美國銀行 (BAC) 2006 Q4 法說會逐字稿

Good morning, welcome to the Countrywide Financial Corporation's fourth-quarter and 2006 year end 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 in the fourth-quarter press release 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.

Now at this point, ladies and gentlemen, we do have all of your phone lines muted or in a listen-only mode.

However, after management's prepared remarks there will be opportunities for your questions. (OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded for replay purposes; that information will be announced at the conclusion of this earnings release.

So with that being said we'll get right to the fourth-quarter agenda and year-end.

And here with our opening remarks is Countrywide's Chairman and Chief Executive Officer, Mr. Angelo Mozilo.

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

Good morning and welcome to Countrywide's earnings teleconference call for the fourth quarter and year end of 2006.

Joining me on the call today are David Sambol, our President and Chief Operating Officer;

Eric Sieracki, our Chief Financial Officer;

Kevin Bartlett, our Chief Investment Officer;

Carlos Garcia, our Chief of Banking and Insurance;

Jim Furash, our President of Countrywide Bank;

Ron Kripalani, our President of Countrywide Capital Markets;

Bob James, our President of Balboa Life and Casualty; and John McMurray, our Chief Risk Officer.

Also with us is Anne McCallion, Managing Director, second in command of our accounting operation.

Let's proceed.

As disclosed in this morning's press release, Countrywide delivered strong results in 2006.

In the face of a challenging environment which included flat and inverted yield curve conditions, home price depreciation, slowing home sales, declining production volumes and pressure on credit quality, Countrywide set a new record for annual diluted earnings per share of $4.30.

While our total loan production of $468 billion in 2006 declined 6% our performance outpaced the industry which is estimated to have declined by an average of about 17%.

Production margins dropped only modestly from 39 basis points in 2005 to 31 basis points in 2006 despite the very competitive pricing environment we faced in 2006.

Our servicing portfolio continued its uninterrupted growth to $1.3 trillion.

Pretax earnings for our banking segment increased 28% establishing a new earnings record at $1.4 billion.

Furthermore, banking operation assets grew by 13% to $83 billion in 2006.

Our Capital Markets business also set new records for pretax earnings and securities trading volume at $554 million and $3.8 trillion, respectively.

Our insurance segment set a new benchmark as well, generating $320 million of pretax earnings for 2006.

The Company made progress in its expense management campaign throughout the second half of the year and we continue to focus on further efficiency and productivity improvements.

Additionally, Countrywide continues to focus on capital optimization.

During the fourth quarter the Company entered into an accelerated share repurchase agreement with a dealer in which we repurchased 38.6 million shares that were subsequently retired.

This share repurchase program was financed largely through the issuance of $1.5 billion in high-quality content debt securities and had a net positive effect of $0.02 per diluted share for 2006.

Now let's take a closer look at each of our key businesses.

Pretax earnings for the loan production sector increased from the third quarter of 2006 to $421 million primarily as a result of a $98 million increase in gain on sale revenue.

This was also aided by a $35 million decrease in operating expenses despite an 11% increase in Mortgage Banking loan funding volume.

Compared to the fourth quarter of 2005 loan production sector pretax earnings growth was driven by a $387 million increase in gain on sale revenue or a 32 basis point margin improvement when measuring earnings as a percentage of production.

This was partially offset by an increase in cost that resulted from our continued investment in growing the loan salesforce and branch distribution network.

For the full year of 2006 loan production sector earnings decreased 21% to $1.3 billion primarily as a result of an increase in expenses partially offset by an improvement in gain on sale.

The quarterly loan servicing sector pretax earnings decreased year-over-year as a result of both a negative swing of $215 million in the net valuation change of MSRs and retained interest and a $132 million increase in interest expense.

The primary sources of the negative valuation movement were the increased investor yield requirements, wider option adjusted spreads and the impact of higher delinquencies on residual valuations.

The increase in interest expense primarily resulted from higher prevailing interest rates on the larger servicing asset as well as increased leverage in the servicing sector stemming from the issuance of 1.5 billion high-quality content debt securities I talked about before that took place in the fourth quarter of 2006 in connection with Countrywide's share repurchase program.

For the 12 months of 2006 loan servicing sector pretax earnings declined modestly as a result of increased interest expense partially offset by increased operating earnings resulting from the larger servicing portfolio.

The increase in interest expense was driven primarily by the overall increase in servicing assets combined with an increase in interest rates which drove up our financing costs.

The banking segment quarterly pretax earnings increased year-over-year driven by a 10% increase in banking operations earnings to $346 million.

The increase in earnings for the banking operations in the fourth quarter of 2006 was driven by a $10 billion increase in interest-earning assets combined with a 24 basis point increase in the net interest margin, the NIM, when compared to the same period a year ago.

For the 12 months pretax earnings rose 28% for the banking segment driven by a 36% increase in earnings from the banking operations.

Earnings of $1.4 billion in the banking operation increased as a result of a 31 basis point increase in interest-earning assets as well as a 40 basis point expansion in the NIM of 2.25%.

Quarterly pretax rates for the Capital Markets segment decreased $33 million from the fourth quarter last year primarily as a result of lower conduit and underwriting revenues.

For the 12 months pretax earnings in the Capital Markets segment rose $102 million over the last year to $554 million fueled by a $93 million increase in conduit revenues, a $23 million increase in underwriting revenues, and a $37 million increase in commercial real estate revenues.

Insurance segment pretax results declined $28 million year-over-year for the fourth quarter of 2006.

This decline resulted from a $21 million earnings decrease at both Balboa Life and Casualty.

For the 12 months pretax earnings in the insurance segment rose 74% from last year to $320 million.

This year-to-year improvement is primarily fueled by an increase in earnings at Balboa Life and Casualty which benefited from fewer catastrophic losses in 2006 as compared to 2005 as well as a 23% growth in net premiums earned.

Balboa Reinsurance also increased its pretax earnings by 21% driven by a 15% increase in the reinsurance portfolio as well as an increase in the percentage of policies earning a higher reinsurance premium.

Looking ahead to 2007 the industry will likely continue -- see continued pressures on margins as mortgage origination volumes decline and industry capacity is rationalized.

We're also preparing for increased barrowed delinquencies and continued credit deterioration.

We believe, however, that 2007 will likely be the trough year for the current housing cycle and that 2008 should represent the beginning of upward trends associated with the next cycle.

