**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-Q**

| **(Mark One)** | ** ** |
|----------------|------------|

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended September 30, 2006**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition periodfrom              to              **

**Commissionfile number: 1-8422**

**Countrywide Financial Corporation**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **13-2641992**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |
| **4500 Park Granada, Calabasas, California**                     |   | **91302**                          |
| (Address of  principal executive offices)                        |   | (Zip Code)                         |

 

**(818) 225-3000**

**(Registrant’s telephone number,including area code)**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes x     Noo

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act (checkone):

Large acceleratedfiler x      Acceleratedfiler o      Non-acceleratedfiler o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct):

Yes o      No x

Indicate the numberof shares outstanding of each of the registrant’s classes of common stock, asof the latest practicable date.

| Class                        | ** ** | **Outstanding at November 2, 2006** |
|------------------------------|------------|-------------------------------------|
| Common Stock $.05  par value |       | 621,075,322                         |

 

 

----

**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QSeptember 30, 2006**

**TABLEOF CONTENTS**

|                                         | ** ** | **Page**                                                                                                                 | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I.  FINANCIAL INFORMATION** |       |                                                                                                                     | 1          |   |
| Item 1.                                 |       | Financial Statements:                                                                                                    |       |   |   |   |
|                                    |       | Consolidated  Balance Sheets—September 30, 2006 and December 31, 2005                                     |       |   | 1 |   |
|                                    |       | Consolidated  Statements of Earnings—Three and Nine Months Ended   September 30, 2006 and 2005                 |       |   | 2 |   |
|                                    |       | Consolidated  Statement of Changes in Shareholders’ Equity—Nine Months Ended  September 30, 2006 and 2005 |       |   | 3 |   |
|                                    |       | Consolidated  Statements of Cash Flows—Nine Months Ended September 30, 2006   and 2005                    |       |   | 4 |   |
|                                    |       | Notes  to Consolidated Financial Statements                                                                              |       |   | 5 |   |
| Item  2.                                |       | Management’s  Discussion and Analysis of Financial Condition and Results of   Operations                            |       |   | 38 |   |
|                                    |       | Overview                                                                                                                 |       |   | 38 |   |
|                                    |       | Results  of Operations Comparison—Quarters Ended September 30, 2006 and 2005                                   |       |   | 42 |   |
|                                    |       | Results  of Operations Comparison—Nine Months Ended September 30, 2006 and 2005                                |       |   | 65 |   |
|                                    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                              |       |   | 82 |   |
|                                    |       | Credit Risk Management                                                                                                   |       |   | 84 |   |
|                                    |       | Loan Servicing                                                                                                           |       |   | 87 |   |
|                                    |       | Liquidity  and Capital Resources                                                                                         |       |   | 88 |   |
|                                    |       | Off-Balance  Sheet Arrangements and Aggregate Contractual Obligations                                                    |       |   | 89 |   |
|                                    |       | Prospective  Trends                                                                                                      |       |   | 90 |   |
|                                    |       | Regulatory Trends                                                                                                        |       |   | 92 |   |
|                                    |       | New  Accounting Standards                                                                                                |       |   | 92 |   |
|                                    |       | Factors  That May Affect Our Future Results                                                                         |       |   | 94 |   |
| Item  3.                                |       | Quantitative  and Qualitative Disclosures About Market Risk                                                              |       |   | 95 |   |
| Item 4.                                 |       | Controls  and Procedures                                                                                                 |       |   | 95 |   |
| **PART II.  OTHER INFORMATION**    |       |                                                                                                                     | 96         |   |
| Item  2.                                |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             |       |   | 96 |   |
| Item 6.                                 |       | Exhibits                                                                                                                 |       |   | 96 |   |

 

----

**PART I.FINANCIAL INFORMATION**

**Item 1.**                        *Financial Statements*

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                                                                    | ** ** | **September 30,  2006**                              | ** **  | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                    | ** ** | **(Unaudited)**                                           | ** **  |
| ** **                                                                                                                                                                                                                                                                                                                    | ** ** | **(in thousands, except share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Cash                                                                                                                                                                                                                                                                                                                          |       | $                                                         | 1,583,722   |                        | $          | 1,031,108 |   |
| Mortgage loans  held for sale                                                                                                                                                                                                                                                                                                 |       | 28,877,092                                                |        | 36,808,185                  |       |
| Trading  securities owned, at fair value                                                                                                                                                                                                                                                                                      |       | 15,971,469                                                |        | 10,314,384                  |       |
| Trading  securities pledged as collateral, at fair value                                                                                                                                                                                                                                                                      |       | 3,465,175                                                 |        | 668,189                     |       |
| Securities  purchased under agreements to resell, securities borrowed and federal funds  sold                                                                                                                                                                                                                                 |       | 25,103,616                                                |        | 23,317,361                  |       |
| Loans held for  investment, net of allowance for loan losses of $207,987 and $189,201,  respectively                                                                                                                                                                                                                          |       | 80,796,708                                                |        | 69,865,447                  |       |
| Investments in  other financial instruments, at fair value                                                                                                                                                                                                                                                                    |       | 12,193,051                                                |        | 11,260,725                  |       |
| Mortgage  servicing rights, at fair value                                                                                                                                                                                                                                                                                     |       | 15,018,415                                                |        | —                      |       |
| Mortgage  servicing rights, net                                                                                                                                                                                                                                                                                               |       | —                                                    |        | 12,610,839                  |       |
| Premises and  equipment, net                                                                                                                                                                                                                                                                                                  |       | 1,569,894                                                 |        | 1,279,659                   |       |
| Other assets                                                                                                                                                                                                                                                                                                                  |       | 8,615,430                                                 |        | 7,929,473                   |       |
| Total assets                                                                                                                                                                                                                                                                                                                  |       | $                                                         | 193,194,572 |                        | $          | 175,085,370 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                                                               | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Notes payable                                                                                                                                                                                                                                                                                                                 |       | $                                                         | 67,632,078  |                        | $          | 76,187,886 |   |
| Securities sold  under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                                   |       | 37,710,297                                                |        | 34,153,205                  |       |
| Trading  securities sold, not yet purchased, at fair value                                                                                                                                                                                                                                                                    |       | 3,395,686                                                 |        | 2,285,171                   |       |
| Deposit  liabilities                                                                                                                                                                                                                                                                                                          |       | 55,895,651                                                |        | 39,438,916                  |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                                                                                                                                     |       | 8,526,122                                                 |        | 6,358,158                   |       |
| Income taxes  payable                                                                                                                                                                                                                                                                                                         |       | 4,935,590                                                 |        | 3,846,174                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                             |       | 178,095,424                                               |        | 162,269,510                 |       |
| Commitments and  contingencies                                                                                                                                                                                                                                                                                                |       | —                                                    |        | —                      |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Preferred  stock—authorized, 1,500,000 shares of $0.05 par value; none issued and  outstanding                                                                                                                                                                                                                           |       | —                                                    |        | —                      |       |
| Common  stock—authorized, 1,000,000,000 shares of $0.05 par value; issued,  617,027,520 shares and 600,169,268 shares at September 30, 2006 and  December 31, 2005, respectively; outstanding, 616,748,918 shares and  600,030,686 shares at September 30, 2006 and December 31, 2005,  respectively |       | 30,851                                                    |        | 30,008                      |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                   |       | 3,435,882                                                 |        | 2,954,019                   |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                                                       |       | 14,878                                                    |        | 61,114                      |       |
| Retained earnings                                                                                                                                                                                                                                                                                                             |       | 11,617,537                                                |        | 9,770,719                   |       |
| Total shareholders’ equity                                                                                                                                                                                                                                                                                               |       | 15,099,148                                                |        | 12,815,860                  |       |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                                                              |       | $                                                         | 193,194,572 |                        | $          | 175,085,370 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

1

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS**

| ** **                                                                                      | ** ** | **Three Months  Ended September 30,**                            | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                                                        | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                      | ** ** | **(Unaudited)  (in thousands, except per share data)** | ** ** |
| **Revenues**                                                                                    |       |                                                                            |       |                                                |       |   |   |   |   |
| Gain on sale of loans and securities                                                            |       | $                                                                               | 1,373,901  |                                                | $          | 1,284,992 |   | $ | 4,262,529 |   | $ | 3,792,152 |   |
| Interest income                                                                                 |       | 3,288,160                                                                       |       | 2,240,183                                           |       | 8,727,498 |   | 5,497,755 |   |
| Interest expense                                                                                |       | (2,489,190                                                                      | )          | (1,588,994                                          | )          | (6,543,619 | ) | (3,814,165 | ) |
| Net interest income                                                                             |       | 798,970                                                                         |       | 651,189                                             |       | 2,183,879 |   | 1,683,590 |   |
| Provision for loan losses                                                                       |       | (37,996                                                                         | )          | (54,834                                             | )          | (163,032 | ) | (91,557 | ) |
| Net interest income after provision for loan losses                                             |       | 760,974                                                                         |       | 596,355                                             |       | 2,020,847 |   | 1,592,033 |   |
| Loan servicing fees and other income from mortgage  servicing rights and retained interests     |       | 1,228,541                                                                       |       | 1,103,533                                           |       | 3,635,587 |   | 3,095,040 |   |
| Realization of expected cash flows from mortgage  servicing rights                              |       | (807,356                                                                        | )          | —                                              |       | (2,314,055 | ) | — |   |
| Amortization of mortgage servicing rights                                                       |       | —                                                                          |       | (653,351                                            | )          | — |   | (1,607,911 | ) |
| Change in fair value of mortgage servicing rights                                               |       | (1,067,320                                                                      | )          | —                                              |       | 479,963 |   | — |   |
| Recovery of mortgage servicing rights                                                           |       | —                                                                          |       | 915,364                                             |       | — |   | 86,458 |   |
| Impairment of retained interests                                                                |       | (141,857                                                                        | )          | (61,697                                             | )          | (211,013 | ) | (296,396 | ) |
| Servicing hedge gains (losses)                                                                  |       | 1,034,353                                                                       |       | (837,241                                            | )          | (472,591 | ) | (242,375 | ) |
| Net loan servicing fees and other income from  mortgage servicing rights and retained interests |       | 246,361                                                                         |       | 466,608                                             |       | 1,117,891 |   | 1,034,816 |   |
| Net insurance premiums earned                                                                   |       | 300,774                                                                         |       | 240,079                                             |       | 864,793 |   | 655,075 |   |
| Other                                                                                           |       | 140,485                                                                         |       | 123,584                                             |       | 392,599 |   | 350,370 |   |
| Total revenues                                                                                  |       | 2,822,495                                                                       |       | 2,711,618                                           |       | 8,658,659 |   | 7,424,446 |   |
| **Expenses**                                                                                    | ** ** | ** **                                                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Compensation                                                                                    |       | 1,138,901                                                                       |       | 988,614                                             |       | 3,357,426 |   | 2,625,236 |   |
| Occupancy and other office                                                                      |       | 257,908                                                                         |       | 228,263                                             |       | 764,319 |   | 642,056 |   |
| Insurance claims                                                                                |       | 101,951                                                                         |       | 183,758                                             |       | 328,802 |   | 348,479 |   |
| Advertising and promotion                                                                       |       | 68,955                                                                          |       | 56,412                                              |       | 194,871 |   | 165,206 |   |
| Other                                                                                           |       | 218,568                                                                         |       | 202,893                                             |       | 663,643 |   | 507,913 |   |
| Total expenses                                                                                  |       | 1,786,283                                                                       |       | 1,659,940                                           |       | 5,309,061 |   | 4,288,890 |   |
| Earnings before  income taxes                                                                   |       | 1,036,212                                                                       |       | 1,051,678                                           |       | 3,349,598 |   | 3,135,556 |   |
| Provision for income taxes                                                                      |       | 388,648                                                                         |       | 417,793                                             |       | 1,296,333 |   | 1,246,361 |   |
| **NET EARNINGS**                                                                                |       | $                                                                               | 647,564    |                                                | $          | 633,885 |   | $ | 2,053,265 |   | $ | 1,889,195 |   |
| Basic                                                                                           |       | $                                                                               | 1.06       |                                                | $          | 1.07 |   | $ | 3.38 |   | $ | 3.21 |   |
| Diluted                                                                                         |       | $                                                                               | 1.03       |                                                | $          | 1.03 |   | $ | 3.29 |   | $ | 3.07 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

2

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

| ** **                                                                          | ** ** | **Number of  Shares of  Common Stock**     | ** **  | **Common  Stock** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                                          | ** ** | **(Unaudited)**                                           | ** **  |
| ** **                                                                          | ** ** | **(in thousands, except share data)** | ** **  |
| **Balance at December 31, 2004**                                               |       |                                                      | 581,648,881 |              |       |                              | $          | 29,085                                                    |       |                   |       | $         | 2,570,402  |   |   |   | $ | 118,943 |   |   | $ | 7,591,646 |   | $ | 10,310,076 |   |
| Comprehensive income:                                                               |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net earnings for the period                                                         |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 1,889,195 |   | 1,889,195 |   |
| Other  comprehensive income (loss), net  of tax:                                    |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized losses from available-for-sale securities                       |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (589 | ) |   | — |   | (589 | ) |
| Net unrealized losses from cash flow hedging  instruments                      |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (556 | ) |   | — |   | (556 | ) |
| Net change in foreign currency translation adjustment                               |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (17,748 | ) |   | — |   | (17,748 | ) |
| Total comprehensive income                                                          |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 1,870,302 |   |
| Issuance of common stock pursuant to stock-based  compensation plans                |       |                                                      | 12,560,985  |              |       |                              | 631        |                                                      |       |                   | 179,988    |      |       |   | — |   |   | — |   | 180,619 |   |
| Tax benefit of stock options exercised                                              |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 93,897     |      |       |   | — |   |   | — |   | 93,897 |   |
| Issuance of common stock, net of treasury stock                                     |       |                                                      | 870,842     |              |       |                              | 44         |                                                      |       |                   | 29,567     |      |       |   | — |   |   | — |   | 29,611 |   |
| Issuance of common stock for conversion of  convertible debt                        |       |                                                      | 2,100,550   |              |       |                              | 105        |                                                      |       |                   | 9,008      |      |       |   | — |   |   | — |   | 9,113 |   |
| Tax benefit of interest on conversion  of convertible debt                     |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 4,796      |      |       |   | — |   |   | — |   | 4,796 |   |
| Cash dividends paid—$0.44 per common share                                |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (259,298 | ) | (259,298 | ) |
| **Balance at September 30, 2005**                                              |       |                                                      | 597,181,258 |              |       |                              | $          | 29,865                                                    |       |                   |       | $         | 2,887,658  |   |   |   | $ | 100,050 |   |   | $ | 9,221,543 |   | $ | 12,239,116 |   |
| **Balance at December 31, 2005**                                               |       |                                                      | 600,030,686 |              |       |                              | $          | 30,008                                                    |       |                   |       | $         | 2,954,019  |   |   |   | $ | 61,114 |   |   | $ | 9,770,719 |   | $ | 12,815,860 |   |
| Remeasurement of mortgage servicing rights to fair  value upon adoption of SFAS 156 |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 67,065 |   | 67,065 |   |
| Balance as adjusted, January 1, 2006                                           |       |                                                      | 600,030,686 |              |       |                              | 30,008     |                                                      |       |                   | 2,954,019  |      |       |   | 61,114 |   |   | 9,837,784 |   | 12,882,925 |   |
| Comprehensive income:                                                               |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net earnings for the period                                                         |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 2,053,265 |   | 2,053,265 |   |
| Other  comprehensive income (loss), net  of tax:                                    |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized losses from available-for-sale securities                       |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (49,981 | ) |   | — |   | (49,981 | ) |
| Net unrealized losses from cash flow hedging  instruments                           |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (9,982 | ) |   | — |   | (9,982 | ) |
| Net change in foreign currency translation adjustment                               |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | 13,727 |   |   | — |   | 13,727 |   |
| Total comprehensive income                                                          |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 2,007,029 |   |
| Issuance of common stock pursuant to stock-based  compensation plans                |       |                                                      | 15,438,630  |              |       |                              | 779        |                                                      |       |                   | 343,836    |      |       |   | — |   |   | — |   | 344,615 |   |
| Excess tax benefit related to stock-based  compensation                             |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 106,372    |      |       |   | — |   |   | — |   | 106,372 |   |
| Issuance of common stock, net of treasury stock                                     |       |                                                      | 864,734     |              |       |                              | 43         |                                                      |       |                   | 30,211     |      |       |   | — |   |   | — |   | 30,254 |   |
| Issuance of common stock for conversion of  convertible debt                        |       |                                                      | 414,868     |              |       |                              | 21         |                                                      |       |                   | 1,444      |      |       |   | — |   |   | — |   | 1,465 |   |
| Cash dividends paid—$0.45 per common share                                |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (273,512 | ) | (273,512 | ) |
| **Balance  at September 30, 2006**                                             |       |                                                      | 616,748,918 |              |       |                              | $          | 30,851                                                    |       |                   |       | $         | 3,435,882  |   |   |   | $ | 14,878 |   |   | $ | 11,617,537 |   | $ | 15,099,148 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

3

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                                          | ** ** | **Nine Months Ended   September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**                                           | ** ** |
| ** **                                                                                                          | ** ** | **(in thousands)**                                   | ** ** |
| **Cash flows from operating activities:**                                                                           | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Net earnings                                                                                                        |       | $                                                         | 2,053,265  |   | $ | 1,889,195 |   |
| Adjustments to reconcile  net earnings to net cash provided (used) by operating activities:                         |       |                                                      |       |   |   |
| Gain on sale of  loans and securities                                                                               |       | (4,262,529                                                | )          | (3,792,152 | ) |
| Accretion of  discount on securities                                                                                |       | (335,855                                                  | )          | (280,316 | ) |
| Interest  capitalized on loans                                                                                      |       | (491,375                                                  | )          | (54,017 | ) |
| Amortization of  deferred premiums, discounts, fees and costs, net                                                  |       | 256,331                                                   |       | 159,949 |   |
| Accretion of fair  value adjustments and discount on notes payable                                                  |       | (60,066                                                   | )          | (20,074 | ) |
| Net change in fair  value of hedged notes payable and related interest-rate and foreign-currency  swaps             |       | (25,793                                                   | )          | (377 | ) |
| Amortization of  deferred fees on time deposits                                                                     |       | 15,100                                                    |       | 9,754 |   |
| Provision for loan  losses                                                                                          |       | 163,032                                                   |       | 91,557 |   |
| Change in MSR  value due to realization of expected cash flows from mortgage servicing rights                  |       | 2,314,055                                                 |       | — |   |
| Amortization of  mortgage servicing rights                                                                          |       | —                                                    |       | 1,607,911 |   |
| Change in fair  value of mortgage servicing rights                                                                  |       | (479,963                                                  | )          | — |   |
| Recovery of  mortgage servicing rights                                                                              |       | —                                                    |       | (332,113 | ) |
| Changes in fair  value of mortgage servicing rights attributable to hedged risk                                     |       | —                                                    |       | 245,655 |   |
| Impairment of  retained interests                                                                                   |       | 146,800                                                   |       | 271,868 |   |
| Servicing hedge  losses                                                                                             |       | 472,591                                                   |       | 242,375 |   |
| Stock-based  compensation expense                                                                                   |       | 123,355                                                   |       | 29,135 |   |
| Depreciation and  other amortization                                                                                |       | 191,540                                                   |       | 180,837 |   |
| Provision for  deferred income taxes                                                                                |       | 622,182                                                   |       | 957,668 |   |
| Origination and  purchase of loans held for sale                                                                    |       | (321,516,353                                              | )          | (320,326,428 | ) |
| Proceeds from sale  and principal repayments of loans held for sale                                                 |       | 328,651,803                                               |       | 310,373,217 |   |
| Increase in trading  securities                                                                                     |       | (8,268,632                                                | )          | (944,482 | ) |
| Increase in other  assets                                                                                           |       | (715,598                                                  | )          | (1,860,608 | ) |
| Increase  (decrease) in trading securities sold, not yet purchased, at fair value                                   |       | 1,110,515                                                 |       | (73,821 | ) |
| Increase  (decrease) in accounts payable and accrued liabilities                                                    |       | 2,069,652                                                 |       | (95,079 | ) |
| Increase  (decrease) in income taxes payable                                                                        |       | 466,903                                                   |       | (18,078 | ) |
| Net cash provided  (used) by operating activities                                                                   |       | 2,500,960                                                 |       | (11,738,424 | ) |
| **Cash flows from investing activities:**                                                                           | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Increase in  securities purchased under agreements to resell, federal funds sold and  securities borrowed |       | (1,786,255                                                | )          | (9,758,828 | ) |
| Additions to loans  held for investment, net                                                                        |       | (11,532,058                                               | )          | (31,064,508 | ) |
| Sales of loans  held for investment                                                                                 |       | 73,699                                                    |       | 2,588,314 |   |
| Additions to  investments in other financial instruments                                                            |       | (2,873,566                                                | )          | (4,651,505 | ) |
| Proceeds from sale  and repayment of investments in other financial instruments                                     |       | 3,324,343                                                 |       | 4,954,077 |   |
| Purchases of  mortgage servicing rights                                                                             |       | (48,817                                                   | )          | (294,410 | ) |
| Purchase of  premises and equipment, net                                                                            |       | (440,829                                                  | )          | (370,027 | ) |
| Net cash used by  investing activities                                                                              |       | (13,283,483                                               | )          | (38,596,887 | ) |
| **Cash flows from financing activities:**                                                                           | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Net (decrease)  increase in short-term borrowings                                                                   |       | (7,245,177                                                | )          | 8,639,563 |   |
| Issuance of  long-term debt                                                                                         |       | 12,362,761                                                |       | 17,747,957 |   |
| Repayment of  long-term debt                                                                                        |       | (13,862,387                                               | )          | (6,809,833 | ) |
| Net increase in  securities sold under agreements to repurchase and federal  funds purchased                   |       | 3,557,092                                                 |       | 13,739,805 |   |
| Net increase in  deposit liabilities                                                                                |       | 16,441,635                                                |       | 17,739,469 |   |
| Excess tax  benefits related to stock-based compensation                                                            |       | 103,211                                                   |       | — |   |
| Tax benefit of  stock options exercised                                                                             |       | —                                                    |       | 93,897 |   |
| Issuance of common  stock                                                                                           |       | 251,514                                                   |       | 181,095 |   |
| Payment of  dividends                                                                                               |       | (273,512                                                  | )          | (259,298 | ) |
| Net cash provided  by financing activities                                                                          |       | 11,335,137                                                |       | 51,072,655 |   |
| Net increase in  cash                                                                                               |       | 552,614                                                   |       | 737,344 |   |
| Cash at beginning  of period                                                                                        |       | 1,031,108                                                 |       | 751,237 |   |
| Cash at end of  period                                                                                              |       | $                                                         | 1,583,722  |   | $ | 1,488,581 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

4

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**Note 1—Basis ofPresentation**

Countrywide Financial Corporation (“Countrywide”) is aholding company which, through its principal subsidiary, Countrywide HomeLoans, Inc. (“CHL”) and other subsidiaries (collectively, the “Company”),is engaged in mortgage lending and other finance-related businesses, includingmortgage banking, retail banking and mortgage warehouse lending, dealing insecurities, insurance underwriting and operating an insurance agency.

The accompanying consolidated financial statementshave been prepared in conformity with U.S. generally accepted accountingprinciples for interim financial information and with the Securities andExchange Commission’s instructions to Form 10-Q and Rule 10-01of Regulation S-X. Accordingly, they do not include all of the information andnotes required by U.S. generally accepted accounting principles for completefinancial statements.

In preparing financial statements in conformity withU.S. generally accepted accounting principles, management is required to makeestimates and assumptions that materially affect the reported amounts of assetsand liabilities and the disclosure of contingent liabilities at the date of thefinancial statements and revenues and expenses during the reporting period.Actual results could differ from those estimates.

In the opinion of management, all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included. Operating results for the nine months ended September 30,2006 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2006. For further information, including adescription of the Company’s significant accounting policies, refer to theconsolidated financial statements and notes thereto included in the AnnualReport on Form 10-K for the year ended December 31, 2005 forthe Company (the “2005 Annual Report”).

Certain amounts reflectedin the prior year consolidated financial statements have been reclassified toconform to current year presentation.

**Note 2—Adoption ofStatement of Financial Accounting Standards No. 156, “Accounting forServicing of Financial Assets” (“SFAS 156”)**

In March 2006, the Financial Accounting StandardsBoard issued SFAS 156, which amends Statement of Financial Accounting StandardsNo. 140, *Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities*, (“SFAS 140”).SFAS 156 changes SFAS 140 by requiring that Mortgage Servicing Rights (“MSRs”)be initially recognized at their fair value and by providing the option toeither: (1) carry MSRs at fair value with changes in fair value recognizedin current period earnings; or (2) continue recognizing periodicamortization expense and assess the MSRs for impairment as originally requiredby SFAS 140. This option may be applied by class of servicing asset orliability.

SFAS 156 is effective for all separately recognizedservicing assets and liabilities acquired or issued after the beginning of anentity’s fiscal year that begins after September 15, 2006, with earlyadoption permitted. The Company has chosen to adopt SFAS 156 effectiveJanuary 1, 2006. The Company has identified MSRs relating to residentialmortgage loans as a class of servicing rights and has elected to apply fairvalue accounting to these MSRs. Presently this class represents all of theCompany’s MSRs. SFAS 156 requires that any adjustment necessary to record MSRsat fair value at adoption be recognized in 

5

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

beginning shareholders’equity. Accordingly, the following adjustment was made to the opening balancesof MSRs, income taxes payable and retained earnings:

| ** **                                                               | ** ** | **MSRs**                | ** ** | **Income Tax  Payable** | ** ** | **Retained  Earnings** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **(in thousands)** | ** ** |
| Balance at  December 31, 2005                                       |       | $                       | 12,610,839 |                         | $          | 3,846,174              |       | $ | 9,770,719 |   |
| Remeasurement of MSRs to fair value upon adoption of  SFAS 156 |       | 109,916                 |       | 42,851                       |       | 67,065                 |       |
| Balance at  January 1, 2006                                         |       | $                       | 12,720,755 |                         | $          | 3,889,025              |       | $ | 9,837,784 |   |

 

As a result of adoptingSFAS 156 and applying fair value accounting to MSRs, the hedge accountingprovisions of Statement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and Hedging Activities*,(“SFAS 133”) no longer apply to the risk management activities of the Company’sMSRs. Therefore, concurrent with the election to carry MSRs at fair value, theCompany discontinued fair value hedge accounting under SFAS 133 related to itsMSRs.

**Note 3—Earnings PerShare**

Basic earnings per share is determined using netearnings divided by the weighted average common shares outstanding during theperiod. Diluted earnings per share is computed by dividing net earningsavailable to common shareholders by the weighted-average shares outstanding,assuming all potentially dilutive common shares were issued.

The following table summarizes the basic and dilutedearnings per share calculations for the periods indicated:

| ** **                                    | ** ** | **Three Months Ended September 30,**           | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **Net  Earnings**                                                  | ** ** | **Shares** | ** ** | **Per-Share  Amount** | ** ** | **Net  Earnings** | ** ** | **Shares** | ** ** | **Per-Share  Amount** | ** ** |
| ** **                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| Net earnings and  basic earnings per share    |       | $                                                                  | 647,564    |   | 612,168 |   |   | $ | 1.06 |   |   | $ | 633,885 |   | 594,130 |   |   | $ | 1.07 |   |   |
| Effect of  dilutive securities:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures                        |       | —                                                             |       | — |   |   |   |   |   | 56 |   | 1,470 |   |   |   |   |   |
| Dilutive stock options                        |       | —                                                             |       | 15,404 |   |   |   |   |   | — |   | 21,392 |   |   |   |   |   |
| Diluted earnings and  earnings per share |       | $                                                                  | 647,564    |   | 627,572 |   |   | $ | 1.03 |   |   | $ | 633,941 |   | 616,992 |   |   | $ | 1.03 |   |   |

 

6

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

 

| ** **                                         | ** ** | **Nine Months Ended September 30,**            | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **Net  Earnings**                                                  | ** ** | **Shares** | ** ** | **Per-Share  Amount** | ** ** | **Net  Earnings** | ** ** | **Shares** | ** ** | **Per-Share  Amount** | ** ** |
| ** **                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| Net earnings and  basic earnings per share         |       | $                                                                  | 2,053,265  |   | 607,233 |   |   | $ | 3.38 |   |   | $ | 1,889,195 |   | 588,663 |   |   | $ | 3.21 |   |   |
| Effect of dilutive  securities:                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures                             |       | 15                                                                 |       | 72 |   |   |   |   |   | 247 |   | 2,050 |   |   |   |   |   |
| Dilutive stock options                             |       | —                                                             |       | 17,404 |   |   |   |   |   | — |   | 24,069 |   |   |   |   |   |
| Diluted earnings and  earnings per share |       | $                                                                  | 2,053,280  |   | 624,709 |   |   | $ | 3.29 |   |   | $ | 1,889,442 |   | 614,782 |   |   | $ | 3.07 |   |   |

 

During the quarters ended September 30,2006 and 2005, stock options to purchase 13,742,512 shares and 128,274 shares,respectively, were outstanding but not included in the computation of earningsper share because they were anti-dilutive. During the nine months ended September 30,2006 and 2005, stock options to purchase 13,699,070 shares and 120,934 shares,respectively, were outstanding but not included in the computation of earningsper share because they were anti-dilutive.

***Stock-Based Compensation***

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123R, *Share-BasedPayment*, (“SFAS 123R”), an amendment of FASB Statement No. 123,*Accounting for Stock-Based Compensation*,using the modified prospective application approach. In accordance with SFAS123R, the Company began charging the unamortized value of previously grantedemployee stock options to compensation expense during the current period. Forawards made on or after January 1, 2006 made to retirement-eligibleemployees that vest upon retirement, the Company is required under SFAS 123R toimmediately charge the associated value to expense. The value of grants made onor after January 1, 2006, to other employees must be amortized over thelesser of (a) the nominal vesting period or (b) for options that vestupon retirement, the period until the grantee becomes retirement-eligible.

As of September 30, 2006, the Company has issuedstock options and shares of restricted stock that, depending on the yeargranted and other factors, have different vesting requirements. Generally,stock options issued before 2004 vest over a period of three to four years andexpire five or ten years after the grant date. Stock options awarded in 2004become vested upon attainment of specific earnings performance targets and, inany event, four and a half years after the grant date regardless of attainmentof the earnings targets and expire five years after the date of grant.Generally, stock options granted in 2005 were fully vested on the grant date.Stock options and stock appreciation rights awarded in 2006 generally vest overa three-year period and expire five to ten years after grant date. Off-cycleawards and awards to new employees have various vesting schedules. Generally,restricted stock vests over a period of three years although some restrictedstock awards granted in 2004 had a performance-based component similar to thestock options granted that year.

The impact of adopting SFAS 123R for the three and ninemonths ended September 30, 2006, was a charge of approximately $25.8million and $75.8 million, respectively ($17.0 million, net of tax, or $0.03 perdiluted share and $51.3 million, net of tax or $0.08 per diluted share,respectively) to compensation expense. The remaining unrecognized compensationcost related to unvested awards as of 

7

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

September 30, 2006,was $106.7 million and the weighted average period of time over which thiscost will be recognized is 1.6 years.

Hadthe estimated fair value of the options granted been included in compensationexpense, for the periods indicated below, the Company’s net earnings andearnings per share would have been as follows:

| ** **                                                                   | ** ** | **Three Months  Ended  September 30,  2005**         | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **(in thousands, except  per share data)** | ** ** |
| Net Earnings:                                                                |       |                                                           |       |                                                  |       |   |   |   |   |
| As reported                                                                  |       |                                                           | $          | 633,885                                               |       |   |   | $ | 1,889,195 |   |   |
| Add: Stock-based compensation included in net earnings,  net of taxes        |       |                                                           | 492        |                                                  |       |   | 2,528 |   |   |
| Deduct: Stock-based employee compensation under SFAS 123,  net of taxes |       |                                                           | (11,744    | )                                                     |       |   | (91,957 | ) |   |
| Pro forma                                                                    |       |                                                           | $          | 622,633                                               |       |   |   | $ | 1,799,766 |   |   |
| Basic Earnings  Per Share:                                                   |       |                                                           |       |                                                  |       |   |   |   |   |
| As reported                                                                  |       |                                                           | $          | 1.07                                                  |       |   |   | $ | 3.21 |   |   |
| Pro forma                                                                    |       |                                                           | $          | 1.05                                                  |       |   |   | $ | 3.06 |   |   |
| Diluted Earnings  Per Share:                                                 |       |                                                           |       |                                                  |       |   |   |   |   |
| As reported                                                                  |       |                                                           | $          | 1.03                                                  |       |   |   | $ | 3.07 |   |   |
| Pro forma                                                                    |       |                                                           | $          | 1.01                                                  |       |   |   | $ | 2.93 |   |   |

 

Theweighted-average assumptions used to value grants of stock options and stockappreciation rights and the resulting average estimated values were as follows:

| ** **                       | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **    2006    ** | ** ** | **2005**                                            | ** ** | **    2006    ** | ** ** | **2005** | ** ** |
| Weighted Average  Assumptions:   |       |                                                     |       |                                                |       |   |   |   |   |   |   |   |   |
| Dividend yield                   |       |                                                     | 1.61       | %                                                   |       | 1.65 | % |   | 1.65 | % |   | 1.70 | % |
| Expected volatility              |       |                                                     | 29.64      | %                                                   |       | 32.50 | % |   | 29.66 | % |   | 32.50 | % |
| Risk-free interest rate          |       |                                                     | 5.03       | %                                                   |       | 3.91 | % |   | 4.72 | % |   | 4.15 | % |
| Expected life (in years)         |       |                                                     | 3.87       |                                                |       | 5.00 |   |   | 4.27 |   |   | 3.15 |   |
| Per-share fair  value of options |       |                                                     | $          | 10.12                                               |       |   | $ | 6.28 |   |   | $ | 10.14 |   |   | $ | 6.95 |   |
| Weighted-average exercise  price |       |                                                     | $          | 37.12                                               |       |   | $ | 36.54 |   |   | $ | 36.45 |   |   | $ | 32.63 |   |

 

The Company began using a lattice model to estimatethe fair value of certain stock awards (i.e., stock appreciation rightsand options) in the second quarter of 2006. Management believes the lattice model provides a better estimate of thefair value of those awards because it permits probabilities to be assigned tofuture changes in key assumptions (e.g., risk-free interest rate, stockvolatility, and dividend rate).  It alsoderives an expected term that captures patterns of exercise by participantsprior to the end of the stated terms of those awards.

