do then recognize the value in the residual, and it's just the proportional increase in subsequent draws to sales has the impact of making it look as though margins on the HELOCs were greater for the period than they actually were.

I estimate about 30 basis points impact from that fact.

Okay.

And then, were there any adjustments to whether is the average life or credit losses or excess spreads in calculating the gain of sale on the home equity products?

Well, nothing unusual.

And we are constantly refining our models for evaluation and speeds, as well as, credit and re-structural issues that are always changing.

So there are subtle differences, but there is nothing significantly different.

We had a very positive market for ABS transaction, during the quarter very low, historically, low spread and so that is one of the other items improving gain on sales in home equity.

Okay.

Then just I know there've been a lot questions on the FAS-133 and MSR hedge accounting, my question is just you're looking at implementing this in the second quarter and issuing revised guidance today, but I don't know if there was -- it seems like by doing this, it would lessen the impact of losses on the hedges.

Is that already incorporated in the revised guidance?

It isn't.

For the purposes of the guidance, we have not considered the change in profile from where we were at the beginning we approved employing hedge accounting.

Excellent.

Thank you very much.

Thank you.

Our next question is from Bill Roy with Jacobs Asset Management.

Please go ahead.

Hi, most of my questions have been answered except a real quickly, on the retained interests, should we expect impairment to continue on the succeeding quarters so long as short-term interest rates keep rising?

I guess put it another way, the rise in short-term interest rates driving the impairment of the subprime residuals?

The rise in short-term interest rates will negatively impact residuals on subprime.

At the same time, we do, as part of our overall hedge of the MSRs and residuals, have in place a hedge for flattening curve.

So, to answer -- complete answer to your question is "yes", it will result in impairment if our hedging is accurate, it will be offset by our hedged gains.

Thanks.

Thank you.

Your next question is from George Sacco with JP Morgan.

Please go ahead.

Hi, if we assume interest rates move up, should we I guess, expect you to switch the accounting for your MSRs going forward as the impairment reserve is used up for even the ones that are not being switched yet?

Yes, I would think that the higher interest rates go, the more likely that we will employee 133.

Okay.

With that in mind, with the switch to sort of a market value approach, if we were to assume interest rates sort of it has the same period of rising, the size of your MSR is going to be increase pretty dramatically I would expect.

If you couple that with the rapid growth of some of your other businesses like the bank and the very low leverage requirements that the high amount of equity the rating agencies make you hold against the servicing business, do you guys foresee any external capital sort of in the future?

No.

No.

Okay.

Thanks.

Your next question as from Mike Cohen with Susquehanna Financial Group.

Please go ahead.

It's actually Michael.

Could you provide an estimate of what do you think the amortization of the MSRs going to be in this quarter?

I know that you guys tend to know that half of the sort of end of the previous quarter's interest rate and I've couple of follow-ups.

We are forecasting 488 million for the second quarter.

Okay.

And then not to sort of beat a dead horse on the weighted average servicing fee book and its impact on loan production margins, but is there sort of numerically is there sort of a number that you're comfortable saying that the change quarter-to-quarter had an X number of basis points impact on the production margins this quarter?

It doesn't.

You have to understand that we're either selling the excess or we're retaining the excess.

In any case, it's done at market value.

So there is no increase in our margins that results from the decision to hold or to sell.

It's simply that you were looking at it from a structural basis, as well as, where we think that we are achieving greater long-term economic value.

But, if you just take, and the simplest form take a four mold on new production times the five basis points of incremental servicing, that's 20 basis points.

We could have either sold that or we could have retained it, its not going to change our margin.

Okay.

Great.

Thank you very much.

We will now go to Matthew Vetto with Smith Barney.

Please go ahead.

I was just curious if you can comment on the market for bulk servicing acquisitions, it is ramped a little bit over last few quarters and I'm wondering, if you think the opportunity is still there and, maybe how much of -- how much is contemplated in your guidance around where the average servicing portfolio will be for the year?

Thanks.

In terms of the market, we have had some company's exit, the business and therefore disclosing service -- services portfolio, and you have companies addressing up the balance sheet and kinds of things happening.

We are -- in terms of your questions related to do we have an interest in it?