As we have said in the past, it is our view that the most relevant way to measure performance and growth in our industry and in our business is to view performance from business cycle to business cycle rather than from year-over-year.

This is how Countrywide manages its franchise and we are well positioned and extremely optimistic about our prospects to continue generating growth and superior returns over future cycles.

I want to now take the opportunity to thank all of our employees and my colleagues for their effort and dedication this past year in assuring Countrywide continues on its mission of making a positive difference in the lives of American families and maintaining our industry leadership position.

This was clearly a challenging 12 months, but our team again rose to the occasion, making this the most successful year in our 37-year history.

Thank you and I'll be happy now to take your questions.

(OPERATOR INSTRUCTIONS).

Ken Bruce, Merrill Lynch.

Thank you.

Good morning.

You have been pretty reasonable about your outlook for 2007 now for some time.

I'm hoping you might be able to shed a little bit of light in terms of just looking back to the last quarter if you're incrementally more cautious now on margins or if you're generally the same just in terms of where you think the trough will be and how long it will take to work its way out?

I think it's important I note this is one man's opinion and some of it is just feel for tempo and what we see happening in the marketplace.

We have our finger on the pulse every day of what's happening throughout the country and what I've laid out for you is our assessment, our best assessment, of where we are in terms of delinquencies, credit qualities, foreclosures, price depreciation.

But these things take time to run its course and, based upon what we see today, we think that we're going to see this continued situation throughout 2007 with it beginning to show signs of improvement by 2008.

Now the reason why we're very optimistic is that all of these negative issues that I laid out -- and I started laying it out at the beginning of 2006 when I talked about a hard landing -- is that, as you will note if you're in touch with the industry, there is a substantial amount of consolidation taking place either through acquisition or just going broke or bankrupt or everything that's happening with the [onits] of the world and throughout the industry.

And a lot of it's happening below the radar screen that you're not aware of that we are.

And that we believe the shakeout has been very positive for us because it has been in the past.

And as we come out of the cycle we will have a much cleaner landscape to operate within -- generally margins improve, productivity improves and so that's our view of it.

So we've got another eight, nine, 10, 12 months of headwinds and then we believe we'll have a much cleaner canvas to paint on for the next few years.

Okay.

And I noticed you were adding quite a bit of credit enhancement to the bank portfolio.

Is that just a reflection of that same cautious approach to what credit is doing today?

Yes, GAAP has its limitations on that issue and we are doing our best to expand our reserves in one form or another.

And obviously you have cash reserves and the other is that you discount the assets and the third is that you can get pool insurance or MI insurance on the assets.

We've I think exercised ourselves to the maximum in that regard and will continue to do so, by the way, throughout 2007 as the opportunity presents itself we will continue to buy additional insurance for both first loss and mezzanine lost on the bank portfolio.

Thank you.

And one final question.

Does the outlook or the guidance for 2007, does that include any additional buybacks based on your earlier announcement in terms of $2.5 billion of a buy back?

I think -- let me say this -- that we are very impressed with the reaction of the investors relative to our last buyback.

We bought -- of the 2.5 billion we bought back 1.3 billion I think, 1.5 billion.

And if the opportunity presents itself in terms of excess capital, we think that's a -- when we talked about capital optimization, that's what we're talking about.

We would, again on an opportunistic basis -- opportunistic basis meaning that we have excess capital to do it.

That's a good use of our capital and we would continue doing that as excess capital is created.

Would you see yourself issuing any more of the equity -- high equity content securities to do that or is that just capital that would be generated in the business over the year?

I'd answer it this way, that our primary concern is always the rating agencies.

We are very protective; covet our ratings, so anything we do in that regard would have to be done within a framework that the rating agencies would be comfortable with that effort.

Great.

Thank you very much.

Mike Vinciquerra, Raymond James.

Good morning.

Could you address for me just what the plans are on the bank side?

Obviously this quarter the growth reversed itself and it looks like you may have just been adjusting what you wanted to hold and how quickly you wanted to grow that given the flat yield curve and so forth, just give us a sense for the strategy there?

Let me just give you the general view of it.

Obviously you saw that take place because the lower volumes that we're facing -- lower volumes and lower margins -- which hampers the flexibility that we had in '95 -- '94, '95 and the first half of '96.

But to take you through a little more detail on the growth of the bank let me turn it over to Carlos Garcia and let him talk you through that.

This is Carlos.

First let me say that the bank's growth rate has been, as you know, extraordinary.

In fact, I think we've grown at an unprecedented organic growth rate since our start from a standstill.

And I might add that we've done that successfully.

And as a result I want you to know that we now have a bank with total assets that are averaging near $100 billion, held for investment assets that exceed $80 billion in assets and deposit franchise that has a productive capacity that competes with the largest financial institutions in America.

So this obviously positions CFC with greater financial strength and flexibility.

And an example of this is that CFC is now funding a significant portion of its Mortgage Banking production through the bank and this is offering CFC a couple of benefits.

One is a lower cost of funds and two is a federal preemption of privileges.

In 2007 we seek to continue to expand the Mortgage Banking activities that are funded by the Bank.

Having said that, let me get to your specific question.

Held for investment asset growth, as you pointed out, did slow in 2006 and particularly in the latter half of the year and the fourth quarter.

And so why?

Market conditions, as we've noted, resulted in a lower volume of attractive portfolio products, especially at attractive returns, and also increased our credit concerns which required us to be more selective.

Obviously as prudent managers we also purposely slowed down our asset growth in Q4 until we were able to develop a suitable plan for this current environment.

This plan calls for the greater use of credit enhancement, as we noted, on both loans acquired for growth as well as on the existing loans held for investment.

Looking forward into 2007 you should expect that our asset growth will continue to be slower as long as these market conditions persist.

But we remain focused on building a high-quality loan portfolio with fixed-rate seconds, HELOCs and other short duration adjustable-rate products.

If or when the yield curve turns around and steepens we may become interested in hybrid loans as well.

In the meantime we've been developing other asset classes to help diversify our asset base and sustain our growth.

In 2006 -- in the latter part of 2006 we launched two new business lines, one is the reverse mortgage business line and the other one is our builder finance unit.

In the first quarter of 2007 we will be launching a commercial real estate lending operation in partnership with Countrywide Capital Market's commercial real estate lending conduit that initially will focus on multifamily loans for the portfolio and those would be small balance multifamily loans.