8

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

Thetable below summarizes stock options and stock appreciation rights activity andrelated information for the nine months ended September 30, 2006:

| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | ** **                 | ** ** | ** **                                  | ** ** | **(in years)**                                  | ** ** | **(in thousands)**             | ** ** |
| Outstanding at  beginning of period |       | 58,424,402                 |       |                                        | $          | 20.06                                                |       |                                |       |   |   |   |   |   |   |   |
| Granted                             |       | 13,963,533                 |       |                                        | 36.45      |                                                 |       |                                |       |   |   |   |   |   |   |
| Exercised                           |       | (13,120,577                | )          |                                        | 14.90      |                                                 |       |                                |       |   |   |   |   |   |   |
| Expired or cancelled                |       | (666,249                   | )          |                                        | 28.11      |                                                 |       |                                |       |   |   |   |   |   |   |
| Outstanding at  end of period       |       | 58,601,109                 |       |                                        | $          | 25.03                                                |       |                                |       | 4.74 |   |   |   | $ | 579,667 |   |   |
| Exercisable                         |       | 37,497,132                 |       |                                        | $          | 21.11                                                |       |                                |       | 4.63 |   |   |   | $ | 517,996 |   |   |

 

Stockoption exercise activity for the three and nine months ended September 30,2006 and 2005 is summarized below:

| ** **      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(in thousands)**                              | ** ** |
| Cash Proceeds   |       | $                                                    | 69,625     |                                                | $          | 25,539 |   | $ | 195,431 |   | $ | 129,583 |   |
| Intrinsic Value |       | $                                                    | 114,910    |                                                | $          | 52,633 |   | $ | 285,948 |   | $ | 264,367 |   |

 

Thetable below summarizes restricted stock activity for the nine months ended September 30,2006:

| ** **                                                     | ** ** | **Number of  Shares** | ** ** | **Weighted  Average Grant  Date Fair  Value** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Outstanding  shares of restricted stock at beginning of period |       |                       | 838,443    |                                                    |       |   | $ | 26.37 |   |   |
| Shares granted                                                 |       |                       | 365,456    |                                                    |       |   | 35.59 |   |   |
| Shares vested                                                  |       |                       | (467,295   | )                                                       |       |   | 24.24 |   |   |
| Shares cancelled                                               |       |                       | (29,982    | )                                                       |       |   | 31.21 |   |   |
| Outstanding shares of  restricted stock at end of period       |       |                       | 706,622    |                                                    |       |   | $ | 32.34 |   |   |

 

**Note 4—DerivativeFinancial Instruments**

***Derivative Financial Instruments***

The primary market risk facing the Company is interestrate risk, which includes the risk that changes in interest rates will resultin changes in the value of our assets or liabilities (“price risk”) and therisk that net interest income from our mortgage loan and investment portfolioswill change in response to changes in interest rates. The overall objective ofthe Company’s interest rate risk management activities is to reduce thevariability of earnings caused by changes in interest rates.

The Company manages interest rate risk in its MortgageBanking Segment through the natural counterbalance of its loan production andservicing businesses. The Company also uses various financial 

9

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

instruments, includingderivatives, to manage the interest rate risk related specifically to thevalues of its interest rate lock commitments (“IRLC”), Mortgage loans andMortgage-Backed Securities (“MBS”) held by the Company pending sale (“MortgageLoan Inventory”), MSRs and retained interests and trading securities, as wellas a portion of its debt. 

The Company managesinterest rate risk in its Banking Segment by funding the segment’sinterest-earning assets with liabilities of similar duration or usingderivative instruments whose valuation changes, when combined with thecharacteristics of the managed liability, create repricing characteristics thatmore closely reflect the repricing behaviors of those assets.

***Risk Management Activities Related to Mortgage LoanInventory and Interest Rate Lock Commitments***

To manage the price risk relating to Mortgage LoanInventory and IRLCs, the Company uses derivative instruments in its riskmanagement activities related to the IRLCs and Mortgage Loan Inventoryincluding: forward sales/purchases of MBS, long call/put options on MBS, longcall/put options on Treasury Futures, short Eurodollar futures contracts, totalrate of return swaps and credit default swaps. Certain of these hedging relationshipsqualify as fair value hedges of mortgage loans under SFAS 133.

During the nine monthsended September 30, 2006, the interest rate risk management activitiesassociated with 61% of the fixed-rate mortgage loan inventory and 44% of theadjustable-rate mortgage loan inventory were accounted for as fair valuehedges. The Company recognized pre-tax losses of $70.2 million and $37.6million, representing ineffectiveness of the hedges of its mortgage inventorythat qualified as fair value hedges under SFAS 133, for the nine months ended September 30,2006 and 2005, respectively. 

***Risk Management Activities Related to MortgageServicing Rights (MSRs) and Retained Interests***

To moderate the effect of changes in interest rates onthe value of MSRs and retained interests on earnings, the Company maintains aportfolio of financial instruments, including derivatives.  This portfolio of financial instruments iscollectively referred to herein as the “Servicing Hedge.”

As a result of adopting SFAS 156 effective January 1,2006, the hedge provisions of SFAS 133 no longer apply to the riskmanagement activities of the Company’s MSRs.

Effective April 1, 2005, a portion of the ServicingHedge was qualified as a fair value hedge under SFAS 133.  During the six months ended September 30,2005, the portion of the Servicing Hedge that qualified as a fair value hedgecovered approximately 26% of the risk associated with a change in fair value ofthe MSRs attributable to changes in interest rates of up to 50 basis points. Atno other time during the nine months ended September 30, 2005 did anyportion of the Servicing Hedge qualify as a hedge under SFAS 133. For the sixmonths ended September 30, 2005, the Company recognized a gain of $24.5million in earnings, which represents the amount of hedge ineffectiveness forthe portion of the Servicing Hedge that qualified as a fair value hedge underSFAS 133. There was no portion of the related hedge instruments’ gain or lossthat was excluded from the assessment of hedge effectiveness.

10

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

The followingtable summarizes the notional amounts of derivative contracts included in theServicing Hedge:

| ** **                                  | ** ** | **Balance,  December 31,  2005** | ** ** | **Additions** | ** ** | **Dispositions/  Expirations** | ** ** | **Balance,  September 30,  2006** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|---------------|------------|--------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **(in millions)**                | ** ** |
| Interest Rate  Swaps                        |       |                                  | $          | 53,850        |       |                           |       | $                                      | 37,590     |   |   |   | $ | (67,795 | ) |   |   | $ | 23,645 |   |   |
| Interest Rate  Swaptions                    |       |                                  | 50,425     |          |       |                           | 69,750     |                                   |       |   | (56,125 | ) |   |   | 64,050 |   |   |
| Mortgage Forward  Rate Agreements           |       |                                  | 31,125     |          |       |                           | 71,600     |                                   |       |   | (57,375 | ) |   |   | 45,350 |   |   |
| Long Call Options  on Interest Rate Futures |       |                                  | 17,500     |          |       |                           | 26,750     |                                   |       |   | (44,250 | ) |   |   | — |   |   |
| Long Treasury  Futures                      |       |                                  | 1,160      |          |       |                           | 1,000      |                                   |       |   | (2,160 | ) |   |   | — |   |   |
| Interest Rate  Caps                         |       |                                  | 300        |          |       |                           | —     |                                   |       |   | (300 | ) |   |   | — |   |   |
| Long Put Options on  Interest Rate Futures  |       |                                  | —     |          |       |                           | 3,500      |                                   |       |   | (3,500 | ) |   |   | — |   |   |

 

***Risk Management Activities Related to Issuance ofLong-Term Debt***

The Company enters into interest rate swap contractswhich enable it to convert a portion of its fixed-rate, long-term debt toU.S. dollar LIBOR-based floating-rate debt (notional amount of $3.9 billion asof September 30, 2006) and to enable the Company to convert a portion ofits foreign currency-denominated fixed and floating-rate, long-term debt toU.S. dollar LIBOR-based floating-rate debt (notional amount of $4.8 billion asof September 30, 2006). These transactions are generally designated asfair value hedges under SFAS 133. For the nine months ended September 30,2006 and 2005, the Company recognized pre-tax gains of $25.8 million and $0.4million, respectively, representing the ineffective portion of such fair valuehedges of debt. 

The Company enters intointerest rate swap contracts which enable it to convert a portion of itsfloating-rate, long-term debt to fixed-rate, long-term debt (notionalamount of $0.1 billion as of September 30, 2006). These transactions aredesignated as cash flow hedges under SFAS 133. For the nine months ended September 30,2006 and 2005, the Company did not recognize any pre-tax gain or loss relatedto the ineffective portion of cash flow hedges. As of September 30, 2006,deferred net gains or losses on derivative instruments included in accumulatedother comprehensive income that are expected to be reclassified to earningsduring the next twelve months are not considered to be material.

***Risk Management Activities Related to DepositLiabilities***

The Company enters into interest rate swap contractsthat have the effect of converting a portion of its fixed-rate depositliabilities to LIBOR-based variable-rate deposit liabilities. Thesetransactions are designated as fair value hedges. For the nine months ended September 30,2006, the Company recognized a pre-tax loss of $2.0 million, representing theineffectiveness relating to these swaps. For the nine months ended September 30,2005, the Company recognized a pre-tax loss of $0.6 million representing theineffective portion of such fair value hedges.

11

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

**Note 5—MortgageLoans Held for Sale**

Mortgageloans held for sale include the following:

| ** **                                         | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **(in thousands)**      | ** ** |
| Prime                                              |       | $                            | 20,951,715 |                        | $          | 27,085,467 |   |
| Nonprime                                           |       | 4,395,429                    |       | 6,736,946                   |       |
| Prime home equity                                  |       | 2,344,893                    |       | 1,948,874                   |       |
| Commercial real  estate                            |       | 1,160,947                    |       | 1,089,262                   |       |
| Deferred  premiums, discounts, fees and costs, net |       | 24,108                       |       | (52,364                     | )          |
|                                               |       | $                            | 28,877,092 |                        | $          | 36,808,185 |   |

 

At September 30, 2006, the Company had pledged $6.9billion and $0.3 billion in mortgage loans held for sale to secure asset-backedcommercial paper and a secured revolving line of credit, respectively.

At December 31, 2005,the Company had pledged $13.0 billion and $3.0 billion in mortgage loans heldfor sale to secure asset-backed commercial paper and a secured revolving lineof credit, respectively.

**Note 6—TradingSecurities**

Tradingsecurities, which consist of trading securities owned and trading securitiespledged as collateral, include the following:

| ** **                                            | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)**      | ** ** |
| Mortgage  pass-through securities:                    |       |                         |       |                        |       |
| Fixed-rate                                            |       | $                            | 11,966,355 |                        | $          | 5,638,161 |   |
| Adjustable-rate                                       |       | 935,110                      |       | 915,302                     |       |
| Total mortgage pass-through securities                |       | 12,901,465                   |       | 6,553,463                   |       |
| Collateralized  mortgage obligations                  |       | 3,786,663                    |       | 2,377,764                   |       |
| U.S. Treasury  securities                             |       | 1,225,887                    |       | 1,037,749                   |       |
| Obligations of  U.S. Government-sponsored enterprises |       | 817,525                      |       | 429,726                     |       |
| Interest-only  stripped securities                    |       | 323,134                      |       | 255,127                     |       |
| Mark-to-market on  to be announced securities         |       | 149,574                      |       | 77,094                      |       |
| Residual  securities                                  |       | 115,375                      |       | 16,494                      |       |
| Asset-backed  securities                              |       | 114,903                      |       | 234,818                     |       |
| Other                                                 |       | 2,118                        |       | 338                         |       |
|                                                  |       | $                            | 19,436,644 |                        | $          | 10,982,573 |   |

 

As of September 30, 2006, $16.7 billion of theCompany’s trading securities had been pledged as collateral for financingpurposes, of which the counterparty had the contractual right to sell orre-pledge $3.5 billion.

12

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

As of December 31,2005, $9.0 billion of the Company’s trading securities had been pledged ascollateral for financing purposes, of which the counterparty had thecontractual right to sell or re-pledge $0.7 billion.

**Note 7—SecuritiesPurchased Under Agreements to Resell, Securities Borrowed and Federal FundsSold**

Thefollowing table summarizes securities purchased under agreements to resell, securitiesborrowed and federal funds sold:

| ** **                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**      | ** ** |
| Securities  purchased under agreements to resell |       | $                            | 17,645,197 |                        | $          | 18,536,475 |   |
| Securities  borrowed                             |       | 6,333,419                    |       | 4,740,886                   |       |
| Federal funds  sold                              |       | 1,125,000                    |       | 40,000                      |       |
|                                             |       | $                            | 25,103,616 |                        | $          | 23,317,361 |   |

 

As of September 30, 2006, the Company hadaccepted collateral related to securities purchased under agreements to reselland securities borrowed with a fair value of $46.7 billion that it had thecontractual ability to sell or re-pledge, including $22.7 billion related toamounts offset by securities sold under agreements to repurchase under masternetting arrangements. As of September 30, 2006, the Company had re-pledged$42.4 billion of such collateral for financing purposes.

As of December 31,2005, the Company had accepted collateral related to securities purchased underagreements to resell and securities borrowed with a fair value of $33.7 billionthat it had the contractual ability to sell or re-pledge, including $12.1billion related to amounts offset by securities sold under agreements torepurchase under master netting arrangements. As of December 31, 2005, theCompany had re-pledged $28.3 billion of such collateral for financing purposes.

13

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

**Note 8—Loans Heldfor Investment, Net**

Loansheld for investment include the following:

| ** **                                                               | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | **(in thousands)**      | ** ** |
| Mortgage loans:                                                          |       |                         |       |                        |       |
| Prime                                                                    |       | $                            | 55,486,886 |                        | $          | 48,655,066 |   |
| Prime home equity                                                        |       | 19,625,354                   |       | 14,990,615                  |       |
| Nonprime                                                                 |       | 25,823                       |       | 157,528                     |       |
| Commercial real estate                                                   |       | 59,183                       |       | —                      |       |
| Total mortgage loans                                                     |       | 75,197,246                   |       | 63,803,209                  |       |
| Warehouse lending  advances secured by mortgage loans                    |       | 3,014,933                    |       | 3,943,046                   |       |
| Defaulted  mortgage loans repurchased from securitizations               |       | 1,567,152                    |       | 1,370,169                   |       |
|                                                                     |       | 79,779,331                   |       | 69,116,424                  |       |
| Purchase premium  and deferred loan origination fees and costs, net |       | 1,225,364                    |       | 938,224                     |       |
| Allowance for  loan losses                                               |       | (207,987                     | )          | (189,201                    | )          |
| Loans held for  investment, net                                          |       | $                            | 80,796,708 |                        | $          | 69,865,447 |   |

 

Mortgage loans held for investment totaling $64.2 billionand $52.2 billion were pledged to secure Federal Home Loan Bank (“FHLB”)advances and to provide for the ability to make additional borrowings from theFHLB at September 30, 2006 and December 31, 2005, respectively.

Mortgage loans held for investment totaling $2.8 billionand $2.0 billion were pledged to secure an unused borrowing facility with theFederal Reserve Bank (“FRB”) at September 30, 2006 and December 31,2005, respectively.

The Company had accepted mortgage loan collateral of $3.1billion and $4.1 billion securing warehouse-lending advances that it had thecontractual ability to re-pledge as of September 30, 2006 andDecember 31, 2005, respectively. Of this amount, $1.6 billion has beenre-pledged to secure borrowings under a secured revolving line of credit as ofSeptember 30, 2006. No mortgage loan collateral had been re-pledged as of December 31,2005.

14

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

Changesin the allowance for loan losses were as follows:

| ** **                                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                             | ** ** | **(in thousands)**                              | ** ** |
| Balance,  beginning of period                                                                          |       | $                                                    | 183,581    |                                                | $          | 155,962 |   | $ | 189,201 |   | $ | 125,046 |   |
| Provision for  loan losses                                                                             |       | 37,996                                               |       | 54,834                                              |       | 163,032 |   | 91,557 |   |
| Net charge-offs                                                                                        |       | (13,912                                              | )          | (15,887                                             | )          | (139,093 | ) | (21,694 | ) |
| Reclassification  of allowance for unfunded commitments from accounts payable and accrued  liabilities |       | 322                                                  |       | —                                              |       | 5,684 |   | — |   |
| Reduction of  allowance due to sale of loans held for investment                                       |       | —                                               |       | (10,125                                             | )          | — |   | (10,125 | ) |
| Other adjustments                                                                                      |       | —                                               |       | —                                              |       | (10,837 | ) | — |   |
| Balance, end of period                                                                                 |       | $                                                    | 207,987    |                                                | $          | 184,784 |   | $ | 207,987 |   | $ | 184,784 |   |

 

15

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

**Note 9—Investmentsin Other Financial Instruments, at Fair Value**

Investmentsin other financial instruments include the following:

| ** **                                                                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **(in thousands)**      | ** ** |
| Available-for-sale  securities:                                                            |       |                         |       |                        |       |
| Mortgage-backed securities                                                                 |       | $                            | 6,121,615  |                        | $          | 6,866,520 |   |
| Obligations of U.S. Government-sponsored enterprises                                       |       | 694,668                      |       | 547,715                     |       |
| Municipal bonds                                                                            |       | 387,292                      |       | 369,748                     |       |
| U.S. Treasury securities                                                                   |       | 188,328                      |       | 144,951                     |       |
| Other                                                                                      |       | 2,836                        |       | 3,109                       |       |
| Subtotal                                                                                   |       | 7,394,739                    |       | 7,932,043                   |       |
| Interests  retained in securitization accounted for as available-for-sale securities:      |       |                         |       |                        |       |
| Prime interest-only and principal-only securities                                          |       | 292,537                      |       | 323,368                     |       |
| Nonprime residual securities                                                               |       | 163,360                      |       | 206,033                     |       |
| Prime home equity line of credit transferor’s  interest                               |       | 157,346                      |       | 158,416                     |       |
| Prepayment penalty bonds                                                                   |       | 70,018                       |       | 112,492                     |       |
| Prime home equity residual securities                                                      |       | 53,386                       |       | 124,377                     |       |
| Prime home equity interest-only securities                                                 |       | 8,626                        |       | 15,136                      |       |
| Prime residual securities                                                                  |       | 8,550                        |       | 21,383                      |       |
| Nonprime interest-only securities                                                          |       | 4,845                        |       | 9,455                       |       |
| Subordinated mortgage-backed pass-through securities                                       |       | 1,752                        |       | 2,059                       |       |
| Total interests retained in securitization accounted  for as available-for-sale securities |       | 760,420                      |       | 972,719                     |       |
| Total available-for-sale securities                                                        |       | 8,155,159                    |       | 8,904,762                   |       |
| Interests retained in  securitization accounted for as trading securities:                 |       |                         |       |                        |       |
| Prime home equity residual securities                                                      |       | 805,371                      |       | 757,762                     |       |
| Prime interest-only and principal-only securities                                          |       | 453,187                      |       | 180,216                     |       |
| Prime home equity line of credit transferor’s  interest                               |       | 412,534                      |       | 95,514                      |       |
| Nonprime residual securities                                                               |       | 405,582                      |       | 341,106                     |       |
| Prepayment penalty bonds                                                                   |       | 92,775                       |       | —                      |       |
| Prime residual securities                                                                  |       | 29,904                       |       | 43,244                      |       |
| Prime home equity interest-only securities                                                 |       | 18,099                       |       | —                      |       |
| Interest rate swaps                                                                        |       | 2,083                        |       | 782                         |       |
| Total interests retained in securitization accounted  for as trading  securities           |       | 2,219,535                    |       | 1,418,624                   |       |
| Hedging instruments and  mortgage pipeline derivatives:                                    |       |                         |       |                        |       |
| Mortgage servicing related                                                                 |       | 1,401,688                    |       | 741,156                     |       |
| Notes payable related                                                                      |       | 305,384                      |       | 107,085                     |       |
| Mortgage loans held for sale and pipeline related                                          |       | 111,285                      |       | 89,098                      |       |
| Total investments  in other financial instruments                                          |       | $                            | 12,193,051 |                        | $          | 11,260,725 |   |

 

16

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

At September 30, 2006, the Company had pledged $1.5billion of MBS to secure securities sold under agreements to repurchase, whichthe counterparty had the contractual right to re-pledge.

At December 31, 2005, the Company had pledged $2.1billion of MBS to secure securities sold under agreements to repurchase, whichthe counterparty had the contractual right to re-pledge and $0.3 billion of MBSto secure an unused borrowing facility with the FRB.

Amortizedcost and fair value of available-for-sale securities are as follows:

| ** **                                             | ** ** | **September 30, 2006** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **Amortized  Cost**              | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                             | ** ** | **(in thousands)**          | ** ** |
| Mortgage-backed  securities                            |       | $                                | 6,238,136  |   |   | $ | 3,908 |   |   | $ | (120,429 | ) | $ | 6,121,615 |   |
| Obligations of  U.S. Government- sponsored enterprises |       | 699,694                          |       |   | 1,465 |   |   | (6,491 | ) | 694,668 |   |
| Municipal bonds                                        |       | 387,970                          |       |   | 1,832 |   |   | (2,510 | ) | 387,292 |   |
| U.S. Treasury  securities                              |       | 187,662                          |       |   | 1,724 |   |   | (1,058 | ) | 188,328 |   |
| Interests  retained in securitization                  |       | 652,223                          |       |   | 124,979 |   |   | (16,782 | ) | 760,420 |   |
| Other                                                  |       | 2,861                            |       |   | — |   |   | (25 | ) | 2,836 |   |
|                                                   |       | $                                | 8,168,546  |   |   | $ | 133,908 |   |   | $ | (147,295 | ) | $ | 8,155,159 |   |

 

| ** **                                            | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**         | ** ** |
| Mortgage-backed  securities                           |       | $                               | 6,985,851  |   |   | $ | 329 |   |   | $ | (119,660 | ) | $ | 6,866,520 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 555,482                         |       |   | 18 |   |   | (7,785 | ) | 547,715 |   |
| Municipal bonds                                       |       | 371,785                         |       |   | 1,115 |   |   | (3,152 | ) | 369,748 |   |
| U.S. Treasury  securities                             |       | 144,840                         |       |   | 1,326 |   |   | (1,215 | ) | 144,951 |   |
| Interests retained  in securitization                 |       | 774,563                         |       |   | 206,999 |   |   | (8,843 | ) | 972,719 |   |
| Other                                                 |       | 3,109                           |       |   | — |   |   | — |   | 3,109 |   |
|                                                  |       | $                               | 8,835,630  |   |   | $ | 209,787 |   |   | $ | (140,655 | ) | $ | 8,904,762 |   |

 

17

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

The Company’savailable-for-sale securities in an unrealized loss position are as follows:

| ** **                                            | ** ** | **September 30, 2006**       | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair Value**                    | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                | ** ** |
| Mortgage-backed securities.                           |       | $                                      | 907,683    |   |   | $ | (8,759 | ) |   | $ | 4,907,707 |   | $ | (111,670 | ) | $ | 5,815,390 |   | $ | (120,429 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       | 121,099                                |       |   | (403 | ) |   | 389,044 |   | (6,088 | ) | 510,143 |   | (6,491 | ) |
| Municipal bonds                                       |       | 29,225                                 |       |   | (102 | ) |   | 197,948 |   | (2,408 | ) | 227,173 |   | (2,510 | ) |
| U.S. Treasury  securities                             |       | 31,761                                 |       |   | (154 | ) |   | 96,947 |   | (904 | ) | 128,708 |   | (1,058 | ) |
| Interests  retained in securitization                 |       | 64,875                                 |       |   | (6,697 | ) |   | 67,001 |   | (10,085 | ) | 131,876 |   | (16,782 | ) |
| Other                                                 |       | 48                                     |       |   | (25 | ) |   | — |   | — |   | 48 |   | (25 | ) |
| Total impaired  securities                            |       | $                                      | 1,154,691  |   |   | $ | (16,140 | ) |   | $ | 5,658,647 |   | $ | (131,155 | ) | $ | 6,813,338 |   | $ | (147,295 | ) |

 

| ** **                                            | ** ** | **December 31, 2005**        | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair Value**                    | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                | ** ** |
| Mortgage-backed securities                            |       | $                                      | 4,468,055  |   |   | $ | (62,031 | ) |   | $ | 2,299,667 |   |   | $ | (57,629 | ) |   | $ | 6,767,722 |   | $ | (119,660 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       | 328,679                                |       |   | (2,371 | ) |   | 185,000 |   |   | (5,414 | ) |   | 513,679 |   | (7,785 | ) |
| Municipal bonds                                       |       | 197,748                                |       |   | (1,655 | ) |   | 71,620 |   |   | (1,497 | ) |   | 269,368 |   | (3,152 | ) |
| U.S. Treasury  securities                             |       | 92,933                                 |       |   | (772 | ) |   | 22,055 |   |   | (443 | ) |   | 114,988 |   | (1,215 | ) |
| Interests  retained in securitization                 |       | 29,148                                 |       |   | (1,510 | ) |   | 79,099 |   |   | (7,333 | ) |   | 108,247 |   | (8,843 | ) |
| Other                                                 |       | 50                                     |       |   | — |   |   | — |   |   | — |   |   | 50 |   | — |   |
| Total impaired  securities                            |       | $                                      | 5,116,613  |   |   | $ | (68,339 | ) |   | $ | 2,657,441 |   |   | $ | (72,316 | ) |   | $ | 7,774,054 |   | $ | (140,655 | ) |

 

The Company’s Asset/Liability Committee assessessecurities classified as available-for sale for other-than-temporary impairmenton a quarterly basis. This assessment evaluates whether the Company intends andis able to recover the amortized cost of the securities when taking intoaccount the Company’s present investment objectives and liquidity requirements.The impairment reflected in these securities is a result of a change in marketinterest rates. Management has the intent and ability to hold these securitiesuntil they recover their amortized cost. Accordingly, other-than-temporaryimpairment related to these securities has not been recognized as of September 30,2006 and December 31, 2005.

18

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

Gross gains and lossesrealized on the sales of available-for-sale securities are as follows:

| ** **                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                             | ** ** |
| Mortgage-backed  securities:                              |       |                                                |       |   |   |
| Gross realized gains                                      |       | $                                                   | —     |   | $ | 31 |   |
| Gross realized losses                                     |       | —                                              |       | (116 | ) |
| Net                                                       |       | —                                              |       | (85 | ) |
| Obligations of U.S.  Government-sponsored enterprises:    |       |                                                |       |   |   |
| Gross realized gains                                      |       | 6                                                   |       | 14 |   |
| Gross realized losses                                     |       | (51                                                 | )          | — |   |
| Net                                                       |       | (45                                                 | )          | 14 |   |
| Municipal bonds:                                          |       |                                                |       |   |   |
| Gross realized gains                                      |       | 64                                                  |       | — |   |
| Gross realized losses                                     |       | (162                                                | )          | (104 | ) |
| Net                                                       |       | (98                                                 | )          | (104 | ) |
| Interests retained in  securitization:                    |       |                                                |       |   |   |
| Gross realized gains                                      |       | 6,956                                               |       | 12,462 |   |
| Gross realized losses                                     |       | —                                              |       | (4,383 | ) |
| Net                                                       |       | 6,956                                               |       | 8,079 |   |
| Other:                                                    |       |                                                |       |   |   |
| Gross realized gains                                      |       | —                                              |       | 1,252 |   |
| Gross realized losses                                     |       | —                                              |       | — |   |
| Net                                                       |       | —                                              |       | 1,252 |   |
| Total gains and losses  on available-for-sale securities: |       |                                                |       |   |   |
| Gross realized gains                                      |       | 7,026                                               |       | 13,759 |   |
| Gross realized losses                                     |       | (213                                                | )          | (4,603 | ) |
| Net                                                       |       | $                                                   | 6,813      |   | $ | 9,156 |   |

 

**Note 10—MortgageServicing Rights**

As noted in “Note 2—Adoption of Statement of FinancialAccounting Standards No.156, *Accounting For Servicingof Financial Assets*,” the Company adopted SFAS 156 effectiveJanuary 1, 2006. As a result of adopting SFAS 156, all separatelyrecognized MSRs created in the securitization or sale of loans afterDecember 31, 2005 are recognized initially at fair value. All MSRs aresubsequently carried at fair value with changes in fair value recognized incurrent period earnings.

19

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

The activity in MSRscarried at fair value is as follows:

| ** **                                                               | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **(in thousands)**                                       | ** ** |
| **Mortgage  Servicing Rights**                                           | ** ** |                                                          | ** ** | ** ** |   |
| Balance at beginning of period                                           |       |                                                          | $          | 12,610,839 |   |   |
| Remeasurement to fair value upon adoption of SFAS  156                   |       |                                                          | 109,916    |   |   |
| Fair value at beginning of period                                        |       |                                                          | 12,720,755 |   |   |
| Additions:                                                               |       |                                                          |       |   |   |
| Purchases of servicing assets                                            |       |                                                          | 48,817     |   |   |
| Servicing resulting from transfers of financial  assets                  |       |                                                          | 4,082,935  |   |   |
| Total additions                                                          |       |                                                          | 4,131,752  |   |   |
| Change in fair value:                                                    |       |                                                          |       |   |   |
| Due to changes in valuation inputs or assumptions in  valuation model(1) |       |                                                          | 479,963    |   |   |
| Other changes in fair value(2)                                           |       |                                                          | (2,314,055 | ) |   |
| **Mortgage  Servicing Rights, at fair value**                            |       |                                                          | $          | 15,018,415 |   |   |

----

(1)          Principally reflectschanges in discount rates and prepayment speed assumptions, primarily due tochanges in interest rates.

(2)          Represents changes dueto realization of expected cash flows.

Theactivity in MSRs carried at lower of cost or fair value is as follows:

| ** **                                                            | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **(in thousands)**                                       | ** ** |
| **Mortgage Servicing Rights**                                         | ** ** |                                                          | ** ** | ** ** |   |
| Balance at beginning of  period                                       |       |                                                          | $          | 9,820,511 |   |   |
| Additions                                                             |       |                                                          | 4,219,928  |   |   |
| Amortization                                                          |       |                                                          | (1,607,911 | ) |   |
| Change in fair value  attributable to hedged risk                     |       |                                                          | (245,655   | ) |   |
| Application of valuation  allowance to write down impaired  MSRs      |       |                                                          | (69,045    | ) |   |
| Balance before valuation  allowance at end of period                  |       |                                                          | 12,117,828 |   |   |
| **Valuation Allowance for Impairment of Mortgage  Servicing  Rights** | ** ** |                                                          | ** ** | ** ** |   |
| Balance at beginning of period                                        |       |                                                          | (1,090,582 | ) |   |
| Recoveries                                                            |       |                                                          | 332,113    |   |   |
| Application of valuation allowance to write down  impaired  MSRs      |       |                                                          | 69,045     |   |   |
| Balance at end of period                                              |       |                                                          | (689,424   | ) |   |
| **Mortgage  Servicing Rights, net**                                   |       |                                                          | $          | 11,428,404 |   |   |

 

20

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

The value of MSRs isderived from the net positive cash flows associated with the servicingcontracts. The Company receives a servicing fee ranging generally from 0.125%to 0.500% annually on the remaining outstanding principal balances of the loans(“contractually specified servicing fee”). The Company generally receives otherremuneration consisting of the ability to earn interest on collected fundsduring the period the funds are held pending remittance to investors, as wellas rights to various mortgagor-contracted fees such as late charges,reconveyance charges and prepayment penalties. Contractually specifiedservicing fees, late charges, prepayment penalties and other ancillary fees arerecorded as a component of servicing fees and other income from MSRs andretained interests in the consolidated statements of earnings.

