美國銀行 (BAC) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by.

We do appreciate your patience today while the conference assembles.

And happy new year, everyone.

Good morning, good afternoon, and welcome to the Countrywide Financial Corporation fourth quarter 2005 earnings conference call.

Please note 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 or 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.

In just a moment, we'll get to Countrywide's executive team, but first I'll cover a few housekeeping items.

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

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

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

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

Well, with that being said, let's get right to this fourth quarter agenda.

Here now with our opening marks is your host, Countrywide's Chairman and Chief Executive Officer, Mr. Angelo Mozilo.

Happy new year, Mr. Mozilo, and please go ahead.

Thank you, and same to you, Brent.

Good morning, and welcome to Countrywide's earnings teleconference call for the fourth quarter and year end of 2005.

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

The presentation will be found on our web site, www.countrywide.com, on the investor relations home page.

Turning to slide 2 of the presentation, we'll see today's agenda.

First I'll give you an overview of our performance during the fourth quarter and for the full year.

Next I'll provide you with a brief review of our bank results.

And finally, I will conclude the presentation with our 2006 earnings guidance.

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

Let's now turn to the fourth quarter and full year results.

Most noteworthy is the fact that our strong full year results were achieved despite volatile interest rates, declining profit margins throughout the industry, and the adverse effects of the 2005 hurricane season.

Now let's begin with a review of our operational and earnings highlights of 2005.

As you can see on slide 4, annual mortgage loan production volume reached 491 billion, establishing a new record for the Company as well as for the industry.

We also made significant advances in market share, increasing our share by more than 25% from 2004 to 2005 according to the various market estimates.

It should be noted that Countrywide enjoyed this market share growth without being an aggressive pricing leader.

Also noteworthy, our servicing portfolio reached $1.1 trillion.

For the quarter, pretax servicing margins were 11 basis points, an improvement of 25 basis points from the fourth quarter of 2004.

For the 2005 full year, servicing margins increased to 7 basis points, an improvement of 13 basis points from 2004.

The servicing sector also reported 4.5 billion in cash reserve -- cash revenues which we define as servicing fees, net of guarantee fees as well as miscellaneous fees and income from other retained interest and escrow balance income.

This compares to 3.2 billion for the 12 months of 2004.

So 4.5 against 3.2.

Pre-tax earnings for the banking segment exceeded the $1 billion mark.

At December 31st, 2005, total assets of Countrywide Bank reached $73 billion compared to 41 billion at December 31st of 2004.

In the capital markets business, securities trading volume also reached a record high of $3.6 trillion.

For the insurance segment, net premiums earned approached the $1 billion mark and generated pre-tax earnings of 184 million despite total -- despite total insurance segment net hurricane related pre-tax charges of $85 million for 2005.

Looking at the operational highlights in greater detail on slide 6, the results show strong increases across the board.

Mortgage loan fundings increased by 40% in the quarter and by 35% for the full year.

Securities trading volume rose by 14% for the quarter and for the year.

Net premiums earned grew by 46% in the quarter and by 22% for the year.

The total pipeline, servicing portfolio, and bank assets increased by 25%, 33%, and 78%, respectively.

On slide 7, consolidated net earnings were up 73% for the fourth quarter and reached 2.5 billion for the year, a 15% improvement.

Earnings per diluted share also reflects similar increases of 69% for the quarter, up to $1.03; and 13% for the full year, $4.11 per share.

Annualized return on average equity was 20% for the fourth quarter and 22% for the full year.

Comparatively, the return in equity for the S&P 500 was 20% according to Bloomberg on January 30th, 2006.

Now let's look at the key business segments in greater detail on slide 8.

In the mortgage banking segment, pre-tax earnings rose by 67% for the fourth quarter to 434 million and reached 2.4 billion for the year, a 4% increase.

In the banking segment, pre-tax earnings increased by 69%, and 84% year-over-year for the fourth quarter and for the full year, respectively, to 329 million and 1.1 billion.

The Bank continues to build its deposit base while leveraging the strong operational capabilities of Countrywide Home Loans.

Pretax earnings in the capital markets business were 133 million for the fourth quarter and 452 million for the full year.

For the insurance segment, pre-tax earnings were 104 million for the fourth quarter, 184 million for the full year.

On a consolidated basis, pre-tax earnings were up 58% for the fourth quarter at 1 billion and reached 4.1 billion, a 15% increase for the full year.

Slide 9 details the mortgage banking pre-tax earnings by business line.

Throughout 2005, mortgage banking profitability was hampered by declining margins in the production sector.

In the fourth quarter of 2005, margins declined to 9 basis points compared to 61 basis points in the fourth quarter of 2004.

The primary cause of the decline was the lower gain on sale driven by front end competitive pricing pressures and weaker secondary marketing conditions as well as a 10 basis points decrease in warehouse spread driven by the flattening of the yield curve.

For the 12 months, overall production margins were 39 basis points in 2005 versus 84 basis points in 2004.

This margin compression was driven by a 36 basis point reduction in gain on sale margin and a 23 basis point reduction in net warehouse spread.

These margins, obviously, are based on production volumes.

For the quarter, loan servicing recorded pre-tax earnings of 306 million which compares to a pre-tax loss of 278 million for the fourth quarter of 2004.

For the 12 months, pre-tax earnings for the servicing component was 670 million, which compares to a pre-tax loss of 434 million, $1 billion turn-around for the comparable period last year, an improvement of 1.1 billion.

Servicing margins for 2005 increased to 7 basis points, an improvement of 13 basis points from 2004.

This expansion in servicing margins resulted primarily from a reduced prepayment rate, which yield improvements of 7 basis points in the impairment recovery of MSRs and other retained interest net of the hedge.

Also higher short-term rates increased escrow balance income by 5 basis points.

At the end of 2005, Countrywide's cap rate was 129 basis points below that of our competitors.

Loan closing services had pre-tax earnings increases of 26 to 24% for the fourth quarter and full year, respectively.

Let's look at our capital market segment.

As we see on slide 10, this segment revenue mix continues to evolve.

For the full year, approximately 38% of revenues are derived from conduit activities; 34% are from underwriting; 20% from securities trading, brokerage, and other activities; and 8% from commercial real estate activities.

Let's turn to a review now of the Bank [performance].

A rapid expansion of our efficient deposit franchise has empowered Countrywide to create a low cost, scalable bank balance sheet that enables the Company to steadily grow assets and earnings.

Countrywide can now optimize the balance between sale and retention of mortgage assets.

During 2005, the Bank grew its assets from 41 billion to 73 billion, a 78% growth rate over 12 months, which allowed the Bank to contribute pre-tax earnings in excess of $1 billion to Countrywide.

The Bank's assets continue to consist of pay option ARMs, HELOCs, and other short-term duration assets.

The Bank -- the Bank's asset growth was primarily driven by a rapidly expanding retail deposit franchise which virtually doubled in 2005.

Further growth in the Bank's deposit franchise will be driven by the continued rollout of low cost, retail, and commercial products; the expansion of escrow deposits associated with Countrywide's loan servicing portfolio; the geographic expansion; and increasing productivity in the retail deposit effort.

For example, in 2006, the Bank will introduce an online, ACH-enabled savings account that taps a large and growing market segment, and will -- and in addition will launch a commercial cash management services and will deploy even more efficient financial center models.