We see this business contributing modestly to earnings in 2007, but presenting more opportunity in subsequent years.

And finally, I'd like to tell you that we're very focused on improving our operating efficiency and reducing our cost of funds both as a means to increase current profitability as well as to enable us to find more low-risk yet attractive return products for the portfolio.

One such endeavor that we're excited about is the rollout of our commercial deposit business in the first quarter of 2007 which is going to focus on the title industry deposits which, as you know, are significant and they also offer a very low cost of funds opportunity for the bank.

Between all of these initiatives we are still favorably positioned to continue growing the Bank albeit at a more modest pace in this environment.

Thank you for all that, Carlos.

Just one follow-up.

On the net interest margin you saw a nice boost this quarter.

I presume most of that related to resets and teasers rolling off.

As you slowed the growth there were fewer teasers as a percentage of the portfolio?

Yes, that's right.

Okay, great.

Thank you, guys.

Seth Glickenhaus, Glickenhaus & Company.

Well, I want to congratulate you fellows, your entire team, for having performed so well in a very tough environment.

My specific question is what detail can you give us about $1.3 trillion servicing that you're doing?

Can you reduce cost, can you improve the profit margin there?

Because any slight improvement against such an enormous base can really be very lucrative and add to earnings nicely?

I was just wondering what details you can give us about it.

I agree with you, Seth.

And we continue to try to apply technology to every application in the servicing protocol.

And there you can gain great efficiencies because it's a scale business.

And you measure it in several ways; one is number of loans serviced per employee is one of the principal ways of measuring your efficiency, and to the extent we continue to build that portfolio over fixed expenses, we're going to gain greater spreads.

So I can tell you that a great amount of effort is being put -- it's all in the technology area.

And also secondly, in moving labor costs to areas of less expensive labor cost so we now have about 3000 employees and Hyderabad and in Mumbai India, which is now beginning to impact our overall cost, and moving many of our people out of California into Chandler, Arizona and Tampa, Florida.

And so the two issues, one is labor cost, big factor; the second is technology, the process, a big factor.

Both of those are being addressed.

We should make substantial progress in 2007 in both of those areas.

Thanks very much.

Bob Napoli, Piper Jaffray.

A question on -- first of all on the Bank's strategy and trying to gauge the credit risk that you do have remaining.

And it has always been the strategy I think of Countrywide to minimize credit risk and it seems like that's the direction you want to go with the Bank as well which makes a lot of sense.

But with the credit insurance that you are purchasing, what net effect does that have on the returns of the Bank and what kind of an outlook would you have -- what would be a reasonable charge-off that you would expect out of the Bank with all of the mortgage insurance?

I don't know if we can get to the charge-off level, but Carlos, do you want to address those questions?

We think that we can still make returns in the Bank in the midteens next year.

Overall obviously there will be some assets that are lower, some that will be higher.

We do anticipate that delinquencies will continue to increase and provisions will remain I think relatively flat.

The thing that causes the provisions to -- and I say flat from the current levels.

From the fourth-quarter levels?

Yes, from the fourth-quarter level, maybe a little lower than that for the whole year.

But the thing that causes our provision to go up is really when delinquency increases at a faster pace in one period than the prior period.

Obviously delinquencies as the portfolio will grow, but as long as they're growing at the same pace then the provisions shouldn't increase, they should stay about the same.

In terms of charge-offs, I don't have a specific number, but like I said, the historical numbers have been very good.

We averaged I think something like 5 basis points for all of last year and they did rise a little bit in the fourth quarter as they did for the entire industry.

And we do anticipate that they will rise modestly in 2007, but I don't think it's anything that's going to materially affect the P&L.

It will be more so that we continue to build the reserves and do it both in terms of on balance sheet reserves for the provisioning as well as through the purchase of mortgage insurance which, by the way, we're buying on our existing portfolio as well as on new assets that we're putting on.

Okay.

And a follow-up question if I could just on the sub prime if you could on the trends are you seeing it seems like one company a day and sometimes to a day are going out of business in that sector.

It still seems pretty tough to us, like a pretty tough segment.

I just wondered if you were seeing any signs of improvement or what your outlook would be for the profitability of that sub prime market.

I did notice you did take it looks like a little bit of a residual right down?

A couple of things.

One on that issue is that -- let me just handle this now in case it comes up.

You notice that in both the wholesale channel as well as our consumer channel that our volumes were lower on a market share basis.

We picked it up on the correspondent.

And it was because we backed away from the sub prime area because of our concern over credit quality.

And I think you're seeing the results of that with those competitors who took that product when we backed away.

So I think there's a couple -- one is you're seeing two or three a day, there's probably 40 or 50 a day throughout the country going down in one form or another.

And I expect that to continue throughout the year.

I think that sub prime is going to be severely hit primarily because the sub prime business was a business of you take inferior credit but you'd have, you'd require superior equity.

And so people had to make a substantial down payment or if they had marginal credit.

Well, that all disappeared in the last couple of years and you get a 100% loan with marginal credit and that doesn't work and so -- particularly if they have any kind of bumps like we have now in the deterioration of real estate values because people can't get out.

So I think we've got a way to go on that and I think you're going to see it more.

I don't think -- there are no signs of it abating, the pressure abating on the sub prime arena and in fact some signs that problems are accelerating.

Bob, this is Dave Sambol.

Just to elaborate on Angelo's comments -- we are certainly seeing that which we expected.

That consolidation in that particular sector is accelerating and we are beginning to see that sector as a result beginning to rationalize.

While we haven't yet seen that manifest itself in improved margins we're hopeful that as we go into '07 we'll begin to see margins improve.

We have recently begun to see a lift in our volume as some of these guys that have gone out of business that volume has been -- a good portion of that volume has come our way.

So those trends from our perspective are very helpful to us.

Another trend I might point out just generally because those who might be interested in it is that we had during the boom the last couple of years we had quite a few of these salespeople leave us -- going for greener pastures supposedly -- and we're seeing a reversal of the tide where they're coming back asking to be rehired.

So you can see -- we're seeing it every day now, a real change in the competitive environment.

Are the gain on sale margins at like the 2% level on new business or -- I know that the quarters were abnormally high as you said in your press release.

Yes, they're slightly below -- around or slightly below that level at the moment.