Our MSR valuation processcombines the use of a discounted cash flow model and extensive analysis ofcurrent market data to arrive at an estimate of fair value at each balancesheet date. The cash flow and prepayment assumptions used in our discountedcash flow model are based on market factors and encompass the historicalperformance of our MSRs, which we believe are consistent with assumptions usedby market participants valuing similar MSRs, and from data obtained on theperformance of similar MSRs. The key assumptions used in the valuation of MSRsinclude mortgage prepayment speeds and the discount rate (projected LIBOR plusoption-adjusted spread). These assumptions can, and generally will, change fromquarter to quarter as market conditions and projected interest rates change.The current market data used in the MSR valuation process and in the assessmentof the reasonableness of our valuation is obtained from peer group MSRvaluation surveys, MSR trades, MSR broker valuations and prices ofinterest-only securities.

The cash flow model andunderlying prepayment and interest rate models used to value the MSRs aresubjected to validation in accordance with the Company’s model validationpolicies. This process includes review of the theoretical soundness of themodels and the related development process, back testing of actual results to modelpredictions, benchmarking to commercially available models and ongoingperformance monitoring.

**Note 11—Other Assets**

Other assets include thefollowing:

| ** **                                                                    | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                    | ** ** | **(in thousands)**      | ** ** |
| Reimbursable servicing advances, net                                          |       |                         | $          | 1,682,280                   |       |   |   | $ | 1,947,046 |   |   |
| Investments in FRB and FHLB stock                                             |       |                         | 1,450,249  |                        |       |   | 1,334,100 |   |   |
| Interest receivable                                                           |       |                         | 956,632    |                        |       |   | 777,966 |   |   |
| Securities broker-dealer receivables                                          |       |                         | 899,237    |                        |       |   | 392,847 |   |   |
| Receivables from custodial accounts                                           |       |                         | 612,589    |                        |       |   | 629,075 |   |   |
| Derivative margin accounts                                                    |       |                         | 380,749    |                        |       |   | 296,005 |   |   |
| Capitalized software, net                                                     |       |                         | 340,694    |                        |       |   | 331,454 |   |   |
| Cash surrender value of assets held in trust for  deferred compensation plans |       |                         | 306,138    |                        |       |   | 224,884 |   |   |
| Restricted cash                                                               |       |                         | 295,871    |                        |       |   | 429,556 |   |   |
| Prepaid expenses                                                              |       |                         | 247,694    |                        |       |   | 187,377 |   |   |
| Real estate acquired in settlement of loans                                   |       |                         | 190,731    |                        |       |   | 110,499 |   |   |
| Receivables from sale of securities                                           |       |                         | 101,533    |                        |       |   | 325,327 |   |   |
| Other assets                                                                  |       |                         | 1,151,033  |                        |       |   | 943,337 |   |   |
|                                                                          |       |                         | $          | 8,615,430                   |       |   |   | $ | 7,929,473 |   |   |

 

21

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

The Company had pledged $0.7billion and $0.1 billion of securities broker-dealer receivables to securesecurities sold under agreements to repurchase at September 30, 2006 andDecember 31, 2005, respectively.

**Note 12—Notes Payable**

Notes payable consists ofthe following:

| ** **                                                                  | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                  | ** ** | **(in thousands)**      | ** ** |
| Federal Home Loan Bank  advances                                            |       | $                            | 28,675,000 |                        | $          | 26,350,000 |   |
| Medium-term notes:                                                          |       |                         |       |                        |       |
| Floating rate                                                               |       | 13,028,182                   |       | 14,466,765                  |       |
| Fixed-rate                                                                  |       | 9,883,893                    |       | 11,503,592                  |       |
|                                                                        |       | 22,912,075                   |       | 25,970,357                  |       |
| Asset-backed commercial  paper                                              |       | 6,660,425                    |       | 12,367,496                  |       |
| Unsecured commercial  paper                                                 |       | 4,538,701                    |       | 6,248,508                   |       |
| Secured revolving lines  of credit                                          |       | 2,010,201                    |       | 2,865,152                   |       |
| Secured overnight bank  loans                                               |       | 400,128                      |       | —                      |       |
| Asset-backed secured  financings                                            |       | 42,790                       |       | 22,998                      |       |
| Unsecured bank loans                                                        |       | 297,000                      |       | 730,000                     |       |
| Junior subordinated  debentures                                             |       | 1,045,423                    |       | 1,085,191                   |       |
| Subordinated debt                                                           |       | 1,000,000                    |       | 500,000                     |       |
| Convertible securities  and liquid yield option note convertible debentures |       | —                       |       | 12,581                      |       |
| Other                                                                       |       | 50,335                       |       | 35,603                      |       |
|                                                                        |       | $                            | 67,632,078 |                        | $          | 76,187,886 |   |

 

***Federal Home Loan Bank Advances***

During the nine months ended September 30, 2006,the Company obtained $14.1 billion of advances from the FHLB. Of theseadvances, $13.5 billion were fixed-rate and $0.6 billion were adjustable-rate.At September 30, 2006, the Company had pledged $64.2 billion of mortgageloans to secure its outstanding FHLB advances and provide the ability to obtainfuture advances.

At December 31, 2005, the Company had pledged$52.2 billion of mortgage loans to secure its outstanding FHLB advances andprovide the ability to obtain future advances.

22

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

***Medium-Term Notes***

Duringthe nine months ended September 30, 2006, the Company issued the followingmedium-term notes:

| ** **        | ** ** | **Outstanding Balance**                     | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
|-------------------|------------|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **        | ** ** | **Floating-Rate**                                | ** ** | **Fixed-Rate**         | ** ** | **Total**              | ** ** | **From** | ** ** | **To** | ** ** | **From** | ** ** | **To** | ** ** |
| ** **        | ** ** | **(dollar amounts in thousands)** | ** ** |
| CFC Series A |       |                                             | $          | —                 |       |                   |       | $ | 76,366 |   |   | $ | 76,366 |   |   | 5.75 | % |   | 6.00 | % | January, 2031 |   | February, 2036 |   |
| CFC Series B |       |                                             | 3,544,989  |                   |       |                   | 299,525    |   |   | 3,844,514 |   |   | 5.13 | % |   | 6.30 | % | May, 2007 |   | April, 2036 |   |
| CFC Euro          |       |                                             | 1,091,881  |                   |       |                   | —     |   |   | 1,091,881 |   |   | 5.52 | % |   | 5.96 | % | March, 2007 |   | February, 2011 |   |
| Total             |       |                                             | $          | 4,636,870              |       |                   |       | $ | 375,891 |   |   | $ | 5,012,761 |   |   |   |   |   |   |   |   |   |   |   |

 

The $0.4 billion of fixed-rate medium-term notesissued by the Company during the nine months ended September 30, 2006,were effectively converted to floating-rate debt using interest rate swaps.

During the nine months ended September 30, 2006,the Company redeemed $8.3 billion of maturing medium-term notes.

As of September 30,2006, $4.8 billion of foreign currency-denominated medium-term notes wereoutstanding. Such notes are denominated in Pounds Sterling, Canadian Dollars,Australian Dollars, Euros, Swiss Francs and Singapore Dollars. These notes havebeen effectively converted to U.S. Dollars through currency swaps.

***Asset-Backed Commercial Paper***

The Company has formed two special purpose entities tofinance certain of its mortgage loans held for sale using commercial paper.These entities issue commercial paper in the form of short-term securedliquidity notes (“SLNs”) with initial maturities of up to 180 days. The SLNs bearinterest at prevailing money market rates approximating LIBOR. The SLNprograms’ capacities, based on aggregate commitments from underlying creditenhancers, totaled $30.7 billion at September 30, 2006.

For the nine months ended September 30,2006, the average borrowings under these facilities totaled $18.9 billion andthe weighted-average interest rate of the SLNs was 5.01%. At September 30,2006, the weighted-average interest rate of the SLNs was 5.44% and the Companyhad pledged $6.9 billion in mortgage loan inventory to secure the SLNs.

***Unsecured Commercial Paper and Backup CreditFacilities***

As of September 30, 2006, the Company hadunsecured credit agreements (revolving credit facilities) with a group ofcommercial banks permitting the Company to borrow an aggregate maximum amountof $12.0 billion. The primary purpose of these credit facilities is to provideliquidity support for the Company’s commercial paper program.

For the nine months ended September 30,2006 the average commercial paper outstanding under these facilities totaled $6.7billion and the weighted average interest rate was 5.02%. At September 30,2006 the weighted-average interest rate was 5.40%.

23

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

***Secured Revolving Lines of Credit***

During 2004, the Company formed a special purposeentity for the purpose of financing inventory with funding provided by a groupof bank-sponsored conduits that are financed through the issuance ofasset-backed commercial paper. The entity incurs interest based on prevailingmoney market rates approximating the cost of asset-backed commercial paper. At September 30,2006, the entity had aggregate commitments from the bank-sponsored conduitstotaling $10.6 billion and had $0.3 billion of outstanding borrowings, securedby $0.3 billion of mortgage loans held for sale. For the nine months ended September 30,2006, the average borrowings under this facility totaled $1.2 billion and theweighted-average interest rate was 4.68%. At September 30, 2006, theweighted-average interest rate was 5.32%.

A new $4.0 billion mastertrust facility was commenced on June 2, 2006 to finance CountrywideWarehouse Lending (“CWL”) receivables backed by mortgage loans. A multi-assetconduit finance company funds the purchase of notes backed by CWL receivablesand issued by a master trust by issuing extendable asset-backed commercialpaper. The borrowing under this facility at September 30, 2006, was $1.5billion, and the Company had pledged $1.6 billion in loans held for investmentto secure this facility. For the nine months ended September 30, 2006, theaverage borrowings under this facility totaled $381.1 million. At September 30,2006 and during the nine months ended September 30, 2006, the weighted averageinterest rate was 5.44%.

***Asset-Backed Secured Financings***

The Company has recordedcertain securitization transactions as secured borrowings as of September 30,2006 and December 31, 2005 because they did not qualify for salestreatment under SFAS 140. The amounts accounted for as secured borrowingstotaled $42.8 million and $23.0 million at September 30, 2006 andDecember 31, 2005, respectively.

***Junior Subordinated Debentures***

As more fully discussed in “Note 13—Notes Payable,”included in the consolidated financial statements of the 2005 Annual Report,the Company has issued junior subordinated debentures to non-consolidatedsubsidiary trusts. The trusts finance their holdings of the junior subordinateddebentures by issuing Company-guaranteed capital securities.

24

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

TheCompany guarantees CHL’s indebtedness to two of the subsidiary trusts,Countrywide Capital I and Countrywide Capital III, which are excluded from theCompany’s consolidated financial statements. Following is summarizedinformation for those trusts:

| ** **                                                                          | ** ** | **September 30, 2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **Countrywide  Capital I**  | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                                                                          | ** ** | **(in thousands)**          | ** ** |
| Balance Sheet:                                                                      |       |                             |       |   |   |   |   |   |   |
| Junior subordinated debentures receivable                                           |       |                             | $          | 307,479 |   |   |   | $ | 205,302 |   |   |
| Other assets                                                                        |       |                             | 7,216      |   |   |   | 4,841 |   |   |
| Total assets                                                                        |       |                             | $          | 314,695 |   |   |   | $ | 210,143 |   |   |
| Notes payable                                                                       |       |                             | $          | 9,225 |   |   |   | $ | 6,173 |   |   |
| Other liabilities                                                                   |       |                             | 7,216      |   |   |   | 4,841 |   |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       |                             | 298,254    |   |   |   | 199,129 |   |   |
| Shareholder’s equity                                                           |       |                             | —     |   |   |   | — |   |   |
| Total liabilities  and shareholder’s equity                                    |       |                             | $          | 314,695 |   |   |   | $ | 210,143 |   |   |

 

| ** **                                                                          | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **Countrywide  Capital I** | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                                                                          | ** ** | **(in thousands)**         | ** ** |
| Balance Sheet:                                                                      |       |                            |       |   |   |   |   |   |   |
| Junior subordinated debentures receivable                                           |       |                            | $          | 307,412 |   |   |   | $ | 205,269 |   |   |
| Other assets                                                                        |       |                            | 1,031      |   |   |   | 692 |   |   |
| Total assets                                                                        |       |                            | $          | 308,443 |   |   |   | $ | 205,961 |   |   |
| Notes payable                                                                       |       |                            | $          | 9,223 |   |   |   | $ | 6,172 |   |   |
| Other liabilities                                                                   |       |                            | 1,031      |   |   |   | 692 |   |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       |                            | 298,189    |   |   |   | 199,097 |   |   |
| Shareholder’s equity                                                           |       |                            | —     |   |   |   | — |   |   |
| Total liabilities  and shareholder’s equity                                    |       |                            | $          | 308,443 |   |   |   | $ | 205,961 |   |   |

 

| ** **                 | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                               | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                                       | ** ** |
| Statement of  Earnings:    |       |                                                          |       |   |   |   |   |   |   |
| Revenues                   |       |                                                          | $          | 18,624 |   |   |   | $ | 12,482 |   |   |
| Expenses                   |       |                                                          | (18,624    | ) |   |   | (12,482 | ) |   |
| Provision for income taxes |       |                                                          | —     |   |   |   | — |   |   |
| Net earnings               |       |                                                          | $          | — |   |   |   | $ | — |   |   |

 

25

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

 

| ** **                 | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                               | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                                       | ** ** |
| Statement of  Earnings:    |       |                                                          |       |   |   |   |   |   |   |
| Revenues                   |       |                                                          | $          | 18,624 |   |   |   | $ | 12,482 |   |   |
| Expenses                   |       |                                                          | (18,624    | ) |   |   | (12,482 | ) |   |
| Provision for income taxes |       |                                                          | —     |   |   |   | — |   |   |
| Net earnings               |       |                                                          | $          | — |   |   |   | $ | — |   |   |

 

***Subordinated Debt***

In May 2006, theCompany issued $1.0 billion of 6.25% fixed rate unsecured subordinated notesmaturing May 2016. The notes rank subordinate and junior to all of theCompany’s senior indebtedness, and rank senior to the Company’s junior subordinateddebentures underlying the Company’s trust preferred securities.

***Convertible Securities and LYONs ConvertibleDebentures***

During the quarter endedMarch 31, 2006, the Company converted its remaining convertible securitiesand Liquid Yield Option Notes (“LYONs”) outstanding through the payment of cashand issuance of common stock.

**Note 13—SecuritiesSold Under Agreements to Repurchase and Federal Funds Purchased**

Thefollowing table summarizes securities sold under agreements to repurchase andfederal funds purchased:

| ** **                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**      | ** ** |
| Securities sold  under agreements to repurchase |       | $                            | 37,510,297 |                        | $          | 33,284,205 |   |
| Federal funds  purchased                        |       | 200,000                      |       | 869,000                     |       |
|                                            |       | $                            | 37,710,297 |                        | $          | 34,153,205 |   |

 

The Company routinely enters short-term financingarrangements to sell securities under agreements to repurchase (“repurchaseagreements”). The repurchase agreements are collateralized by mortgage loansand securities. All securities underlying repurchase agreements are held in safekeepingby broker-dealers or banks. All agreements are to repurchase the same orsubstantially identical securities.

Federal funds purchased generally represent overnightborrowings of reserves from other banks in the Federal Reserve Bank System. Interestis generally settled the next day at the federal funds rate.

At September 30, 2006, repurchase agreements weresecured by $16.7 billion of trading securities, $42.4 billion ofsecurities purchased under agreements to resell and securities borrowed, $1.5billion in investments in other financial instruments, and $0.7 billion ofother assets. At September 30, 2006, $22.7 billion of the pledgedsecurities purchased under agreements to resell and securities borrowed relatedto 

26

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

amounts offset againstsecurities sold under agreements to repurchase pursuant to master nettingagreements.

At December 31, 2005,repurchase agreements were secured by $9.0 billion of trading securities,$28.3 billion of securities purchased under agreements to resell andsecurities borrowed, $2.1 billion in investments in other financialinstruments, and $0.1 billion of other assets. At December 31, 2005,$12.1 billion of the pledged securities purchased under agreements toresell and securities borrowed related to amounts offset against securitiessold under agreements to repurchase pursuant to master netting agreements.

**Note 14—DepositLiabilities**

Thefollowing table summarizes deposit balances:

| ** **                                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)**      | ** ** |
| Time deposits:                                            |       |                         |       |                        |       |
| Retail                                                    |       | $                            | 18,384,118 |                        | $          | 13,434,338 |   |
| Brokered                                                  |       | 12,033,140                   |       | 7,442,073                   |       |
| Company-controlled  custodial deposit accounts(1)         |       | 15,699,176                   |       | 13,200,801                  |       |
| Money market  accounts                                    |       | 7,854,529                    |       | 4,466,195                   |       |
| Non-interest-bearing  checking accounts                   |       | 1,125,832                    |       | 926,645                     |       |
| Savings accounts                                          |       | 827,658                      |       | 823                         |       |
|                                                      |       | 55,924,453                   |       | 39,470,875                  |       |
| Basis adjustment through application of hedge  accounting |       | (28,802                      | )          | (31,959                     | )          |
|                                                      |       | $                            | 55,895,651 |                        | $          | 39,438,916 |   |

----

(1)          Theseaccounts represent the portion of the investor custodial accounts controlled byCountrywide that have been placed on deposit with the Company.

**Note 15—Regulatoryand Agency Capital Requirements**

The Company is a bank holding company as a result ofits acquisition of Countrywide Bank (the “Bank”) (formerly Treasury Bank). Boththe Company and the Bank are subject to regulatory capital requirements imposedby the Board of Governors of the Federal Reserve System (the “FederalReserve”). The Company is also subject to U.S. Department of Housing and UrbanDevelopment, Fannie Mae, Freddie Mac and Government National MortgageAssociation (“Ginnie Mae”) net worth requirements, which are lower than thoseof the Federal Reserve.

27

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

AtSeptember 30, 2006 and December 31, 2005, the Company and the Bank’sregulatory capital ratios and amounts and minimum required capital ratios forthe Company and the Bank to maintain a “well capitalized” status were asfollows:

| ** **              | ** ** | **September 30, 2006**                 | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **              | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **              | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage Capital |       |                                             | 5.0        | % |   |   | 6.9 | % |   | $ | 14,687,464 |   |   | 6.9 | % |   | $ | 6,545,117 |   |
| Risk-Based Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                  |       |                                             | 6.0        | % |   |   | 11.6 | % |   | $ | 14,687,464 |   |   | 11.5 | % |   | $ | 6,545,117 |   |
| Total                   |       |                                             | 10.0       | % |   |   | 13.1 | % |   | $ | 16,556,792 |   |   | 11.8 | % |   | $ | 6,730,896 |   |

----

(1)          Minimumrequired to qualify as “well capitalized.”

| ** **              | ** ** | **December 31, 2005**                  | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **              | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **              | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage Capital |       |                                             | 5.0        | % |   |   | 6.3 | % |   | $ | 12,564,162 |   |   | 7.3 | % |   | $ | 5,343,675 |   |
| Risk-Based Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                  |       |                                             | 6.0        | % |   |   | 10.7 | % |   | $ | 12,564,162 |   |   | 12.2 | % |   | $ | 5,343,675 |   |
| Total                   |       |                                             | 10.0       | % |   |   | 11.7 | % |   | $ | 13,760,176 |   |   | 12.5 | % |   | $ | 5,457,019 |   |

----

(1)          Minimumrequired to qualify as “well capitalized.”

28

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

**Note16—Supplemental Cash Flow Information**

The following tablepresents supplemental cash flow information:

| ** **                                                                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                                                         | ** ** | **(in thousands)**                             | ** ** |
| Cash used to pay  interest                                                                                                         |       | $                                                   | 6,512,785  |   | $ | 3,628,334 |   |
| Cash used to pay  income taxes                                                                                                     |       | 104,470                                             |       | 213,646 |   |
| Non-cash investing  activities:                                                                                                    |       |                                                |       |   |   |
| Transfer of loans from loans held for investment to  mortgage loans held for sale                                             |       | 672,809                                             |       | 2,752,436 |   |
| Unrealized loss on available-for-sale securities,  foreign currency translation adjustments and cash flow hedges, net of  tax |       | (46,236                                             | )          | (18,893 | ) |
| Retention of other financial instruments in  securitization  transactions                                                          |       | 1,408,373                                           |       | 1,557,352 |   |
| Servicing resulting from transfer of financial  assets                                                                             |       | 4,082,935                                           |       | 3,925,518 |   |
| Non-cash  financing activities:                                                                                                    |       |                                                |       |   |   |
| Decrease in Mortgage Loans Held in special purpose  entities and asset-backed secured financings                                   |       | —                                              |       | (10,563,299 | ) |
| Remeasurement of fair value of MSRs upon adoption of  SFAS 156, net of tax                                               |       | 67,065                                              |       | — |   |
| Issuance of common stock for conversion of  convertible debt                                                                       |       | 1,465                                               |       | 9,113 |   |
| Tax effect of  interest on conversion of convertible debt                                                                          |       | —                                              |       | 4,796 |   |
|                                                                                                                                    |            |                                                     |            |  |  |  |  |

 

**Note 17—Segmentsand Related Information**

The Company has five business segments: MortgageBanking, Banking, Capital Markets, Insurance and Global Operations.

The Mortgage Banking Segment is comprised of threesectors: Loan Production, Loan Servicing and Loan Closing Services.

The Loan Production Sector originates prime andnonprime loans through a variety of channels on a national scale. The LoanProduction Sector is comprised of four lending divisions of Countrywide HomeLoans and also includes the mortgage banking activities of Countrywide Bank.The four production divisions are: the Consumer Markets Lending Division, theFull Spectrum Lending Division, the Wholesale Lending Division and theCorrespondent Lending Division. The Consumer Markets and Full Spectrum LendingDivisions source mortgage loans directly with consumers through the Company’sretail branch network and call centers, as well as through real estate agentsand homebuilders. The Wholesale Lending Division sources mortgage loansprimarily from mortgage brokers. The Correspondent Lending Division acquiresmortgage loans from other mortgage lenders, including financial institutions.

The Loan Servicing Sector includes investments in MSRsand retained interests, as well as the Company’s loan servicing operations andsubservicing for other domestic financial institutions. The Loan ClosingServices Sector is comprised of the LandSafe companies, which provide creditreports, appraisals, title reports and flood determinations to the Company’sLoan Production Sector, as well as to third parties.

29

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

The Banking Segment’s operations include theinvestment and fee-based activities of Countrywide Bank (“Banking Operations”)together with the activities of Countrywide Warehouse Lending. BankingOperations invests primarily in mortgage loans sourced from the Loan ProductionSector. Countrywide Warehouse Lending provides third-party mortgage lenderswith temporary financing secured by mortgage loans.

The Capital Markets Segment includes the operations ofCountrywide Securities Corporation, a registered broker-dealer specializing inthe mortgage securities market. It also includes the operations of CountrywideAsset Management Corporation, Countrywide Commercial Real Estate Finance Inc.,Countrywide Servicing Exchange, CFC International Capital Markets, Limited,Countrywide Capital Markets Asia Ltd, Countrywide Alternative Investments Inc.,CSC Futures Inc., Countrywide Capital Markets Asia (H.K.) Limited, CAAManagement Inc. and Countrywide Derivative Products, Inc.

The Insurance Segment includes Balboa Life andCasualty Group, a national provider of property, life and liability insurance;Balboa Reinsurance Company, a primary mortgage reinsurance company; andCountrywide Insurance Services, Inc., a national insurance agency offeringa specialized menu of insurance products directly to consumers.

The Global Operations Segment includes Global HomeLoans Limited, a provider of loan origination processing and loan subservicingin the United Kingdom until July 31, 2006; UKValuation Limited, a provider ofproperty valuation services in the UK; Countrywide International TechnologyHoldings Limited, a licensor of loan origination processing, servicing andresidential real estate value assessment technology; and CFC India PrivateLimited, a provider of call center, data processing and information technologyrelated services.

Intercompany transactions are generally recorded on anarms-length basis. However, the fulfillment fees paid by Banking Operations tothe Production Sector for origination costs incurred on mortgage loans fundedby Banking Operations are generally determined on an incremental cost basis,which may be less than the fees that Banking Operations would pay to a thirdparty.

30

----

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

Includedin the tables below labeled “Other” are the holding company activities andcertain reclassifications to conform management reporting to the consolidatedfinancial statements:

| ** **       | ** ** | **Quarter Ended September 30, 2006** | ** ** |
|------------------|------------|----------------------------------------------------------|------------|
| ** **       | ** ** | **Mortgage Banking**                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Loan  Production**                                     | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **       | ** ** | **(in thousands)**                                  | ** ** |
| Revenues:        |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External         |       | $                                                        | 1,374,273  |   | $ | 82,642 |   |   | $ | 74,362 |   |   | $ | 1,531,277 |   | $ | 704,557 |   | $ | 196,032 |   | $ | 326,848 |   |   | $ | 15,436 |   |   | $ | 48,345 |   |   | $ | 2,822,495 |   |   |
| Intersegment     |       | 38,694                                                   |       | 259,680 |   |   | — |   |   | 298,374 |   | (202,036 | ) | 61,955 |   | — |   |   | — |   |   | (158,293 | ) |   | — |   |   |
| Total Revenues   |       | $                                                        | 1,412,967  |   | $ | 342,322 |   |   | $ | 74,362 |   |   | $ | 1,829,651 |   | $ | 502,521 |   | $ | 257,987 |   | $ | 326,848 |   |   | $ | 15,436 |   |   | $ | (109,948 | ) |   | $ | 2,822,495 |   |   |
| Pre-tax Earnings |       | $                                                        | 280,684    |   | $ | 123,373 |   |   | $ | 19,870 |   |   | $ | 423,927 |   | $ | 370,806 |   | $ | 141,099 |   | $ | 91,343 |   |   | $ | 3,451 |   |   | $ | 5,586 |   |   | $ | 1,036,212 |   |   |
| Total Assets     |       | $                                                        | 27,533,250 |   | $ | 23,990,637 |   |   | $ | 70,388 |   |   | $ | 51,594,275 |   | $ | 91,920,690 |   | $ | 48,369,185 |   | $ | 2,491,999 |   |   | $ | 178,205 |   |   | $ | (1,359,782 | ) |   | $ | 193,194,572 |   |   |

 

| ** **              | ** ** | **Quarter Ended September 30, 2005** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                     | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                                  | ** ** |
| Revenues:               |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                        | 1,396,958  |   | $ | 347,509 |   |   | $ | 76,017 |   |   | $ | 1,820,484 |   | $ | 482,940 |   | $ | 113,353 |   | $ | 263,894 |   |   | $ | 58,141 |   |   | $ | (27,194 | ) |   | $ | 2,711,618 |   |   |
| Intersegment            |       | (12,700                                                  | )          | 122,849 |   |   | — |   |   | 110,149 |   | (101,759 | ) | 65,610 |   | — |   |   | — |   |   | (74,000 | ) |   | — |   |   |
| Total Revenues          |       | $                                                        | 1,384,258  |   | $ | 470,358 |   |   | $ | 76,017 |   |   | $ | 1,930,633 |   | $ | 381,181 |   | $ | 178,963 |   | $ | 263,894 |   |   | $ | 58,141 |   |   | $ | (101,194 | ) |   | $ | 2,711,618 |   |   |
| Pre-tax Earnings (Loss) |       | $                                                        | 413,731    |   | $ | 257,666 |   |   | $ | 31,139 |   |   | $ | 702,536 |   | $ | 278,264 |   | $ | 92,042 |   | $ | (32,119 | ) |   | $ | 8,153 |   |   | $ | 2,802 |   |   | $ | 1,051,678 |   |   |
| Total Assets            |       | $                                                        | 31,685,325 |   | $ | 16,995,604 |   |   | $ | 78,419 |   |   | $ | 48,759,348 |   | $ | 75,320,469 |   | $ | 44,453,513 |   | $ | 2,273,589 |   |   | $ | 274,393 |   |   | $ | 211,723 |   |   | $ | 171,293,035 |   |   |

 

31

----

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

| ** **              | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                              | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                                           | ** ** |
| Revenues:               |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                                 | 4,233,325  |   | $ | 648,176 |   | $ | 224,755 |   | $ | 5,106,256 |   | $ | 1,913,820 |   | $ | 569,583 |   | $ | 941,945 |   |   | $ | 65,716 |   |   | $ | 61,339 |   | $ | 8,658,659 |   |
| Intersegment            |       | 3,685                                                             |       | 665,378 |   | — |   | 669,063 |   | (515,957 | ) | 209,209 |   | — |   |   | — |   |   | (362,315 | ) | — |   |
| Total Revenues          |       | $                                                                 | 4,237,010  |   | $ | 1,313,554 |   | $ | 224,755 |   | $ | 5,775,319 |   | $ | 1,397,863 |   | $ | 778,792 |   | $ | 941,945 |   |   | $ | 65,716 |   |   | $ | (300,976 | ) | $ | 8,658,659 |   |
| Pre-tax Earnings (Loss) |       | $                                                                 | 889,397    |   | $ | 651,374 |   | $ | 68,302 |   | $ | 1,609,073 |   | $ | 1,037,263 |   | $ | 454,262 |   | $ | 245,033 |   |   | $ | 16,439 |   |   | $ | (12,472 | ) | $ | 3,349,598 |   |
| Total Assets            |       | $                                                                 | 27,533,250 |   | $ | 23,990,637 |   | $ | 70,388 |   | $ | 51,594,275 |   | $ | 91,920,690 |   | $ | 48,369,185 |   | $ | 2,491,999 |   |   | $ | 178,205 |   |   | $ | (1,359,782 | ) | $ | 193,194,572 |   |

 

| ** **              | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                              | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                                           | ** ** |
| Revenues:               |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                                 | 4,092,271  |   | $ | 668,294 |   | $ | 205,842 |   | $ | 4,966,407 |   | $ | 1,225,559 |   | $ | 423,145 |   | $ | 736,335 |   |   | $ | 169,458 |   |   | $ | (96,458 | ) | $ | 7,424,446 |   |
| Intersegment            |       | (19,222                                                           | )          | 266,955 |   | — |   | 247,733 |   | (203,054 | ) | 137,841 |   | — |   |   | — |   |   | (182,520 | ) | — |   |
| Total Revenues          |       | $                                                                 | 4,073,049  |   | $ | 935,249 |   | $ | 205,842 |   | $ | 5,214,140 |   | $ | 1,022,505 |   | $ | 560,986 |   | $ | 736,335 |   |   | $ | 169,458 |   |   | $ | (278,978 | ) | $ | 7,424,446 |   |
| Pre-tax Earnings (Loss) |       | $                                                                 | 1,557,523  |   | $ | 363,958 |   | $ | 79,135 |   | $ | 2,000,616 |   | $ | 745,365 |   | $ | 318,940 |   | $ | 80,166 |   |   | $ | 17,513 |   |   | $ | (27,044 | ) | $ | 3,135,556 |   |
| Total Assets            |       | $                                                                 | 31,685,325 |   | $ | 16,995,604 |   | $ | 78,419 |   | $ | 48,759,348 |   | $ | 75,320,469 |   | $ | 44,453,513 |   | $ | 2,273,589 |   |   | $ | 274,393 |   |   | $ | 211,723 |   | $ | 171,293,035 |   |

 

32

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

**Note 18—Summarized Financial Information**

Summarizedfinancial information for Countrywide Financial Corporation (parent only) andsubsidiaries is as follows:

| ** **                                                                                   | ** ** | **September 30, 2006**                            | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                                     | ** ** |
| **Balance  Sheets:**                                                                         |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans held for sale                                                                 |       |                                                        | $          | — |   |   |   | $ | 22,181,096 |   |   | $ | 6,700,112 |   | $ | (4,116 | ) | $ | 28,877,092 |   |
| Trading securities                                                                           |       |                                                        | —     |   |   |   | 323,134 |   |   | 19,130,911 |   | (17,401 | ) | 19,436,644 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       |                                                        | —     |   |   |   | — |   |   | 25,671,288 |   | (567,672 | ) | 25,103,616 |   |
| Loans held for investment, net                                                          |       |                                                        | —     |   |   |   | 4,445,648 |   |   | 76,363,328 |   | (12,268 | ) | 80,796,708 |   |
| Investments in other financial instruments                                              |       |                                                        | 123,965    |   |   |   | 2,867,947 |   |   | 9,213,458 |   | (12,319 | ) | 12,193,051 |   |
| Mortgage servicing rights, at fair value                                           |       |                                                        | —     |   |   |   | 15,012,933 |   |   | 5,482 |   | — |   | 15,018,415 |   |
| Investment in subsidiaries                                                                   |       |                                                        | 14,970,725 |   |   |   | — |   |   | 3,686 |   | (14,974,411 | ) | — |   |
| Other assets                                                                                 |       |                                                        | 18,101,467 |   |   |   | 12,764,089 |   |   | 9,724,645 |   | (28,821,155 | ) | 11,769,046 |   |
| Total assets                                                                                 |       |                                                        | $          | 33,196,157 |   |   |   | $ | 57,594,847 |   |   | $ | 146,812,910 |   | $ | (44,409,342 | ) | $ | 193,194,572 |   |
| Notes payable                                                                                |       |                                                        | $          | 17,693,154 |   |   |   | $ | 22,103,209 |   |   | $ | 33,950,396 |   | $ | (6,114,681 | ) | $ | 67,632,078 |   |
| Securities sold under agreements to repurchase  and federal funds purchased             |       |                                                        | —     |   |   |   | 173,768 |   |   | 38,102,503 |   | (565,974 | ) | 37,710,297 |   |
| Deposit liabilities                                                                          |       |                                                        | —     |   |   |   | — |   |   | 56,093,657 |   | (198,006 | ) | 55,895,651 |   |
| Other liabilities                                                                            |       |                                                        | 403,855    |   |   |   | 31,055,042 |   |   | 7,936,185 |   | (22,537,684 | ) | 16,857,398 |   |
| Equity                                                                                       |       |                                                        | 15,099,148 |   |   |   | 4,262,828 |   |   | 10,730,169 |   | (14,992,997 | ) | 15,099,148 |   |
| Total liabilities and equity                                                                 |       |                                                        | $          | 33,196,157 |   |   |   | $ | 57,594,847 |   |   | $ | 146,812,910 |   | $ | (44,409,342 | ) | $ | 193,194,572 |   |