These combined initiatives materially expand the Bank's deposit generation capacity, thereby enabling us to continue lowering -- lowering its cost of funding -- funding play a greater role in funding Countrywide at a much lower cost.

The cornerstone of the retail deposit franchise is our growing network of 86 financial centers, which was the primary driver of the Bank's fourth quarter $3 billion in retail deposit production, or $12 billion on an annualized basis.

I'm on page 14 -- slide 14 at the moment.

As you can see, the Bank's financial centers have quickly outpaced industry averages of 65 million per branch and have achieved on average $300 million of balances within four years of opening.

That's a remarkable difference between us and our competition in term also of efficiencies.

Our financial center productivity nearly doubled in 2005 driven by more effective marketing and sales techniques, including the cross sale of newly introduced basic money market accounts.

On slide 15, Countrywide has just begun to realize the potential value of its deposit and market opportunities.

As previously mentioned, the Bank has further opportunity to expand geographically within Countrywide Home Loan's footprint over the 850 retail mortgage offices and to introduce new innovative financial center concepts and lower-cost deposit products.

Countrywide Bank initially focussed on the CD market due to its large size, senior concentration and limited infrastructure requirements.

In 2005, we entered the large money market savings segment, which is twice the size of the CD market; and we did this through our cross sell activities in our financial centers.

This entry has been very successful and already represents 25% of our total financial center production.

In 2006, the Bank will introduce an online ACH-enabled savings account which I mentioned earlier, that will penetrate the new and fast growing segment of the online consumer.

Ultimately our web channel will evolve to offer online transaction accounts.

Our focus on the CD and savings accounts covers a market of 4.3 trillion in size, representing 93% of the FDIC insured deposits, and it is growing at a compound annual growth rate of 6.6%.

As you can see, we have just begun to scratch the surface of our potential penetration in the deposit market.

Moving on to the asset section on slide 16, the Bank's business model continues to produce strong financial performance with fourth quarter return on assets of 1.1% and return on equity of 15.6%.

As anticipated and mentioned in last quarter's call, margins improved this quarter but remained compressed due to the combined effect of the interest rate lag and the teaser rates in the Bank's loan portfolio.

Overall margin compression due to interest rate lag and teaser rate effects decreased during the fourth quarter to 47 basis points from 55 basis points in the third quarter.

The bank continues to maintain operating efficiencies at extraordinary levels while building infrastructures for growth, including the introduction of the new financial centers, investments in technology, and the expansion of deposit product offerings.

The Bank's portfolio remains concentrated.

On slide 17.

In short duration prime first and prime second [leading] mortgages, and this, along with our origination, servicing and risk management competencies have driven our impressive credit performance.

The credit performance of our loan portfolio as measured by nonperforming assets and chargeups has been outstanding at 151 million and 6.8 million, respectively.

In addition, delinquency by vintage continues to develop in line with or better than expectations for each major product segment.

The Bank remains appropriately reserved for expected losses including those associated with Hurricane Katrina.

The delinquency and lost performance related to Hurricane Katrina has been better than originally estimated.

On slide 18, we focus on the key characteristics of our pay option portfolio, and we do this because it's very topical today.

The amount of pay option loans in the Bank's portfolio now stands at 26 billion, up from 22 billion last quarter.

As can be expected in an environment with rising short-term rates, the dollars balance of loans with negative amortization has been increasing and now stands at $14 billion.

However, the amount of cumulative negative amortization remains relatively small at $75 million, which is approximately 0.5% of the unpaid principle balances.

It's important to note that our loan quality remains extremely high.

The original CLTV, combined loan-to-value, and original LTVs, or loan to value, are 78% and 75%, respectively, and the average FICO scores of the portfolio are well above 700.

At 10 basis points, delinquencies remain low relative to other loans of comparable product, types, and vintages.

The increase is due to the seasoning of our portfolio.

Now let's -- now we'll turn to our 2006 guidance which is on slide 20, Countrywide's 2006 earnings guidance was announced at $3.80 to $4.80 per diluted share.

Key full year assumptions behind the guidance including total mortgage market originations of 2.2 trillion to 3.2 trillion; average ten-year U.S.

Treasury yield from 4% to 5%; mortgage banking segment pre-tax earnings of 1.85 billion to 2.55 billion; and pre-tax earnings from other business segments which including banking, capital markets, insurance and global operations of 2.05 billion to 2.35 billion.

This guidance includes the effects of FASB 123-R related to the expensing of stock options which was effective for Countrywide on January 1st, 2006.

We expect the charge to earnings in 2006 related to stock options to be less than $100 million pre-tax.

This guidance, however, does not include the effects of the pending financial standard regarding fair value accounting for mortgage servicing rights or FASB 156.

We believe FASB 156 may be issued in March of 2006 and may be adopted by Countrywide as of January 1st of 2006 retroactively.

Key assumptions behind the guidance in the mortgage banking segment on slide 21 include company loan production market share of 18% to 18.5%.

Company loan origination volume of 400 billion to 600 billion.

Mortgage banking segment production pre-tax margin of 15 basis points to 40 basis points.

Average loan servicing portfolio of 1.2 to 1.3 trillion, and loan servicing pre-tax margins of 1 basis point to 10 basis points.

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

Before opening the line to your questions, I'd like to reiterate that Countrywide delivered strong earnings growth in 2005 despite a challenging transitional operating environment.

Countrywide delivered a 22% return on average equity for our shareholders and earnings that were the second highest in the Company's history.

In fact, had it not been for Katrina, it would have been the highest earnings for the Company.

These strong results were achieved in a difficult interest rate environment, challenging margins throughout the industry and let's not forget the forces of nature and the devastation caused by the hurricane season.

The exceptional performance in 2005 is a reflection of the Company's intellectual assets as well as the continuing dedication of our people who are relentless in the pursuit of our vision.

Our Company reflects the quality of its people, and I thank every one of Countrywide's employees for their extraordinary efforts during 2005.

And now we'll ask the moderator to explain the protocol for the questions.

Thank you very much.

[OPERATOR INSTRUCTIONS].

Bob Napoli, Piper Jaffray.

Good afternoon and congratulations on the solid trends in your business.

A couple questions and I'll leave it open for others.

The Bank asset growth in the quarter, the earnings were very strong.

The margin did as you suggested it would.

The asset growth slowed more than we thought.

I was wondering if you could give some kind of an outlook on the growth strategy in the Bank, and was the slow down to build capital?

Was it because of the flat yield curve?

Bob, I don't know what your expectations are, but we grew the Bank from 41 to 73 billion.

That -- I don't think there's a bank that has that type of growth in the United States.

We've had the fastest growing bank in the country.

That said, [inaudible] I think you have to have a perspective on that.

Secondly, our responsibility is to manage the capital of the Company, to make sure that we're judicious in how that capital is allocated through our various businesses, and it was -- the primarily driver was to make certain that we were -- we had a proper allocation of capital during the year, and those are the primary drivers.

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

Yes.

I think if you look back over the growth of the Bank that we've been -- we've aggressively been growing the Bank, but in an opportunistic way.