In the fourth-quarter they were anomalously high because of the timing difference we made reference to in the third quarter which turned around in the fourth quarter.

Right.

Thank you very much.

Jonathan Gray, Sanford Bernstein.

I wonder if I could ask two questions, a fairly technical straightforward one at first.

The Bank's total assets of $83 billion, the press release indicates that approximately $19 billion are credit enhancement mortgage insurance.

Am I correct that that excludes a substantial percentage of the portfolio that is in the form of Fanny and Freddie MBS as well and Judy Mae?

In other words, of the $83 billion we've got 22% that you've insured with private MI, isn't there a large component of the Bank's portfolio that are mortgage-backed securities, government guaranteed?

No, we'll walk you through that, Jonathan.

That's not the case.

Jonathan, how you doing?

I'm doing fine.

Atta boy.

Okay, go ahead.

The Bank's assets consist primarily of a loan portfolio, I think it was around $72 billion or so, (indiscernible) billion at the end of the year as well as there's also like 5 to $7 billion in securities that are of sequential CMOs, AAA sequential CMOs, they're not really guaranteed by Fannie Mae necessarily, but (multiple speakers).

But there are no Fannie or Freddie MBS in the Bank's portfolio of any size?

Not of any size.

But in addition to the 19 billion presumably there are also second mortgages that were insured in prior periods?

Jonathan, the way to look at it is, as Carlos said, of the Bank's balance sheet approximately $72 billion represent residential loan -- whole loan residential loan investments.

And of that $72 billion, $19 billion by the end of the first quarter will be credit enhanced with some form of pool insurance or mortgage insurance policies.

Okay.

My next question -- I hope this isn't in bad form or anything, but how are you addressing questions that must be coming to you regarding discussions in the press of some sort of business alignment or even acquisition by Bank of America or another major lender?

Are you able to comment on it at all?

You've known us a long time, Jonathan, and you know that as a matter of policy we don't comment on market rumors.

Very good, thank you.

Ken Posner, Morgan Stanley.

I wanted to ask a couple questions about the production margin which was higher than we had forecasted.

But as you point out, there is the timing difference.

Would it be possible to quantify that timing difference so that we can understand what the underlying run rate of the production margin in the fourth quarter was?

Kevin Bartlett?

It was about $15 million in the fourth quarter that related to loans that had a hedge loss in the third quarter that kind of reversed itself in the fourth quarter through higher gains in both the home equity section and also in the nonprime section.

So it's about a $15 million ballpark in each one of those areas.

So the total gain on sale margin -- sorry, the total production margin would be slightly below the 36 basis points that you recorded?

I'll do the math, but it sounds like it was still a relatively healthy production margin.

And then one other question on the production margin, the prime production margin was 93 basis points, down slightly from the third quarter, but up rather significantly from a year ago.

Is the prime market now past the worse part of the cycle or is the prime market still facing competitive pressure in front of it?

This is Dave, Ken.

We've seen prime margins over the last quarter fairly stable.

There's still downward pressure, although not acute.

The most notable negative impact on prime margins for us is the falling volume and percent of the mix represented by pay option arms, which are our highest or amongst our highest margin products in the prime area.

And that explains the majority of the drop that you've seen quarter-over-quarter on the prime side.

And so I don't know that I would say that the worst is behind us.

We are bracing for continued pressure as volumes in the market drop and excess capacity increases before consolidation results in that working itself out of the market.

But we have not yet seen significant pressure on non-pay option prime margins.

And if I can sneak in one last question just on the MSR hedge.

There was a small write down in the MSR and there was a negative number on the MSR hedging benefit line.

And I know those numbers don't always move exactly in the right direction due to accounting limitations, but is there anything else to read into those two numbers?

Yes, this is Kevin Bartlett again.

The thing that happened in the fourth quarter was rates didn't really move that much, but the amount that they did move was in opposite directions.

What I mean by that is mortgage rates were down slightly for the quarter and yet the treasury curve was slightly higher and the swap curve was slightly higher.

And so the swap curve would cause slight losses on the hedge in addition to the amount of option or time value that we would normally experience which is roughly $100 million of the $140 million that you see in the P&L.

And then the decline in the asset value is primarily driven by the change in mortgage rates being slightly lower.

So this is one of those quarters where the numbers move slightly against you and there are other quarters where they move slightly --?

Yes, that's right.

Thank you very much.

Paul Miller, Friedman Billings Ramsay.

Thank you very much.

I was wondering if you guys could add some color on your servicing value book.

I know this time around you had a servicing fee of roughly 42 basis points which is one of the highest we've seen in a long time.

And I know, Angelo, you're saying that there are a lot of things moving in your direction to lower that servicing fee, not increase it.

And also -- which gave you like 177 basis points of servicing value to book which was somewhat on the high end of your ranges, so it's still within your range.

But can you just add some color on that, why those numbers are so high?

I'm going to have Kevin do that.

It's true that our goal is to continue to reduce that excess servicing down.

And unfortunately it's not a smooth journey as you go through that process.

But -- and we continue to try to influence all the protocols -- external protocols to reduce the overall servicing fee.

But Kevin, do you want to walk him through that?

The first thing is that the mix shift in the fourth quarter is slightly more fixed-rate loans which have a higher cap rate than some of the ARM loans that replace the pay options most notably that declined and were replaced by higher fixed-rate volume.

And then the next thing is that we retain more access in the fourth quarter versus the third.

And our thinking there is that bank growth and assets has been a little on the lower side and one of the ways we could deploy excess capital was to invest in some servicing.

And so that explains most of the difference that occurred in the fourth quarter.

And then one other question.

On the buyback you guys talked about in the third quarter, talking about buying back over the next four quarters, I guess you can clear me up -- I might be mistaken here -- it was about $2.5 billion where you guys are going to issue like a 1.5 to $1.8 billion debt security.

Is this $1.5 billion debt security, is that the debt security we're going to see -- are we going to see anything else?

And can you tell me the interest rate on this particular debt security?

Eric?

The Board authorized $2.5 billion of a repurchase.

We gave notice at the end of the third quarter when we gave you our earnings report that we were going to repurchase between 1 billion and 2 billion during the fourth quarter.

In fact, we did buy 1.5 billion back through an accelerated stock repurchase.

We financed that with $1.5 billion of a hybrid security.