 

| ** **                              | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Countrywide  Financial  Corporation  (Parent Only)**       | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                           | ** ** |
| **Statements of Earnings:**             |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                |       |                                                              | $          | (39,994 | ) |   |   | $ | 4,939,392 |   |   |   | $ | 4,304,208 |   |   |   | $ | (544,947 | ) |   |   | $ | 8,658,659 |   |   |
| Expenses                                |       |                                                              | 9,882      |   |   |   | 3,902,601 |   |   |   | 1,934,960 |   |   |   | (538,382 | ) |   |   | 5,309,061 |   |   |
| (Benefit) provision for  income taxes   |       |                                                              | (20,509    | ) |   |   | 396,607 |   |   |   | 922,974 |   |   |   | (2,739 | ) |   |   | 1,296,333 |   |   |
| Equity in net earnings of  subsidiaries |       |                                                              | 2,082,632  |   |   |   | — |   |   |   | — |   |   |   | (2,082,632 | ) |   |   | — |   |   |
| Net earnings                            |       |                                                              | $          | 2,053,265 |   |   |   | $ | 640,184 |   |   |   | $ | 1,446,274 |   |   |   | $ | (2,086,458 | ) |   |   | $ | 2,053,265 |   |   |

 

33

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

| ** **                                                                                        | ** ** | **December 31, 2005**                             | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)**                                     | ** ** |
| **Balance Sheets:**                                                                               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans held for sale                                                                      |       | $                                                           | —     |   |   | $ | 35,349,126 |   |   | $ | 1,445,383 |   | $ | 13,676 |   | $ | 36,808,185 |   |
| Trading securities                                                                                |       | —                                                      |       |   | 255,127 |   |   | 10,729,483 |   | (2,037 | ) | 10,982,573 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       | —                                                      |       |   | 710,000 |   |   | 24,171,178 |   | (1,563,817 | ) | 23,317,361 |   |
| Loans held for investment,  net                                                                   |       | —                                                      |       |   | 5,588,767 |   |   | 64,279,238 |   | (2,558 | ) | 69,865,447 |   |
| Investments in other  financial instruments                                                       |       | 7,324                                                       |       |   | 1,969,097 |   |   | 9,284,304 |   | — |   | 11,260,725 |   |
| Mortgage servicing rights,  net                                                                   |       | —                                                      |       |   | 12,604,453 |   |   | 6,386 |   | — |   | 12,610,839 |   |
| Investments in subsidiaries                                                                       |       | 12,657,967                                                  |       |   | — |   |   | 2,483 |   | (12,660,450 | ) | — |   |
| Other assets                                                                                      |       | 16,802,566                                                  |       |   | 8,748,527 |   |   | 13,303,484 |   | (28,614,337 | ) | 10,240,240 |   |
| Total assets                                                                                      |       | $                                                           | 29,467,857 |   |   | $ | 65,225,097 |   |   | $ | 123,221,939 |   | $ | (42,829,523 | ) | $ | 175,085,370 |   |
| Notes payable                                                                                     |       | $                                                           | 16,347,891 |   |   | $ | 36,181,800 |   |   | $ | 35,152,400 |   | $ | (11,494,205 | ) | $ | 76,187,886 |   |
| Securities sold under agreements to repurchase  and federal funds  purchased            |       | —                                                      |       |   | 1,844,789 |   |   | 33,871,846 |   | (1,563,430 | ) | 34,153,205 |   |
| Deposit liabilities                                                                               |       | —                                                      |       |   | — |   |   | 39,559,051 |   | (120,135 | ) | 39,438,916 |   |
| Other liabilities                                                                                 |       | 304,106                                                     |       |   | 23,439,496 |   |   | 5,723,435 |   | (16,977,534 | ) | 12,489,503 |   |
| Equity                                                                                            |       | 12,815,860                                                  |       |   | 3,759,012 |   |   | 8,915,207 |   | (12,674,219 | ) | 12,815,860 |   |
| Total liabilities  and equity                                                                     |       | $                                                           | 29,467,857 |   |   | $ | 65,225,097 |   |   | $ | 123,221,939 |   | $ | (42,829,523 | ) | $ | 175,085,370 |   |

 

| ** **                             | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)**       | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                           | ** ** |
| **Statements of Earnings:**            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                              | $          | 2,450 |   |   |   | $ | 4,870,145 |   |   | $ | 2,899,834 |   | $ | (347,983 | ) |   | $ | 7,424,446 |   |   |
| Expenses                               |       |                                                              | 17,728     |   |   |   | 3,050,831 |   |   | 1,554,803 |   | (334,472 | ) |   | 4,288,890 |   |   |
| (Benefit) provision for income taxes   |       |                                                              | (6,701     | ) |   |   | 734,322 |   |   | 524,356 |   | (5,616 | ) |   | 1,246,361 |   |   |
| Equity in net earnings of subsidiaries |       |                                                              | 1,897,772  |   |   |   | — |   |   | — |   | (1,897,772 | ) |   | — |   |   |
| Net earnings                           |       |                                                              | $          | 1,889,195 |   |   |   | $ | 1,084,992 |   |   | $ | 820,675 |   | $ | (1,905,667 | ) |   | $ | 1,889,195 |   |   |

 

34

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

**Note 19—Borrowerand Investor Custodial Accounts**

As of September 30,2006 and December 31, 2005, the Company managed $22.6 billion and $22.0billion, respectively, of borrower and investor custodial cash accounts. Thesecustodial accounts arise in connection with the Company’s mortgage servicingactivities. Except as described below, these amounts are not recorded on theCompany’s balance sheets. Of these amounts, $16.5 billion and $14.0billion, respectively, were deposited at the Bank, of which $15.7 billion and$13.2 billion, respectively, were interest bearing and included in the Company’sdeposit liabilities as custodial deposit accounts with an additional $0.8billion in each period included in deposit liabilities in non-interest bearingchecking accounts. The remaining balances were deposited with other depositoryinstitutions.

**Note 20—LegalProceedings**

Countrywide and certainsubsidiaries are defendants in various legal proceedings involving mattersgenerally incidental to their businesses. Although it is difficult to predictthe ultimate outcome of these proceedings, management believes, based ondiscussions with counsel, that any resulting liability will not materiallyaffect the consolidated financial position of the Company.

**Note 21—LoanCommitments**

As of September 30,2006 and December 31, 2005, the Company had undisbursed home equity linesof credit commitments of $8.9 billion and $7.2 billion, respectively, as wellas undisbursed construction loan commitments of $1.7 billion and $1.5 billion,respectively. As of September 30, 2006, outstanding commitments to fundmortgage loans totaled $38.2 billion.

**Note 22 — PensionPlan**

The Company has a defined benefit pension plan (the“Plan”) covering substantially all of its employees hired prior to January 1,2006. The Company’s policy is to contribute the amount actuarially determinedto be necessary to pay the benefits under the Plan, and in no event to pay lessthan the amount necessary to meet the minimum funding standards of ERISA.

On September 1, 2006, theCompany made the maximum allowable tax deductible pension plan contribution of$62.6 million for the plan year 2005.

**Note 23—SubsequentEvents**

On October 24, 2006, the Company announced that itsBoard of Directors declared a dividend of $0.15 per common share payable November30, 2006 to shareholders of record on November 13, 2006.

The Board of Directors has authorized a sharerepurchase program of up to $2.5 billion. In connection with this program, theCompany intends to repurchase $1 billion to $2 billion of its common stock inthe fourth quarter of 2006 financed through the issuance of enhanced trustpreferred securities.

35

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

**Note 24—RecentlyIssued Accounting Pronouncements**

InFebruary 2006, the FASB issued Statement of Financial Accounting StandardsNo. 155, *Accounting for Certain Hybrid FinancialInstruments* (“SFAS 155”), an amendment of SFAS 133 andSFAS 140. This statement:

·       establishesa requirement to evaluate interests in securitized financial instruments thatcontain an embedded derivative requiring bifurcation;

·       permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;

·       clarifieswhich interest-only strips and principal-only strips are not subject to SFAS133; and

·       clarifiesthat concentration of credit risks in the form of subordination are notembedded derivatives.

SFAS 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The adoption of SFAS 155 is not expectedto have a significant impact on the consolidated financial position or earningsof the Company.

During July 2006, the Financial AccountingStandards Board issued FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes (“FIN 48”). FIN 48 was issued to clarify therequirements of Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes”, relating to the recognition of income taxbenefits.

FIN 48 provides atwo-step approach to recognizing and measuring tax benefits when the benefits’realization is uncertain. The first step is to determine whether the benefit isto be recognized; the second step is to determine the amount to be recognized:

·       Incometax benefits should be recognized when, based on the technical merits of a taxposition, the entity believes that if a dispute arose with the taxing authorityand were taken to a court of last resort, it is more likely than not (i.e. aprobability of greater than 50 percent) that the tax position would besustained as filed.

·       Ifa position is determined to be more likely than not of being sustained, thereporting enterprise should recognize the largest amount of tax benefit that isgreater than 50 percent likely of being realized upon ultimate settlement withthe taxing authority.

FIN 48 is applicable to Countrywide beginning in thefirst quarter of 2007. The cumulative effect of applying the provisions ofFIN 48 upon adoption will be reported as an adjustment to beginningretained earnings. The adoption of FIN 48 is not expected to have a significantimpact on the consolidated financial position or earnings of the Company.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 provides a framework for measuring fair value when suchmeasurements are utilized for accounting purposes. The framework focuses on anexit price in the principal (or, alternatively, the most advantageous) marketdetermined in an orderly transaction between willing market participants. SFAS157 establishes a three-tiered fair value hierarchy with the highest tier(Level 1) representing quoted prices for identical assets or liabilities in anactive market and the lowest tier 

36

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Unaudited)**

(Level 3) representingestimated values based on unobservable inputs. Under SFAS 157, relateddisclosures are segregated for assets and liabilities measured at fair valuebased on the level used within the hierarchy to determine their fair values.For the Company, SFAS 157 is effective January 1, 2008, with early adoptionpermitted as of January 1, 2007. The Company has not yet determined whether itwill adopt SFAS 157 early or the expected financial impact, if any, uponadoption.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans* (“SFAS 158”),an amendment of FASB Statement Nos. 87, 88, 106, and 132(R). SFAS 158 requiresa liability (or an asset) to be recorded that reflects the underfunded (oroverfunded) status of its postretirement benefit plans. The portion of thatliability (or asset) that has not been recognized in earnings shall be offsetagainst Accumulated Other Comprehensive Income (a component of equity), net oftaxes. SFAS 158 also requires the measurement date for those obligations to coincidewith an entity’s fiscal year-end, which is the measurement date currently usedby the Company. SFAS 158 is effective as of December 31, 2006. The Companycurrently estimates that an additional liability will be recorded upon adoptionof SFAS 158 that is not expected to exceed $100 million.

In September 2006, the Securities and ExchangeCommission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB 108”), *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB 108 providesthe SEC staff’s views regarding the process of quantifying financial statementmisstatements. It requires the use of two different approaches to quantifyingmisstatements—(1) the rollover approach and (2) the iron curtain approach—whenassessing whether such a misstatement is material to the current periodfinancial statements. The rollover approach focuses on the impact on the incomestatement of a misstatement originating in the current reporting period. Theiron curtain approach focuses on the cumulative effect on the balance sheet asof the end of the current reporting period of uncorrected misstatementsregardless of when they originated. If a material misstatement is quantifiedunder either approach, SAB 108 would require a correction to be made. Dependingon the magnitude of the correction with respect to the current period financialstatements, the correction could result in changes to financial statements forprior periods. SAB 108 will be effective for the Company’s fiscal year endingDecember 31, 2006. At this time, the Company does not expect the application ofSAB 108 to have a significant effect on its previously reported financialstatements or the financial statements for the period of adoption.

37

----

**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

Countrywide is a diversified financial servicescompany engaged in mortgage-finance related activities. We organize ourbusinesses into five segments—Mortgage Banking, Banking, Capital Markets,Insurance and Global Operations.

As used in this Report,references to “we,” “our,” “the Company” or “Countrywide” refer to CountrywideFinancial Corporation and its consolidated subsidiaries unless otherwiseindicated.

***Third Quarter Results***

The third quarter of 2006 was characterized by both declininginterest rates and an inverted yield curve. However, the absolute level ofinterest rates was higher during the current quarter than during the year-agoquarter. The amount of total U.S. mortgage originations nationally declined 25%when compared to the third quarter of 2005; our mortgage loan productiondeclined 22%.

Our consolidated net earnings for the third quarter of2006 were $647.6 million, an increase of 2% from 2005’s third quarter netearnings of $633.9 million. The increase in our net earnings resulted inlarge part from an after tax decline of $115.3 million in insurance claims andother losses recorded in 2005 primarily as a result of hurricane Katrina,together with increased profitability of our Banking and Capital MarketSegments. These increases were offset by a decrease in the profitability of ourMortgage Banking Segment.

The Company’s Loan Production and Loan ServicingSectors are generally countercyclical over the long-term; specifically, in adeclining interest rate environment as experienced in the third quarter, LoanProduction pre-tax profits would be expected to generally improve and LoanServicing pre-tax profits would be expected to generally decline. However, inthe short term, this countercyclicality may not be evident because the changein value of the MSRs and retained interests is reflected in Loan ServicingSector results as interest rates change, whereas gain on sale is recorded inLoan Production Sector results after loans are processed, funded and sold.

Our Loan Servicing Sector wasaffected by a decrease in the value of our mortgage servicing rights (“MSRs”)and other retained interests, net of the Servicing Hedge, which was a loss of$173 million in the current quarter compared to a gain of $16 million in theyear-ago quarter. Our Loan Production Sector was affected by a decrease inproduction volume while operating expenses increased as the Company continuedto invest in loan sales force and branch network expansion.

***Mortgage Market***

The mortgage lending business has historically been theprimary source of our revenues and earnings. As a result, the dominant externalinfluences on our operating results are the demand for mortgage loans in theU.S., which is affected by such factors as prevailing mortgage interest ratesand the strength of the U.S. housing market, and economic factors affectingborrowers’ ability to repay the loans we either hold or sell with creditenhancements provided.

For the quarter and nine months ended September 30,2006, we estimate that total U.S. residential mortgage production was $724 billionand $2,151 billion, respectively, compared to $966 billion and $2,516 billionfor the quarter and nine months ended September 30, 2005, respectively.Based on these internal mortgage market estimates, we increased our marketshare to 15.7% for the current quarter from 15.1% in the year-ago period. Ourmarket share increased from 15.3% in the quarter ended June 30, 2006. The increasein market share from the second quarter of 2006 was due to an increase inproduction by our Correspondent Lending division.

38

----

We estimate the mortgagemarket for 2006 to be between $2.7 trillion and $2.9 trillion compared to $3.3trillion in 2005.

***Loan Production***

Our total loan productionvolume decreased during the third quarter due primarily to the impact of theslowing housing market for purchase mortgages and higher interest rates on refinancemortgage loans. Our adjustable rate loan production has decreased from 51% oftotal production in the quarter ended September 30, 2005 to 44% in thecurrent quarter, reflecting the decreased relative attractiveness of theseloans compared to fixed-rate loans as the yield curve flattened. Pay-optionloan production has decreased from approximately 20% of our loan productionduring the quarter ended September 30, 2005 to approximately 13% of ourproduction during the quarter ended September 30, 2006. 

***Interest Rate Risk and Credit Risk***

The principalmarket risk we face is interest rate risk—the risk that the value of our assetsor liabilities or our net interest income will change due to changes ininterest rates. Interest rate risk is significant to our Mortgage Banking,Banking and Capital Markets Segments.

·       Inour Mortgage Banking Segment, interest rate risk is reflected in the value ofour interest rate lock commitments, inventory of loans held for sale, tradingsecurities, retained interests and MSRs. We manage interest rate risk throughthe natural counterbalance of our loan production operations and our investmentin MSRs, as well as with our hedging activities. 

·       Inour Banking Segment, interest rate risk primarily affects our net interestincome as a result of differences in changes in interest rates between ourinterest-earning assets and interest-bearing liabilities. We generally managethis risk by investing in relatively short-duration assets and matching theduration and re-pricing characteristics of our interest-bearing liabilitieswith those of our interest-earning assets.

·       Inour Capital Markets Segment, interest rate risk primarily affects our portfolioof trading securities and our conduit activities. We manage this risk byactively hedging the value of our inventory using financial instruments such asexchange-traded and over-the-counter derivatives as well as securities.

We also face credit risk, primarily related to ourresidential mortgage lending activities in both the Banking and MortgageBanking Segments. Credit risk is the potential for financial loss resultingfrom the failure of a borrower or an institution to honor its contractualobligations to us.

Credit risk has historically most directly affectedour investment in other financial instruments that are credit subordinated toother securities. We are also exposed to credit risk through therepresentations and warranties included in our loan sales and securitizations. Inaddition, our investment in mortgage loans held for investment exposes us tocredit risk. We manage mortgage credit risk by underwriting our mortgage loanproduction to secondary market standards and by limiting credit recourse toCountrywide in our loan sales and securitization transactions. We also managecredit risk in our investment loan portfolio by retaining high credit qualityloans, through pricing strategies designed to compensate for the risk, byactive portfolio, delinquency and loss management and mitigation activities andby obtaining credit insurance policies on selected pools of mortgage loans thatprovide partial protection from credit losses.

Our credit risk includesnon-traditional loans we hold for investment, such as pay-option loans. Pay-optionloans differ from more traditional monthly amortizing loans by providing borrowerswith the option to make fully amortizing, interest-only, or“negative-amortizing” payments. Our underwriting standards specify that aborrower must qualify for a pay-option loan at the loan’s fully amortizingpayment based on fully indexed interest rates. These requirements notwithstanding,the lower initial payment 

39

----

requirementsof pay-option loans may increase the credit risk inherent in our loans held forinvestment as the required monthly payments for pay-option loans eventuallyincrease. Borrowers may be less able to pay the increased amounts and,therefore, more likely to default on the loan, than a borrower using a moretraditional monthly-amortizing loan. Our exposure to this higher credit risk isincreased by any negative amortization that has been added to the principal balance.Furthermore, substantially all of the pay-option loans we originate areunderwritten based on “reduced documentation” standards whereby the loanapplicant’s income is based on representations provided by the borrower. Ourpay-option investment loan portfolio borrowers had, at the time the loans wereoriginated, average FICO scores (a measure of borrower creditworthiness) of 721and original loan-to-value and combined loan-to-values of 75% and 78%,respectively. We believe this product is an attractive portfolio investment asthe higher credit risk inherent in pay-option loans is balanced by higherexpected returns relative to other first mortgage loan products.

***Liquidity and Capital***

Our liquidity and financing requirements are significant.We meet these requirements in a variety of ways, including use of the publiccorporate debt and equity markets, mortgage- and asset-backed securitiesmarkets, and through the financing activities of our Bank, such asdeposit-gathering and Federal Home Loan Bank advances. The objective of ourliquidity management is to ensure that adequate, diverse and reliable sourcesof cash are available to meet our funding needs on a cost-effective basis. Ourability to raise financing at the level and cost required to competeeffectively is dependent on maintaining our high credit standing.

How we grow our businesses and meet our financingneeds is influenced by regulatory agency and public debt rating agency capitalrequirements. These requirements influence the nature of the financing we areable to obtain, the assets in which we invest and the rate at which we are ableto grow. 

As part of our ongoing capital optimization plan, theBoard of Directors has authorized a share repurchase program of up to $2.5billion. In connection with this program, we intend to repurchase $1 billionto $2 billion of our common stock in the fourth quarter of 2006 financedthrough the issuance of enhanced trust preferred securities.

At September 30,2006, we exceeded the regulatory capital requirements to be classified as “wellcapitalized,” with a tier 1 leverage capital ratio of 6.9% and total risk basedratio of 13.1%. 

***Competition and Consolidation***

The mortgage lending industryis dominated by large, sophisticated financial institutions. To competeeffectively in the future, we will be required to maintain a high level ofoperational, technological, and managerial expertise, as well as an ability toattract capital at a competitive cost. Recently, well-capitalized Wall Streetinvestment banking firms have increased their participation in the mortgagebanking business. We expect the entrance of these firms to the marketplace toincrease competition in the near-term, especially in the nonconforming andnonprime loan products. 

The industry continues toundergo consolidation. We expect this trend to continue. We believe that wewill benefit from industry consolidation through increased market share andenhanced ability to recruit talented personnel.

**Critical AccountingPolicies**

The accounting policies with the greatest impact onour financial condition and results of operations, and which require the mostjudgment, pertain to our mortgage securitization activities, our investments inMSRs and retained interests, and our use of derivatives to manage interest raterisk. Our critical 

40

----

accounting policiesinvolve the following three areas: 1) accounting for gains on sales of loansand securities; 2) accounting for MSRs and retained interests, includingvaluation of these assets; and 3) accounting for derivatives and our relatedinterest rate risk management activities.

Effective January 1,2006, we adopted Statement of Financial Accounting Standards No. 156—*Accounting for Servicing of Financial Assets*(“SFAS 156”),which amends Statement of Financial Accounting Standards No. 140—*Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities* (“SFAS 140”). SFAS 156 changesthe accounting for, and reporting of, the recognition and measurement ofseparately recognized servicing assets and liabilities. Accordingly, theadoption of SFAS 156 has changed the Company’s accounting policies relating togain on sale of loans and securities and the accounting for MSRs subsequent totheir initial recognition, effective January 1, 2006. A discussion of thecritical accounting policies applied through December 31, 2005 is includedin our 2005 Annual Report.

***Gain on Sale of Loans and Securities***

Most of the mortgage loans we produce are sold in thesecondary mortgage market, primarily in the form of securities and to a lesserextent as whole loans. When we sell loans in the secondary mortgage market, wegenerally do not sell the MSRs that are created. In securitization transactions,we may also retain interests, including interest-only securities,principal-only securities and residual securities.

We determine the gain on sale of a security or loansby allocating the carrying value of the underlying mortgage loans betweensecurities or loans sold and the interests retained, based on their relativefair values. The gain on sale we report is the difference between the proceedswe receive from the sale and the cost allocated to the securities or loanssold. The proceeds include cash and other assets obtained (MSRs) less anyliabilities incurred (i.e., liabilities for representations and warranties orother recourse provisions). The timing of such gain recognition is dependent onmeeting very specific accounting criteria and, as a result, the gain on salemay be recorded in a different accounting period from when the transfer of theloans is completed.

41

----

Hereis an example of how this accounting works:

| Carrying value of  mortgage loans underlying a security(1)                           |   | $       | 1,000,000 |   |
|--------------------------------------------------------------------------------------|--------|---------|-----------|--------|
| Fair values:                                                                         |   |    |      |
| Security                                                                             |   | $       | 999,000   |   |
| MSRs                                                                                 |   | 10,000  |      |
| Retained interests                                                                   |   | 4,000   |      |
| Liabilities incurred                                                                 |   | (1,000  | )         |
| Sales proceeds:                                                                      |   |    |      |
| Cash                                                                                 |   | $       | 999,000   |   |
| MSRs                                                                                 |   | 10,000  |      |
| Liabilities incurred                                                                 |   | (1,000  | )         |
|                                                                                 |   | $       | 1,008,000 |   |
| Fair value used  to allocate basis:                                                  |   |    |      |
| Loans sold (sales proceeds)                                                          |   | $       | 1,008,000 |   |
| Retained interests                                                                   |   | 4,000   |      |
|                                                                                 |   | $       | 1,012,000 |   |
| Computation of  gain on sale of security:                                            |   |    |      |
| Sales proceeds                                                                       |   | $       | 1,008,000 |   |
| Less: Cost allocated to loans sold ($1,000,000  ́  ($1,008,000÷$1,012,000)) |   | 996,047 |      |
| Gain on sale                                                                         |   | $       | 11,953    |   |
| Initial recorded value  of retained interests ($1,000,000 – $996,047)           |   | $       | 3,953     |   |

----

(1)          Thecarrying value of mortgage loans includes the outstanding principal balance ofthe loans, net of deferred origination costs and fees, any premiums ordiscounts and any basis adjustment resulting from hedge accounting.

***Accounting for MSRs***

Effective January 1,2006, we adopted SFAS 156 and we have elected to account for MSRs relating toresidential mortgages at fair value with changes in fair value recorded incurrent period earnings. Therefore, we no longer record periodic amortizationor evaluate MSRs for impairment, as was required prior to adoption of SFAS 156.

***Results ofOperations Comparison—Quarters Ended September 30, 2006 and 2005***

***ConsolidatedEarnings Performance***

Our consolidated netearnings for the third quarter of 2006 were $647.6 million, an increase of 2% from2005’s third quarter net earnings of $633.9 million. Our diluted earningsper share were $1.03, same as the year-ago period. The increase in our net earningsresulted primarily from an after-tax decline of $115.3 million in hurricanelosses that were recorded in the third quarter of 2005 together with increasedprofitability of our Banking and Capital Market Segments. These increases wereoffset by a decrease in the profitability of our Mortgage Banking Segment.

The Banking Segmentproduced pre-tax earnings of $370.8 million, an increase of 33% from the year-agoperiod. The increase in profitability of our Banking Segment was primarily dueto a 21% increase in average interest-earning assets at Countrywide Bank fromthe year-ago period. The Capital Markets Segment produced an increase inpre-tax earnings of $49.1 million, or 53%.

42

----

The decrease in theprofitability of our Mortgage Banking Segment was due primarily to decreased profitabilityin both our Loan Production and Loan Servicing Sectors. Our Loan ServicingSector was affected by a decrease in the value of MSRs and other retainedinterests, net of the Servicing Hedge, which was a loss of $173 million in thecurrent quarter compared to a gain of $16 million related to valuation changes,net of the Servicing Hedge in the year-ago quarter. Our Loan Production Sectorwas affected by increased operating expenses that resulted from our investmentin expanding our loan sales force and distributed branch network to support ourlong-term strategy of growing market share.

**Operating SegmentResults**

Pre-taxearnings (loss) by segment are summarized below:

| ** **             | ** ** | **Quarters Ended  September 30,** | ** ** |
|------------------------|------------|---------------------------------------------|------------|
| ** **             | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in thousands)**                     | ** ** |
| Mortgage Banking:      |       |                                        |       |   |   |
| Loan Production        |       | $                                           | 280,684    |   | $ | 413,731 |   |
| Loan Servicing         |       | 123,373                                     |       | 257,666 |   |
| Loan Closing Services  |       | 19,870                                      |       | 31,139 |   |
| Total Mortgage Banking |       | 423,927                                     |       | 702,536 |   |
| Banking                |       | 370,806                                     |       | 278,264 |   |
| Capital Markets        |       | 141,099                                     |       | 92,042 |   |
| Insurance              |       | 91,343                                      |       | (32,119 | ) |
| Global Operations      |       | 3,451                                       |       | 8,153 |   |
| Other                  |       | 5,586                                       |       | 2,802 |   |
| Total                  |       | $                                           | 1,036,212  |   | $ | 1,051,678 |   |

 

The pre-tax earnings (loss) of each segment includeintercompany transactions, which are eliminated in the “other” category.

Mortgageloan production by segment and product, net of intersegment sales, is summarizedbelow:

| ** **                                | ** ** | **Quarters Ended  September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in millions)**                      | ** ** |
| Segment:                                  |       |                                        |       |   |   |
| Mortgage Banking                          |       | $                                           | 106,252    |   | $ | 131,126 |   |
| Capital Markets - conduit acquisitions(1) |       | 4,322                                       |       | 5,083 |   |
| Banking Operations                        |       | 3,133                                       |       | 9,801 |   |
| Total Mortgage Loan Fundings              |       | 113,707                                     |       | 146,010 |   |
| Commercial real estate                    |       | 1,346                                       |       | 1,113 |   |
|                                      |       | $                                           | 115,053    |   | $ | 147,123 |   |
| Product:                                  |       |                                        |       |   |   |
| Prime Mortgage                            |       | $                                           | 91,868     |   | $ | 122,228 |   |
| Prime Home Equity                         |       | 11,705                                      |       | 11,581 |   |
| Nonprime Mortgage                         |       | 10,134                                      |       | 12,201 |   |
| Commercial real estate                    |       | 1,346                                       |       | 1,113 |   |
|                                      |       | $                                           | 115,053    |   | $ | 147,123 |   |

----

(1)   Acquisitionsfrom third parties

43

----

Thefollowing table summarizes loan production by purpose and by interest ratetype:

| ** **              | ** ** | **Quarters Ended  September 30,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                      | ** ** |
| **Purpose:**            |       |                                        |       |   |   |
| Non-purchase            |       | $                                           | 60,217     |   | $ | 77,342 |   |
| Purchase                |       | 54,836                                      |       | 69,781 |   |
|                    |       | $                                           | 115,053    |   | $ | 147,123 |   |
| **Interest Rate Type:** |       |                                        |       |   |   |
| Fixed-Rate              |       | $                                           | 64,424     |   | $ | 72,476 |   |
| Adjustable-Rate         |       | 50,629                                      |       | 74,647 |   |
|                    |       | $                                           | 115,053    |   | $ | 147,123 |   |

 

**Mortgage BankingSegment**

The Mortgage BankingSegment includes the Loan Production, Loan Servicing and Loan Closing ServicesSectors. The Loan Production and Loan Closing Services Sectors generallyperform most profitably when mortgage interest rates are relatively low and thedemand for mortgage loans is high. Conversely, the Loan Servicing Sectorgenerally performs well when mortgage interest rates are relatively high andloan prepayments are low. We generally expect the natural counterbalance ofthese sectors, which we refer to as the macro hedge to reduce the impact ofchanges in mortgage interest rates on our earnings.

***Loan Production Sector***

The Loan Production Sector sources mortgage loansthrough the four production channels of Countrywide Home Loans (“CHL”)—ConsumerMarkets, Wholesale Lending, Correspondent Lending and Full Spectrum Lending.These loans are funded through either one of these channels or throughCountrywide Bank.

44

----

Thefollowing table summarizes Mortgage Banking loan production by channel, by mortgageloan type, by purpose and by interest rate type:

| ** **                            | ** ** | **Quarters Ended  September 30,(1)** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(in millions)**                         | ** ** |
| **Channel:**                          |       |                                           |       |   |   |
| Originated:                           |       |                                           |       |   |   |
| Consumer Markets                      |       | $                                              | 29,003     |   | $ | 35,321 |   |
| Wholesale Lending                     |       | 22,762                                         |       | 24,911 |   |
| Full Spectrum Lending                 |       | 9,217                                          |       | 7,422 |   |
| Total originated                      |       | 60,982                                         |       | 67,654 |   |
| Purchased—Correspondent  Lending |       | 45,270                                         |       | 63,472 |   |
| ** **                            |       | $                                              | 106,252    |   | $ | 131,126 |   |
| **Mortgage  Loan Type:**              |       |                                           |       |   |   |
| Prime Mortgage                        |       | $                                              | 87,713     |   | $ | 109,383 |   |
| Nonprime Mortgage                     |       | 9,336                                          |       | 11,399 |   |
| Prime Home Equity                     |       | 9,203                                          |       | 10,344 |   |
|                                  |       | $                                              | 106,252    |   | $ | 131,126 |   |
| **Purpose:**                          |       |                                           |       |   |   |
| Non-purchase                          |       | $                                              | 56,302     |   | $ | 69,446 |   |
| Purchase                              |       | 49,950                                         |       | 61,680 |   |
|                                  |       | $                                              | 106,252    |   | $ | 131,126 |   |
| **Interest  Rate Type:**              |       |                                           |       |   |   |
| Fixed-Rate                            |       | $                                              | 62,378     |   | $ | 68,480 |   |
| Adjustable-Rate                       |       | 43,874                                         |       | 62,646 |   |
|                                  |       | $                                              | 106,252    |   | $ | 131,126 |   |

----

(1)          $33.7 billion and $4.9billion of these loans were funded by Countrywide Bank during the quarter endedSeptember 30, 2006 and 2005, respectively.

Mortgage Banking loan production volume for thequarter ended September 30, 2006 decreased 19% from the year-ago period dueto a 25% decrease in total U.S. residential mortgage production partiallyoffset by an increase in market share.

The Consumer Markets Division’s strategy is to gainmarket share through growth in its sales force, distributed retail branchnetwork, call centers and joint venture businesses. The Full Spectrum LendingDivision continues to increase its sales forces and retail branch offices as ameans to increase market share. The Wholesale Lending Division also continuesto increase their sales force.