And there are quarters where we have greater opportunity for expansion and growth in the Bank and we'll continue to review the quarter and our objectives and the spreads available and continue the rapid growth, although I just think you can't count on a straight line -- continuous growth rate.

Some quarters are going to be better than other quarters.

I think, Bob, also I would -- what comes to my mind is that, as we pointed out in the presentation here, that we now have enormous flexibility as a result of the Bank in terms of having gain on sale opportunity or retain it -- retain the earnings over a period of time to get the spread, and I think you saw an example of that in 2005, the kind of flexibility the Bank has given us in terms of managing the Company over the short and long-term.

Bob, a couple more points on the bank growth.

This is Eric Sieracki.

Our original goal was to get to 120 billion by '08.

So you can see that we're substantially ahead of that schedule.

And reflecting back on Stan's point about taking opportunistic view of growth, you see it wasn't very ratable throughout the year.

We had a spike in growth during the second quarter.

It was a little bit slower in the fourth.

Capital is certainly an issue, but perhaps what's more important to you is forward looking, the Bank should have self funding growth to at least $100 billion level in '06.

And again, I think what's more important is forward-looking growth than what you saw in '05, admittedly fourth quarter growth was slow, and it will be dictated by capital that's available.

So that 120 billion, there's still no change to that target or that goal?

No.

There is not at the moment.

Thanks.

And just -- my last question is just on subprime margins were very low in the quarter.

I was wondering if you could give some color on why it was as weak as it was.

We know December was really tough in that business and if it has improved.

Bob, there's two things I want to talk about.

One is that we certainly have seen improvement this month.

The tail end of the fourth quarter in this month in prime spreads, there's been -- there's a notable improvement there.

There's a slight improvement in the subprime.

It has not improved at the level the prime has.

And we'll just have to see.

But it's really -- you read about it.

It's the Ameriquests and New Centuries of the world continue to put -- as well as companies that have a REIT.

They're dumping the losses into the REIT and then securitizing the stuff they have a profit in.

So that historically -- that cannot continue.

It's just a matter of when it's going to break.

But we see a little crack in the seam in the quarter -- first month [of 2006].

Thank you.

Paul Miller, FBR.

Yes.

Thanks a lot.

Just to follow up on Bob's talk about the spreads, your production margin came in from, like, 32 basis points to 9 basis points, and I think a lot of people out there are thinking that it could get worse.

Could you just talk about -- do you think this is the trough?

Because we know the fourth quarter was a sloppy quarter due to a lot of things like Reg AB and whatnot.

Are you seeing a pretty good improvement across the board in the first quarter and do you expect it to continue to improve throughout the year?

It would be speculative on my part, so let me disclose that initially.

But this is just a sense that I have in speaking to the production people and Stan and others, and I'd like Stan to comment on this.

But we do -- it appears to me -- it appears to me that the fourth quarter appeared to be the worst of what we're going to see.

And I think what we'll probably see in 2006 is some consolidation, people getting out of the business, the weaker ones folding, and that will all portend to be -- help us to get a better spread on these loans.

At least historically that's what happened when you've had the kind of quarter you've had in the fourth quarter relative to very, very reduce -- inordinate reductions in spreads.

But, Stan, you want to comment on that?

Yes.

I think you termed it accurately that a lot of the issues in the fourth quarter was the result of a sloppy market in terms of execution and that took place primarily on the subprime side where we saw credit spreads widen out at the -- during the quarter.

We do accumulate production for sale, and we saw the creds -- the credit spreads widen out, and that resulted in worse execution than we had previously experienced.

There is very strong evidence in the credit default swap market that credit spreads have tightened during the first quarter, so we can be using that as an index.

I think we can be hopeful that we'll see improving margins on subprime.

Now, the subprime market is also less disciplined up to this point than the prime market where there's immediate reaction, immediate ability to pass through pricing variations.

And I think over the long-term, we're seeing improved disciplines in that market, and so to the extent that pricing changes are very slow to pass through to the front end, that we look for an evolution or continuing a continuing evolution in the subprime market.

I should note that the credit spreads also impacted to a slighter extent the pay option market -- the prime market, and some slight changes in terms of our modeling of prepayment speeds on residuals also impacted spreads in the -- in the fourth quarter, all of which are things that we adjust in our pricing models and should reflect improvement in the subsequent quarters.

So I think to -- just to summarize that, there are two real -- two main factors that were clear particularly in the fourth quarter.

One was the competition on the front end in terms of pricing and on the back end the inefficiency of the secondary markets, which you could conclude was the perfect storm.

Perfect storms don't come about that often.

So I think that's we're beginning to see the skies clear, at least they appear to be clearing in [inaudible] quarter 2006.

And then one really quick question.

When you guys go -- if you guys -- if fair value accounting, it comes about and you guys adopt it, is there a catchup that you would have to do, write up or write down the MSR to bring everything equal?

Write up.

Eric, do you want to --

At December 31, we have $110 million of fair value in excess of book value, and that would immediately be realized.

It would go through equity.

It would not go through P&L.

Okay.

Thank you very much, guys.

You're welcome.

Chris Brendler, Stifel Nicolaus.

Hi.

Thanks.

Good morning.

Can we focus on servicing for a second?

The fourth quarter results, the expenses were a little lower -- interest expense was a little lower.

If you could just give me a little color there?

And then, more importantly, the guidance for '06, if I look at your production -- or your servicing margin, it looks like it's been a little bit north of your range the last two quarters.

Given the outlook for what should be slower amortization as production comes down a little bit, although it's obviously a wild card, if I look at sort of servicing without the net impairment and hedging the costs, we're looking at 12 or so basis points right now versus your range of 1 to 10.

So if you could give me a little more color on what your guidance of 1 to 10 basis points for '06 implies on the MSR assets?

Okay.

First I want to clear.

Is that correct that the expenses are down in servicing?

It's hard for me to believe that.

Are they down per loan?

Is that it per loan.

It's probably Katrina.

Katrina as it related to the servicing portfolio went through the segment.

Oh, I see.

That was an anomaly out of Katrina.

We have a blip and then come down again.

So that's Katrina.

Let's go through the prepayment amortization issues that you raised.

You guys want to handle that?

Okay.

As far as the servicing margins guidance of 1 to 10 basis points for '06, certainly a negatively convexed asset.

The 1 bip margin is less relevant than the 10 based on the rate range of 4 to 5 on the ten-year that we gave you.

Of course, the hedge cost is a key driver of what those margins are going to be.

We experienced margins of 11 basis points in the third and fourth quarters.

We had outstanding hedge performance in the third quarter.

We actually more than covered theta.

So that's not something that we were prepared to forecast into the future.

Any other questions you have about that '06 guidance?

Okay.

So you basically are expecting the MSR to be a little bit of a drag.

I mean, if you look at margins without MSR impairment and hedging, it's 12 basis points or so, right -- or 13 basis points the last quarter.

Maybe that's somewhat Katrina related.

But can you sort of handicap for me or maybe first start off by telling us what the first quarter amortization assumption is and then handicap within the range of 1 to 10 maybe just some sort of simple interest rate scenarios and production scenarios that put you at the high end of the range?

The expected amortization for the first quarter would be 718 versus 683 for the fourth quarter.