Our capacity to issue additional is probably just north of 300 million, that's a relatively small deal size.

We do have other excess capital.

We will be growing our excess capital during the year.

We'll be monitoring our investment in our old businesses, our new businesses and we'll take a look at our cumulative excess capital position to determine whether or not we're in a position to buy any more stock back.

In harkening back to Ken's question about what kind of repurchases are in the forecast -- in the event we don't deploy the equity in our new businesses in our old businesses, the ROE that we would earn on a stock repurchase would be about the same level.

So the impact on the forecast would be fairly neutral.

So the interest rate on the 1.5 billion that we issued was 7%.

Okay, thank you very much.

I just want to thank you guys for putting in the tables on the nonperforming assets, that helped tremendously.

Thank you very much.

We aim to please.

Ed Groshans, Fox-Pitt Kelton.

First I just want to -- Angelo, in one of your responses you talked about higher reinsurance premiums.

And I was wondering, is that for the MI reinsurance and you're seeing more premiums come your way?

Are you talking about in the Balboa RE.

Yes, in Balboa RE.

It's -- of course we increased -- the corporates increased and there was the amount of insurance revenues coming in simply because there are more loans that we are issuing, we're reinsuring with our counterparties.

There's been no increase in premiums themselves, right?

This is John.

No, there's not been an increase in the premium rates.

It's simply, as Angelo points out, the growth in the underlying portfolio that's reinsured.

And is that a function of what we're seeing in the marketplace of I guess more appetite for fixed-rate products and more is coming through that channel as opposed to securitization channels?

This is John again.

It's not just fixed rates but rather the comparison of something with an MI policy on it at the loan level versus say maybe a piggyback loan.

And you will note recently the tax law change which makes that premium now deductible for certain consumers.

I would imagine that that change in the tax law will increase the amount of MI insurance which is a positive for Balboa RE and MI companies, they're the ones that I'm sure lobby for it.

But basically it relates to any loan -- in order to reduce the down payment requirement that people opt for MI and that business just continues to grow and Balboa RE grows with it.

Okay.

The other question I have is on your guidance for this year.

Pretty much this time last year we see the same type of guidance, except I guess a few tweaks in that the overall rate environment for this year is a little bit higher, the high end origination is a little bit lower.

I guess what are you seeing out there that would give you kind of the flat guidance range compared to where we were last year when things looked I guess a little bit better?

Well, we know a lot more 12 months later than we did last year at this time.

And we have a better sense of the trends.

And we're guided by what we see -- you see there's a wide range in that guidance because there are some unknowns, uncertainties when you're trying to project something out 12 months in advance.

But I think the way to look at it is based upon all the data that we collect, all of our intuitive knowledge comes together in what we believe will be this year's results.

Now as we have in the past, as the year begins to unfold and changes take place -- and they will take place -- we will revise that guidance.

Narrowing -- you'll see a narrow it as it goes along and if it needs adjustment up or down based upon current events we will do so.

So this is our best shot at it 12 months before it actually happens.

Right.

And then last year you gave us guidance for the diversified businesses.

Are you going to give us that guidance this year also?

We're not going to do that this year?

Ed, we've streamlined the guidance in order to make it a more simple, easier process to understand.

We still give you a great amount of detail.

We look at the level of detail that other competitors give you and we see that we give you quite a bit.

We've given you an idea of what the overall market size is going to be.

You can interpolate what our market share is going to be based on our funding indications here.

We've given you some detailed information on our production margins, on our average report size and our servicing margins.

So we feel we've got a lot of data there.

Okay, fair enough.

My last question, and I think Jonathan Grey addressed it a little bit.

But Angelo, what I'd like is more your view of the independence of Countrywide.

Like what's that decision tree where Countrywide stays independent or potentially says, you know what, it's time to hit a bid or something along those lines?

I think it would be inappropriate for me to comment on it.

I think that the only thing I would say is that we do each day is work as hard as we can to enhance shareholder value.

That's our focus to make sure that every step we take, every plan we put in place, every technology that we apply, every person that we put in place to operate the Company is dedicated to increase shareholder value.

And that's our focus and that will always be our focus.

And that's about all I'll say on that issue.

All right, thank you very much.

Eric Wasserstrom, UBS.

Just a couple of smaller items.

Why was it that the interest expense associated with the issuance of the hybrid securities was captured in the servicing area as opposed to another business area?

The reason that we classified the hybrid security there is because we've always considered the excess equity that we have to finance the servicing.

And so when we replaced that excess equity with the security which got 75% equity credit it was logical to dedicate that debt to the servicing sector.

Other items that go in there are the deferred taxes and things of that nature.

So you're going to see higher leverage because it used to be equity and you're going to see a relatively high cost of funds, as we mentioned before.

And so that caused a significant increase in interest expense in the servicing sector.

In the $300 million of remaining excess capital that you view, that's also in that segment as well I'm assuming.

The $300 million is our capacity to issue additional hybrid, so that's a notional number, that's not extent number.

All right, I see.

But the excess capital, just broadly speaking, you would consider that business to still have excess capital?

Historically that's where we've placed the excess capital, in the servicing sector.

Okay.

And in the Capital Markets business, was some of the decline in the quarter a function of volume or was it a function of margin as a result of the mix of instruments being traded?

This is Ron.

It was a combination of the two, there were declining volumes as well as some margin compression from the inventory that we held over from the third quarter which will get securitized into the fourth quarter.

I see.

And can you just give me a sense of what that -- what those assets were?

What the assets were that were being securitized.

These were all in the sub prime arm, fixed whole loan and scratch and dent.

And just one last thing.

The miscellaneous production income has remained at an elevated level, what's captured in that?

Is that late fee income or what is that exactly?

It's predominantly fulfillment fees paid by the bank.

Thanks very much.

Fred Cannon, KBW.

Thanks for taking the time.

I had a question on the nonprime margins.

In the press release you stated that the margin increase between the third and the fourth quarter is a result of lower credit enhancement costs.

Given the worsening credit during the quarter, I was wondering if you could shed some light on the lower credit enhancement costs.

Sure, this is Kevin Bartlett.

Some of the widening that took place in the third quarter we kind of experienced the third-quarter margins being low and we made some adjustments to both our pricing for the fourth quarter and also to our execution strategies.