Followingis a summary of our loan origination channels’ sales organizations:

| ** **             | ** ** | **September 30,** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **             | ** ** | **Sales Force**   | ** ** | **Branches** | ** ** | **Sales Force** | ** ** | **Branches** | ** ** |
| **Channel:**           | ** ** |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Consumer Markets       |       |                   | 8,904      | ** ** |   |   | 772 | ** ** |   |   | 8,183 | ** ** |   |   | 631 | ** ** |   |
| Full Spectrum  Lending |       |                   | 5,874      | ** ** |   |   | 224 | ** ** |   |   | 4,494 | ** ** |   |   | 187 | ** ** |   |
| Wholesale Lending      |       |                   | 1,478      | ** ** |   |   | 52 | ** ** |   |   | 1,233 | ** ** |   |   | 52 | ** ** |   |
| Correspondent Lending  |       |                   | 190        | ** ** |   |   | — | ** ** |   |   | 162 | ** ** |   |   | — | ** ** |   |

 

45

----

Thepre-tax earnings of the Loan Production Sector are summarized below:

| ** **                              | ** ** | **Quarters Ended September 30,**  | ** **  |
|-----------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                              | ** ** | **2006**                                         | ** **  | **2005** | ** ** |
| ** **                              | ** ** | **Amount**                                       | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** **  |
| Revenues:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                | 1,000,023   |   |   |   |   |   | $ | 861,108 |   |   |   |   |   |
| Prime Home Equity                       |       | 232,570                                          |        |   |   |   |   | 300,532 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 180,374                                          |        |   |   |   |   | 222,618 |   |   |   |   |   |
| Total revenues                          |       | 1,412,967                                        |        |   | 1.33 | % |   | 1,384,258 |   |   | 1.06 | % |   |
| Expenses:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 618,337                                          |        |   | 0.58 | % |   | 583,243 |   |   | 0.44 | % |   |
| Other operating                         |       | 361,124                                          |        |   | 0.34 | % |   | 275,813 |   |   | 0.21 | % |   |
| Allocated corporate                     |       | 152,822                                          |        |   | 0.15 | % |   | 111,471 |   |   | 0.09 | % |   |
| Total expenses                          |       | 1,132,283                                        |        |   | 1.07 | % |   | 970,527 |   |   | 0.74 | % |   |
| Pre-tax earnings                        |       | $                                                | 280,684     |   |   | 0.26 | % |   | $ | 413,731 |   |   | 0.32 | % |   |
| Total Mortgage Banking  loan production |       | $                                                | 106,252,000 |   |   |   |   |   | $ | 131,126,000 |   |   |   |   |   |

 

Revenues (in dollars and expressed as a percentage ofmortgage loans produced) increased from the year-ago period driven primarily byimproved Prime Mortgage loan revenues partially offset by a $14.3 billion reductionin the volume of loans sold. In the quarter ended September 30, 2006, $107.1billion of mortgage loans, or 101% of Mortgage Banking loan production, wassold compared to $121.4 billion of mortgage loans, or 93% of Mortgage Bankingloan production, in the quarter ended September 30, 2005.

Expenses (in dollars and as a percentage of loansproduced) increased from the year-ago period, primarily due to costs incurred tosupport our investment in expanding the loan sales force and distributed branchnetwork to support the achievement of our long-term strategy of market sharegrowth. In addition, a reduction in production volume and the rate of deferralof expenses under SFAS 91 contributed to the increase in expenses. While wecontinue to expand our loan production capacity, we are also adjusting staffingand occupancy levels in markets where declines in production require suchadjustments.

The primary capacity constraint in our loanorigination activities is the number of loan operations personnel we have onstaff. Therefore, we measure planned capacity by multiplying the number of ourloan operations personnel by the number of loans we expect each loan operationsstaff person to process under normal conditions. Management adjusts staffinglevels to account for changes in the current and projected near-term mortgagemarket. During the quarter ended September 30, 2006, the Loan ProductionSector operated at approximately 91% of planned operational capacity, comparedto 101% during the year-ago period. 

46

----

Thefollowing table summarizes the number of people included in the Loan ProductionSector workforce:

| ** **                              | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Sales                                   |       | 16,446                 |       | 14,072 |   |
| Operations:                             |       |                   |       |   |   |
| Regular employees                       |       | 10,342                 |       | 11,189 |   |
| Temporary staff                         |       | 1,453                  |       | 2,225 |   |
|                                    |       | 11,795                 |       | 13,414 |   |
| Administration  and support             |       | 3,772                  |       | 2,756 |   |
| Total Loan  Production Sector workforce |       | 32,013                 |       | 30,242 |   |

 

***Loan Servicing Sector***

The Loan Servicing Sector includes a workforce of approximately7,000 who service almost eight million mortgage loans. The Loan ServicingSector’s results include fees and other income earned and expenses incurred forservicing loans for others; the financial performance of our investments inMSRs and retained interests and associated risk management activities; andprofits from subservicing activities. The long-term performance of this sectoris affected primarily by the level of interest rates, the corresponding effecton the level of projected and actual prepayments in our servicing portfolio,our operational effectiveness and our ability to manage interest rate risk.

Our servicing portfolio grew to $1,244.3 billion at September 30,2006, a 19% increase from September 30, 2005. At the same time, theoverall weighted-average note rate of loans in our servicing portfolioincreased to 6.4% from 6.0% at September 30, 2005.

47

----

Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                                              | ** ** | **Quarters Ended September 30,**  | ** **    |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|---------------|
| ** **                                                              | ** ** | **2006**                                         | ** **    | **2005** | ** ** |
| ** **                                                              | ** ** | **Amount**                                       | ** **    | **Percentage of  Average  Servicing  Portfolio(1)** | ** ** | **Amount** | ** ** | **Percentage of  Average  Servicing  Portfolio(1)** | ** ** |
| ** **                                                              | ** ** | **(dollar amounts in thousands)** | ** **    |
| Servicing fees,  net of guarantee fees                                  |       | $                                                | 940,831       |   |   | 0.311 | % |   | $ | 826,189 |   |   | 0.333 | % |   |
| Escrow balance  income                                                  |       | 238,082                                          |          |   | 0.079 | % |   | 119,211 |   |   | 0.048 | % |   |
| Miscellaneous  fees                                                     |       | 167,719                                          |          |   | 0.055 | % |   | 135,391 |   |   | 0.054 | % |   |
| Income from  retained interests                                         |       | 123,816                                          |          |   | 0.041 | % |   | 108,181 |   |   | 0.043 | % |   |
| Realization of  expected cash flows from mortgage servicing rights |       | (806,968                                         | )             |   | (0.267 | )% |   | — |   |   | — |   |   |
| Amortization of  mortgage servicing rights                              |       | —                                           |          |   | — |   |   | (653,351 | ) |   | (0.263 | )% |   |
| Operating revenues                                                      |       | 663,480                                          |          |   | 0.219 | % |   | 535,621 |   |   | 0.215 | % |   |
| Change in fair  value of mortgage servicing rights                      |       | (1,066,937                                       | )             |   | (0.353 | )% |   | — |   |   | — |   |   |
| Recovery of  mortgage servicing rights                                  |       | —                                           |          |   | — |   |   | 915,364 |   |   | 0.369 | % |   |
| Impairment of  retained interests                                       |       | (140,384                                         | )             |   | (0.046 | )% |   | (61,697 | ) |   | (0.025 | )% |   |
| Servicing hedge  gains (losses)                                         |       | 1,034,353                                        |          |   | 0.342 | % |   | (837,241 | ) |   | (0.337 | )% |   |
| Valuation changes, net of Servicing Hedge                               |       | (172,968                                         | )             |   | (0.057 | )% |   | 16,426 |   |   | 0.007 | % |   |
| Total servicing revenues                                                |       | 490,512                                          |          |   | 0.162 | % |   | 552,047 |   |   | 0.222 | % |   |
| Operating  expenses                                                     |       | 181,799                                          |          |   | 0.060 | % |   | 184,629 |   |   | 0.074 | % |   |
| Allocated  corporate expenses                                           |       | 21,291                                           |          |   | 0.007 | % |   | 17,471 |   |   | 0.007 | % |   |
| Total servicing expenses                                                |       | 203,090                                          |          |   | 0.067 | % |   | 202,100 |   |   | 0.081 | % |   |
| Interest expense                                                        |       | 164,049                                          |          |   | 0.054 | % |   | 92,281 |   |   | 0.037 | % |   |
| Pre-tax earnings                                                        |       | $                                                | 123,373       |   |   | 0.041 | % |   | $ | 257,666 |   |   | 0.104 | % |   |
| Average servicing  portfolio                                            |       | $                                                | 1,209,255,000 |   |   |   |   |   | $ | 993,296,000 |   |   |   |   |   |

----

(1)          Annualized

Pre-tax earnings in the Loan ServicingSector were $123.4 million during the quarter ended September 30, 2006, adecrease of $134.3 million from the year-ago period. The decline in pre-taxearnings was due to valuation changes, net of the Servicing Hedge, which were aloss of $173 million in the current quarter. During the year-ago period,valuation changes, net of the ServicingHedge, were a gain of $16 million, which included $24.7 million related to hurricane losses. Alsocontributing to the decline in pre-tax earnings was an increase in interestexpense related to the cost of carrying a larger average investment in Servicing Sector assets and increasedcost of debt. These reductions were partially offset by higher operatingrevenues due to a larger servicing portfolio and operating expenses of $26.4 million related to hurricane losses recorded in the year-ago quarter,which were not repeated in the current quarter.

As a result of theadoption of SFAS 156, MSRs are carried at fair value with the change in valuerecorded in current period earnings. The primary factors causing a change infair value of MSRs are changes in interest rates and other market factors(shown as “Change in fair value of mortgage servicing rights” in the precedingtable) and realization of expected cash flows from mortgage servicing rights.

48

----

***Loan Closing Services Sector***

This sector is comprised of the LandSafe companies,which provide credit reports, flood determinations, appraisals, propertyvaluation services and title reports primarily to the Loan Production Sector andto third parties as well.

The LandSafe companiesproduced $19.9 million in pre-tax earnings in the quarter ended September 30,2006, representing a decrease of 36% from the year-ago period. The decrease inLandSafe’s pre-tax earnings was primarily due to the decline in the mortgagemarket and an increase in expenses as a result of the Company’s hiring of over100 additional staff appraisers and reviewers, an initiative to enhance ourappraisal fraud detection activities.

**Banking Segment**

The Banking Segment includes the investment andfee-based activities of Countrywide Bank (“Banking Operations”), along with theactivities of Countrywide Warehouse Lending (“CWL”), a provider of mortgageinventory financing to other mortgage bankers.

The Bank also produces loans for sale through ourMortgage Banking Segment. This activity is a mortgage banking activity and themortgage loan production, the related balance sheet and the income relating tothe sale of these loans are included in the Mortgage Banking Segment.

TheBanking Segment achieved pre-tax earnings of $370.8 million during the quarterended September 30, 2006, compared to $278.3 million for the year-agoperiod. Following is the composition of pre-tax earnings by component:

| ** **                              | ** ** | **Quarters Ended  September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(in thousands)**                     | ** ** |
| Banking  Operations                     |       | $                                           | 378,455    |   | $ | 259,325 |   |
| CWL                                     |       | 11,619                                      |       | 27,303 |   |
| Allocated  corporate expenses(1)        |       | (19,268                                     | )          | (8,364 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                           | 370,806    |   | $ | 278,264 |   |

----

(1)          Not included in thecalculation of Banking Operations’ efficiency ratio.

Thefollowing table shows total Banking Operations loan production volume by originationchannel:

| ** **             | ** ** | **Quarters Ended  September 30,** | ** ** |
|------------------------|------------|---------------------------------------------|------------|
| ** **             | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in millions)**                      | ** ** |
| Correspondent  Lending |       | $                                           | 1,472      |   | $ | 2,848 |   |
| Consumer Markets       |       | 1,215                                       |       | 2,438 |   |
| Wholesale Lending      |       | 446                                         |       | 4,515 |   |
|                   |       | $                                           | 3,133      |   | $ | 9,801 |   |

 

The production retained in our investment portfoliowas $3.1 billion in the quarter ended September 30, 2006, compared to $9.8billion in the year-ago period. This contributed to slower asset growth in ourBanking Operations. Our strategic plan calls for continued long-term growth inBank assets; however, many factors may impact the asset growth in any quarter.These include general mortgage market conditions, the availability of assetswhich meet the yield requirements of our Banking Operations and the Company’scapital and earnings considerations.

49

----

Therevenues and expenses of Banking Operations are summarized in the followingtable:

| ** **                                          | ** ** | **Quarters Ended  September 30,**      | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest income                                     |       | $                                                | 1,422,514  |   | $ | 925,974 |   |
| Interest expense                                    |       | (946,172                                         | )          | (573,670 | ) |
| Net interest income                                 |       | 476,342                                          |       | 352,304 |   |
| Provision for  loan losses                          |       | (27,872                                          | )          | (44,792 | ) |
| Net interest income after provision for loan losses |       | 448,470                                          |       | 307,512 |   |
| Non-interest  income                                |       | 36,446                                           |       | 40,169 |   |
| Non-interest  expense                               |       | (106,461                                         | )          | (88,356 | ) |
| Pre-tax earnings                                    |       | $                                                | 378,455    |   | $ | 259,325 |   |
| Efficiency  ratio(1)                                |       | 21                                               | %          | 23 | % |
| After-tax return on  average assets                 |       | 1.08                                             | %          | 0.89 | % |

----

(1)          Non-interest expensedivided by the sum of net interest income plus non-interest income. The BankingOperations’ efficiency ratio reflects the expense structure resulting from its relationship with CHL. If the Banking Operations of Countrywide Bankwere a stand-alone entity, the nature and amount of its expenses would differfrom those reported. For example, the fulfillment fees paid by CountrywideBank to the Loan Production Sector for origination costs incurred on investmentmortgage loans funded by Countrywide Bank are generally determined on an incremental cost basis which is less than would be incurred in anarms-length transaction.

50

----

The componentsof net interest income of Banking Operations are summarized below:

| ** **                                        | ** ** | **Quarters Ended September 30,**  | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **Average  Balance**                             | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** |
| ** **                                        | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest-earning assets:                          |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans(1)                                 |       | $                                                | 76,505,502 |   | $ | 1,323,810 |   |   | 6.91 | % |   | $ | 61,567,136 |   | $ | 835,380 |   |   | 5.41 | % |   |
| Securities available for sale(2)                  |       | 5,681,819                                        |       | 66,882 |   |   | 4.71 | % |   | 6,389,697 |   | 74,976 |   |   | 4.69 | % |   |
| Short-term investments                            |       | 819,472                                          |       | 10,874 |   |   | 5.26 | % |   | 489,367 |   | 4,345 |   |   | 3.52 | % |   |
| FHLB securities and FRB stock                     |       | 1,537,435                                        |       | 20,948 |   |   | 5.41 | % |   | 1,289,353 |   | 11,273 |   |   | 3.47 | % |   |
| Total earning assets                              |       | 84,544,228                                       |       | 1,422,514 |   |   | 6.72 | % |   | 69,735,553 |   | 925,974 |   |   | 5.30 | % |   |
| Allowance for loan losses                         |       | (165,173                                         | )          |   |   |   |   |   |   | (85,175 | ) |   |   |   |   |   |   |
| Other assets                                      |       | 1,159,232                                        |       |   |   |   |   |   |   | 620,596 |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                                | 85,538,287 |   |   |   |   |   |   |   | $ | 70,270,974 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits                             |       | $                                                | 7,150,257  |   | 92,032 |   |   | 5.11 | % |   | $ | 2,959,540 |   | 28,474 |   |   | 3.82 | % |   |
| Savings                                           |       | 302,485                                          |       | 3,989 |   |   | 5.23 | % |   | 879 |   | 3 |   |   | 1.33 | % |   |
| Company-controlled custodial deposits             |       | 16,591,425                                       |       | 213,147 |   |   | 5.10 | % |   | 13,797,445 |   | 114,785 |   |   | 3.30 | % |   |
| Time deposits                                     |       | 29,550,865                                       |       | 359,323 |   |   | 4.82 | % |   | 17,875,852 |   | 165,013 |   |   | 3.66 | % |   |
| Total interest-bearing deposits                   |       | 53,595,032                                       |       | 668,491 |   |   | 4.95 | % |   | 34,633,716 |   | 308,275 |   |   | 3.53 | % |   |
| FHLB advances                                     |       | 22,299,799                                       |       | 253,617 |   |   | 4.51 | % |   | 25,587,856 |   | 227,668 |   |   | 3.53 | % |   |
| Other borrowed funds                              |       | 1,778,435                                        |       | 24,064 |   |   | 5.37 | % |   | 4,285,210 |   | 37,727 |   |   | 3.49 | % |   |
| Total borrowed funds                              |       | 24,078,234                                       |       | 277,681 |   |   | 4.58 | % |   | 29,873,066 |   | 265,395 |   |   | 3.52 | % |   |
| Total interest-bearing liabilities                |       | 77,673,266                                       |       | 946,172 |   |   | 4.83 | % |   | 64,506,782 |   | 573,670 |   |   | 3.53 | % |   |
| Non  interest-bearing liabilities and  equity:    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking                     |       | 1,153,866                                        |       |   |   |   |   |   |   | 672,792 |   |   |   |   |   |   |   |
| Other liabilities                                 |       | 1,127,999                                        |       |   |   |   |   |   |   | 819,977 |   |   |   |   |   |   |   |
| Shareholder’s equity                         |       | 5,583,156                                        |       |   |   |   |   |   |   | 4,271,423 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity |       | 7,865,021                                        |       |   |   |   |   |   |   | 5,764,192 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s  equity  |       | $                                                | 85,538,287 |   |   |   |   |   |   |   | $ | 70,270,974 |   |   |   |   |   |   |   |
| Net interest  income                              |       |                                             |       | $ | 476,342 |   |   |   |   |   |   |   | $ | 352,304 |   |   |   |   |   |
| Net interest  spread(3)                           |       |                                             |       |   |   |   | 1.89 | % |   |   |   |   |   |   | 1.77 | % |   |
| Net interest margin(4)                            |       |                                             |       |   |   |   | 2.28 | % |   |   |   |   |   |   | 2.03 | % |   |

----

(1)           Average balances include nonaccrual loans.

(2)           Average balances and yields for securities availablefor sale are based on average amortized cost computed on the settlement datebasis.

(3)           Calculated as yield on total average interest-earningassets less rate on total average interest-bearing liabilities.

(4)           Calculated as annualized net interest income divided bytotal average interest-earning assets.

51

----

Thedollar amounts of interest income and interest expense fluctuate depending uponchanges in interest rates and in the relative volumes of our interest-earningassets and interest-bearing liabilities. Changes attributable to(i) changes in volume (changes in average outstanding balances multipliedby the prior period’s rate), (ii) changes in rate (changes in averageinterest rate multiplied by the prior period’s volume), and (iii) changesin rate/volume (changes in rate times the change in volume)—which wereallocated proportionately to the changes in volume and the changes in rate andincluded in the relevant column below—are as follows:

| ** **                            | ** ** | **Quarter Ended  September 30, 2006 vs. September 30, 2005** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Increase (Decrease) Due to**                                                   | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **    Volume    **                                      | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                            | ** ** | **(in thousands)**                                                                         | ** ** |
| Interest-earning  assets:             |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Mortgage loans                        |       |                                                                                            | $          | 202,232 |   |   | $ | 286,198 |   |   | $ | 488,430 |   |   |
| Securities available for sale         |       |                                                                                            | (8,332     | ) |   | 238 |   |   | (8,094 | ) |   |
| Short-term investments                |       |                                                                                            | 3,768      |   |   | 2,761 |   |   | 6,529 |   |   |
| Other investments                     |       |                                                                                            | 2,410      |   |   | 7,265 |   |   | 9,675 |   |   |
| Total interest income                 |       |                                                                                            | $          | 200,078 |   |   | $ | 296,462 |   |   | $ | 496,540 |   |   |
| Interest-bearing  liabilities:        |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Money market deposits                 |       |                                                                                            | $          | 51,316 |   |   | $ | 12,242 |   |   | $ | 63,558 |   |   |
| Savings deposits                      |       |                                                                                            | 3,953      |   |   | 33 |   |   | 3,986 |   |   |
| Company-controlled custodial deposits |       |                                                                                            | 26,675     |   |   | 71,687 |   |   | 98,362 |   |   |
| Time deposits                         |       |                                                                                            | 130,785    |   |   | 63,525 |   |   | 194,310 |   |   |
| Total deposits                        |       |                                                                                            | 212,729    |   |   | 147,487 |   |   | 360,216 |   |   |
| FHLB advances                         |       |                                                                                            | (31,827    | ) |   | 57,776 |   |   | 25,949 |   |   |
| Other borrowed  funds                 |       |                                                                                            | (28,250    | ) |   | 14,587 |   |   | (13,663 | ) |   |
| Total borrowings                      |       |                                                                                            | (60,077    | ) |   | 72,363 |   |   | 12,286 |   |   |
| Total interest expense                |       |                                                                                            | 152,652    |   |   | 219,850 |   |   | 372,502 |   |   |
| Net interest  income                  |       |                                                                                            | $          | 47,426 |   |   | $ | 76,612 |   |   | $ | 124,038 |   |   |

 

The increase in net interest income is primarily dueto a $14.8 billion or 21% increase in average interest-earning assets, combinedwith a 25 basis point increase in net interest margin.  The increase in the net interest margin fromthe year-ago quarter was a result of the reduced impact of teaser rates earnedon recently funded pay-option loans as fewer such loans were originated in the thirdquarter of 2006 compared to the year-ago quarter. This increase was partiallyoffset by the effect of the interest rate pricing lag and a change in the assetmix. 

The Banking Operations provision for loan losses decreasedby $16.9 million during the quarter ended September 30, 2006 compared tothe quarter ended September 30, 2005. While the provision rose year overyear related to increased delinquency and portfolio seasoning, this increasewas more than offset by declines related to hurricane Katrina, slower fundinggrowth and payoffs. The provision for loan losses and the related allowance forloan losses is impacted by many factors, including economic conditions (forexample, housing prices, interest rates and unemployment rates), the borrower’scredit profile, the loan’s payment requirements, delinquency, and loanseasoning and prepayments.

Banking Operations holds a substantial investment in nontraditional loans, primarily pay-option loans. These loans have interest ratesthat adjust monthly and minimum required payments that adjust annually,resulting in the potential for negative amortization. Minimum monthly paymentsmay increase by no more than 71¤2% per yearunless the unpaid balance increases to a specified limit, which is no more than115% of the original loan amount, at which time a new monthly payment amountadequate to repay the loan over its remaining contractual life is established.To ensure that contractual loan payments are 

52

----

adequate to repay a loan,the fully amortizing loan payment amount is re-established after either five orten years and again every five years thereafter.

Assuming today’s interest rates remain unchanged, mostborrowers who consistently make the minimum required payment will have the contractualright to make less than the full interest payment for three to four years from thedate of funding, at which time the negative amortization cap will be reachedand a new monthly payment amount will be required. The resulting paymentadjustment could be substantial. 

We manage the risk relating to these non traditionalloans through a variety of methods, including active borrower communications bothbefore and after funding and through our underwriting standards.  Our underwriting standards conform to thoserequired to make the pay-option loans salable into the secondary market at thedate of funding, including a requirement that the borrower meet secondarymarket debt-service ratio tests based on the borrower making the fullyamortizing loan payment and assuming the loan’s interest rate is fully indexed.(A fully indexed note rate equals the sum of the current index rate plus themargin applicable to the loan.)

Followingis a summary of pay-option loans held for investment by Banking Operations:

| ** **                                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(in thousands)**      | ** ** |
| Total pay-option  loan portfolio                                |       | $                            | 35,392,562 |                        | $          | 26,101,306 |   |
| Pay-option loans  with accumulated negative amortization:       |       |                         |       |                        |       |
| Principal                                                       |       | $                            | 29,585,875 |                        | $          | 13,963,721 |   |
| Accumulated negative amortization (from original  loan balance) |       | $                            | 471,325    |                        | $          | 74,748 |   |
| Average original  loan-to-value ratio(1)                        |       | 75                           | %          | 75                          | %          |
| Average combined  loan-to-value ratio(2)                        |       | 78                           | %          | 78                          | %          |
| Average original  FICO score(3)                                 |       | 721                          |       | 720                         |       |
| Loans delinquent 90 days  or more                               |       | 0.32                         | %          | 0.10                        | %          |

----

(1)          The ratio of the lowerof the appraised value or purchase price of the property to the amount of theloan that is secured by the property.

(2)          The ratio of the lowerof the appraised value or purchase price of the property to the amount of allloans secured by the property.

(3)   A FICOscore is a measure of borrower creditworthiness determined using a statisticalmodel. FICO scores range from approximately 300 to 850, with a higher scoreindicating an individual with a more favorable credit profile compared to anindividual with a lower score.

53

----

Thecomposition of the Banking Operations balance sheets is as follows: 

| ** **                                                                       | ** ** | **September 30, 2006**                | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **Amount**                                      | ** ** | **Rate**              | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                                                       | ** ** | **(dollar amounts in millions)** | ** ** |
| **Assets**                                                                       |       |                                            |       |                  |       |   |   |   |   |
| Short-term investments                                                           |       | $                                               | 3,508      |                  | 5.26       | % | $ | 245 |   | 4.08 | % |
| Mortgage loans, net of allowance for loan losses of  $180 and $103, respectively |       | 76,304                                          |       | 7.31                  | %          | 64,279 |   | 6.11 | % |
| Securities available for sale                                                    |       | 5,409                                           |       | 4.45                  | %          | 6,251 |   | 5.02 | % |
| FHLB securities and FRB stock                                               |       | 1,449                                           |       | 5.36                  | %          | 1,333 |   | 4.73 | % |
| Total interest-earning assets                                                    |       | 86,670                                          |       | 7.01                  | %          | 72,108 |   | 5.98 | % |
| Other assets                                                                     |       | 1,434                                           |       |                  |       | 919 |   |   |   |
| Total assets                                                                     |       | $                                               | 88,104     |                  |       |   | $ | 73,027 |   |   |   |
| **Liabilities and Equity**                                                       |       |                                            |       |                  |       |   |   |   |   |
| Deposits:(1)                                                                     |       |                                            |       |                  |       |   |   |   |   |
| Customer                                                                         |       | $                                               | 39,095     |                  | 4.96       | % | $ | 25,300 |   | 4.09 | % |
| Company-controlled escrow deposit accounts                                       |       | 15,774                                          |       | 5.32                  | %          | 13,333 |   | 4.18 | % |
| FHLB advances                                                                    |       | 23,976                                          |       | 4.50                  | %          | 26,267 |   | 3.88 | % |
| Other borrowings                                                                 |       | 298                                             |       | 5.34                  | %          | 1,280 |   | 4.23 | % |
| Total interest-bearing liabilities                                               |       | 79,143                                          |       | 4.89                  | %          | 66,180 |   | 4.03 | % |
| Other liabilities                                                                |       | 2,830                                           |       |                  |       | 1,574 |   |   |   |
| Shareholder’s equity                                                        |       | 6,131                                           |       |                  |       | 5,273 |   |   |   |
| Total liabilities and equity                                                     |       | $                                               | 88,104     |                  |       |   | $ | 73,027 |   |   |   |
| Primary spread(2)                                                                |       |                                            |       | 2.12                  | %          |   |   | 1.95 | % |
| Nonaccrual loans                                                                 |       | $                                               | 337        |                  |       |   | $ | 154 |   |   |   |

----

(1)          Includes inter-companydeposits.

(2)          Calculated as the yieldon total interest-earning assets less the rate on total interest-bearingliabilities.

The Banking Segment alsoincludes the operations of CWL. CWL’s pre-tax earnings decreased by $15.7 millionduring the quarter ended September 30, 2006 in comparison to the year-agoperiod, primarily due to a 48% decrease in average mortgage warehouse advances.Such average advances decreased to $4.0 billion in the quarter ended September 30,2006 from $7.6 billion in the year-ago period, primarily due to an overalldecrease in activity with Mortgage Banking Segment customers. At September 30,2006, warehouse lending advances were $3.0 billion and had an average yield of 6.6%during the quarter ended September 30, 2006.

**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $141.1 million for the quarter ended September 30, 2006, an increase of$49.1 million, or 53%, from the year-ago period driven by a 44% increase inrevenues.

54

----

Thefollowing table shows revenues, expenses and pre-tax earnings of the CapitalMarkets Segment:
|                              | ** ** | **Quarters Ended  September 30,** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in thousands)**                     | ** ** |
| Revenues:                    |       |                                        |       |   |   |
| Conduit                      |       | $                                           | 121,126    |   | $ | 53,093 |   |
| Underwriting                 |       | 71,727                                      |       | 82,363 |   |
| Commercial real estate       |       | 26,166                                      |       | 5,994 |   |
| Securities trading           |       | 23,039                                      |       | 23,593 |   |
| Brokering                    |       | 10,293                                      |       | 6,611 |   |
| Other                        |       | 5,636                                       |       | 7,309 |   |
| Total revenues               |       | 257,987                                     |       | 178,963 |   |
| Expenses:                    |       |                                        |       |   |   |
| Operating expenses           |       | 106,953                                     |       | 83,929 |   |
| Allocated corporate expenses |       | 9,935                                       |       | 2,992 |   |
| Total expenses               |       | 116,888                                     |       | 86,921 |   |
| Pre-tax earnings             |       | $                                           | 141,099    |   | $ | 92,042 |   |

 

During the quarter ended September 30, 2006, theCapital Markets Segment generated revenues totaling $121.1 million from itsconduit activities, primarily managing the acquisition and sale orsecuritization of whole loans on behalf of the Mortgage Banking Segment.Conduit revenues for the reporting period increased 128% in comparison to theyear-ago period because of an increase in margins, primarily associated withadjustable-rate products, partially offset by a decline in volume of loans soldduring the period.

Underwriting revenues decreased $10.6 million over theyear-ago period because of decrease in margins resulting from a change in themix of products.

During the current reporting period, the commercialreal estate finance activities of the Capital Markets Segment generatedrevenues totaling $26.2 million primarily from sales of commercial real estateloans compared to $6.0 million in the year-ago period. The increase in revenuewas due to an increase in the volume of loans sold, and to a lesser extent anincrease in margins due to a change in product mix.

Thefollowing table shows the composition of Countrywide Securities Corporation securitiestrading volume, which includes intersegment trades with the Mortgage Banking Segment,by instrument:

| ** **                       | ** ** | **Quarters Ended  September 30,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(in millions)**                      | ** ** |
| Mortgage-backed  securities      |       | $                                           | 539,165    |   | $ | 515,819 |   |
| Asset-backed  securities         |       | 63,650                                      |       | 43,144 |   |
| Other                            |       | 29,687                                      |       | 32,052 |   |
| Subtotal(1)                      |       | 632,502                                     |       | 591,015 |   |
| U.S. Treasury  securities        |       | 300,408                                     |       | 380,358 |   |
| Total securities  trading volume |       | $                                           | 932,910    |   | $ | 971,373 |   |

----

(1)          Approximately 16% of thesegment’s non-U.S. Treasury securities trading volume was with CHL during eachof the quarters ended September 30, 2006 and 2005.

55

----

U.S. Treasury securitiesdecreased $80.0 billion or 21% over the year-ago period because of marketconditions, including the inverted yield curve and low volatility in the marketduring the quarter ended September 30, 2006 as compared to the year-ago period.

**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $123.5 million over theyear-ago period, to $91.3 million during the quarter ended September 30,2006. The following table shows pre-tax earnings (losses) by component:

| ** **                                         | ** ** | **Quarters Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                     | ** ** |
| Balboa  Reinsurance Company                        |       | $                                           | 60,003     |   | $ | 40,387 |   |
| Balboa Life and  Casualty Operations(1)            |       | 42,563                                      |       | (68,353 | ) |
| Allocated  corporate expenses                      |       | (11,223                                     | )          | (4,153 | ) |
| Total Insurance  Segment pre-tax earnings (losses) |       | $                                           | 91,343     |   | $ | (32,119 | ) |

----

(1)          Includes the Balboa Lifeand Casualty Group and the Countrywide Insurance Services Group.

The following table showsnet insurance premiums earned:

| ** **                           | ** ** | **Quarters Ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**                     | ** ** |
| Balboa  Reinsurance Company          |       | $                                           | 56,676     |   | $ | 44,682 |   |
| Balboa Life and  Casualty Operations |       | 244,098                                     |       | 195,397 |   |
| Total net  insurance premiums earned |       | $                                           | 300,774    |   | $ | 240,079 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                           | ** ** | **Quarters Ended September 30,**  | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company          |       | $                                                | 3,558      |   |   | 6 | % |   | $ | 11,348 |   |   | 25 | % |   |
| Balboa Life and  Casualty Operations |       | 98,393                                           |       |   | 40 | % |   | 172,410 |   |   | 88 | % |   |
| Total insurance  claim expenses      |       | $                                                | 101,951    |   |   |   |   |   | $ | 183,758 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $60.0million in pre-tax earnings, an increase of 49% over the year-ago period,driven primarily by an increase in the percentage of policies earning higherreinsurance premiums and growth of 17% in the mortgage loans included in ourloan servicing portfolio that are covered by reinsurance contracts.