And what I was trying to give you the indication with with the negative convexity comment is you wouldn't take a simple average of the 1 and the 10.

The expected outcome would probably be closer to 7 than the simple average of 5.5.

And interest rate scenarios where that would -- if rates stay relatively stable, we should have a flat yield curve production as in sort of the midpoint of your -- industry production's the midpoint of your guidance would be -- tend towards the higher end of that range?

Say that again?

I'm sort of trying to think about the yield curve today under a relatively stable environment.

Amortization comes down a little bit.

Your hedging costs maybe go up a little bit.

But it seems like your guidance is a little bit conservative.

Is that fair?

Well, that's for you to assess.

It's the beginning of the year.

We're given you our best shot at the guidance.

There's a fairly wide interest rate range here.

You could have a wide range of scenarios.

It's very unlikely that you're going to see some flat rate scenario.

There's likely to be some volatility.

Of course.

Okay.

Thanks.

Ed Groshans, Fox-Pitt Kelton.

Good afternoon, gentlemen.

Just wanted to get your sense on -- the FFIC put their guidance out for ARMs, specifically addressing option ARMs and 80/20s with that product and underwriting at the full index rate.

I just wanted to get some sense of is there no impact, little impact or some impact to Countrywide's model?

And then how would we see that coming through?

We -- first of all, we're -- they put out their guidance for comment, and we are in the process of producing our comments to their guidance.

We agree with the basic central themes of the guidance that they've provided.

There are some things that we don't agree with.

But most of what they are providing we already do.

We have very prudent underwriting standards.

We pay options, for example, are underwritten at the fully indexed rate.

So it isn't we don't think that it will have a major impact only the market.

We do think that the outcome of the guidance and as soon as people have a chance to comment and provide a basis for revising certain of the items in their comments, we think that we'll have a better, more disciplined market and a, by the way, a better competitive landscape for Countrywide since we are -- we underwrite at a very prudent level today.

And then I know on the last conference call there was talk about the start rate of 1% and maybe Countrywide taking a look at that.

Has Countrywide changed their start right rate or is that still under review?

We made several adjustments to the start rate, and it varies by the product and the owner occupancy and the FICO scores, but we did make adjustments, and we are evaluating whether or not additional adjustments are appropriate in the future.

And then just one final question.

The miscellaneous fees in the servicing segment the are running, I guess, about 55, 53 basis points now, and they were running closer to 100 basis points just a few quarters ago.

Could you just talk to what's driving that down a little bit there?

Looking at the third quarter of the it was 10.6 basis points and it was 9.9 in the fourth.

As far as last year, it was 11.1.

So we see that in flatter range than you do.

Yes.

I'm sorry.

I misspoke.

That's right. 10 basis points down to 5 basis points.

I'm sorry.

Is that just like late fees and things along those lines, or is there other --?

Miscellaneous fees would be late charges, prepayment penalties, those type -- inspection fees, foreclosure fees, bankruptcy fees.

Okay.

So those are all -- and some of those do run -- and obviously, if you have higher delinquencies in a particular month or a particular quarter, you're going to have higher fees.

So -- or NSF checks, we get a fee for those.

We get fees also for people who are paying online and pay on certain dates if they pay later than expected, they have to pay a certain fee.

We have Western Union fees which are paid to us where people send us checks through Western Union.

It's a variety of --

So there's no driving factor there that coming down --?

No.

Nothing there.

I would just like to emphasize again that we're seeing that at 10.6 basis points in the third quarter and 9.9 in the fourth, so we're seeing that in a flatter range than what you're seeing.

We can chat about that off-line.

I appreciate that.

Thank you very much, gentlemen.

Robert Bohlen, KBW.

Good morning, gentlemen.

I just have three quick questions.

I was wondering if you could give on the holding company level, your total risk based capital ratio?

Just under 11%.

Just under 11?

Yes.

You have the tier 1 leverage also?

We'll get back to you with that later during the call.

And then the last question, we noticed in your -- on the pamphlet for the earnings conference call, when you gave the delinquencies on the pay option ARM at 10 basis points at 90 days, previously you've given delinquencies on a 60-day.

Do you have that number on a 60-day basis for us?

Okay.

What we'll do is we'll give you the tier 1 leverage ratio while we dig up that number.

As of December 31, we're looking at 6.3%.

Okay.

The [inaudible] for the bank, Jim, that's overall?

He's looking -- he wants it -- you want it over all, not for the Bank?

Am I correct?

No.

I'm looking -- on your -- it's from slide 18 so on the bank.

The bank only?

Yes.

All right.

As of December 31, '05 it's 12 basis points.

12 basis points?

Okay.

Thank you very much, gentlemen.

Eric Wasserstrom, UBS.

Thank you.

Just a quick question on the -- can you help me understand what was driving the mix of what you sold in the quarter relative to what the market conditions were?

In particular with the sales of the subprime inventory.

Eric, you want to handle that?

We -- first of all, one of the items clearly that drives our sales during the quarter is capital issues and the relative equity to support retention.

We had built up a level of subprime that we sold in the -- where we had higher levels of sales of subprime in the fourth quarter, and we retained a greater level of home equity production as that is a very viable asset for the Bank to retain.

And we're just managing the inventories and developing the size and quantity to create the securitization so most of the fluctuation that you see taking place is between the subprime and home equity production.

Got you.

And was there a reversal of Katrina-related provisions in the quarter?

There was.

Where did that flow through?

It flowed through the income statement.

We had at both [inaudible] insurance company was in the third [inaudible] the fourth quarter.

Insurance company was 13 million.

CHL was 28.

And the bank was 5 for a total of 46.

Thanks very much.

And the background behind that, so you know, is that we've been out there inspecting all these properties.

We're about 60% through it.

And we were finding in that 60% that the reserves that we had were higher than we believed [was required].

We retain the reserves on the 40% that we have yet to inspect.

Good news.

To get a little bit more articulate on that, as far as the percentage of properties affected, we found on the 50% that we inspected that the effective percentage was coming in about half of what we expected.

As far as the frequency, once those properties were affected, the frequency ran about double, but the severity was far less than what we expected.

Far less than half of what we expected.

All of that netted out to the declines in the reserves that we took in the fourth quarter.

However, as Angelo mentioned, we did not adjust our originally conservative estimates on the 50% of the properties that were not inspected.

In other words, we did not extrapolate the far superior performance to what we expected on the 50% that we did inspect on to the 50% that we did not inspect.

I see.

And Eric --

Conservative estimates are still there.

Yes.

The reason for the difference in 60 and 50 is the balance of this month we've covered another 10%.

I see.

And, Eric, just so I understand that last comment entirely, the severity was much lower and the incidence was somewhat lower?

Well, we look at it three ways.

We look at the number of properties affected.

Once the property's affected, then we look at the frequency of a default, and then we look at the severity of the loss.

I see.

And in terms of the number of properties affected, that ran about half of what we expected.

Once those properties were affected, the frequency ran higher than what we expected.

But once there was an actual loss, it was less than half of what we expected.

All that netted out to the $46 million of reserves that were pulled back in the fourth quarter.

Okay.

Great.

Thanks for the clarification.

Kenneth Bruce, Merrill Lynch.

Thank you.

Good morning.