And we said the answer is "yes", we look at almost everything that comes across.

In fact, we made some acquisitions over the last 10 or 11 months, as high as $10 billion, and so we're always interested in looking at things that make economic sense to us and have added value.

The second part of your question was...

The average servicing portfolio forecast for the year.

It is 950 billion to 980 billion, unchanged from prior guidance.

Does that contemplates further book acquisitions or...?

Yes, it does -- no, it does not.

It's primarily organic.

There maybe as I said maybe opportunities that come along, we don't project any -- we never have acquisitions of bulk.

That is just to be opportunistic on our part.

So what you see there in terms of our projection is organic.

The area that we are seeing good value in bulk acquisitions in the subprime servicing arena where there is very little capability in the, we are able to acquire a net servicing at pretty healthy returns.

Okay.

Thanks a lot.

Our next question is from Fred Cannon with KBW.

Go ahead please.

Thanks.

And most of my questions have been answered.

I had a couple of follow-ups.

One is on the low introductory rates on the pay option ARMs.

Stan, you said those had a very significant effect on your ARM -- on your net interest income.

And are those just one-month teaser rates or those longer than that?

Teaser one month or three months?

One month or three months?

Yes.

As Stan mentioned earlier, the impact -- we estimate the impact, and our next margin would be eight bits on an annualize basis about $48 million on net interest income.

Okay.

And are you originating a lot of the pay options ARMs or the bank portfolio at this point in time?

A combination.

Most of it is not going into the bank, but we are trying to develop protocol and a process for delivering greater levels to meet the banks growth need.

These are all high FICO.

Right.

Okay.

So you are both selling those into the secondary market and portfolio to the pay options ARMs?

That's correct.

Great.

Okay.

Thank you very much.

Thank you.

Next we have Adam Weinrich (ph) with Basswood Partners.

Go ahead please.

Hi.

Thank you.

Two questions, please.

To follow-up on the short-term options ARMs, can you comment on your enthusiasm for that product and how enthusiastically you are trying to develop greater production for that?

If you could comment on the volume of those loans that you've been doing in recent quarters and also may be competition in the market.

I notice that BOA was starting to rollout that type of loan.

And, secondly, really quick we would like an update on the reducing the minimum-servicing fee on the JC business?

On the pay option ARMs itself.

It is a very good product.

And it fits the needs of many homebuyers, and these are again high cycle because of the complexity of that product.

And -- but we are continuing to originated it and we will -- we have no restrictions on the amount, the dollar amount or the number of loans that we will do in that area.

It's a time-tested product, by the way we'll say we has had that product for years.

And if you originate it properly, it's very profitable.

It is a good product for both us, the lender, and for the mortgage broker.

It is a lot of flexibility based upon with eight days month in terms of how much cash there are available to make the payments.

So, it's a very good product and it is time tested.

In terms of the competition, you would expect that when we show the kind of success and we always shown the kind of success with that product that -- others will look at say that we should be participating, and they are.

And we expect that, it's not, we don't have an exclusive on it obviously.

And we're willing to go head-to-head with anybody on any product and believe firmly that because of our quality of execution, that we will beat them at that game.

In terms of the servicing fee itself, it is still important for this company and is still an issue with this company to see what we can do to lower the servicing fee because of the leveraging constraints.

In the hedging requirements on an inflated MSR as result of the servicing fees.

So, that being said, the environment we have today is not conducive, in my opinion to getting it done in a reasonable period of time.

I think that once the Fannie, Freddie issue -- this issue are finally settled down.

I think we are getting closer to that.

Despite what you read in the press, I think that we are getting closer to once that settles down.

They just don't need a another hour and they are back at this point of time.

I think in there -- than I think we can make some progress on it.

They clearly -- Fannie and Freddie clearly understand it and not only understanding importance of getting it down so we get greater participation in the marketplace.

But, it will be a proponent and helpful in that process of doing that, but right now is just not the environment to push that initiative.

Thank you.

To answer the one question that you had asked and Eric had mentioned the 45% of our production was ARM production about 18% of the production is pay option.

Do you think it afford? 18 of the total or 18 of the 45?

Of the total.

Okay.

Next we have Lawrence Kam with Sonic Capital.