Our Life and Casualty insurance business producedpre-tax earnings of $42.6 million, an increase of $110.9 million, or 162%, fromthe year-ago period. The increase in earnings was driven by a $48.7 million or 25%increase in net earned premiums during the quarter ended September 30,2006 in comparison to the year-ago and by a $103.6 million decrease incatastrophe claims expense over the year-ago period. The increase in net earnedpremiums was primarily attributable to a growth in voluntary auto insurance and

56

----

lender-placed propertyinsurance. Insurance claim expenses decreased from 88% to 40% of net earnedpremiums due to a reduction in hurricane-related claims in comparison to theyear-ago period.

Our Life and Casualtyinsurance operations manage insurance risk by reinsuring significant portionsof such risk. Balboa seeks to earn profits by capitalizing on Countrywide’scustomer base and institutional relationships, as well as through operatingefficiencies and sound underwriting.

**Global OperationsSegment**

Global Operations pre-taxearnings totaled $3.5 million during the quarter ended September 30, 2006,a decrease of $4.7 million from the year-ago period. The decrease in earningswas primarily due to the termination of the joint venture with Barclays Bank,PLC.

**Detailed Line ItemDiscussion of Consolidated Revenue and Expense Items**

***Gain on Sale of Loans and Securities***

Gainon sale of loans and securities is summarized below:

| ** **                   | ** ** | **Quarters Ended September 30,**  | ** **  |
|------------------------------|------------|--------------------------------------------------|-------------|
| ** **                   | ** ** | **2006**                                         | ** **  | **2005** | ** ** |
| ** **                   | ** ** | ** **                                       | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                   | ** ** | **Loans Sold**                              | ** **  | **Amount** | ** ** | **Margin(2)** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **Margin(2)** | ** ** |
| ** **                   | ** ** | **(dollar amounts in thousands)** | ** **  |
| Mortgage Banking:            |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans         |       | $                                                | 84,656,067  |   | $ | 847,427 |   |   | 1.00 | % |   | $ | 102,885,533 |   | $ | 777,810 |   |   | 0.76 | % |   |
| Prime Home Equity  Loans:    |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial Sales                |       | 10,855,628                                       |        | 137,523 |   |   | 1.27 | % |   | 10,188,168 |   | 196,470 |   |   | 1.93 | % |   |
| Subsequent draws             |       | 1,022,201                                        |        | 37,159 |   |   | 3.64 | % |   | 745,900 |   | 26,751 |   |   | 3.59 | % |   |
|                         |       | 11,877,829                                       |        | 174,682 |   |   | 1.47 | % |   | 10,934,068 |   | 223,221 |   |   | 2.04 | % |   |
| Nonprime Mortgage Loans      |       | 10,584,928                                       |        | 143,607 |   |   | 1.36 | % |   | 7,556,295 |   | 172,656 |   |   | 2.28 | % |   |
| Total Production Sector      |       | 107,118,824                                      |        | 1,165,716 |   |   | 1.09 | % |   | 121,375,896 |   | 1,173,687 |   |   | 0.97 | % |   |
| Reperforming  loans          |       | —                                           |        | (26 | ) |   | 0.00 | % |   | 318,327 |   | 6,572 |   |   | 2.06 | % |   |
|                         |       | $                                                | 107,118,824 |   | 1,165,690 |   |   | 1.09 | % |   | $ | 121,694,223 |   | 1,180,259 |   |   | 0.97 | % |   |
| Capital Markets:             |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)        |       | $                                                | 15,036,425  |   | 102,517 |   |   | 0.68 | % |   | $ | 17,466,210 |   | 41,475 |   |   | 0.24 | % |   |
| Underwriting                 |       | N/A                                              |        | 65,556 |   |   | N/A |   |   | N/A |   | 71,777 |   |   | N/A |   |   |
| Commercial real estate       |       | $                                                | 1,219,279   |   | 19,357 |   |   | 1.59 | % |   | $ | 436,740 |   | 5,200 |   |   | 1.19 | % |   |
| Securities trading and other |       | N/A                                              |        | (6,334 | ) |   | N/A |   |   | N/A |   | (21,279 | ) |   | N/A |   |   |
|                         |       |                                             |        | 181,096 |   |   |   |   |   |   |   | 97,173 |   |   |   |   |   |
| Other                        |       | N/A                                              |        | 27,115 |   |   | N/A |   |   | N/A |   | 7,560 |   |   | N/A |   |   |
|                         |       |                                             |        | $ | 1,373,901 |   |   |   |   |   |   |   | $ | 1,284,992 |   |   |   |   |   |

----

(1)          Includes loans sourcedfrom the Mortgage Banking Segment.

(2)   Gain onsale as a percentage of loans sold.

The increase in Capital Markets’ gain on sale relatedto its conduit activities was due to an increase in margins resulting from ashift in sales of loans to adjustable-rate products, which had higher margins,partially offset by decreased sales volume due to lower U.S. residentialmortgage production and increased 

57

----

competition. The increasein Capital Markets’ gain on sale related to its commercial real estateactivities was due to an increase in the volume of loans sold and an increasein margins on such loans resulting from a change in mix of loans towards highermargin products. Capital Markets’ revenues from its securities tradingactivities consist of gain on sale and interest income. In a steep yield curveenvironment, net interest income will comprise a larger percentage of totalsecurities trading revenue. As the yield curve flattens, the mix of revenueswill shift toward gain on sale of securities. During the quarter ended September 30,2006, the yield curve was inverted, which resulted in a shift in tradingrevenues from interest income to gain on sale.

Forthe Mortgage Banking Segment, the effects of changes in the volume of loansales and the margin on sale on the amount of gain on sale is summarized in thefollowing table:

| ** **               | ** ** | **Quarter Ended  September 30, 2006 vs. September 30, 2005** | ** ** |
|--------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Increase (Decrease) Due to**                                                   | ** ** | ** ** | ** ** |
| ** **               | ** ** | **    Loans Sold    **                             | ** ** | **    Margin    ** | ** ** | **    Total    ** | ** ** |
| ** **               | ** ** | **(in thousands)**                                                                         | ** ** |
| Mortgage Banking:        |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans     |       |                                                                                            | $          | (153,601 | ) |   |   | $ | 223,218 |   |   | $ | 69,617 |   |
| Prime Home Equity Loans: |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Initial Sales            |       |                                                                                            | 12,163     |   |   |   | (71,110 | ) |   | (58,947 | ) |
| Subsequent draws         |       |                                                                                            | 10,039     |   |   |   | 369 |   |   | 10,408 |   |
|                     |       |                                                                                            | 22,202     |   |   |   | (70,741 | ) |   | (48,539 | ) |
| Nonprime Mortgage Loans  |       |                                                                                            | 55,239     |   |   |   | (84,288 | ) |   | (29,049 | ) |
| Total Production Sector  |       |                                                                                            | (76,160    | ) |   |   | 68,189 |   |   | (7,971 | ) |
| Reperforming loans       |       |                                                                                            | (6,598     | ) |   |   | — |   |   | (6,598 | ) |
| Total Mortgage  Banking  |       |                                                                                            | $          | (82,758 | ) |   |   | $ | 68,189 |   |   | $ | (14,569 | ) |

 

Gain on sale of Prime Mortgage Loans increased in thequarter ended September 30, 2006 as compared to the quarter ended September 30,2005 due primarily to increased margins on such loans, partially offset bylower sales of such loans.

Gain on sale of Prime Home Equity Loans decreased inthe quarter ended September 30, 2006 as compared to the year-ago perioddue primarily to decreased margins on such loans, partially offset by anincrease in sales of such loans, reflecting continuing competitive conditionsin the marketplace, increased cost of credit enhancements and wider secondarymarketing spreads.

Gain on sale of Nonprime Mortgage Loans decreased inthe quarter ended September 30, 2006 as compared to 2005 due primarily toa decrease in margins resulting from competitive market conditions, andincreased cost of credit enhancements, partially offset by higher sales of suchloans.

Additionally, becauseinventory of nonprime and fixed rate second mortgage loans were not qualifiedfor hedge accounting pursuant to SFAS 133, there were timing mismatches whereinhedging gains and losses and the offsetting change in value of the inventorywere recognized in different quarters. Specifically, reductions in the value ofloans sold in the third quarter of 2006 were offset by hedge gains that wererecorded in the second quarter of 2006. Furthermore, hedge losses recorded inthe third quarter of 2006 should be offset by greater gain on sale of therelated loans in the fourth quarter of 2006. These factors combined to reducethe nonprime and home equity gain on sale margin in the third quarter of 2006.

58

----

***Net Interest Incomeand Provision for Loan Losses***

Netinterest income is summarized below:

| ** **                                           | ** ** | **Quarters Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                     | ** ** |
| Net interest income  (expense):                      |       |                                        |       |   |   |
| Banking Segment loans and securities                 |       | $                                           | 490,557    |   | $ | 385,810 |   |
| Mortgage Banking Segment loans and securities        |       | 165,178                                     |       | 140,697 |   |
| Loan Servicing  Sector:                              |       |                                        |       |   |   |
| Net interest income on custodial balances            |       | 238,082                                     |       | 119,211 |   |
| Interest expense                                     |       | (179,871                                    | )          | (95,750 | ) |
| Capital Markets Segment securities inventory         |       | 39,958                                      |       | 47,164 |   |
| Other                                                |       | 45,066                                      |       | 54,057 |   |
| Net interest income                                  |       | 798,970                                     |       | 651,189 |   |
| Provision for loan losses                            |       | (37,996                                     | )          | (54,834 | ) |
| Net interest  income after provision for loan losses |       | $                                           | 760,974    |   | $ | 596,355 |   |

 

The increase in netinterest income from the Banking Segment was attributable to both an increasein the net interest margin and growth in the average investment in mortgageloans. Average assets in the Banking Segment increased to $88.5 billion duringthe quarter ended September 30, 2006, an increase of $11.2 billion, or 14%over the year-ago period. 

The increase in netinterest income from Mortgage Banking Segment loans and securities reflects an increasein the average inventory balance offset by a decrease in net interest marginfrom the year-ago period. The Mortgage Banking Segment loan and securitiesinventory is primarily financed with borrowings tied to short-term indices.Short-term interest rates rose more than long-term mortgage interest ratesbetween the year-ago period and the quarter ended September 30, 2006,reducing the net interest margin.

Net interest income fromcustodial balances increased in the current period due to an increase in theearnings rate from 3.48% during the quarter ended September 30, 2005 to 5.43%during the quarter ended September 30, 2006, partially offset by a decreaseof $2.0 billion in average custodial balances from the year-ago period. We arerequired to pass through monthly interest to security holders on paid-off loansat the underlying security rates, which were higher than the short-term ratesearned by us on the payoff float. The amount of such interest passed through tothe security holders was $75.3 million and $98.9 million in the quarters ended September 30,2006 and 2005, respectively.

Interest expense allocatedto the Loan Servicing Sector increased primarily due to the effect of anincrease in total Servicing Sector assets combined with an increased cost ofdebt.

The decrease in netinterest income from the Capital Markets securities portfolio is attributableto a decrease in the net interest margin from 0.52% in the quarter ended September 30,2005 to 0.31% in the quarter ended September 30, 2006, partially offset bya 14% increase in the average inventory of securities held. The decrease in thenet interest margin earned on the securities portfolio is primarily due to an invertingof the yield curve which was evidenced by a larger increase in short-termfinancing rates compared to the increase in rates in the longer-term securitiesheld by the Capital Markets Segment. The decline in net interest income wasmore than offset by an increase in gain on sale.

The provision for loanlosses was $38.0 million in the quarter ended September 30, 2006 compared to$54.8 million in the year-ago quarter. While the provision rose year overyear related to increased delinquency and portfolio seasoning, the increase wasmore than offset by declines related to hurricane Katrina and payoffs and slowerfunding growth in Banking Operations.

59

----

Nonaccrualloans, which includes loans held for investment and loans held for sale,foreclosed assets and the allowance for loan losses at period end aresummarized as follows:

| ** **                                                                                  | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                                  | ** ** | **(in thousands)**      | ** ** |
| Nonaccrual loans:(1)                                                                        |       |                         |       |                        |       |                         |       |   |   |   |   |   |   |
| Mortgage loans:(2)                                                                          |       |                         |       |                        |       |                         |       |   |   |   |   |   |   |
| Nonprime                                                                                    |       |                         | $          | 586,764                     |       |                         |       | $ | 325,257 |   |   |   | $ | 347,724 |   |   |
| Prime                                                                                       |       |                         | 375,214    |                        |       |                         | 347,476    |   |   |   | 274,564 |   |   |
| Prime home equity                                                                           |       |                         | 130,218    |                        |       |                         | 110,040    |   |   |   | 52,901 |   |   |
| Subtotal                                                                                    |       |                         | 1,092,196  |                        |       |                         | 782,773    |   |   |   | 675,189 |   |   |
| Warehouse lending advances                                                                  |       |                         | —     |                        |       |                         | —     |   |   |   | — |   |   |
| Defaulted FHA-insured and VA-guaranteed mortgage  loans repurchased from securities(2) |       |                         | 436,095    |                        |       |                         | 465,599    |   |   |   | 577,912 |   |   |
| Total nonaccrual loans                                                                      |       |                         | 1,528,291  |                        |       |                         | 1,248,372  |   |   |   | 1,253,101 |   |   |
| Real estate acquired in settlement of loans                                                 |       |                         | 190,731    |                        |       |                         | 110,499    |   |   |   | 70,971 |   |   |
| Total nonaccrual loans and foreclosed assets                                                |       |                         | $1,719,022 |                        |       |                         | $          | 1,358,871 |   |   |   | $ | 1,324,072 |   |   |
| Nonaccrual loans as a  percentage of loans held for investment:                             |       |                         |       |                        |       |                         |       |   |   |   |   |   |   |
| Total                                                                                       |       |                         | 1.9        | %                           |       |                         | 1.8        | % |   |   | 1.8 | % |   |
| Excluding loans FHA-insured and VA-guaranteed loans                                         |       |                         | 1.3        | %                           |       |                         | 1.1        | % |   |   | 1.0 | % |   |
| Allowance for  loan losses                                                                  |       |                         | $          | 207,987                     |       |                         |       | $ | 189,201 |   |   |   | $ | 184,784 |   |   |
| Allowance for loan  losses as a percentage of nonaccrual loans:                             |       |                         |       |                        |       |                         |       |   |   |   |   |   |   |
| Total                                                                                       |       |                         | 13.6       | %                           |       |                         | 15.2       | % |   |   | 14.7 | % |   |
| Excluding loans FHA-insured and VA-guaranteed loans                                         |       |                         | 19.0       | %                           |       |                         | 24.2       | % |   |   | 27.4 | % |   |
| Allowance for loan  losses as a percentage of loans held for investment                     |       |                         | 0.3        | %                           |       |                         | 0.3        | % |   |   | 0.3 | % |   |

----

(1)          This amount excludes $803.0 million,$473.9 million and $216.8 million, of government-insured loans eligiblefor repurchase from Ginnie Mae securities issued by us at September 30,2006, December 31, 2005, and September 30, 2005, respectively. Ourservicing agreement with Ginnie Mae allows us to repurchase loans that aredelinquent more than 90 days instead of continuing to advance the delinquentinterest to the security holders. These amounts are included in loans held forinvestment as Countrywide has the option of repurchasing the loans from thesecurities and is required to include such loans on its balance sheets.However, we do not include these loans in our nonaccrual balances because wehave not exercised the option to repurchase the loans.

(2)   A largeportion of the mortgage loans included in nonaccrual loans have beenrepurchased pursuant to breaches of representations and warranties made toinvestors when the loans were originally sold. These repurchased mortgage loansare recorded at fair value on the date of repurchase and their fair valuereflects their impaired status, as appropriate. Therefore the allowance forlosses on these loans only reflects any additional deterioration in the loans’status after the date of repurchase.

The increase in theallowance for loan losses from September 30, 2005 is due mainly tocontinuing growth and seasoning of the Bank’s loan portfolio partially offsetby a reduction in the reserve requirements for loans held for investment in theMortgage Banking Segment. The reduction in the reserve requirements in theMortgage Banking Segment is the result of liquidation or write down andtransfer to held for sale. The provision for loan losses and the relatedallowance for loan losses is impacted by many factors, including economic conditions(for example, housing prices, interest rates and 

60

----

unemploymentrates), the borrower’s credit profile, the loan’s payment requirements, andloan seasoning and prepayments.

***Loan Servicing Fees and Other Income from MSRs andRetained Interests***

Loanservicing fees and other income from MSRs and retained interests are summarizedbelow:

| ** **                                                             | ** ** | **Quarters Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                     | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                           | 940,831    |   | $ | 826,189 |   |
| Income from  retained interests                                        |       | 123,816                                     |       | 108,181 |   |
| Late charges                                                           |       | 73,804                                      |       | 61,583 |   |
| Prepayment  penalties                                                  |       | 70,495                                      |       | 62,519 |   |
| Global Operations  Segment subservicing fees                           |       | 210                                         |       | 26,655 |   |
| Ancillary fees                                                         |       | 19,385                                      |       | 18,406 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                           | 1,228,541  |   | $ | 1,103,533 |   |

----

(1)          Includes contractuallyspecified servicing fees

The increase in servicing fees, net of guarantee fees,was principally due to a 22% increase in the average servicing portfolio,partially offset by a decrease in the overall annualized net service fee earnedfrom 0.333% of the average portfolio balance during the quarter ended September 30,2005 to 0.311% during the quarter ended September 30, 2006.

The increase in incomefrom retained interests was due primarily to a 27% increase in the averageinvestment in these assets from the quarter ended September 30, 2005 tothe quarter ended September 30, 2006 partially offset by a reduction ofthe yield on such instruments from 22% in the year ago quarter to 20% in thecurrent quarter.  The yield excludes anyimpairment charges or recoveries, which are included in impairment of retainedinterests in the consolidated statement of earnings. These investments includeinterest-only and principal-only securities as well as residual interests thatarise from the securitization of mortgage loans, particularly Nonprime Mortgageand Prime Home Equity Loans.

***Realization of Expected Cash Flows from MortgageServicing Rights***

Effective January 1,2006, we adopted SFAS 156 and elected to carry our MSRs at fair value withchanges in fair value recorded in earnings. The change in fair value of theMSRs that is included in earnings for the quarter ended September 30, 2006consists of two primary components—a reduction in fair value due to therealization of expected cash flows from the MSRs and a change in valueresulting from changes in interest rates and other market factors. Therealization of expected cash flow from MSRs during the quarter resulted in avalue reduction of $807.4 million during the quarter ended September 30, 2006.

***Change in Value of Mortgage Servicing Rights***

We recorded a decrease inthe fair value of the MSRs in the quarter ended September 30, 2006 of $1,067.3 millionprimarily as a result of the effect of declining mortgage rates on the fairvalue of MSRs during the quarter.

61

----

***Amortization of Mortgage Servicing Rights***

We recorded amortizationof MSRs of $653.4 million, or an annual rate of 23.6%, during the quarter endedSeptember 30, 2005. The amortization rate of the MSRs was dependent on theforecasted prepayment speeds at the beginning of the quarter.

***Recovery of Mortgage Servicing Rights***

During the quarter ended September 30,2005, we recovered previously recorded impairment of MSRs of $915.4 million,primarily driven by the increase in mortgage interest rates at the end of theperiod.

***Impairment of Retained Interests***

In the quarter ended September 30, 2006, werecognized impairment of retained interests of $141.9 million. The decrease invalue of our retained interests was caused primarily by a decline in estimatedcash flows underlying our interest-only securities that resulted from anincrease in forecasted prepayment speeds due to the decline in mortgage rates duringthe current period.  In addition, theoverall value of our retained interests declined due to a net increase inmarket yields required on our retained interests.

In the quarter endedSeptember 30, 2005, we recognized impairment of retained interests of $61.7million. The collateral underlying certain of these residuals is fixed-ratewhile the pass-through rate is floating. An increase in projected short-terminterest rates during the period caused compression of the spread on suchresiduals, which resulted in a decline in their value.

***Servicing Hedge Gains/Losses***

The Servicing Hedge is designed to supplement themacro hedge and to offset a portion of the change in value of MSRs and retainedinterests recorded in current period earnings. The values of the derivativesthat are the primary components of the Servicing Hedge are tied to long-termTreasury, mortgage and swap rate indices. These rates decreased during thequarter ended September 30, 2006. As a result, the Servicing Hedgeachieved a gain of $1,034.4 million, net of $131 million of time value decay ofthe options included in the Servicing Hedge (our “hedge cost”). In the quarterended September 30, 2005, these rates increased. As a result, theServicing Hedge incurred a loss of $837.2 million, including $139 million of hedgecost.

In a stable interest rateenvironment, we expect to incur no significant declines in value of MSRs otherthan recovery of our investment through the realization of cash flows; however,we expect to incur expenses related to the Servicing Hedge caused primarily bytime value decay on options used in the hedge. The level of Servicing Hedgegains or losses in any period depends on various factors such as the size andcomposition of the hedge, the shape of the yield curve and the level of impliedinterest rate volatility.

***Net Insurance Premiums Earned***

An increase in premiumsearned on the voluntary auto and lender-placed property insurance lines ofbusiness along with an increase in reinsurance premiums earned contributed tothe $60.7 million increase in net insurance premiums earned.

62

----

***OtherRevenue***

Otherrevenue consisted of the following:

| ** **                                 | ** ** | **Quarters Ended  September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                     | ** ** |
| Appraisal fees, net                        |       | $                                           | 33,972     |   | $ | 31,100 |   |
| Credit report fees, net                    |       | 18,313                                      |       | 20,425 |   |
| Title services                             |       | 10,715                                      |       | 12,024 |   |
| Insurance agency  commissions              |       | 7,384                                       |       | 8,338 |   |
| Global Operations  Segment processing fees |       | 2,480                                       |       | 16,383 |   |
| Other                                      |       | 67,621                                      |       | 35,314 |   |
| Total other revenue                        |       | $                                           | 140,485    |   | $ | 123,584 |   |

 

***CompensationExpenses***

Compensationexpenses increased $150.3 million, or 15%, during the quarter ended September 30,2006 as compared to the year-ago period. Details are presented below:

| ** **                          | ** ** | **Quarters Ended  September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(in thousands)**                     | ** ** |
| Base salaries                       |       | $                                           | 591,009    |   | $ | 534,941 |   |
| Incentive bonus and  commissions    |       | 476,559                                     |       | 564,296 |   |
| Payroll taxes and  benefits         |       | 239,400                                     |       | 162,906 |   |
| Deferral of loan  origination costs |       | (168,067                                    | )          | (273,529 | ) |
| Total compensation expenses         |       | $                                           | 1,138,901  |   | $ | 988,614 |   |

 

Average workforce by segment is summarizedbelow:

| ** **                                   | ** ** | **Quarters Ended  September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Mortgage Banking                             |       | 40,935                                      |       | 37,929 |   |
| Banking                                      |       | 2,471                                       |       | 1,911 |   |
| Capital Markets                              |       | 846                                         |       | 644 |   |
| Insurance                                    |       | 2,133                                       |       | 2,065 |   |
| Global Operations                            |       | 2,148                                       |       | 2,708 |   |
| Corporate Administration                     |       | 7,311                                       |       | 5,979 |   |
| Average workforce, including temporary staff |       | 55,844                                      |       | 51,236 |   |

 

In the Loan ProductionSector, compensation expenses decreased $72.2 million, or 9%, prior to thedeferral of loan origination costs, because of a production driven decrease inbonus expense partially offset by a 9% increase in average staff to provide thecapacity to increase loan production and to expand our operations to supportour long-term objective of market share growth.

In the Loan ServicingSector, compensation expense rose $8.2 million, or 11%, to accommodate an 11%increase in the number of loans serviced. Compensation expenses increased inmost other business segments and corporate areas, reflecting growth in theCompany.

Incremental direct costsassociated with the origination of loans are deferred when incurred. Subsequenttreatment of these costs is based on whether the loans are held for sale orheld for investment. If the loan is sold, the costs deferred are included as acomponent of gain on sale; if the loan is held for investment, the deferredcosts are amortized to interest income over the life of the loan. Deferral ofloan 

63

----

originationcosts decreased due to a decline in the volume of loans produced and a decreasein the SFAS 91 deferral rate.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                | ** ** | **Quarters Ended  September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**                     | ** ** |
| Office and equipment  rentals             |       | $                                           | 56,843     |   | $ | 47,503 |   |
| Depreciation expense                      |       | 52,997                                      |       | 38,875 |   |
| Utilities                                 |       | 42,424                                      |       | 36,158 |   |
| Postage and courier  service              |       | 28,339                                      |       | 26,538 |   |
| Office supplies                           |       | 20,007                                      |       | 23,647 |   |
| Repairs and maintenance                   |       | 18,988                                      |       | 16,351 |   |
| Dues and subscriptions                    |       | 14,607                                      |       | 15,247 |   |
| Other                                     |       | 23,703                                      |       | 23,944 |   |
| Total occupancy and other office expenses |       | $                                           | 257,908    |   | $ | 228,263 |   |

 

Occupancy and other officeexpenses for the quarter ended September 30, 2006 increased by 13%, or $29.6million, primarily to accommodate a 9% increase in the average workforce.

***Insurance Claim Expenses***

Insurance claim expenseswere $102.0 million for the quarter ended September 30, 2006 as comparedto $183.8 million for the year-ago period. The decrease in insurance claimexpenses was due to a $103.6 million decrease in catastrophe claim expensesover the year-ago period, partially offset by growth in our insurance book ofbusiness.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 22% from the quarter ended September 30, 2005, as aresult of the increasing competition for lending business as the mortgagemarket declines.

***Other Operating Expenses***

Other operating expensesare summarized below:

| ** **                                          | ** ** | **Quarters Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                     | ** ** |
| Insurance commission expense                        |       | $                                           | 50,919     |   | $ | 46,673 |   |
| Legal, consulting, accounting and auditing expenses |       | 47,367                                      |       | 37,936 |   |
| Travel and entertainment                            |       | 26,398                                      |       | 30,329 |   |
| Losses on servicing-related advances                |       | 22,156                                      |       | 33,637 |   |
| Insurance                                           |       | 15,357                                      |       | 17,005 |   |
| Taxes and licenses                                  |       | 14,814                                      |       | 11,776 |   |
| Software amortization and impairment                |       | 14,414                                      |       | 19,421 |   |
| Other                                               |       | 55,184                                      |       | 48,131 |   |
| Deferral of loan origination costs                  |       | (28,041                                     | )          | (42,015 | ) |
| Total other operating expenses                      |       | $                                           | 218,568    |   | $ | 202,893 |   |

 

64

----

***Results of Operations Comparison—Nine Months Ended September 30,2006 and 2005***

***Consolidated Earnings Performance***

Net earnings for the nine months ended September 30,2006 were $2,053.3 million, a 9% increase from the year-ago period. Ourdiluted earnings per share were $3.29, a 7% increase from the year-ago period.

The increase in our earnings resulted primarily froman increase in the Banking Segment, which produced pre-tax earnings of $1,037.3million, an increase of 39% from the year-ago period; and an increase inour Capital Markets Segment which produced pre-tax earnings of $454.3 million,an increase of 42% from the year-ago period. The increase in profitability ofour Banking Segment was primarily due to a 38% increase in averageinterest-earning assets in Banking Operations from the year-ago period. Theincrease in profitability of our Capital Markets Segment was due to increaserevenue from all sources.

The increase in netearnings from our Banking and Capital Market Segments was offset by a decreasein the profitability of our Mortgage Banking Segment which produced pre-taxearnings of $1,609.1 million for the nine months ended September 30, 2006,a decrease of 20% from the same period last year. The decrease in theprofitability of our Mortgage Banking Segment was primarily due to a decline inthe profitability of our Loan Production Sector, as the increase in revenuesfrom higher margins on gain on sale was more than offset by increased operatingexpenses as the Company continued to build its production capacity. Thisdecline in the Production Sector pre-tax earnings was partially offset byimproved profitability in our Loan Servicing.

**Operating SegmentResults**

Pre-taxearnings (loss) by segment are summarized below:

| ** **             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in thousands)**                             | ** ** |
| Mortgage Banking:      |       |                                                |       |   |   |
| Loan Production        |       | $                                                   | 889,397    |   | $ | 1,557,523 |   |
| Loan Servicing         |       | 651,374                                             |       | 363,958 |   |
| Loan Closing Services  |       | 68,302                                              |       | 79,135 |   |
| Total Mortgage Banking |       | 1,609,073                                           |       | 2,000,616 |   |
| Banking                |       | 1,037,263                                           |       | 745,365 |   |
| Capital Markets        |       | 454,262                                             |       | 318,940 |   |
| Insurance              |       | 245,033                                             |       | 80,166 |   |
| Global Operations      |       | 16,439                                              |       | 17,513 |   |
| Other                  |       | (12,472                                             | )          | (27,044 | ) |
| Total                  |       | $                                                   | 3,349,598  |   | $ | 3,135,556 |   |

 

The pre-tax earnings (loss) of each segment includeintercompany transactions, which are eliminated in the “other” category.

65

----

Mortgageloan production by segment and product, net of intersegment sales, issummarized below:

| ** **                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in millions)**                              | ** ** |
| Segment:                                  |       |                                                |       |   |   |
| Mortgage Banking                          |       | $                                                   | 303,339    |   | $ | 311,029 |   |
| Banking Operations                        |       | 15,453                                              |       | 34,389 |   |
| Capital Markets - conduit acquisitions(1) |       | 14,942                                              |       | 12,399 |   |
| Total Mortgage Loan Fundings              |       | 333,734                                             |       | 357,817 |   |
| Commercial real estate                    |       | 3,309                                               |       | 2,409 |   |
|                                      |       | $                                                   | 337,043    |   | $ | 360,226 |   |
| Product:                                  |       |                                                |       |   |   |
| Prime Mortgage                            |       | $                                                   | 267,960    |   | $ | 293,957 |   |
| Prime Home Equity                         |       | 35,229                                              |       | 31,403 |   |
| Nonprime Mortgage                         |       | 30,545                                              |       | 32,457 |   |
| Commercial real estate                    |       | 3,309                                               |       | 2,409 |   |
|                                      |       | $                                                   | 337,043    |   | $ | 360,226 |   |

----

(1)          Acquisitions from thirdparties

Thefollowing table summarizes loan production by purpose and by interest ratetype:

| ** **               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(in millions)**                              | ** ** |
| **Purpose:**             |       |                                                |       |   |   |
| Non-purchase             |       | $                                                   | 179,379    |   | $ | 187,793 |   |
| Purchase                 |       | 157,664                                             |       | 172,433 |   |
|                     |       | $                                                   | 337,043    |   | $ | 360,226 |   |
| **Interest  Rate Type:** |       |                                                |       |   |   |
| Fixed-Rate               |       | $                                                   | 177,679    |   | $ | 169,582 |   |
| Adjustable-Rate          |       | 159,364                                             |       | 190,644 |   |
|                     |       | $                                                   | 337,043    |   | $ | 360,226 |   |

 

**Mortgage BankingSegment**

The Mortgage BankingSegment includes the Loan Production, Loan Servicing and Loan Closing ServicesSectors.

***Loan Production Sector***

Mortgage Banking loan production volume for the ninemonths ended September 30, 2006, decreased 2% from the year-ago period dueto a 15% decrease in total U.S. residential mortgage production offset by ourincrease in market share.

66

----

Thefollowing table summarizes Mortgage Banking loan production by channel, byMortgage Loan type, by purpose and by interest rate type:

| ** **                            | ** ** | **Nine Months Ended  September 30,(1)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(in millions)**                                 | ** ** |
| **Channel:**                          |       |                                                   |       |   |   |
| Originated:                           |       |                                                   |       |   |   |
| Consumer Markets                      |       | $                                                      | 88,003     |   | $ | 89,527 |   |
| Wholesale Lending                     |       | 67,520                                                 |       | 61,881 |   |
| Full Spectrum Lending                 |       | 25,280                                                 |       | 17,723 |   |
| Total originated                      |       | 180,803                                                |       | 169,131 |   |
| Purchased—Correspondent  Lending |       | 122,536                                                |       | 141,898 |   |
|                                  |       | $                                                      | 303,339    |   | $ | 311,029 |   |
| **Mortgage Loan Type:**               |       |                                                   |       |   |   |
| Prime Mortgage                        |       | $                                                      | 245,767    |   | $ | 257,935 |   |
| Prime Home Equity                     |       | 29,966                                                 |       | 23,838 |   |
| Nonprime Mortgage                     |       | 27,606                                                 |       | 29,256 |   |
|                                  |       | $                                                      | 303,339    |   | $ | 311,029 |   |
| **Purpose:**                          |       |                                                   |       |   |   |
| Non-purchase                          |       | $                                                      | 161,902    |   | $ | 162,878 |   |
| Purchase                              |       | 141,437                                                |       | 148,151 |   |
|                                  |       | $                                                      | 303,339    |   | $ | 311,029 |   |
| **Interest Rate Type:**               |       |                                                   |       |   |   |
| Fixed-Rate                            |       | $                                                      | 170,233    |   | $ | 159,130 |   |
| Adjustable-Rate                       |       | 133,106                                                |       | 151,899 |   |
|                                  |       | $                                                      | 303,339    |   | $ | 311,029 |   |

----

(1)          $58.0 billion and $4.9billion of these loans were funded by Countrywide Bank during the nine monthsended September 30, 2006 and 2005, respectively. 