The quarter -- fourth quarter witnessed obviously some very difficult margin pressure on net production margins and obviously based on your guidance you're expecting that that will improve generally speaking in 2006.

My question relates to the 36 billion or $37 billion worth of available for sale loans in [NBF].

And wondering in terms of your management of that inventory level if we might see some of that be sold into a possibly strengthening market or not?

Trying to identify the 37 billion.

Do you have it identified?

I'm just working off your balance sheet.

We're trying to get back to that.

Inventory.

Okay.

Basically we are in the process of selling and delivering our inventory on a continuous ongoing basis, and we're delivering as quickly as we can pool and ready the mortgages for delivery.

So it isn't -- we don't have a strategy -- a hold for sale strategy.

We basically sell into the markets that exist.

Most of the inventory in our pipeline are hedged forward so that interest rate -- most of the interest rate risks relative to that -- either the pipeline or the inventory is almost eliminated, although we're subject to -- changes in credit spreads can impact us.

But the -- there is not a concept of hold and wait at all in our inventory.

It's marked to the lower of cost or market.

So -- and that's -- it's just long-term history of how we've managed that asset.

You're not trying to allocate capital to a balance sheet at the holding company that might ebb and flow over time?

It sounds like if you expect volume to be generally similar in '06 to '05, that you will have similar inventory levels over that period?

Our -- the basic strategy of the Company is to leave the portfolio activities to the Bank.

And so what you'll see in the Company is the -- where we choose to be a long term investor and enjoy spread income, you'll see the asset levels growing at the Bank and not inside the mortgage company.

And the last follow-up.

As it relates to the Bank ROE, it's right around 16%.

Would you expect that to be at the lower end of kind of the reasonable range to expect for returns on the allocated capitol to the Bank?

We've seen return requirements 15 to 20% opportunities.

I think it varies with the market.

Thank you.

Moshe Orenbuch, Credit Suisse First Boston.

Thanks.

Could we just go back a little bit to the production margins?

Your guidance for '06 is a range of 15 to 40 basis points.

Given all of the things that went on, you were a little below the low end of that in the fourth quarter.

You mentioned that you thought the gain on sale margins had troughed.

Kind of -- maybe could you talk a little about what you think has to happen to get to the midpoint of that range?

Well, let me just take a shot at it.

I think that what's -- you have to get to the cause of it.

There are two things that cause it.

One, as I said, was the competitive challenge that we faced in the industry, the hand to hand combat that we engage in every day.

This is my own words that we had some irresponsible players, particularly starting in the midyear and continued to accelerated through the fourth quarter.

I've never -- I've been doing this 53 years.

I've never seen that situation sustained over a long period of time.

Eventually they gag on it.

And maybe that's just beginning to happen now.

So one is, on the front end you're going to have to have some consolidation take place.

The irresponsible players either stop their irresponsible behavior or be knocked out for one reason or another.

And the second is that we -- the sloppiness that was seen and described in this call relative to the secondary markets, we've seen that cleanup in this quarter.

So I think that those two elements are the key parts of the equation to get that margin to the midpoint rather than to lower end of the spectrum.

Eric, do you have a comment on that?

Yes.

Moshe, what I would point out is that the bulk of the margin decline from the 90 to 100 basis points that everybody got used to during the refi boom to the 32 basis points of the third quarter was principally driven by front end pricing competition to the three production channels that we solicit production from.

The 23 bip decline in the fourth quarter could 90% be attributed to secondary marketing executions.

Some of this was due to late quarter phenomena, investor demand late in the fourth quarter, balance sheet management, things of that issue.

End of the day, it's going to be a matter of passing through those secondary marketing costs into the market.

Does that happen in the first quarter, or second quarter where the market recovers enough where you can past those costs through?

That's the issue.

Keep in mind that the second and third quarter were 40 and 32.

Okay?

So keep all those things in perspective.

Just one quick follow-up.

Was there any kind of characterization of -- Angelo, going back to kind of your hand to hand combat example as to the nature of the competitors?

Anything that characterized them?

Were they large banks?

Were they otherwise, in terms of the ones that were most --?

I think it broke down to several, Moshe, into several areas.

One, if you take into subprime, as I pointed out earlier, no question that the key players there are Ameriquest and New Century, a couple of others, but they were the key players that sort of set the bar and set it high.

Is that sustainable?

I don't think so.

You begin to see, again, a little crack in the armor with the settlements that -- various announcement that Ameriquest made -- has made for the settlement and laying off 10% of their people, and so on and so forth.

I think they're clearly -- there's a -- there's going to be -- there could be a change in the atmosphere that we face in the field.

The second would be the balance sheet players where the big banks -- they're not so much in subprime.

The big banks do a lot of balance sheet building and to do that they're using the hybrids, because it does give them some financial flexibility, putting the hybrids on the balance sheet, and jumbo hybrids.

And there they've been aggressive because they just related to the cost of funds without any regard to the secondary market.

And they were very, very active in the last six months of the year.

So as we build our bank, we're going to be able to be competitive in that area.

But I think those are the two factors standing out in my mind as I travel the country talking to our branch people, is the big banks and the hybrids and the subprime players being Ameriquest and Century.

Thanks a lot.

Welcome.

And did you have any follow-ups, Mr. Orenbuch?

No.

That's it.

Thank you.

Mike Vinciquerra, Raymond James.

Thank you.

Good afternoon.

On the insurance side, your net premiums from the carrier jumped pretty substantially.

I'm just wondering -- I don't know if there's anything related to the hurricane there, but they were up sharply quarter-over-quarter.

Can you provide a little detail on that, please?

We're discussing that now, Mike.

By the way, it's good morning here.

My apology, Angelo.

We're going to look into that, Mike.

We'll get back to you shortly on that one.

Okay.

And just -- the only other one is just looking at your a assumptions on production, I know we don't have a crystal ball on this obviously, but most of the other folks who publish an assumption for '06 are around 2.2, 2.3 trillion, and you've got the top end up around 3.

I'm curious under what market scenario that might occur and kind of what you guys are looking at in terms of trends heading into '06 that might make that even a realistic possibility?

On a $3 trillion market?

Right.

We've given you a wide range there of 4 to 5, certainly at the 4, 4.25.

That's what you've had this year.

You've had -- you'll have close to 3 trillion this year or more, so all you have to do is repeat the band that we had in '05.

And if you -- if you look historically at that, Mike, that size of market has been continuously, every single year, underestimated by the GSEs, by the forecasters, by the MBA, and they've had to adjust continuously, because I think they leave out certain factors such as increasing prices and greater volume and the aggressiveness of home builders.

For example, you saw new home -- new home sales up when everybody thought it was going to be down because they're putting in incentives and all kinds of stuff.

So I think that it's -- I think that's somewhere -- I think it's closer to the higher end of the mid range than it would be to the low end, would be my guess based upon what we've seen.

Mike, I would suggest that the consensus for the 10 year's closer to 5.

Our range is 4 to 5.

We could be argued to be bullish there.

We'll see how it turns out.

I want to emphasize Angelo's point about the conservative nature of the GSEs and the MBA.

They have some inhibition about being aggressive, being high, and the number actually coming in below them.

Historically, they've always been very, very low.

We've given you a range of 4 to 5 on the 10 year.