In the execution strategies in the fourth quarter we came up with a couple of new techniques that basically enhanced our ability to lay out some of the credit risk in the structure and as a result the margins in that business improved fairly substantially.

Did that include putting on a greater value for the residuals?

No.

Okay.

Then in terms of that, because then when we turn to be page on the servicing it said your negative servicing value was the impact of higher delinquencies on a residual valuation.

So on the one hand it was just better execution on the gain on sale side of it versus the delinquencies on the residual value and the servicing -- I'm just trying to -- is there any link between those two issues I guess is the question?

Not really.

I think that the fourth-quarter change in residual values is due to the delinquency progression in excess to some of the estimates that we had on the existing residuals as the market deteriorated.

But the fourth-quarter margins were really driven by better primary pricing as well as an execution change where we were able to lay off more of the credit risk through the structure to third parties.

That's the lower credit enhancement cost you mean?

Yes.

So you sold more and got a better gain even though credit was deteriorating?

Yes.

Okay.

Just finally, one last question.

The tax rate dropped a bit in the quarter.

I was wondering if you could tell us about that and maybe about the tax rate assumed in the guidance looking forward.

What happens is that we have a significant amount of deferred taxes and those have to be repriced every quarter.

And we've been very diligently working on moving employees out of California.

This is a state tax driven issue; this won't impact federal taxes.

And as we move employees and operations out of California we generally enjoy lower tax rates.

And what happens is it's not just the future earnings that you're going to have but the tax liabilities that you have that you haven't paid yet that get repriced as well.

And so there's a little bit of an overplay here in that repricing those deferreds will bring the current period tax rate a little bit lower than we would expect.

We would expect the '07 tax rate to be in the mid 38% range.

So the fourth quarter is a little bit of a true up of that fact and you get a little bit of a better run rate moving forward on an ongoing basis, is that the way to think about it because of pushing things of the state?

That's fair to say.

Thanks, Eric.

Chris Brendler, Stifel Nicolaus.

If I look at your guidance for '07 and take the midpoint of all the assumptions you've laid out there, I can back into -- diversified earnings look to be almost exactly flat from '06.

So my question is, I think you addressed the bank a little bit.

It sounded like the bank earnings will be relatively flat.

Is it the expectation that the rest of the diversified earnings, most importantly the Capital Markets business, will look at a flat year in '07?

And Ron, if you could address a little bit more detail the conduit revenue is going to be a big driver of the shortfall versus my expectations this quarter in Capital Markets, and how does that play into -- because, obviously, a lot of disruption is happening in the lower-rated credits on the ABS side.

How does that play into your outlook for production margins?

It seems like a little bit of a disconnect when you see the conduit revenues fall so sharply this quarter, but yet the production margins held up pretty well.

I think that highlights in particular the difference between the production margins on the origination side and the securitization margins that we experience in the bond classes that have widened dramatically as you point out.

In the fourth quarter, whether you looked at the ABS index which is a synthetic view of the asset-backed market at the BBB and BBB- classes that widen rather dramatically, starting in the fourth quarter and continuing into this quarter, you see that we expect the volume of business to slow down, which we saw in sub prime and ARM production in the fourth quarter, and we expect a repricing of those loans.

Specifically if you look at the lag between Countrywide Home Loans production and the Capital Markets unit, we tend to have a longer aggregation period.

So the loans that we marked and sold in the fourth quarter reflected loans that we'd acquired in the third quarter and have aggregated for a period of two or three months.

That is what reflects the lower conduit revenues in the fourth quarter.

It is also the case that when you look at the food chain within our business, the margins in the conduit business are the lowest.

You start with retail and then wholesale and then correspondent one loan at a time acquisitions in correspondent, and then bulk purchases through our conduit activities.

And in that space, margins are the lowest.

And it is also today one of the most crowded spaces with all of the dealers having built their own conduits.

So what we are seeing in the conduit is not necessarily reflective of what we are seeing on the retail and wholesale side, for example.

I think that's great color.

A follow-up on the bank portfolio.

It looks like the decline in loans held for investment, a big chunk of it looks to have come out of the pay option portfolio, and yet you have also seen another substantial increase in the amount of negative amortization there.

My question is did mortgage insurance that you're layering on and expect to layer on in the first quarter, is that primarily targeted for the pay option portfolio?

Just give me your overall level of comfort with that portfolio.

I think in the neg am before Carlos and Jim take over, it is very important to distinguish between the percentage of neg am which shows rapid acceleration verses the dollar amount.

And I would like you to walk through that with him, Carlos, because the dollar amount is not a significant percentage indicator.

The portfolio, the loan portfolio that is, did decline slightly in the fourth quarter, and the decline was primarily in the pay option ARM, but that is just a function of the repayment rates on that product as well as our slowdown in the additions to the portfolio as we reassessed and developed the strategy that I mentioned before, including the credit enhancement.

The credit enhancement that we are buying is both for pay options and second-lien products.

We have always purchased one on the second-line products, and on the second lien it's purchased on the high CLTV product.

In the case of the pay options, we've started this year really in the fourth quarter to buy a substantial amount of credit enhancement to protect ourselves against what we consider to be the riskiest portions of that portfolio; that being the loans that were originated most recently and that we're going to be adding in 2007.

Those loans being the ones that are being put on at sort of the -- or near the peak of the real estate market.

The other loans have significant home price appreciation in them, the ones that were originated in '03, '04, even '05.

So they have substantial equity.

But our plan is to enhance the pay option portfolio significantly to the extent we keep growing it.

One quick final question, I know there is going to be a denominator effect here, but in the 10-Q I believe you gave us the delinquency rate on the pay option portfolio.

Do you have that handy?

We should have that delinquency number.

Do you want just bank only?

Yes.

The delinquency rate on the pay options is about 67 basis points.

It is the 90 plus delinquency rate.

A little over half of 1%.

It was 32 last quarter?

No, it was 44 last quarter.

Thank you.

Bruce Harting, Lehman Brothers.

Just one question on $100 million or so increase in other expense, just wondering what that was on a link quarter, I think.

Then more a macro question, it seems like -- I remember a long time ago it seemed like the banks were very, very involved in mortgage lending, sort of call that the old model where they hoped that when they controlled the flow and kept them say in the '80s, they kept the loans on balance sheet.

And then the economics of the business changed and you saw the banks tend to get out of the mortgage lending business.