Thepre-tax earnings of the Loan Production Sector are summarized below:

| ** **                             | ** ** | **Nine Months Ended September 30,** | ** **  |
|----------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                             | ** ** | **2006**                                                | ** **  | **2005** | ** ** |
| ** **                             | ** ** | **Amount**                                              | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                             | ** ** | **(dollar amounts in thousands)**        | ** **  |
| Revenues:                              |       |                                                    |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                         |       | $                                                       | 3,064,884   |   |   |   |   |   | $ | 2,535,384 |   |   |   |   |   |
| Nonprime Mortgage                      |       | 600,498                                                 |        |   |   |   |   | 887,646 |   |   |   |   |   |
| Prime Home Equity                      |       | 571,628                                                 |        |   |   |   |   | 650,019 |   |   |   |   |   |
| Total revenues                         |       | 4,237,010                                               |        |   | 1.39 | % |   | 4,073,049 |   |   | 1.31 | % |   |
| Expenses:                              |       |                                                    |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                           |       | 1,845,407                                               |        |   | 0.61 | % |   | 1,469,641 |   |   | 0.47 | % |   |
| Other operating                        |       | 1,070,289                                               |        |   | 0.35 | % |   | 759,903 |   |   | 0.25 | % |   |
| Allocated corporate                    |       | 431,917                                                 |        |   | 0.14 | % |   | 285,982 |   |   | 0.09 | % |   |
| Total expenses                         |       | 3,347,613                                               |        |   | 1.10 | % |   | 2,515,526 |   |   | 0.81 | % |   |
| Pre-tax earnings                       |       | $                                                       | 889,397     |   |   | 0.29 | % |   | $ | 1,557,523 |   |   | 0.50 | % |   |
| Total Mortgage Banking loan production |       | $                                                       | 303,339,000 |   |   |   |   |   | $ | 311,029,000 |   |   |   |   |   |

 

67

----

Revenues increased from the year-ago period primarilydriven by improved Prime Mortgage loan gain on sale partially offset by theeffect of continuing competitive pressure on Nonprime Mortgage Loans and PrimeHome Equity Loans gain on sale and by reduced net interest income earned onloans held for sale caused by the effect of the flattening yield curve. In the ninemonths ended September 30, 2006, $292.8 billion of mortgage loans, or 97%of Mortgage Banking loan production, was sold compared to $297.9 billion ofmortgage loans, or 96% of Mortgage Banking loan production, during the ninemonths ended September 30, 2005.

Expenses (in dollars and as a percentage of loansproduced) increased from the year-ago period, primarily due to costs incurred tosupport our investment in expanding the loan sales force and distributed branchnetwork to support the achievement of our long-term strategy of market sharegrowth. In addition, a lower deferral rate of expenses under SFAS 91contributedto the increase in expenses.

During the nine monthsended September 30, 2006, the Loan Production Sector operated atapproximately 87% of planned operational capacity, compared to 97% during theyear-ago period.

***Loan Servicing Sector***

Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                                         | ** ** | **Nine Months Ended September 30,** | ** **    |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|---------------|
| ** **                                                         | ** ** | **2006**                                                | ** **    | **2005** | ** ** |
| ** **                                                         | ** ** | **Amount**                                              | ** **    | **Percentage of  Average  Servicing  Portfolio(1)** | ** ** | **Amount** | ** ** | **Percentage of  Average  Servicing  Portfolio(1)** | ** ** |
| ** **                                                         | ** ** | **(dollar amounts in thousands)**        | ** **    |
| Servicing fees,  net of guarantee fees                             |       | $                                                       | 2,794,071     |   |   | 0.320 | % |   | $ | 2,307,775 |   |   | 0.333 | % |   |
| Escrow balance  income                                             |       | 605,263                                                 |          |   | 0.069 | % |   | 226,999 |   |   | 0.033 | % |   |
| Miscellaneous  fees                                                |       | 446,709                                                 |          |   | 0.051 | % |   | 367,250 |   |   | 0.053 | % |   |
| Income from  retained interests                                    |       | 386,331                                                 |          |   | 0.044 | % |   | 333,296 |   |   | 0.048 | % |   |
| Realization of  expected cash flows from mortgage servicing rights |       | (2,312,897                                              | )             |   | (0.264 | )% |   | — |   |   | — |   |   |
| Amortization of  mortgage servicing rights                         |       | —                                                  |          |   | — |   |   | (1,607,911 | ) |   | (0.232 | )% |   |
| Operating revenues                                                 |       | 1,919,477                                               |          |   | 0.220 | % |   | 1,627,409 |   |   | 0.235 | % |   |
| Change in fair  value of mortgage servicing rights                 |       | 479,709                                                 |          |   | 0.055 | % |   | — |   |   | — |   |   |
| Recovery of  mortgage servicing rights                             |       | —                                                  |          |   | — |   |   | 86,458 |   |   | 0.012 | % |   |
| Impairment of  retained interests                                  |       | (208,967                                                | )             |   | (0.024 | )% |   | (297,791 | ) |   | (0.043 | )% |   |
| Servicing hedge  losses                                            |       | (472,591                                                | )             |   | (0.054 | )% |   | (242,375 | ) |   | (0.034 | )% |   |
| Valuation changes, net of Servicing Hedge                          |       | (201,849                                                | )             |   | (0.023 | )% |   | (453,708 | ) |   | (0.065 | )% |   |
| Total servicing revenues                                           |       | 1,717,628                                               |          |   | 0.197 | % |   | 1,173,701 |   |   | 0.170 | % |   |
| Operating  expenses                                                |       | 554,722                                                 |          |   | 0.064 | % |   | 494,056 |   |   | 0.071 | % |   |
| Allocated corporate  expenses                                      |       | 65,874                                                  |          |   | 0.007 | % |   | 46,686 |   |   | 0.007 | % |   |
| Total servicing expenses                                           |       | 620,596                                                 |          |   | 0.071 | % |   | 540,742 |   |   | 0.078 | % |   |
| Interest expense                                                   |       | 445,658                                                 |          |   | 0.051 | % |   | 269,001 |   |   | 0.039 | % |   |
| Pre-tax earnings                                                   |       | $                                                       | 651,374       |   |   | 0.075 | % |   | $ | 363,958 |   |   | 0.053 | % |   |
| Average servicing  portfolio                                       |       | $                                                       | 1,163,744,000 |   |   |   |   |   | $ | 922,747,000 |   |   |   |   |   |

----

(1)          Annualized

68

----

Pre-tax earnings in theLoan Servicing Sector were $651.4 million during the nine months ended September 30,2006, an improvement of $287.4 million from the year-ago period. The increasein pre-tax earnings is due to improved valuation changes, net of the ServicingHedge, and improvement in operating revenues due mainly to a larger portfolioand higher escrow balance benefit resulting from an increase in the escrowearnings rate. These improvements were partially reduced by increased interestexpense related to a larger average investment in Servicing Sector assets andincreased cost of debt.

***Loan Closing Services Sector***

The LandSafe companiesproduced $68.3 million in pre-tax earnings in the nine months ended September 30,2006, representing a decrease of 14% from the year-ago period. The decrease inLandsafe’s pre-tax earnings was primarily due to the decline in the mortgagemarket.

**Banking Segment**

TheBanking Segment achieved pre-tax earnings of $1,037.3 million during the ninemonths ended September 30, 2006, compared to $745.4 million for theyear-ago period. Following is the composition of pre-tax earnings by component:

| ** **                              | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(in thousands)**                             | ** ** |
| Banking  Operations                     |       | $                                                   | 1,037,928  |   | $ | 703,393 |   |
| CWL                                     |       | 43,151                                              |       | 65,560 |   |
| Allocated  corporate expenses(1)        |       | (43,816                                             | )          | (23,588 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                                   | 1,037,263  |   | $ | 745,365 |   |

----

(1)          Not included incalculation of Banking Operations’ efficiency ratio

Thefollowing table shows total Banking Operations loan production volume by originationchannel:

| ** **             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in millions)**                              | ** ** |
| Correspondent  Lending |       | $                                                   | 7,262      |   | $ | 11,618 |   |
| Wholesale Lending      |       | 6,122                                               |       | 16,238 |   |
| Consumer Markets       |       | 2,069                                               |       | 6,533 |   |
|                   |       | $                                                   | 15,453     |   | $ | 34,389 |   |

 

69

----

Therevenues and expenses of Banking Operations are summarized in the followingtable:

| ** **                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(dollar amounts in thousands)**    | ** ** |
| Interest income                                     |       | $                                                   | 3,785,783  |   | $ | 2,211,265 |   |
| Interest expense                                    |       | (2,470,043                                          | )          | (1,307,624 | ) |
| Net interest income                                 |       | 1,315,740                                           |       | 903,641 |   |
| Provision for  loan losses                          |       | (91,305                                             | )          | (71,463 | ) |
| Net interest income after provision for loan losses |       | 1,224,435                                           |       | 832,178 |   |
| Non-interest income                                 |       | 109,929                                             |       | 107,806 |   |
| Non-interest  expense                               |       | (296,436                                            | )          | (236,591 | ) |
| Pre-tax earnings                                    |       | $                                                   | 1,037,928  |   | $ | 703,393 |   |
| Efficiency  ratio(1)                                |       | 21                                                  | %          | 23 | % |
| After-tax return on  average assets                 |       | 1.05                                                | %          | 0.97 | % |

----

(1)          Non-interest expensedivided by the sum of net interest income plus non-interest income. The BankingOperations’ efficiency ratio reflects the expense structure resulting from itsrelationship with CHL. If the Banking Operations of Countrywide Bank were astand-alone entity, the nature and amount of its expenses would differ fromthose reported. For example, the fulfillment fees paid by Countrywide Bank tothe Loan Production Sector for origination costs incurred on investmentmortgage loans funded by Countrywide Bank are generally determined on anincremental cost basis which is less than would be incurred in an arms-lengthtransaction.

70

----

The componentsof net interest income of Banking Operations are summarized below:

| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **Average  Balance**                                    | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** |
| ** **                                        | ** ** | **(dollar amounts in thousands)**        | ** ** |
| Interest-earning  assets:                         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans(1)                                 |       | $                                                       | 71,149,750 |   | $ | 3,481,152 |   |   | 6.53 | % |   | $ | 49,537,777 |   | $ | 1,957,245 |   |   | 5.27 | % |   |
| Securities available for  sale(2)                 |       | 5,961,981                                               |       | 221,003 |   |   | 4.94 | % |   | 6,123,269 |   | 210,533 |   |   | 4.58 | % |   |
| Short-term investments                            |       | 650,984                                                 |       | 24,315 |   |   | 4.99 | % |   | 495,642 |   | 10,996 |   |   | 2.97 | % |   |
| FHLB securities and FRB stock                     |       | 1,435,570                                               |       | 59,313 |   |   | 5.70 | % |   | 1,061,780 |   | 32,491 |   |   | 4.09 | % |   |
| Total earning assets                              |       | 79,198,285                                              |       | 3,785,783 |   |   | 6.38 | % |   | 57,218,468 |   | 2,211,265 |   |   | 5.16 | % |   |
| Allowance for loan losses                         |       | (134,800                                                | )          |   |   |   |   |   |   | (65,383 | ) |   |   |   |   |   |   |
| Other assets                                      |       | 1,095,042                                               |       |   |   |   |   |   |   | 682,057 |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                                       | 80,158,527 |   |   |   |   |   |   |   | $ | 57,835,142 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                    |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits                             |       | $                                                       | 5,734,675  |   | 204,453 |   |   | 4.77 | % |   | $ | 2,323,968 |   | 59,808 |   |   | 3.44 | % |   |
| Savings                                           |       | 102,662                                                 |       | 3,994 |   |   | 5.20 | % |   | 1,207 |   | 13 |   |   | 1.47 | % |   |
| Company-controlled custodial deposits        |       | 15,304,002                                              |       | 550,520 |   |   | 4.81 | % |   | 10,835,877 |   | 237,543 |   |   | 2.93 | % |   |
| Time deposits                                     |       | 26,295,083                                              |       | 894,126 |   |   | 4.55 | % |   | 14,943,793 |   | 387,925 |   |   | 3.47 | % |   |
| Total interest-bearing deposits                   |       | 47,436,422                                              |       | 1,653,093 |   |   | 4.66 | % |   | 28,104,845 |   | 685,289 |   |   | 3.26 | % |   |
| FHLB advances                                     |       | 23,358,044                                              |       | 743,742 |   |   | 4.26 | % |   | 20,976,798 |   | 529,183 |   |   | 3.37 | % |   |
| Other borrowed funds                              |       | 1,966,101                                               |       | 73,208 |   |   | 4.98 | % |   | 3,951,381 |   | 93,152 |   |   | 3.15 | % |   |
| Total borrowed funds                              |       | 25,324,145                                              |       | 816,950 |   |   | 4.31 | % |   | 24,928,179 |   | 622,335 |   |   | 3.34 | % |   |
| Total interest-bearing liabilities                |       | 72,760,567                                              |       | 2,470,043 |   |   | 4.54 | % |   | 53,033,024 |   | 1,307,624 |   |   | 3.30 | % |   |
| Non interest-bearing liabilities and equity:      |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing  checking                    |       | 1,124,577                                               |       |   |   |   |   |   |   | 340,283 |   |   |   |   |   |   |   |
| Other liabilities                                 |       | 864,299                                                 |       |   |   |   |   |   |   | 834,446 |   |   |   |   |   |   |   |
| Shareholder’s equity                         |       | 5,409,084                                               |       |   |   |   |   |   |   | 3,627,389 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity |       | 7,397,960                                               |       |   |   |   |   |   |   | 4,802,118 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s equity   |       | $                                                       | 80,158,527 |   |   |   |   |   |   |   | $ | 57,835,142 |   |   |   |   |   |   |   |
| Net interest income                               |       |                                                    |       | $ | 1,315,740 |   |   |   |   |   |   |   | $ | 903,641 |   |   |   |   |   |
| Net interest spread(3)                            |       |                                                    |       |   |   |   | 1.84 | % |   |   |   |   |   |   | 1.86 | % |   |
| Net interest  margin(4)                           |       |                                                    |       |   |   |   | 2.21 | % |   |   |   |   |   |   | 2.10 | % |   |

----

(1)           Average balances include nonaccrual loans.

(2)           Average balances and yields for securities availablefor sale are based on average amortized cost computed on the settlement datebasis.

(3)           Calculated as yield on total average interest-earningassets less rate on total average interest-bearing liabilities.

(4)           Calculated as annualized net interest income divided bytotal average interest-earning assets.

Thedollar amounts of interest income and interest expense fluctuate depending uponchanges in interest rates and in the relative volumes of our interest-earningassets and interest-bearing liabilities. 

71

----

Changes attributable to (i) changes in volume(changes in average outstanding balances multiplied by the prior period’srate), (ii) changes in rate (changes in average interest rate multipliedby the prior period’s volume), and (iii) changes in rate/volume (changesin rate times the change in volume)—which were allocated proportionately to thechanges in volume and the changes in rate and included in the relevant columnbelow—are as follows:

| ** **                            | ** ** | **Nine Months Ended  September 30, 2006 vs. September 30, 2005** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Increase (Decrease) Due to**                                                            | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **     Volume     **                                   | ** ** | **     Rate     ** | ** ** | **Total Changes** | ** ** |
| ** **                            | ** ** | **(in thousands)**                                                                                  | ** ** |
| Interest-earning  assets:             |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Mortgage loans                        |       |                                                                                                     | $          | 916,536 |   |   | $ | 607,371 |   |   | $ | 1,523,907 |   |   |
| Securities available for sale         |       |                                                                                                     | (5,655     | ) |   | 16,125 |   |   | 10,470 |   |   |
| Short-term investments                |       |                                                                                                     | 4,187      |   |   | 9,132 |   |   | 13,319 |   |   |
| Other investments                     |       |                                                                                                     | 13,139     |   |   | 13,683 |   |   | 26,822 |   |   |
| Total interest income                 |       |                                                                                                     | $          | 928,207 |   |   | $ | 646,311 |   |   | $ | 1,574,518 |   |   |
| Interest-bearing  liabilities:        |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Money market deposits                 |       |                                                                                                     | $          | 114,565 |   |   | $ | 30,080 |   |   | $ | 144,645 |   |   |
| Savings deposits                      |       |                                                                                                     | 3,864      |   |   | 117 |   |   | 3,981 |   |   |
| Company-controlled custodial deposits |       |                                                                                                     | 122,527    |   |   | 190,450 |   |   | 312,977 |   |   |
| Time deposits                         |       |                                                                                                     | 359,525    |   |   | 146,676 |   |   | 506,201 |   |   |
| Total deposits                        |       |                                                                                                     | 600,481    |   |   | 367,323 |   |   | 967,804 |   |   |
| FHLB advances                         |       |                                                                                                     | 64,831     |   |   | 149,728 |   |   | 214,559 |   |   |
| Other borrowed funds                  |       |                                                                                                     | (59,396    | ) |   | 39,452 |   |   | (19,944 | ) |   |
| Total borrowings                      |       |                                                                                                     | 5,435      |   |   | 189,180 |   |   | 194,615 |   |   |
| Total interest expense                |       |                                                                                                     | 605,916    |   |   | 556,503 |   |   | 1,162,419 |   |   |
| Net interest  income                  |       |                                                                                                     | $          | 322,291 |   |   | $ | 89,808 |   |   | $ | 412,099 |   |   |

 

The increase in net interest income is primarily due toa $22.0 billion or 38% increase in average interest-earning assets, combinedwith an 11 basis point increase in net interest margin. The increase in the netinterest margin from the year-ago period was a result of the reduced impact ofteaser rates earned on recently funded loans as fewer pay-option loans wereoriginated in the nine months ended September 30, 2006 compared to the year-agoperiod. This increase was partially offset by the effect of the interest ratepricing lag. 

The Banking Operation’s provision for loan lossesincreased by $19.8 million during the nine months ended September 30,2006, compared to the nine months ended September 30, 2005. This increasereflects current portfolio growth, along with providing for seasoning of loansacquired during the past years of rapid portfolio growth.

The second component ofthe Banking Segment is CWL. Its pre-tax earnings decreased by $22.4 millionduring the nine months ended September 30, 2006, in comparison to theyear-ago period, primarily due to a 26% decrease in average mortgage warehouseadvances, which resulted primarily from an overall decrease in activity withMortgage Banking Segment customers.

**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $454.3 million for the nine months ended September 30, 2006, anincrease of $135.3 million, or 42%, from the year-ago period, driven by a 39%increase in revenues mainly due to an increase in conduit, underwriting andcommercial real estate revenues.

72

----

Thefollowing table shows revenues, expenses and pre-tax earnings of the CapitalMarkets Segment:

| ** **                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in thousands)**                             | ** ** |
| Revenues:                    |       |                                                |       |   |   |
| Conduit                      |       | $                                                   | 347,966    |   | $ | 221,442 |   |
| Underwriting                 |       | 221,897                                             |       | 190,633 |   |
| Securities trading           |       | 84,322                                              |       | 67,360 |   |
| Commercial real estate       |       | 70,279                                              |       | 44,585 |   |
| Brokering                    |       | 26,435                                              |       | 21,857 |   |
| Other                        |       | 27,893                                              |       | 15,109 |   |
| Total revenues               |       | 778,792                                             |       | 560,986 |   |
| Expenses:                    |       |                                                |       |   |   |
| Operating expenses           |       | 303,366                                             |       | 231,282 |   |
| Allocated corporate expenses |       | 21,164                                              |       | 10,764 |   |
| Total expenses               |       | 324,530                                             |       | 242,046 |   |
| Pre-tax earnings             |       | $                                                   | 454,262    |   | $ | 318,940 |   |

 

During the nine months ended September 30, 2006,the Capital Markets Segment generated revenues totaling $348.0 million from itsconduit activities, primarily managing the acquisition and sale orsecuritization of whole loans on behalf of the Mortgage Banking Segment.Conduit revenues for the reporting period increased 57% in comparison to theyear-ago period because of an increase in volume of adjustable-rate andnonprime products combined with an increase in margins on adjustable-rateproducts.

Underwriting revenues increased $31.3 million over theyear-ago period because of increased securitization volume, primarilyadjustable-rate products.

Securities trading revenue increased 25% over theyear-ago period due to an increase in trading margins and volume, partiallyoffset by lower net interest income due to a tightening of net spreadsresulting from a flattening of the yield curve.

During the nine months ended September 30, 2006,the commercial real estate finance activities of the Capital Markets Segmentgenerated revenues totaling $70.3 million primarily from sales of commercialreal estate loans compared to $44.6 million in the year-ago period. Theincrease in revenue was due to an increase in the volume of loans soldpartially offset by a decrease in margins resulting from price competition anda change in the mix of products sold.

73

----

Thefollowing table shows the composition of CSC securities trading volume, whichincludes intersegment trades with the Mortgage Banking Segment, by instrument:

| ** **                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(in millions)**                              | ** ** |
| Mortgage-backed  securities      |       | $                                                   | 1,638,393  |   | $ | 1,403,555 |   |
| Asset-backed  securities         |       | 125,387                                             |       | 113,044 |   |
| Other                            |       | 116,486                                             |       | 66,598 |   |
| Subtotal(1)                      |       | 1,880,266                                           |       | 1,583,197 |   |
| U.S. Treasury  securities        |       | 965,335                                             |       | 1,104,291 |   |
| Total securities  trading volume |       | $                                                   | 2,845,601  |   | $ | 2,687,488 |   |

----

(1)   Approximately 15% and 16% of the segment’s non-U.S. Treasurysecurities trading volume was with CHL during each of the nine months ended September 30,2006 and 2005, respectively.

**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $164.9 million over theyear-ago period, to $245.0 million during the nine months ended September 30,2006. The following table shows pre-tax earnings (losses) by component:

| ** **                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**                             | ** ** |
| Balboa  Reinsurance Company               |       | $                                                   | 159,161    |   | $ | 120,447 |   |
| Balboa Life and  Casualty Operations(1)   |       | 109,911                                             |       | (25,546 | ) |
| Allocated  corporate expenses             |       | (24,039                                             | )          | (14,735 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                                   | 245,033    |   | $ | 80,166 |   |

----

(1)          Includes the Balboa Lifeand Casualty Group and the Countrywide Insurance Services Group.

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**                             | ** ** |
| Balboa  Reinsurance Company          |       | $                                                   | 163,627    |   | $ | 131,526 |   |
| Balboa Life and  Casualty Operations |       | 701,166                                             |       | 523,549 |   |
| Total net  insurance premiums earned |       | $                                                   | 864,793    |   | $ | 655,075 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Amount**                                              | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                           | ** ** | **(dollar amounts in thousands)**        | ** ** |
| Balboa  Reinsurance Company          |       | $                                                       | 24,293     |   |   | 15 | % |   | $ | 31,144 |   |   | 24 | % |   |
| Balboa Life and  Casualty Operations |       | 304,509                                                 |       |   | 43 | % |   | 317,335 |   |   | 61 | % |   |
| Total insurance  claim expenses      |       | $                                                       | 328,802    |   |   |   |   |   | $ | 348,479 |   |   |   |   |   |

 

74

----

Our mortgage reinsurance business produced $159.2million in pre-tax earnings, an increase of 32% over the year-ago period,driven primarily by an increase in policy renewal rates and growth of 17% inthe mortgage loans included in our loan servicing portfolio that are covered byreinsurance contracts.

Our Life and Casualtyinsurance business produced pre-tax earnings of $109.9 million, an increase of$135.5 million from the year-ago period. The increase in earnings was driven bya 34% increase in net earned premiums during the nine months ended September 30,2006, in comparison to the year-ago period, and by a decrease in catastrophelosses of $113.9 million from the year-ago period. The increase in net earnedpremiums was primarily attributable to an increase in voluntary homeowners andauto insurance. Insurance claim expenses decreased as a percentage of netearned premiums primarily due to a reduction in hurricane related claims in thecurrent period as compared to the year-ago period.

**Global OperationsSegment**

Global Operations pre-taxearnings totaled $16.4 million during the nine months ended September 30,2006, a decrease of $1.1 million from the year-ago period.  The decrease in earnings was primarily due tothe termination of the joint venture with Barclays Bank, PLC.

**Detailed Line ItemDiscussion of Consolidated Revenue and Expense Items**

***Gain on Sale of Loans and Securities***

Gainon sale of loans and securities is summarized below:

| ** **                    | ** ** | **Nine Months Ended September 30,** | ** **  |
|-------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                    | ** ** | **2006**                                                | ** **  | **2005** | ** ** |
| ** **                    | ** ** | ** **                                              | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                    | ** ** | **Loans Sold**                                     | ** **  | **Amount** | ** ** | **Margin(2)** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **Margin(2)** | ** ** |
| ** **                    | ** ** | **(dollar amounts in thousands)**        | ** **  |
| Mortgage Banking:             |       |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans          |       | $                                                       | 240,007,756 |   | $ | 2,717,250 |   |   | 1.13 | % |   | $ | 246,741,673 |   | $ | 2,181,008 |   |   | 0.88 | % |   |
| Nonprime Mortgage Loans       |       | 29,570,762                                              |        | 493,047 |   |   | 1.67 | % |   | 31,523,425 |   | 742,391 |   |   | 2.36 | % |   |
| Prime Home Equity Loans:      |       |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial Sales                 |       | 20,000,572                                              |        | 307,251 |   |   | 1.54 | % |   | 17,233,196 |   | 412,903 |   |   | 2.40 | % |   |
| Subsequent draws              |       | 3,195,861                                               |        | 116,863 |   |   | 3.66 | % |   | 2,415,841 |   | 88,234 |   |   | 3.65 | % |   |
|                          |       | 23,196,433                                              |        | 424,114 |   |   | 1.83 | % |   | 19,649,037 |   | 501,137 |   |   | 2.55 | % |   |
| Total Production Sector       |       | 292,774,951                                             |        | 3,634,411 |   |   | 1.24 | % |   | 297,914,135 |   | 3,424,536 |   |   | 1.15 | % |   |
| Reperforming loans            |       | 247,162                                                 |        | 2,635 |   |   | 1.07 | % |   | 1,001,989 |   | 29,475 |   |   | 2.94 | % |   |
|                          |       | $                                                       | 293,022,113 |   | 3,637,046 |   |   | 1.24 | % |   | $ | 298,916,124 |   | 3,454,011 |   |   | 1.16 | % |   |
| Capital Markets:              |       |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)         |       | $                                                       | 50,891,454  |   | 312,614 |   |   | 0.61 | % |   | $ | 42,134,334 |   | 184,750 |   |   | 0.44 | % |   |
| Underwriting                  |       | N/A                                                     |        | 202,163 |   |   | N/A |   |   | N/A |   | 157,490 |   |   | N/A |   |   |
| Commercial real estate        |       | $                                                       | 3,177,349   |   | 50,586 |   |   | 1.59 | % |   | $ | 1,568,656 |   | 42,800 |   |   | 2.73 | % |   |
| Securities trading and  other |       | N/A                                                     |        | 10,886 |   |   | N/A |   |   | N/A |   | (64,472 | ) |   | N/A |   |   |
|                          |       |                                                    |        | 576,249 |   |   |   |   |   |   |   | 320,568 |   |   |   |   |   |
| Other                         |       | N/A                                                     |        | 49,234 |   |   | N/A |   |   | N/A |   | 17,573 |   |   | N/A |   |   |
|                          |       |                                                    |        | $ | 4,262,529 |   |   |   |   |   |   |   | $ | 3,792,152 |   |   |   |   |   |

----

(1)          Includes loans sourcedfrom the Mortgage Banking Segment.

(2)   Gain onsale of a percentage of loans sold.

75

----

The increase in Capital Markets’ gain on sale relatedto its conduit activities was due to increased sales of mortgage loans andimproved margins. The increase in Capital Markets’ gain on sale related to itscommercial real estate activities was due to an increase in sales of such loans,partially offset by a decrease in margins on such loans. Capital Markets’revenues from its securities trading activities consist of gain on sale andinterest income. In a steep yield curve environment, net interest income willcomprise a larger percentage of total securities trading revenue. As the yieldcurve flattens, the mix of revenues will shift toward gain on sale ofsecurities. During the nine months ended September 30, 2006, the yieldcurve was flatter than in the year-ago period, which resulted in a shift intrading revenues from interest income to gain on sale.

Forthe Mortgage Banking Segment, the effects of changes in the volume of loansales and the margin on sale on the amount of gain on sale is summarized in thefollowing table:

| ** **                | ** ** | **Nine Months Ended  September 30, 2006 vs. September 30, 2005** | ** ** |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Increase (Decrease) Due to**                                                            | ** ** | ** ** | ** ** |
| ** **                | ** ** | **  Loans Sold  **                                                              | ** ** | **Margin** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(in thousands)**                                                                                  | ** ** |
| Mortgage Banking:         |       |                                                                                                     |       |   |   |   |   |   |   |
| Prime Mortgage Loans      |       |                                                                                                     | $          | (61,001 | ) |   | $ | 597,243 |   | $ | 536,242 |   |
| Nonprime Mortgage Loans   |       |                                                                                                     | (43,636    | ) |   | (205,708 | ) | (249,344 | ) |
| Prime Home Equity  Loans: |       |                                                                                                     |       |   |   |   |   |   |   |
| Initial Sales             |       |                                                                                                     | 58,950     |   |   | (164,602 | ) | (105,652 | ) |
| Subsequent draws          |       |                                                                                                     | 28,523     |   |   | 106 |   | 28,629 |   |
|                      |       |                                                                                                     | 87,473     |   |   | (164,496 | ) | (77,023 | ) |
| Total Production Sector   |       |                                                                                                     | (17,164    | ) |   | 227,039 |   | 209,875 |   |
| Reperforming loans        |       |                                                                                                     | (14,537    | ) |   | (12,303 | ) | (26,840 | ) |
| Total Mortgage  Banking   |       |                                                                                                     | $          | (31,701 | ) |   | $ | 214,736 |   | $ | 183,035 |   |

 

Gain on sale of Prime Mortgage Loans increased in the ninemonths ended September 30, 2006, as compared to the nine months ended September 30,2005, due primarily to higher margins, partially offset by decreased sales ofsuch loans. 

Gain on sale of Nonprime Mortgage Loans decreased inthe nine months ended September 30, 2006, as compared to 2005, dueprimarily to lower margins resulting from increased pricing competition and todecreased sales of such loans.

Gain on sale of Prime HomeEquity Loans decreased in the nine months ended September 30, 2006, ascompared to the year-ago period due primarily to reduced margins on such loansresulting from increased pricing competition, partially offset by increasedsales of such loans.

76

----

***Net Interest Income and Provision for Loan Losses***

Netinterest income is summarized below:

| ** **                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                             | ** ** |
| Net interest income  (expense):                      |       |                                                |       |   |   |
| Banking Segment loans and securities                 |       | $                                                   | 1,365,012  |   | $ | 971,404 |   |
| Mortgage Banking Segment loans and securities        |       | 447,409                                             |       | 472,716 |   |
| Loan Servicing  Sector:                              |       |                                                |       |   |   |
| Net interest income on custodial balances            |       | 605,263                                             |       | 226,999 |   |
| Interest expense                                     |       | (491,530                                            | )          | (292,309 | ) |
| Capital Markets Segment securities inventory         |       | 90,123                                              |       | 138,852 |   |
| Other                                                |       | 167,602                                             |       | 165,928 |   |
| Net interest income                                  |       | 2,183,879                                           |       | 1,683,590 |   |
| Provision for loan losses                            |       | (163,032                                            | )          | (91,557 | ) |
| Net interest  income after provision for loan losses |       | $                                                   | 2,020,847  |   | $ | 1,592,033 |   |

 

The increase in net interest income from the BankingSegment was primarily attributable to growth in the average investment inmortgage loans. Average assets in the Banking Segment increased to $83.5billion during the nine months ended September 30, 2006, an increase of $20.5billion, or 33% over the year-ago period. Net interest margin increasedto 2.18% during the nine months ended September 30, 2006, from 2.06%during the nine months ended September 30, 2005.

The decrease in net interest income from MortgageBanking Segment loans and securities reflects a decrease in net interest marginpartially offset by an increase in average balances from the year-ago period.The Mortgage Banking Segment loan and securities inventory is primarilyfinanced with borrowings tied to short-term indices. Short-term interest ratesrose more than long-term mortgage interest rates between the year-ago periodand the nine months ended September 30, 2006, reducing the net interestmargin.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate from 2.97% duringthe nine months ended September 30, 2005, to 5.12% during the nine monthsended September 30, 2006, along with an increase of $265.8 million inaverage custodial balances over the year-ago period. We are required to passthrough a full month’s interest to security holders on paid-off loans,regardless of the payoff date, at the underlying security rates, which weresubstantially higher than the short-term rates earned by us on the payofffloat. The amount of such interest passed through to the security holders was $224.7million and $248.3 million in the nine months ended September 30, 2006 and2005.

Interest expense allocated to the Loan ServicingSector increased primarily due to the effect of rising interest rates, combinedwith an increase in total Servicing Sector assets.

The decrease in net interest income from the CapitalMarkets’ securities portfolio is attributable to a decrease in the net interestmargin from 0.50% in the nine months ended September 30, 2005, to 0.32% inthe nine months ended September 30, 2006, partially offset by an increaseof 11% in the average inventory of securities held. The decrease in the netinterest margin earned on the securities portfolio is primarily due to aflattening of the yield curve which was evidenced by a larger increase inshort-term financing rates versus the increase in rates in the longer-termsecurities held by the Capital Markets Segment. The decline in net interestincome was more than offset by an increase in gain on sale of loans andsecurities.