We believe the market would range from 2.2 to 3.2.

And frankly, if we had to move it, we would probably move it up.

We'd probably move the top end to 3.3 if we moved anything.

Now, as far as your net written premiums questions, there were two contracts that were required to be changed to deposit accounting, and while the deposit was small, the accounting requires that we gross up the premiums and losses, so the premiums were up $30 million as a result of that.

Is that a run rate we should be thinking about for future quarters?

No.

And, Mike, I'd also -- your business is researching.

Go back and research what everybody forecast at the beginning of 2005, us versus everybody else, including the GSEs.

Without adjustment, just look what they announced in January of 2005 versus what the year ended up, and I think you'll see that we're correct that they are -- they're consistent, but consistently wrong.

I can't argue with that.

Thank you very much for all the thoughts on it.

Appreciate it, guys.

Bruce Harting, Lehman Brothers.

Yes.

It seems like some congratulations is in order for having more than 50 -- the majority of your earnings coming from other than mortgage banking this quarter, and a trend that hopefully continues from your 2006 guidance.

And given that your guidance from top to bottom -- or from 1.85 billion to 2.55 billion on mortgage banking is about a 37.5% differential, but the band is much tighter on pre-tax earnings from other segments.

I would think that as that 50%-plus contribution from other segments this quarter, which hit a crossover point, grows to an even bigger percentage of the total, your full year guidance will get tighter as time goes by and get a higher PE.

So two things.

I'm, one, at a little bit of a loss to understand why the stock's down today on this sort of break-through quarter and secondly is there anything you can do?

Eric, you said that you -- I think mathematically you're already built in for over 100 billion of loans outstanding by the end of the year.

But is there anything you could do to fuel that growth even more and accelerate the continued positive transition?

Thanks.

Bruce, first of all, let me just comment you've been a long-time friend [inaudible] of the Company for many years, and so I appreciate your accolades about the -- how we've been able to apportion out earnings and fulfill our goal of diversifying the base Company, and we'll continue to do that.

You can see clearly both in our planning process and in our results that we continue to work towards greater diversification and greater stability of earnings.

We will -- and just -- we will continue on that trend.

Exactly how it will break out again will depend upon what opportunities the market gives us.

I also just want to comment that -- at least let me speak for the management team here.

Our job is to make sure that we build a word class company -- a well-balanced, world-class company that's sustainable over time and that we dominate where we can dominate in the business that we're in, particularly our core business of mortgage banking.

What happens with stock on a given day is a situation that we cannot control.

What we can control is the destiny of the Company, and that ultimately will predict the destiny of the stock, but not on any given day.

So I know that the stock being down or the balls being red today is upsetting to some, but it's not to us.

We know that we're building a great company, and you can see by the results of the last 38 years that the -- that ultimately the stock reflects that the work we're doing here to build a world class company.

And we have your line open, Mr. Harting, for any follow-ups.

Yes.

Thank you.

And then you commented on -- thanks for that answer -- on FAS, the adoption.

You said that it'll probably be adopted in the first quarter retroactively to the beginning of the year.

And [MDMAC] talked about this a little bit last week.

And then I know there's another FAS rule out on exposure draft, which is very exciting, talking about allowing companies to fair value all of their assets and liabilities.

Can you just give a little bit of the background on -- you mentioned, Eric, that it'll be about $110 million write up.

What is the ongoing -- will this reduce the volatility?

My understanding is this is a one-time election to take this, or is that not correct?

And then -- any comments on that other giraffe that's out there and how that might impact your accounting going forward?

Is it a positive or negative?

Thank you.

Bruce, we're only going to tell you if you tell us what MDMAC said.

Bruce -- Bruce, this is Stan.

The -- going to fair market value accounting on the servicing asset will clearly simplify some of the operational issues, including amortization, for example.

Amortization has less significance because you're no longer dealing with lower of cost.

You're dealing with what is the fair market value of the asset going forward.

Today where we're dealing with lower of cost or market, we are dealing with a hedge profile that is much more costly to hedge because there's limited upside accounting values.

So one of the graded values or advantages of fair market value accounting is that it will probably lead to a more simple process of hedging combined with accounting and most likely a lower cost.

The down side to that is that it will probably increase volatility because the asset will be written up.

And in that way you'll have in a declining rate environment greater variability, as opposed to the cushions that you develop in a lower of cost or market methodology.

But it is a change that we think is very positive for the industry and the overall management of the servicing asset.

Thank you.

Mark Patterson, NWQ Investment Group.

Thank you.

A couple of things.

First, as I was looking at the annual earnings of '05 versus '04, I understand that we need to make the restatement change that was $0.19 a share.

That is correct.

That affected that embedded derivative issue.

That's correct.

And then -- and then we had $0.14, as I'm calculating it, on the 85 million of after tax hurricane effect in '05.

That's an offset.

Right.

And the hurricanes in '04 was 45 million pre-tax?

Is that the number?

45 in -- [inaudible].

'05?

-- '04 [inaudible].

-- You're saying we had a hurricane hit of 45 million.

Is the question is is it pre-tax?

I think it is.

In the fourth quarter of '04.

In the fourth quarter of '04 we had 45 for hurricanes, yes.

And was that the total for '04?

Did we have something in the third quarter?

We had -- in the third quarter, we had 23 for a total of 68 for '04.

Okay.

So the way that one could look at this is that you made $4.11 this year and you'd take $0.19 off of that for the restate, you'd add $0.14 for hurricane effect, and you get to an adjusted 4.06.

You could do that.

And you could look at '04 and say you made 3.63, but you would add $0.19 for the restate, and then you would add another $0.07 for hurricanes, so you'd be at 3.89 roughly.

You could -- if it was a perfect world, you could do that.

So I mean, really in looking at it in more of a top down way, you've had a -- we've had a flat origination market.

Call it 2.8 trillion apiece by MBA standards.

And the earnings have gone from 380 -- high 380s to 406, up, say, call it 5%.

And in an environment where your pre-tax production margins fell more than in half.

I was thinking, in addition to what Bruce said, it speaks to that whole diversity issue.

I mean, I was kind of amazed to see that this first quarter that the banking segment overtook both the servicing and production segments individually.

And I just -- I really think it speaks to the diversification strides that have been made at Countrywide, and I commend you guys on that.

Thank you very much.

I had another question regarding the consolidation factor, Angelo, that you've spoken about for -- that you might expect for 2006.

Is -- is this an issue where -- I know Countrywide historically has always been an organic grower -- that you might consider acquisitions in addition to just kind of just taking market share organically like you have in the past?

Yes.

I think, two things to look at -- at least two things.

One is that consolidation, which I believe will take place, will create two opportunities.

One, historically in consolidations, we have picked off the intellectual assets.

The Company has been built to a great extent not only the foundation of the people that I hired 27 years ago, but also enhanced by those that we -- that came to us from companies that either went out of business, consolidated, cultural changes, whatever.

The second -- so intellectual assets, and that's a key aspect of if, and that talks to organic growth, the -- continuing the organic growth and maybe in fact increasing it.

The second is that this fallout could create a situation where there are actual opportunities out there -- companies, entities, parts of companies that can be acquired in one form or another, and we would look at that.

So it's a long way to answer your question, but absolutely we were -- we're a big company now and growth -- organic growth will continue.