And then it seems like in the '90s, some of the ones that re-entered did it not because they were good at the details of mortgage lending -- that has always been your strength is making money through cycles and paying attention to the details and making money through it every cycle.

But it seemed like a lot of the banks just got into the business and hoped that they could kind of crack the code on cross-selling products to their mortgage servicing customers, and that didn't really work.

And I am just wondering now in the last five, six years if the model has kind of changed again in the minds of the banks and how you see the competition in terms of the Wall Street firms obviously getting more involved in making money through the capital markets.

And if that is a longer-term success, do you think the banks are much more interested in competing in the space and that is why we are seeing the Citi/ABN Amro deal and many of these others, Merrill and First Franklin, because the capital markets activity is just that much more successful today as Fannie and Freddie have had their issues?

So just curious if that is kind of what is happening out there in the marketplace as you see it.

And then just a quick third one, I do not know if you're able to comment, but any changes from the -- is the nice growth you have had year-over-year in pay option ARMs, $10 billion or so on balance sheet, anything to do with the Wachovia/Golden West, and any change in sort of the option ARM competitive market as a result of that?

Thank you.

Let me see if I can work through this with you.

I think that in terms of this more philosophical, in terms of the banks, the history as I have been observing it for the last now 54 years, the banks with the exception of a couple tend to come in and out of it because theoretically, it sounds good.

We will get the big share of their wallet, the consumer's wallet, by getting in the mortgage business, and we'll get their car loans and all kinds of stuff like that.

I would say other than Wells who I think has done a magnificent job at the cross-sell concept, they have not been successful, particularly with mortgages.

Mortgages require a very detailed, very heavy lifting obtaining that product, processing, underwriting, closing, servicing, all of that sort of stuff.

And the banks don't tend to do that very well.

Therefore, the consumer or the representative of the consumers, be they mortgage brokers or real estate brokers, tend to try to find that source which is the most efficient, and that has always been Countrywide year in and year out, decade in, decade out.

The banks just, because the leadership of banks change from time to time and they come in with a new view and they want to get in the mortgage business, but historically none of them have really made it work.

If you were able to pull apart their mortgage franchise within the banks, none of them are very profitable at all.

Eventually, they wake up to that and they exit, and I don't see any change in that.

So again, you have a couple of banks that do it well, but most don't and most won't, for a couple of reasons.

One, they have a lot of things on their plate and they tend to place a lot of emphasis on the other parts of their business and not on the mortgage business.

So they treat it as a side business, a tertiary business, and they get tertiary results.

And I don't see any change in that going forward.

I don't see any major paradigm there relative to banks and how they handle it, although they will come in and out for the next -- I won't be around for the next three or four decades, but you guys might, and you'll see them come in and out, and you will see that same pattern.

In terms of the Wall Street houses, I think again some of them will probably succeed at it, most of them won't, because of the problems you have seen.

Merrill Lynch, with [ONIT] is a prime example of a well-intentioned company that didn't understand the true vagaries of our business and didn't understand the concept of early payment default and inability to securitize delinquent loans, and also the fact that the counterparties in our business for the most part are very weak financially.

And when you go to put things back to them, they disappear.

So Merrill Lynch, I think, is not an anomaly.

I think it's an example of what happens in our business, and very few in the mortgage banking business are astute enough to deal with that, no less as a new player.

I think a couple of them probably will succeed, and it will be part of the competitive landscape going forward, and someone will decide this is not a business I really want to be in.

So I think that is my view of it, and we for years, Bruce, we competed against mortgage banks, all kinds of mortgage banks throughout the country, thousands of thousands of them, and they are gone.

Then we competed with the thrifts.

We were told that was a problem.

They are gone.

Then we competed with the banks.

Most of those exited the business as for of ABN Amro was one that was going to come in and wipe us out.

General Motors was going to come in and wipe us out.

All gone.

Now it is the investment banks, and they are just another new player in the business, and we will compete effectively against them.

There was a $100 million question on expenses.

Eric, you want to take that?

Bruce, this is Eric.

You asked about the $100 million increase in other expenses from the fourth quarter of last year to the fourth quarter of this year. $32 million of that relates to professional fees.

That would be various litigation matters. $14 million relates to insurance, taxes, licenses, which would primarily be credit enhancement at the bank, and it truly trails off into smaller items that have limited significance after that.

Okay.

Thank you.

Then just on the option ARM, any noticeable change in the competitive environment, Wachovia/Golden West?

Well, okay, yes.

Maybe Dave can answer the question, but my viewpoint we don't see any difference.

It's sort of been very static and quiet.

I wouldn't attribute our pickup because of the transfer of the Sandlers to Wachovia.

I think it's pickup because we decided to get into the business, and if we decide to get into a business, we will take our share.

Do you have any --?

The history of pay option ARMs for Countrywide is characterized by a focus in '05 on our part to be a bigger player in that market, and that explains the growth that we enjoyed in volume in pay option ARMs.

I wouldn't say that the Wachovia transaction had anything to do with our volumes.

More recently, the drop-off in volumes is explained by lesser consumer demand for the product, which in part is the result of all of the negative press that the product has received and in part the higher interest rates which affected the attractiveness of that product relative to other products.

To give you a perspective on that, I think in the first quarter about 21% ARM's origination went down to 9%, something like that.

So you can see the substantial drop-off, because I think that the consumers themselves have become concerned about that issue.

And with the tightening of credit requirements, the combination of those issues have substantially reduced the volume of that product.

Okay, thanks very much.

Scott Carmel, Philadelphia Financial.

Good morning, and I apologize if you already addressed it, but on the option ARM side I know you said that volumes were down in the quarter and they have been for the last two, but was the pricing that you're getting on selling those option ARMs any different?

Margins are still relatively strong for the volumes that we're doing.

Could you give us a number on that?

Give you details of the margins?

They're slightly up from the third quarter and most of that I think is -- as the dwindling supply of that product has met with still a reasonable amount of demand on behalf of investors to buy those loans, the spreads on that product have tightened in and continued tightening in into January.

Although recently, maybe the last couple weeks it's widened out just a little bit.

I know pre payments have been pretty strong on that asset.

Do you see that affecting pricing on what you can sell them for at all?

Not really.

I think that people price in the fast speeds that that product exhibits depending on whether you're talking about loans with or without prepayment penalties.

So I don't really see that there's any change there that would impact pricing.