Please go ahead.

Hi.

Good morning.

Sorry, got in on the call late, so I'm not sure what you said with respect to the increase in the margin on the gain on sale?

Yes.

We have given.

Could you drill down a little bit more on what was the component to that increase, ARMs versus fixed, and you know the mix and what specific products are driving that increase?

Well, we were talking about the ARM production and the higher margin ARM production is an overall influence on gain on sale.

The general environment itself has been controlled with strong purchase market.

Our operations have proven to produce mortgages in this environment that are consistent margins.

We do have, I mentioned earlier in the call, a move from net interest income to gain on sale, which is really a result of the shift in the interest rate curve that results in our pricing methodology in a greater level of gain on sales versus net interest income.

We had a very positive market, as it related to the home equity market, ABS spread tightening.

That also contributed to margins.

And you know, there was a significant less or -- some volatility during the first quarter where rates was moving down and then up towards the end of the quarter, which played very well into the type of convexity hedge profile that we utilize in the inventory and pipeline and we also produced a very good hedge results in the quarter.

And also, one other question with respect to moving towards the hedging kind of the MSR again, I guess, next year FAS is going to allow to use fair value accounting.

So when it be just simpler from an operational standpoint just to do everything the same way as you had previously this kind of pro forma out you know, the low impact as opposed to adopting 133 again?

Yes.

I think that's a theoretical question.

We -- by the way, are not convinced that we're heading towards a market value accounting; we have been waiting for several years now for this change.

We just think, if we could, you know if there is, if it's mark to market accounting that we would be better off in employing that convention, which will really be the future model rather than sticking with what will ultimately be an antiquated methodology and so it isn't something that we haven't discussed in great detail of what would be our preference.

We're -- lean very much on the side of moving to market accounting and trying to take out the number of differences that we have to explain between...

So you just didn't want to jump the gun on FAS beyond the -- on this issue.

We really can't.

We've got -- we have to wait.

Okay.

Thank you very much.

Thank you.

Our next question is from Charlotte Chamberlain with Jefferies and Company.

Go ahead please.

Yes.

A housekeeping issue and then something more to across to go.

In looking at the very helpful payable and I'll hope you'll produce this again in future quarters where you show us the gain on sale.

It appears that in the nonprime section, I guess this is your side non.

On your nonprime loan sold in the fourth quarter and the first quarter add up to more than produced.

And I assume the reason for that is the 6 -- to roughly 6.5 billion, that got shifted from the fourth quarter to the first quarter.

That's correct.

Okay.

Now, as I understood that FAS 140 misadventure with your accounting, didn't something that shifted also into 2006 -- into the December but wasn't everything kind of shifted up one quarter.

The fourth quarter had sales that were urgently recorded in the third quarter forget recast to the fourth quarter.

Sale that occurred during the fourth quarter will recast into the first, you are correct.

Okay.

How much was..

First quarter has in-closed from the third and out-closed to the first.

Okay.

So, how much got shifted into the fourth quarter from the third?

It is about $6 billion.

Okay.

So 6 billion came in..

Came in from the third to the fourth.

Okay.

And so the gentlemen, who asked the question about what happen to the margins -- to the impact to the margins from shifting from the fourth to the first, I'll ask the same question about the stock that got shifted from the September quarter to the December quarter, did that help reverse the margin and its -- and by how much?

Those were higher margins gains that help the fourth quarter.

Okay.

So, presumably, the fourth quarter margin is super height because -- height is, probably, a inappropriate term but because you have higher margin loans coming into the fourth quarter and lower margin loans going into the first quarter.

That's correct.

Okay.

Kind of normalize, could you give me an idea of what it was and could you just kind a give us normalize, you know, if you just take Garden variety, December quarter loans versus Garden variety March quarter loans, what was the gain on sale there?

I guess, and it's only in this nonprime bucket, right, all this in and out business impact?

Charlotte, it's -- yes, the primary issue, the deal that is in the subprime and one of the issues that margins are changing during the prior year, as we mentioned before, that market becoming more competitive.

We really don't have a calculation precisely the way that you are asking for it.

Charlotte, I would characterize that this way.

The relative gain levels in fourth quarter were about 3 points.