We'll continue to do it as aggressively as we possibly can and prudently, but we'll look at acquisition opportunities as well.

Okay.

Great.

I have one final question for you.

With regard to some confusion that seems to be on the call about the size of the mortgage market expectation for us for '06, when you -- on your very -- I think it's slide 4, kind of your first real slide.

You show market shares that are roughly a little north of 17% based on MBA, Fannie and Freddie, but are 15.7% as the way that you normally look at it per IMF.

Right.

In the 15.7% on your 491 million -- billion of fundings is -- speaks to a 3.1 trillion market as opposed to the 2.8 that, say, the MBA has.

And so when we see this 2.2 to 3.2, I understand that there's already a lot of estimates that are closer to the 2.2 trillion range out there, but you're kind of looking at this on a different basis?

Well, that's a fair comment.

Obviously, what we tried to show was the range of market share based on what your assessment of the market is.

That's why we gave you the 2.2 -- the 3.2 with the market share range that we have, so you could get to the funding range of 400 to 600.

Right.

So the 18 to 18 -- yes.

Right.

Exactly -- the 18 to 18.5% market share would be equivalent to how you looked at 2005 which was your 15.7% market share?

Your point is well-taken.

Okay.

Great.

Thank you.

One last point, Mark.

We appreciate your thoughtful analysis on '04 versus '05.

We like to take a little bit longer view of things.

And if you look at our 5-year compound annual growth rate, it happens to correlate with the beginning of the refinance boom.

It's 39% using the 411 unadjusted number for 2005.

So 39% compound annual growth rate over five years we're quite proud of.

Can't complain with that.

Thanks a lot.

Seth Glickenhaus, Glickenhaus & Company.

Angelo, I want to congratulate you and the team for a superb job over the years.

Most of my questions have been answered.

However, there's one that has been somewhat overlooked.

What are your prospects for the insurance company?

You made it clear that you're very optimistic about the Bank, and there's a lot of question about the mortgage production, but how about the insurance company?

What are your personal feelings and the team's feelings about the growth of the insurance company?

Well, we've been banged around a lot -- thank you very much for your compliment, and thank you for the support over many years.

The -- we are really spending our time, Seth, right now restructuring that entity.

We have made some decisions -- made decisions relative to Florida where it appears that there's going to be several years of this hurricane issue, and so we want to take ourselves out of harm's way.

We have -- doubled our reinsurance coverage in these areas that have some weather difficulties.

And so we were trying to position the Company so it's safe, sound, and sanitary and growing.

And we're entering new markets.

I think I'll be better able to answer your questions once I have the entity stabilized.

It did okay this year, but you can see it was hit pretty hard in Katrina, as well as '04 in Florida, and we've got to get ourselves out of harm's way, because it surely impacts our earnings and, again, our objective is to stabilize our earnings.

So I think at the end of this year, I'll have a better assessment as to exactly what I want -- what we want to do with that entity.

Very good.

Thank you ever so much, Angelo.

Keep up the wonderful work.

Thank you.

Happy new year, Seth.

George Sacco, J.P. Morgan.

Hi.

I have two questions for you.

First would be how much residual has now been transferred to the Sunfish joint venture?

250.

It's 200 million.

200 million.

200.

And the maximum is still 250?

That's right.

Are there any plans to expand that or do anything similar to that venture?

Yes.

We'd like to do more of those ventures.

I think the issue there is how many investors can you find.

These are unique investors that are high -- have a high tolerance for risk, and so we'll have to see if we can do it.

We'd like to do more of those, yes.

And then were there any subprime NIM securitizations this quarter?

There were.

Yes.

Dollar amount?

We're looking it up right now.

We're zeroing in.

Getting closer.

We're working on that, George.

We'll come back with that number.

Okay.

That's all I have.

Neil Abromavage, Deutsche Bank.

Hello, everyone.

How are you?

I just had one quick question hoping you could address capacity -- supply capacity -- in this industry and maybe do it from both the prime area as well as the subprime area as well.

Thanks, Angelo.

Okay.

Were you talking about [inaudible] the volumes, transactions?

Are you talking about --

Head count capacity.

Brokers.

Yes.

Well, if you look at those projections, generally what you'll see, if you hit the midpoint of those projections in terms of mortgage size, there has to be an adjustment in head count.

And [inaudible] that's what you see going on.

There's been announcements by various companies, in fact one today, where there's been a reduction in head count throughout the industry.

And you'll see us react that way.

We just look at it -- the simplest way to look at this is a loan employee -- or loan production per employee.

So there's a certain number of loans we believe that is an efficient execution for us for each employee to handle.

If that loan count goes down, the employee [inaudible] we have to make an adjustment to the employee count.

And so it depends.

And we're prepared -- it's -- I can't say it's automatic, because you're dealing with human beings and it's very tough to let people go, but we try to position ourselves so that we can either move those people into servicing [inaudible] to an area where we are growing, and if we can't do that, then we reduce head count.

So you'll see capacity reduced, I believe, throughout the industry, including Countrywide, throughout 2006.

Okay.

Great.

And maybe just one follow-up.

I think your '05 results were very good in a tough environment, and as you sort of think about events that could have happened in 2006, what are you -- what might accelerate or quicken the pace of what could be a potential shakeout in the industry?

Is it regulatory?

Is it interest rates?

Is it credit related?

Is it secondary market?

Is it this capacity thing that you just touched on?

Just to get your sense there.

It is primarily -- we dealt with all kinds of interest rates.

You got to remember this company goes back to 7.5% --17.5% FHA rates, 25% prime.

We survived all of that and ultimately thrived on it because it shook out so many people. [Until] you're going to have that kind of situation.

So to me, it's competitive issues and capacity issues, the two that will probably -- you'll probably see shake out in 2006.

Absent some -- look.

It's very unpredictable as I pointed out to our Board members yesterday.

This is not lineal.

And that is, if we say that interest rates were at 4.5 versus 4 in the long bond, could you pinpoint exactly what the impact would be in earnings per share?

You can't.

There's a lot of variables within that -- within that framework.

But I think that the primary factor you'd be looking at is [inaudible] drive those interest rates that'll drive competition that'll drive capacity and that'll drive what the -- the size of the market.

But Stan has a comment here.

Stan, did you want comment?

Yes.

I just -- I think the easiest one [inaudible] of the ways to comment on the level of NIMs transactions is that relative to our sales of subprime, we either NIMed or sold all of the residuals -- the residuals on that production.

So basically all of the production or almost all of the production was NIMed.

And it's -- you can follow our transactions on Bloomberg if you want to see the structures that were initiated.

So that answers the NIM question.

Okay.

You have --

The actual amount added to NIMs in terms of our investment in NIMs for the quarter was 117 million.

So we covered the -- from NIMs to market share and size of market and what's going to impact 2006.

I think -- again, 2006 will be a challenging year, but a great year for Countrywide because it has the strength to take advantage of the opportunities which come about as a result of the consolidation.

I agree.

Thank you very much, Angelo.

Okay.

I'd like to take this opportunity to clarify an answer that was given earlier.

The question was about over 60 delinquencies for pay option ARMs, and the answer of 12 basis points that was given was for 60 to 90 days.