From an investment standpoint, from our own bank's investment standpoint and secondary market investor standpoint, one of the things that makes option arms attractive is the fact that the vast majority of what's originated carries prepayment penalties.

And so it's less negatively convexed, it's less adversely exposed to fast prepayment speeds.

I have a correction on the delinquencies on pay options, and this is driven primarily by the fact that the portfolio pay option was reduced through prepayments.

But on September 30th our pay option delinquency was 32 basis points, as of 12/31 it's 63 basis points -- again, driven primarily by the reduction in the number of loans that are in the pay option category.

And those are 90 plus.

Okay, great.

Just one other question.

On Balboa Life, could you explain to us the year-over-year decline in earnings, what's driving that?

Bob James?

There are two events there.

One in the fourth quarter of 2005, that quarter benefited from a reserve take down due to cat reduction reserves primarily from Hurricane Katrina.

If you'll remember, Katrina was an unprecedented event; when we set those reserves we did it on a conservative basis.

As we learn more about those claims those reserves will reduce.

So that quarter got a benefit from that.

In the fourth quarter of '06 there was a write-down that you heard about earlier in the insurance business.

If you normalize that there's actually a slight improvement quarter over quarter.

Okay, great.

Thanks a lot.

Greg Lapin, Tribeca.

I just have follow-ups.

On the Balboa Life, on the Forest Place premium, they were down 4%, they've been growing nine months over nine months.

Does that have something to do with the industry or a Balboa specific item?

We've had a reinsurance agreement with the lender that took some of those premiums to another client of ours.

But if you normalize that the premium in the FOH is actually up.

So premiums and earnings up?

Yes.

And then just on the '08 outlook, I hear you on the consolidation side and -- I'm trying to figure out how to put this -- the most correlated factor to credit is the unemployment rate and we're witnessing a cycle with deterioration in delinquencies without a change in unemployment.

So embedded in your '08 improving outlook, it sounds like you're not paying much attention to the economic cycle or kind of mean reverting upward movements in unemployment.

So I kind of wanted to see -- in looking at past cycle the manifestation of credit losses even lack unemployments by up to a year.

So what are the economic assumptions you're using?

And if you could talk about how the mortgage cycle plays out over the next few years in the context of key macro variables?

I agree with you that there is a direct link between unemployment and delinquencies.

And what you're seeing is in terms of the issue of higher delinquencies in a very low unemployment environment is two factors, driven by two factors I believe.

One is a maturing of these portfolios.

As portfolios mature, both in the bank and in our servicing (inaudible), you will get naturally higher delinquencies and, by the way, coming off unprecedented low levels.

Because not only did you have low unemployment, you also had increasing real estate values.

Both tend to substantially depress delinquencies.

So now you have a more normal environment that's evolving, both maturing of the portfolio and you have deteriorating real estate values which are contributing to it.

Because people up to this point were able -- if they got into trouble able to sell their home, get out some equity and move on.

Now because the amount of leverage they have they're unable to sell their home and move on.

And so that factor increases delinquencies.

Dave Sambol wants to address the issue of the other factors in our guidance.

Yes, just mirroring what Angelo said.

The factors that we considered in arriving at the guidance include a lower expected mortgage market volume, resulting pressure on production margins, and then higher credit costs, as Angelo commented, associated with higher delinquencies and defaults.

With respect to the delinquency and default picture, in this cycle it's less a function of a weak economy and job picture than it is a correlation to what's the trend in housing.

We've had a situation where there's been affordability and speculation and low rates moving to high rates.

And also for the most part a liberal credit environment over the last several years all of which is now -- as rates are going up, as credit is tightening, is going to contribute in our view to continued pressure on delinquencies and defaults and associated credit cost.

And those are the factors that we considered in arriving at the guidance.

We have not baked in the higher unemployment rate because we have no basis for that.

But if that would happen, obviously we'd have to make adjustments along the way.

We also have lower rates, by the way, which would increase our margin.

So there are offsets to all of this, it doesn't stay on one track.

Go ahead, I'm sorry, David.

As we reflected on the cycle, one of the reasons we believe that 2007 might be the likely trough of the housing cycle is the fact that the economy is looking as good as it is other than the housing market.

And hopefully that will temper some of the increase and pressure on delinquencies and defaults.

Okay, thank you.

Will Keaten, Galleon.

I was wondering how specifically does your guidance reflect your expectations for increased delinquencies and continued credit deterioration?

For example, are you reflecting additional residual write-downs or higher servicing costs in your servicing margin?

And then also, how are you reflecting additional credit enhancement costs in your estimate?

Is that incorporated in the production margin?

Thank you.

As it relates to delinquencies and servicing costs, obviously -- let me just address that portion of it.

Operationally you do experience higher costs when you're dealing with delinquent versus someone is making their payment on time, but there are offsets to it.

And you'll notice that if you pull apart our financials you'll see that the late fees and other fees that are -- inure from a higher delinquency are very, very substantial and more than cover the additional cost.

So that clearly has a -- higher delinquencies have a clear cash offset.

As to what else is baked into our numbers --

Our guidance provides obviously for a fairly broad range and within that range we contemplate a range of possible outcomes with respect to credit costs and delinquencies.

And so we do reflect on different scenarios in arriving at that range.

And the one other thing to add, we also expect this loan season -- which we expect the portfolio to season during '07 -- that delinquencies will go up.

And so that's typically baked into our probability models as well.

But what we can say is we didn't factor in material improvement or any notable improvement from the current levels of delinquencies that we're seeing.

And in that respect maybe you could characterize our guidance as not having an optimistic component with respect to credit in that way.

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

Thank you all for participating in the call.

We appreciate -- this was a -- in the almost 40-year history of the company this was by far the largest group, over 600 participants this morning and we're very appreciate of your support and your questions. 750 -- okay, well.

So thank you very much and we'll talk to you at the end of next quarter.

Thank you.

Ladies and gentlemen, Mr. Mozilo is making today's conference available for replay, it's for two full weeks starting at 12 PM Pacific Standard time January 30th all the way through 11:59 PM February 13th.

To access AT&T's executive replay service, please dial 800-475-6701; at the voice prompt enter today's conference ID of 858-014.

And that does conclude our earnings call for this fourth quarter and year end 2006.

Thank you very much for your participation as well as using AT&T's executive teleconference service.

You may now disconnect.