And what will be shifted out of the first quarter and into second quarter, because not all the securities were sold at quarter end were slightly lower than that.

And those margins that came into the fourth quarter from the third were more in the order of closer to 4 points.

Okay.

So you had 4-point margin loans coming in and we had...

From third to the fourth, the production during fourth quarter was 3-point margin production.

The production during the first quarter was 3 points, but what got transferred into the second to come is lower margin product.

Okay.

And then, the more philosophical question, of course, goes to Angelo.

Angelo, I know I have written this in our reports, that in the past you said that Golden West is a different model, they have a different cost structure, they have a different philosophy.

And I'm pretty sure I heard you say today, when someone was asking you about the optional, I would say Golden West has made these for decades.

And the performance is very good, and we are going to compete very aggressively against that.

One, did I hear that right?

Two, what's changed?

Well, first of all, I didn't say a decade.

I said it was ahead of it at some period of time, Charlotte.

So I just wanted to say it is time tested.

I don't know in fact it was for decades.

I think a couple of things changed.

One is that -- let me first explain the world savings model, first of all, they are probably one of the best management teams that I have ever come across in the financial services area, in terms of managing that entire operation.

Secondly, is that their balance sheet -- they are using their balance sheet for all this product, and that's a different model, and in my opinion, this is my opinion, it's not one that's scalable, because that was with that management, it would be a much bigger operation.

It's certainly capable of doing it, but it's just my opinion, it's just not a scalable model.

The way Countrywide wants to scale up, across the country, every town in Hamlet, that kind of thing.

I think, two things have changed at Countrywide, one is we are able to -- the bank has helped us to develop product and to be more creative in our product development, because we can use their balance sheet to do that.

Secondly, we are able to, with others, to create a liquid secondary market for that product, to be able to securitizing and get it out.

And that's a key to Countrywide, because we don't have an unlended balance sheet, and so we always need, in order to and volumes of product that we need, in the environment that we operate in, and we need a liquid secondary market, and that began to develop.

That was the change, one is the bank using that balance sheet and two as a liquid secondary market so we can go head-to-head, with anybody with any product that make sense to us.

And did that liquid secondary market, I guess get critical mass?

I say the last, can we say last six months.

Yes.

Last six months.

Okay.

Yes.

I mean certainly as the rates are growing, do you still call it treasury bank?

It is treasury bank, internally it's Treasury Bank, within Countrywide.

Outside of Countrywide, we call it Countrywide banking because Countrywide has a brand, a well-known brand, a well-respected brand, and we want leverage off that brand and secondly didn't want to have to support two different brands.

So, we call it Countrywide Bank is look assigned out of the public, publicly know, it's Countrywide Bank.

Internally, it's Treasury Bank.

But, still at the rate you are going on, I'd would assume that by year-end 2005, the loan balance in Treasury Bank or going to exceed the loan balance at Golden and it's not the end of this year, it will be the first quarter of net?

When you take you mean the average on balance or the --?

Yes.

They are only about $107 billion, and at the rate you are going...?

Yes.

That right, that correct.

It's we're -- under our model, and we have a different -- we have a different mission and I think within that space we are serving, we are actually world class, I got a perfect meaning.

We just have a -- we have a different model and a different mission.

And in our space, we believe, we are world class.

Okay.

Thanks.

Here next we have Bob Napoli with Piper Jaffray.

Go ahead please.

Hello.

Just on your capital market business, I wonder, if you could comment on the trading profitability within that business, and margins have been down.

I think that's kind of where you see the biggest chunk of pressure I apologize if somebody asked that I have you jump up the call for a while.

No.

No, nobody asked that, I don't understand and Eric talked that what my senses is, it's going to be a good tighten down there is it, it's more of volatility issue.

They don't care where it instraits (ph) are, they need volume, and so it's a volume issue, that we're we facing because of a lack of volatility, and that's what would you saw in those number, I believe, not a margin squeeze.

Thank you.

But Stan one thing

Yes.

I didn't know I just when -- comparing to the heights of the mortgage back market where that primarily there're around margin were more significant in the past and they are in a market's that's under much greater competitive pressure in the securities trading, particularly mortgage backed securities market and that is, as you could see supplemented buy a lot of the growth and foundation that we've laid in for other activities like our treasury desk, and like the commercial real estate activities.