If you include the over 90 days, that's another 10 basis points.

So the correct answer for over 60 delinquencies for pay option ARMs is 22 basis points.

Thank you.

Robert Lacoursiere, Banc of America Securities.

Yes.

Good.

Thank you.

Just a couple of questions.

One is on the effective tax rate.

It was a little bit lower this quarter, and whether you could guide whether it was a one time catchup and we should be modeling at the full year average rate of 39% going forward?

[Understand], it's something that we try to manage.

We try to move assets out of high cost states like California, which we continue to do.

That was what you saw as a result of that effort.

Stan, do you want to comment on the -- where we'll end up on this thing?

Well, we're -- we have -- there was a catchup in the fourth quarter.

We have been steadily moving activities outside of California which is producing a lower tax rate.

We anticipate the tax rate going forward to enjoy much of the activities that we've -- that have been moved out.

And in fact, we see the rate actually for the -- for all of 2006 being around the 39% level.

But it's something we actively manage.

As pointed out to you, for example if we have a problem in a particular state, technology permits us to do that today, although we need some people.

But we can move and -- looking at Nevada, looking at Utah, continue to look at other areas where we believe that we could enjoy a lower tax rate and can move activities.

Can't do it overnight, but over a short period of time move activities to those lower tax states.

Just an unrelated question is -- got to do with the increase in the gain on sales booked in the -- or shown in the segment analysis for the capital markets group.

Was there any that was related to gain on securities or are those all the conduit gains?

That'll conduit.

Conduit gains.

It's also -- let me point out since you're on that issue just give you some of the things we're thinking about into 2006.

You see that the margin is a big part of the notional sales or activities in Countrywide Securities was treasuries.

Treasuries enjoy a very, very small [inaudible] almost invisible to the naked eye.

However, we are entering other businesses such as swaps -- [swaptions] that would, we believe, enhance the spreads on treasuries because they're directly linked to treasuries, and so we're making some of those adjustments in 2006 to see if we can get the spreads up on -- as a primary dealer to get the spreads up on treasuries.

Because we'll have -- because if the volume's being done has a profound impact on Countrywide securities.

So we're working on various areas to get that -- that spread increased.

Thank you.

You're welcome.

Matthew Lindenbaum, Basswood Partners.

Hi.

How are you?

Just a question on the guidance on the servicing, pre-tax income in the -- at the high end of the range, the 10 basis points which I assume is the 2.2 trillion market.

I'm just curious in the back in -- over the last couple of years, Stan has commented on sort of what a normal run off prepayment rate is even though it's sort of hard to peg.

So I'm sort of -- two questions.

One that 10 basis points, 2.2 trillion market is assuming what kind of runoff rate, prepayment rate or overall payment rate?

And is that -- should we assume whatever that number is, is sort of your best guess at what a sort of a normalized -- quote, unquote normalized runoff rate is?

We don't really have with us the -- all of the individual models that -- to share the composition of what makes up the 10 basis points, but clearly it is the higher level of servicing earnings comes in the high interest rate environment.

I think the best view that Eric had provided is that we kind of look at the margins more towards the 7 basis point level in a normal market, and increasing to the 10 basis points, and we're at the high end.

That just seems -- just to follow up, seems lower than what you've said in the past, and the only way I can sort of get there is if I assume that the runoff -- in the old days you would sort of talk about a runoff rate of 12 to 15% higher than what it's been in the past, but maybe we're in -- given your current portfolio that number is higher or there's some secular increase in hedging expenses or something?

Well, we used to talk about 12 to 15 basis points in terms of normal servicing margins.

Right.

To answer your question about what the CPR would be related to that 7 midpoint range, it would be in the very high teens.

You've got a different product mix now.

You've got products that are prepaying more quickly.

Right.

And you also have a higher hedge cost today, too.

Right.

So it's a combination of the composition of the portfolio leading to higher runoff rates and higher hedge expense?

That's correct.

And so the normalized 12 to 15 basis points of pre-tax margin is sort of ancient history, and now we're sort of in a world where maybe it can get as high as 10?

Well, again the 12 to 15 was driven by lower speeds that were predominant at that time.

We're making our best assessment of what these would be.

Again, this is transitional market, and consumer behavior is they get used to products that they have.

There was an article in the paper today where lenders are supposedly aggressively targeting ARM borrowers today, trying to get them into fixed rate loans.

We're trying to contemplate all these trends.

Right.

Hybrids that are coming due, things of that nature.

I think refinance -- I think overall -- I did say this that -- I don't know what Stan has talked about in the past because I have a hard time remembering what I've talked about in the past, but I think overall the -- you can expect that the average refinance rate that has been traditionally accepted in the past is going to change, that the refinance rate is -- let's say it was at a high -- when interest rates are higher, 20% -- 10 to 20% would be the refinance rate.

I think that's going to be substantially higher because you don't have a book of 30-year fixed anymore.

You have -- as Eric pointed out, you have hybrids, three year, five year.

They're coming due.

That's one.

Two, anecdotally what we see and what I particularly see is that people who took out ARMs -- I'm sorry.

HELOCs in the low interest rate market thinking that it was a giveaway are now shocked -- faced with payment shocks, and this is not the average -- these people -- that are upper middle class are now reconverting and refinancing into a fixed rate loan and consolidating that HELOCs because they cann't stand the payment shocks.

And even though they're sitting with, let's say, a fixed at 5.5 or a fixed and attached to that as a HELOC, they are consolidating into a 30-year fixed at 6.5, taking the 1% increase just to get out of harm's way relative to future increases in the HELOC.

So you have -- the environment has change the dramatically, and I think therefore the prepayment rate is going to be higher.

Right.

And just to follow-up lastly just to clarify on the -- I think Eric said earlier on the bank that the target -- the guidance had been 120 billion by '08.

I have in mind, though, it's 120 billion by '06.

So just if we could just clarify what the sort of current guidance is for the bank growth rates overtime?

Could you accept the fact that your notes could be wrong?

Oh, absolutely.

They're probably wrong.

So, yes. 210 -- I think we've been at that for a period of time now for '08, right?

120.

120, yes.

120 for '08 was our guidance at the beginning of '05, and of course that guidance has been evolving over time.

Right.

The comment that was made earlier is that the bank is self-funding to the $100 billion level in '06.

Right.

To the extent it gets a capital contribution from the parent, you can see that level go higher.

Right.

The -- just one last point on the prepayment speeds of the new structure of our portfolio.

The fact that we have greater levels of prepayments are -- produce earnings and revenue opportunity on the production side.

And so when we look purely at the servicing segment, we're looking at the contractual cash flows that relate to the servicing asset, but the great benefit of the change in the mix and the higher level of prepayments is ongoing higher level of production opportunity.

Right.

Great.

Thank you.

And thank you, Mr. Lindenbaum.

Well, with that, Mr. Mozilo, and our host panel, I'll turn the call back to you for any closing remarks.

Well, thank you very much, Brent, and thank you to all the participants for your questions.

They were constructive, informative.

Obviously, any time you ask questions, it forces us to think.

And we'll see you next quarter.

Thank you very much.

And, ladies and gentlemen, your host is making today's conference available for digitized replay for two full weeks starting at 12 p.m.

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February the 14th.

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