And that the trading still requires that we continue to build market share and as Angelo said just take advantage of the varying market.

Some provide greater opportunities.

I think also, it's important to note, for your assessment is that, and our treasury operations returned to profit for the first time in the quarter.

And it's a result of in that space, our margins increased by 50% in our Treasury execution.

And we are still not will be complete with the last leap of our technology for the treasure trading at the end of June, and that will give us not only great activity, but hopefully at better margins.

Do you expect margins and the trading and the mortgage backed to, is kind of permanently impaired, there is pushed on trading margins and as you know a lot of different sectors than we do it in equity and fixed income..

Nothing is permanent.

I think they are normalizing and you know from what was very, robust..

Right.

..a couple of years.

Okay.

And also Bob, there is no more benefit from steep yield curve.

There was lot of net interest income that was earned in the broker deal

To our carriage right now.

Yes.

Let me also point out that excluding treasuries, trading volume year-over-year was down from 562 billion to 474 billion.

That excludes treasuries.

That usually lay out and you can see on page 13 of the presentation that their revenues were down from $49 million to $19 million.

Yes.

Okay.

And hey Eric, congratulations on your position there.

Thank you, Bob.

And for manages point of view it's well-deserved.

Yes.

Thank you.

Thanks.

Thank you.

And our final question comes from Girish Bhakoo with RC&C.

Go ahead please.

Hi.

I just, maybe wanted to beep this prime gain of sale, I think a little bit more.

I was wondering if you would comment on how is it behaved across the channel first?

In terms of, in our prime margins have been, you know, fairly consistent in terms of their relationship across the channels, there's a little bit higher improved performance in our retail and wholesale activities.

Wholesale also?

Yes.

And do you guys have a goal for, in terms of the rate of growth that you expect in retail branches and a loan offices for this year.

It's is been terrific in the past, I might be reading too much into, but it sounds like that would slow this year?

Yes.

We do have a, obviously, we have goals, we have strategic plans for the balance this year in terms of besides that sales force, you know, as we said early we are going to continue to grow that.

And in fact, as far as you can see it when it grow it.

But I don't do you have any -- do you know any numbers of salesman that we're going put on this year do you know that numbers.

I think it closed last year 4,800, and I was just wondering if we should project same kind of growth as you've had in the past or..?

Well, in terms of the sales force, we added about 300 during the first quarter, if you look year-over-year, we added about 3,500.

So, you can see that the pace has slowed.

Nonetheless, we have a robust pipeline, and you see that fundings were relatively unchanged quarter-to-quarter.

Yes.

Did I say that we are going to continue to build our sales forces.

We will have by 2008, the largest sales force in the country, and our goal is to have the highest quality of sales force in the country.

And than I assume that the pricing strategy is between different retail and wholesale.

And so with your comment about the extra service that you provide in retail hoping to take off some of the pressure on pricing.

Does that lead to any kind of conflicts between those two channels, when you have two different Countrywide pricing sheets out there?

Yes.

We do have -- there are channel conflicts, but that's something that we had to manage from 1982, when we started the wholesale division.

But the way to look at it is this, is that if Countrywide has in the retail side, probably a 5% market share or some number like that, overall we are 15% something.

That means that the wholesale brokers have 95% of the market to go after.

And as they consider us a threat at 5%, they really shouldn't be in the business, and that's what we tell them.

And, we will not be -- we are concerned about channel conflicts and we don't subordinate ourselves to it, we require all of our channels to gain as much market share as they can and they have to manage that conflict.

Thanks so much.

Thank you.

We have no further questions.

Please go ahead with your closing remarks.

Okay.

We thank you very much for everyone participating.

Thank you Kathy, and thank you everyone who is on the line, and hope we've responded satisfactory to your questions, and we will be talking to you at the end of the next quarter.

Thank you very much.

Thank you.

And ladies and gentleman, this management discussion will be available for replay through a midnight Eastern Daylight time on May 10th, 2005.

The replay dialing numbers are 800-475-6701 within the US and 320-365-3844 for international.

The access code is 776023.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.