77

----

The increase in theprovision for loan losses is due to the continuing growth and seasoning of theBanking Segment’s loan portfolio, along with deteriorating credit performanceof loans held for investment in our Mortgage Banking Segment.

***Loan Servicing Fees and Other Income from MSRs andRetained Interests***

Loanservicing fees and other income from MSRs and retained interests are summarizedbelow:

| ** **                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                             | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                                   | 2,794,071  |   | $ | 2,307,775 |   |
| Income from  retained interests                                        |       | 386,331                                             |       | 333,296 |   |
| Late charges                                                           |       | 203,068                                             |       | 174,302 |   |
| Prepayment  penalties                                                  |       | 182,429                                             |       | 142,032 |   |
| Global Operations  Segment subservicing fees                           |       | 12,034                                              |       | 82,385 |   |
| Ancillary fees                                                         |       | 57,654                                              |       | 55,250 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                                   | 3,635,587  |   | $ | 3,095,040 |   |

----

(1)          Includes contractuallyspecified servicing fees

The increase in servicing fees, net of guarantee fees,was principally due to a 26% increase in the average servicing portfolio,partially offset by a decrease in the overall annualized net service fee earnedfrom 0.333% of the average portfolio balance during the nine months ended September 30,2005, to 0.320% during the nine months ended September 30, 2006.

The increase in incomefrom retained interests was due primarily to a 28% increase in the averageinvestment in these assets.

***Realization of Expected Cash Flows from MortgageServicing Rights***

Effective January 1,2006, we adopted SFAS 156 and elected to carry our MSRs at fair value withchanges in fair value recorded in earnings. The change in fair value of theMSRs that is included in earnings for the nine months ended September 30,2006, consists of two primary components—a reduction in fair value due to therealization of expected cash flows from the MSRs and a change in valueresulting from changes in interest rates and other market factors. Therealization of expected cash flows from MSRs during the nine months resulted ina value reduction of $2,314.1 million during the nine months ended September 30,2006.

***Change in Value of Mortgage Servicing Rights***

We recorded an increase inthe fair value of the MSRs in the nine months ended September 30, 2006, of$480.0 million primarily as a result of the increase in mortgage rates duringthe period.

***Amortization of Mortgage Servicing Rights***

We recorded amortizationof MSRs of $1,607.9 million, or an annual rate of 20.5%, during the nine monthsended September 30, 2005. The amortization rate of the MSRs was dependenton the forecasted prepayment speeds at the beginning of the period.

78

----

***Recovery of Mortgage Servicing Rights***

During the nine monthsended September 30, 2005, we recovered previously recorded impairment ofMSRs of $86.5 million, primarily driven by an increase in mortgage interestrates during the period.

***Impairment of Retained Interests***

In the nine months ended September 30, 2006, werecognized impairment of other retained interests. The collateral underlyingcertain of these residuals is fixed-rate while the pass-through rate isfloating. An increase in projected short-term interest rates during the periodcaused compression of the spread on such residuals, which resulted in a declinein their value. Our interest-only securities also decreased in value, which wascaused primarily by a decline in estimated cash flows underlying suchsecurities that resulted from an increase in forecasted prepayment speeds dueto the decline in mortgage rates towards the end of the current period. Inaddition, the overall value of our retained interests declined due to a netincrease in market yields required on our retained interests.

In the nine months endedSeptember 30, 2005, we recognized impairment of other retained interests. Thecollateral underlying certain of these residuals is fixed-rate while thepass-through rate is floating. An increase in projected short-term interestrates during the period caused compression of the spread on such residuals,which resulted in a decline in their value.

***Servicing Hedge Losses***

The Servicing Hedge isdesigned to supplement the macro hedge and to offset a portion of the change invalue of MSRs and retained interests recorded in current period earnings. Thevalues of the derivatives that are the primary components of the ServicingHedge are tied to long-term Treasury, mortgage and swap rate indices. Theserates increased during the nine months ended September 30, 2006 and September 30,2005. As a result, the Servicing Hedge incurred a loss of $472.6 million,including $376 million of hedge cost, during the nine months ended September 30,2006 and a loss of $242.4 million, including $407 million of hedge cost, duringthe nine months ended September 30, 2005.

***Net Insurance Premiums Earned***

Net insurance premiumsearned increased $209.7 million as a result of increases in the voluntaryhomeowners and auto insurance, as well as lender-placed property lines ofbusiness along with an increase in reinsurance premiums earned.

***Other Revenue***

Otherrevenue consisted of the following:

| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                             | ** ** |
| Appraisal fees,  net                       |       | $                                                   | 100,057    |   | $ | 78,857 |   |
| Credit report  fees, net                   |       | 57,270                                              |       | 59,441 |   |
| Title services                             |       | 30,796                                              |       | 34,676 |   |
| Insurance agency  commissions              |       | 22,480                                              |       | 19,995 |   |
| Global Operations  Segment processing fees |       | 15,424                                              |       | 43,676 |   |
| Other                                      |       | 166,572                                             |       | 113,725 |   |
| Total other  revenue                       |       | $                                                   | 392,599    |   | $ | 350,370 |   |

 

79

----

Global Operations Segmentprocessing fees decreased during the nine months ended September 30, 2006 ascompared to the year-ago period due to the termination of our joint venturewith Barclays Bank, PLC.

***Compensation Expenses***

Compensationexpenses increased $732.2 million, or 28%, during the nine months ended September 30,2006 as compared to the year-ago period. Details are presented below:

| ** **                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(in thousands)**                             | ** ** |
| Base salaries                       |       | $                                                   | 1,732,268  |   | $ | 1,439,034 |   |
| Incentive bonus  and commissions    |       | 1,442,081                                           |       | 1,427,527 |   |
| Payroll taxes and  benefits         |       | 691,010                                             |       | 471,223 |   |
| Deferral of loan  origination costs |       | (507,933                                            | )          | (712,548 | ) |
| Total  compensation expenses        |       | $                                                   | 3,357,426  |   | $ | 2,625,236 |   |

 

Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                    | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Mortgage Banking                              |       |                                                     | 40,873     |   |   |   | 34,371 |   |   |
| Banking                                       |       |                                                     | 2,355      |   |   |   | 1,708 |   |   |
| Capital Markets                               |       |                                                     | 778        |   |   |   | 608 |   |   |
| Insurance                                     |       |                                                     | 2,127      |   |   |   | 1,994 |   |   |
| Global Operations                             |       |                                                     | 2,200      |   |   |   | 2,511 |   |   |
| Corporate  Administration                     |       |                                                     | 7,164      |   |   |   | 5,732 |   |   |
| Average  workforce, including temporary staff |       |                                                     | 55,497     |   |   |   | 46,924 |   |   |

 

In the Loan Production Sector, compensation expensesincreased $168.0 million, or 8%, prior to the deferral of loan originationcosts, because of a 19% increase in average staff to expand our loan productioncapacity to support our long-term objective of market share growth.

In the Loan ServicingSector, compensation expense rose $55.4 million, or 26%, to accommodate an 11%increase in the number of loans serviced. Compensation expenses increased inmost other business segments and corporate areas, reflecting growth in theCompany.

80

----

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                             | ** ** |
| Office and  equipment rentals              |       | $                                                   | 165,214    |   | $ | 134,329 |   |
| Depreciation  expense                      |       | 150,595                                             |       | 136,818 |   |
| Utilities                                  |       | 120,760                                             |       | 97,598 |   |
| Postage and  courier service               |       | 84,599                                              |       | 73,586 |   |
| Office supplies                            |       | 65,456                                              |       | 63,625 |   |
| Repairs and  maintenance                   |       | 56,757                                              |       | 43,940 |   |
| Dues and  subscriptions                    |       | 48,241                                              |       | 38,823 |   |
| Other                                      |       | 72,697                                              |       | 53,337 |   |
| Total occupancy  and other office expenses |       | $                                                   | 764,319    |   | $ | 642,056 |   |

 

Occupancy and other officeexpenses for the nine months ended September 30, 2006, increased by 19%,or $122.3 million, primarily to accommodate an 18% increase in the averageworkforce.

***Insurance ClaimExpenses***

Insurance claim expenseswere $328.8 million for the nine months ended September 30, 2006, ascompared to $348.5 million for the year-ago period. The decrease in insuranceclaim expenses was due mainly to a $113.9 million reduction in catastropheclaim expenses offset by growth in our insurance book of business.

***Advertising andPromotion Expenses***

Advertising and promotionexpenses increased 18% from the nine months ended September 30, 2005, as aresult of a shift in the mortgage loan production market. Purchase activity,which was more prevalent in the 2006 period, generally requires moreadvertising and promotion than refinance activity, which is customarily drivenby increased consumer demand for mortgages resulting from low interest rates.

***Other OperatingExpenses***

Other operating expensesare summarized below:

| ** **                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                             | ** ** |
| Legal, consulting, accounting and auditing expenses |       | $                                                   | 160,870    |   | $ | 91,374 |   |
| Insurance commission expense                        |       | 141,809                                             |       | 114,942 |   |
| Travel and entertainment                            |       | 100,960                                             |       | 78,453 |   |
| Losses on servicing-related advances                |       | 55,557                                              |       | 78,620 |   |
| Insurance                                           |       | 43,994                                              |       | 39,755 |   |
| Taxes and licenses                                  |       | 43,787                                              |       | 33,685 |   |
| Software amortization and impairment                |       | 41,485                                              |       | 48,087 |   |
| Other                                               |       | 158,906                                             |       | 132,849 |   |
| Deferral of loan origination costs                  |       | (83,725                                             | )          | (109,852 | ) |
| Total other operating  expenses                     |       | $                                                   | 663,643    |   | $ | 507,913 |   |

 

The increase in operating expenses reflects growth inthe Company.

81

----

**Quantitative andQualitative Disclosures About Market Risk**

The primary market risk weface is interest rate risk. The predominant type of interest rate risk atCountrywide is price risk, which is the risk that the value of our assets andliabilities will change due to changes in interest rates. Interest rate riskalso includes the risk that the net interest income from our mortgage loan andinvestment portfolios will change in response to changes in interest rates.From an enterprise perspective, we manage interest rate risk through thenatural counterbalance of our loan production and servicing businesses. We alsouse various financial instruments, including derivatives, to manage theinterest rate risk related specifically to the values of our interest rate lockcommitments, Mortgage Loan Inventory and MBS held for sale, MSRs and retainedinterests and trading securities, as well as a portion of our debt and depositliabilities. The overall objective of our interest rate risk managementactivities is to reduce the variability of earnings caused by changes ininterest rates. Our Corporate Asset/Liability Management Committee, which iscomprised of several of the Company’s senior financial executives, isresponsible for management of this risk.

***Impact of Changesin Interest Rates on the Net Value of the Company’s Interest Rate-SensitiveFinancial Instruments***

We perform various sensitivity analyses that quantifythe net financial impact of changes in interest rates on our interestrate-sensitive assets, liabilities and commitments. These analyses incorporateassumed changes in the interest rate environment, including selectedhypothetical, instantaneous parallel shifts in the yield curve.

We employ various commonly used modeling techniques tovalue our financial instruments in connection with these sensitivity analyses.For mortgage loans, MBS, MBS forward contracts, collateralized mortgageobligations and MSRs, option-adjusted spread (“OAS”) models are used. Theprimary assumptions used in these models for the purpose of these sensitivityanalyses are prepayment speeds and the implied market volatility of interestrates. For options and interest rate floors, an option-pricing model is used.The primary assumption used in this model is implied market volatility ofinterest rates. Retained interests are valued using a zero volatilitydiscounted cash flow model. The primary assumptions used in these models areprepayment rates, discount rates and credit losses.

82

----

Thefollowing table summarizes the estimated change in fair value of ourinterest-rate-sensitive assets, liabilities and commitments as of September 30,2006, given several hypothetical, (instantaneous) parallel shifts in the yieldcurve:

| ** **                                                            | ** ** | **Change in Fair Value** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Change in Interest Rate (basis points)**   | ** ** | ** **                              | ** ** | **-100** | ** ** | **-50** | ** ** | **+50** | ** ** | **+100** | ** ** |
| ** **                                                            | ** ** | **(in millions)**                  | ** ** |
| MSRs and financial  instruments:                                      |       |                                    |       |   |   |   |   |   |   |
| MSRs and retained interests                                           |       | $                                       | (2,879     | ) | $ | (1,328 | ) | $ | 1,046 |   | $ | 1,793 |   |
| Impact of  Servicing Hedge:                                           |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                        |       | 395                                     |       | 197 |   | (197 | ) | (392 | ) |
| Swap-based                                                            |       | 3,404                                   |       | 1,380 |   | (818 | ) | (1,278 | ) |
| MSRs and retained interests, net                                      |       | 920                                     |       | 249 |   | 31 |   | 123 |   |
| Interest rate lock commitments                                        |       | 257                                     |       | 184 |   | (327 | ) | (749 | ) |
| Mortgage Loan Inventory                                               |       | 731                                     |       | 494 |   | (728 | ) | (1,624 | ) |
| Impact of  associated derivative instruments:                         |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                        |       | (1,035                                  | )          | (688 | ) | 991 |   | 2,228 |   |
| Treasury-based                                                        |       | 70                                      |       | 23 |   | 45 |   | 126 |   |
| Eurodollar-based                                                      |       | (33                                     | )          | (21 | ) | 42 |   | 93 |   |
| Interest rate lock commitments and Mortgage Loan  Inventory, net      |       | (10                                     | )          | (8 | ) | 23 |   | 74 |   |
| Countrywide Bank:                                                     |       |                                    |       |   |   |   |   |   |   |
| Securities portfolio                                                  |       | 141                                     |       | 85 |   | (106 | ) | (226 | ) |
| Mortgage loans                                                        |       | 592                                     |       | 292 |   | (468 | ) | (818 | ) |
| Deposit liabilities                                                   |       | (274                                    | )          | (143 | ) | 152 |   | 309 |   |
| Federal Home Loan Bank advances                                       |       | (241                                    | )          | (89 | ) | 220 |   | 283 |   |
| Countrywide Bank, net                                                 |       | 218                                     |       | 145 |   | (202 | ) | (452 | ) |
| Notes payable and capital securities                                  |       | (702                                    | )          | (351 | ) | 337 |   | 652 |   |
| Impact of  associated derivative instruments:                         |       |                                    |       |   |   |   |   |   |   |
| Swap-based                                                            |       | 139                                     |       | 70 |   | (71 | ) | (141 | ) |
| Notes payable and capital securities, net                             |       | (563                                    | )          | (281 | ) | 266 |   | 511 |   |
| Insurance company investment portfolios                               |       | 57                                      |       | 29 |   | (30 | ) | (61 | ) |
| Net change in fair  value related to MSRs and financial instruments   |       | $                                       | 622        |   | $ | 134 |   | $ | 88 |   | $ | 195 |   |
| Net change in fair value  related to broker-dealer trading securities |       | $                                       | (1         | ) | $ | 3 |   | $ | (8 | ) | $ | (21 | ) |
|                                                                       |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following tablesummarizes the estimated change in fair value of the Company’sinterest-rate-sensitive assets, liabilities and commitments as ofDecember 31, 2005, given several hypothetical (instantaneous) parallelshifts in the yield curve:

| ** **                                                               | ** ** | **Change in Fair Value** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Change in Interest Rate (basis points)**      | ** ** | ** **                              | ** ** | **-100** | ** ** | **-50** | ** ** | **+50** | ** ** | **+100** | ** ** |
| ** **                                                               | ** ** | **(in millions)**                  | ** ** |
| Net change in  fair value related to MSRs and financial instruments |       | $                                       | (429       | ) | $ | (419 | ) | $ | 695 |   | $ | 1,333 |   |
| Net change in fair value  related to broker-dealer trading securities    |       | $                                       | (18        | ) | $ | (3 | ) | $ | (11 | ) | $ | (33 | ) |
|                                                                          |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

These sensitivity analysesare limited in that they were performed at a particular point in time; arebased on the hedge position in place at that particular point in time; onlycontemplate certain movements in interest rates; do not incorporate changes ininterest rate volatility or changes in the relationship of one 

83

----

interestrate index to another; are subject to the accuracy of various assumptions used,including prepayment forecasts and discount rates; and do not incorporate otherfactors that would impact the Company’s overall financial performance in suchscenarios, most significantly the impact of changes in loan production earningsthat result from changes in interest rates. Not all of the changes in fairvalue would affect current period earnings. For example, changes in fair valueof securities accounted for as available-for-sale are recognized as a componentof shareholders’ equity, net of income taxes, and our debt is carried at itsunpaid principal balance net of issuance discount or premium. Absent hedgeaccounting, changes in the market value of our debt are not recorded incurrent-period earnings. For these reasons, the preceding estimates should notbe viewed as an earnings forecast.

***Market Risk—Foreign Currency Risk***

To diversify our fundingsources on a global basis, we also issue medium-term notes denominated inforeign currencies. We manage the associated foreign currency risk throughcross-currency swap transactions. The terms of the cross-currency swaps havethe effect of converting all foreign currency-denominated medium-term notesinto U.S. dollar obligations, thereby eliminating the associated foreigncurrency risk. As a result, potential changes in the exchange rates of foreigncurrencies denominating such medium-term notes would not have a net financialimpact on future earnings, fair values or cash flows.

**Credit RiskManagement**

Our primary credit risk isin our residential mortgage lending activities, and to a much lesser extent, inour commercial real estate lending activities. We manage our credit riskthrough credit policy, underwriting, quality control and surveillanceactivities as well as through use of credit enhancements, especiallynonrecourse and limited recourse securitizations. We also employ proactivecollection and loss mitigation efforts.

***Sale of Loans—Representations and Warranties***

Nearly all of the mortgageloans that we originate in our Mortgage Banking Segment are sold into thesecondary mortgage market in the form of securities, and to a lesser extent inthe form of loans. In the case of both securitizations and loan sales, we retainpotential liability as a result of the representations and warranties we maketo purchasers and insurers of the loans. In the event of a breach of suchrepresentations and warranties, we may be required to either repurchase themortgage loans with the identified defects or indemnify the investor orinsurer. In either case, we bear the risk of any subsequent credit loss on themortgage loans. The liability associated with this risk totaled $303.5 millionat September 30, 2006 and $169.8 million at December 31, 2005. The increase inthis liability is due mainly to the addition of the liabilities related to securitizationsin the current period together with an increase in loan sales, which generallyhave more extensive representations and warranties than securitizations. Theexpense of $209.3 million for the nine months ended September 30, 2006associated with the liability for representations and warranties was recordedas a component of gain on sale of loans in the consolidated income statement.

***Securitization Credit Recourse***

When we securitize our mortgage loans, we may retainlimited credit risk. As described in more detail in our 2005 Annual Report onForm 10-K, the degree to which credit risk on the underlying loansis transferred through the securitization process depends on the structure ofthe securitization. Our Prime Mortgage Loans generally are securitized on anon-recourse basis, while Prime Home Equity Loans and Nonprime Mortgage Loansgenerally are securitized with limited recourse for credit losses.

84

----

Our exposure to creditlosses related to our recourse securitization activities is limited to thecarrying value of our subordinated interests and to the contractual limit ofreimbursable losses under our corporate guarantees less the recorded liabilityfor such guarantees. These amounts at September 30, 2006 are as follows:

| ** **                                                   | ** ** | **September 30,  2006** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**      | ** ** |
| Subordinated  Interests:                                     |       |                         |       |   |   |
| Prime home equity residual securities                        |       |                         | $          | 858,757 |   |   |
| Prime home equity line of credit transferor’s  interest |       |                         | 569,880    |   |   |
| Nonprime residual securities                                 |       |                         | 568,942    |   |   |
| Prime residual securities                                    |       |                         | 38,454     |   |   |
| Subordinated mortgage-backed pass-through securities         |       |                         | 1,752      |   |   |
|                                                         |       |                         | $          | 2,037,785 |   |   |
| Corporate guarantees in  excess of recorded liability        |       |                         | $          | 523,497 |   |   |

 

Expected future credit losses are considered in thedetermination of the fair value of the subordinated interests.

Thetotal credit losses incurred for the nine months ended September 30, 2006and 2005 related to all of our mortgage loan sales activities are summarized asfollows:

| ** **                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**                             | ** ** |
| Nonprime  securitizations with retained residual interest          |       | $                                                   | 77,089     |   | $ | 49,138 |   |
| Repurchased or  indemnified loans                                  |       | 75,554                                              |       | 25,505 |   |
| Prime home equity  securitizations with retained residual interest |       | 46,990                                              |       | 21,560 |   |
| Nonprime  securitizations with corporate guarantee                 |       | 7,853                                               |       | 8,611 |   |
| VA losses in  excess of VA guarantee                               |       | 1,426                                               |       | 1,541 |   |
| Prime home equity  securitizations with corporate guarantee        |       | 2,173                                               |       | 9,219 |   |
|                                                               |       | $                                                   | 211,085    |   | $ | 115,574 |   |

 

***Portfolio Lending Activities***

As discussed in the preceding section, “Detailed LineItem Discussion of Consolidated Revenue and Expense Items—*Net InterestIncome and Provision for Loan Losses*,” we have a portfolio ofmortgage loans held for investment, consisting primarily of Prime Mortgage andPrime Home Equity Loans, with unpaid principal balances that amounted to $75.2billion at September 30, 2006. This portfolio is held primarily in ourBanking Operations. Our investment portfolio and unused home equity lines ofcredit includes $12.2 billion of Prime Mortgage Loans, Prime Home EquityMortgage Loans and unused home equity lines of credit that had a combinedloan-to-value ratio greater than or equal to 90% for owner occupied propertiesand 85% for non owner occupied properties. Of these loans, $5.1 billion arecovered by pool insurance policies that provide partial protection againstcredit losses. With respect to the remaining portion of this portfolio, wegenerally retain full credit exposure on these loans other than primarymortgage insurance (which is generally required for conventional loans withloan-to-value ratios greater than 80%).

We also provide short-termsecured mortgage-loan warehouse advances to various lending institutions, whichtotaled $3.0 billion at September 30, 2006. We incurred no credit lossesrelated to this activity during the nine months ended September 30, 2006.

85

----

***Mortgage Reinsurance***

We provide mortgagereinsurance on certain mortgage loans included in our servicing portfoliothrough contracts with several primary mortgage insurance companies. Underthese contracts, we absorb mortgage insurance losses in excess of a specifiedpercentage of the principal balance of a given pool of loans, subject to acontractual limit, in exchange for a portion of the pools’ mortgage insurancepremium. As of September 30, 2006, approximately $86.8 billion of mortgageloans in our servicing portfolio are covered by such mortgage reinsurance contracts.The reinsurance contracts place limits on our maximum exposure to losses. At September 30,2006, the maximum aggregate losses under the reinsurance contracts was limitedto $787.5 million. We are required to pledge securities to cover this potentialliability. For the nine months ended September 30, 2006, we did notexperience any losses under our reinsurance contracts.

***Mortgage Loans Held for Sale***

At September 30,2006, mortgage loans held for sale amounted to $28.9 billion. While the loansare in inventory, we bear credit risk after taking into consideration primarymortgage insurance (which is generally required for conventional loans withloan-to-value ratios greater than 80%), FHA insurance or VA guarantees.Historically, credit losses related to loans held for sale have not beensignificant.

***Counterparty Credit Risk***

We have exposure to credit loss in the event ofcontractual non-performance by our trading counterparties and counterparties toour various over-the-counter derivative financial instruments. We manage thiscredit risk by selecting only counterparties we believe to be financiallystrong, spreading the credit risk among many such counterparties and by placingcontractual limits on the amount of unsecured credit extended to any singlecounterparty.

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at September 30, 2006, before and aftercollateral held by us, was as follows:

| ** **                                        | ** ** | **September 30,  2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **(in millions)**       | ** ** |
| Aggregate credit exposure  before collateral held |       |                         | $          | 1,658 |   |   |
| Less: collateral  held                            |       |                         | (1,316     | ) |   |
| Net aggregate unsecured  credit exposure          |       |                         | $          | 342 |   |   |

 

For the nine months ended September 30,2006, we incurred no credit losses due to non-performance of any of ourcounterparties.

86

----

**Loan Servicing**

The following table setsforth certain information regarding our servicing portfolio of single-familymortgage loans, including loans and securities held for sale, loans held forinvestment and loans serviced under subservicing agreements, for the periodsindicated.

| ** **                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in millions)**                              | ** ** |
| Beginning owned  servicing portfolio |       | $                                                   | 1,081,189  |   | $ | 821,475 |   |
| Add: Loan production                 |       | 333,734                                             |       | 357,817 |   |
| Purchased MSRs (bulk  acquisitions)  |       | 3,115                                               |       | 43,232 |   |
| Less: Runoff(1)                      |       | (194,279                                            | )          | (202,457 | ) |
| Ending owned servicing  portfolio    |       | 1,223,759                                           |       | 1,020,067 |   |
| Subservicing portfolio               |       | 20,552                                              |       | 27,556 |   |
| Total servicing  portfolio           |       | $                                                   | 1,244,311  |   | $ | 1,047,623 |   |
| MSR portfolio                        |       | $                                                   | 1,118,117  |   | $ | 922,374 |   |
| Mortgage loans owned                 |       | 105,642                                             |       | 97,693 |   |
| Subservicing portfolio               |       | 20,552                                              |       | 27,556 |   |
| Total servicing portfolio            |       | $                                                   | 1,244,311  |   | $ | 1,047,623 |   |

 

| ** **                                               | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(in millions)** | ** ** |
| Composition of owned  servicing portfolio at period end: |       |                   |       |   |   |
| Conventional mortgage                                    |       | $                      | 1,011,093  |   | $ | 798,344 |   |
| Nonprime Mortgage                                        |       | 111,625                |       | 117,666 |   |
| Prime Home Equity                                        |       | 49,244                 |       | 53,728 |   |
| FHA-insured mortgage                                     |       | 38,109                 |       | 37,409 |   |
| VA-guaranteed mortgage                                   |       | 13,688                 |       | 12,920 |   |
| Total owned portfolio                                    |       | $                      | 1,223,759  |   | $ | 1,020,067 |   |
| Delinquent mortgage  loans(2):                           |       |                   |       |   |   |
| 30 days                                                  |       | 2.62                   | %          | 2.51 | % |
| 60 days                                                  |       | 0.85                   | %          | 0.71 | % |
| 90 days or more                                          |       | 1.03                   | %          | 0.81 | % |
| Total delinquent  mortgage loans                         |       | 4.50                   | %          | 4.03 | % |
| Loans pending  foreclosure(2)                            |       | 0.52                   | %          | 0.42 | % |
| Delinquent mortgage  loans(2):                           |       |                   |       |   |   |
| Conventional                                             |       | 2.50                   | %          | 2.28 | % |
| Nonprime Mortgage                                        |       | 16.93                  | %          | 12.37 | % |
| Prime Home Equity                                        |       | 2.10                   | %          | 1.19 | % |
| Government                                               |       | 13.41                  | %          | 13.13 | % |
| Total delinquent  mortgage loans                         |       | 4.50                   | %          | 4.03 | % |
| Loans pending  foreclosure(2):                           |       |                   |       |   |   |
| Conventional                                             |       | 0.22                   | %          | 0.21 | % |
| Nonprime Mortgage                                        |       | 2.86                   | %          | 1.70 | % |
| Prime Home Equity                                        |       | 0.10                   | %          | 0.06 | % |
| Government                                               |       | 1.17                   | %          | 1.07 | % |
| Total loans pending foreclosure                          |       | 0.52                   | %          | 0.42 | % |

----

(1)          Runoffrefers to principal repayments on loans.

(2)          Expressed as apercentage of the total number of loans serviced, excluding subserviced loansand loans purchased at a discount due to their non-performing status.

87

----

We attribute the overallincrease in delinquencies in our servicing portfolio primarily due to portfolioseasoning, changing economic and housing market conditions and increased delinquencyin the loans in hurricane-affected areas, which contributed 14 basis points tothe increase. In addition, changing borrower profiles and higher combined loanto value ratios contributed to the increased nonprime delinquency. We believethe delinquency rates in our servicing portfolio are consistent with rates forsimilar mortgage loan portfolios in the industry.

**Liquidity andCapital Resources**

We regularly forecast our potential funding needs overthree-month and longer horizons, taking into account debt maturities andpotential peak balance sheet levels. We establish reliable sources of liquiditysized to meet a range of potential future funding requirements. We currentlyhave $95.1 billion in available sources of short-term liquidity, whichrepresents an increase of $5.4 billion from December 31, 2005. We believewe have adequate financing capacity to meet our currently foreseeable needs.

As part of our capital optimization plan and as a costeffective means for financing growth, we issued $1.0 billion in fixed-ratesubordinated notes during the second quarter of 2006. These subordinated notesare eligible for Tier 2 regulatory capital treatment and represent an efficientand non-dilutive means for supporting our capital management efforts. Also,as part of our ongoing capital optimization plan, the Board of Directors hasauthorized a share repurchase program of up to $2.5 billion. In connectionwith this program, we intend to repurchase $1 billion to $2 billion of ourcommon stock in the fourth quarter of 2006 financed through the issuance of enhancedtrust preferred securities.

At September 30,2006 and December 31, 2005, the Company’s and the Bank’s regulatorycapital ratios and amounts and minimum required capital ratios for each entityto maintain a “well capitalized” status were as follows:

| ** **               | ** ** | **September 30, 2006**                 | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 6.9 | % |   | $ | 14,687,464 |   |   | 6.9 | % |   | $ | 6,545,117 |   |
| Risk-Based Capital:      |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 11.6 | % |   | $ | 14,687,464 |   |   | 11.5 | % |   | $ | 6,545,117 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 13.1 | % |   | $ | 16,556,792 |   |   | 11.8 | % |   | $ | 6,730,896 |   |

----

(1)          Minimumrequired to qualify as “well capitalized.”

| ** **               | ** ** | **December 31, 2005**                  | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 6.3 | % |   | $ | 12,564,162 |   |   | 7.3 | % |   | $ | 5,343,675 |   |
| Risk-Based Capital:      |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 10.7 | % |   | $ | 12,564,162 |   |   | 12.2 | % |   | $ | 5,343,675 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 11.7 | % |   | $ | 13,760,176 |   |   | 12.5 | % |   | $ | 5,457,019 |   |

----

(1)          Minimumrequired to qualify as “well capitalized.”

88

----

**Cash Flows**

Cash flows provided byoperating activities were $2.5 billion for the nine months ended September 30,2006, compared to cash flows used by operating activities of $11.7 billion forthe nine months ended September 30, 2005. In the nine months ended September 30,2006 proceeds from the sales of mortgage loans exceeded funds used to originateand purchase mortgage loans by $7.1 billion, which resulted in cash flowsprovided by operating activities. In the nine months ended September 30,2005 funds used to originate and purchase mortgage loans exceeded proceeds fromthe sales of mortgage loans by $10.0 billion, which resulted in cash flowsused by operating activities. Partially offsetting the change in cash flows frommortgage loans held for sale was a $7.3 billion increase in cash used tosettle trading securities during the nine months ended September 30, 2005as compared to the nine months ended September 30, 2006.

Net cash used by investingactivities was $13.3 billion for the nine months ended September 30, 2006,compared to $38.6 billion for the nine months ended September 30, 2005.The decrease in net cash used in investing activities was attributable to a $19.5billion decrease in cash used to fund loans held for investment combined withan $8.0 billion decrease in securities purchased under agreements to resell,securities borrowed and federal funds sold.

Net cash provided byfinancing activities for the nine months ended September 30, 2006 totaled$11.3 billion, compared to $51.1 billion for the nine months ended September 30,2005. The decrease in cash provided by financing activities was comprised of a$26.1 billion net decrease in short-term borrowings, including securities soldunder agreements to repurchase. Also contributing to the decline in net cashprovided by financing activities was the amount of net additions to long-termdebt. In the nine months ended September 30, 2005, long-term debt increased$10.9 billion compared to a decline in long-term debt of $1.5 billion in thenine months ended September 30, 2006.

**Off-Balance Sheet Arrangements and AggregateContractual Obligations**

***Off-Balance SheetArrangements and Guarantees***

In the ordinary course ofour business we engage in financial transactions that are not reflected on ourbalance sheet. (See Note 2—“Summary of Significant Accounting Policies” in the2005 Annual Report for a description of our consolidation policy.) Suchtransactions are structured to manage our interest rate, credit or liquidityrisks, to diversify funding sources or to optimize our capital.

Substantially all of ouroff-balance sheet arrangements relate to the securitization of mortgage loans.Our mortgage loan securitizations are normally structured as sales as specifiedby Statement of Financial Accounting Standards No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”(“SFAS 140”), and as such involve the transfer of the mortgage loans toqualifying special-purpose entities that are not subject to consolidation. In asecuritization, an entity transferring the assets is able to convert thoseassets into cash. Special-purpose entities used in such securitizations obtaincash to acquire the assets by issuing securities to investors. In asecuritization, we customarily provide representations and warranties withrespect to the mortgage loans transferred. In addition, we generally retain theright to service the transferred mortgage loans.

We also generally have theright to repurchase mortgage loans from the special-purpose entity if theremaining outstanding balance of the mortgage loans falls to a level where thecost of servicing the loans becomes burdensome in relation to the benefits ofservicing.

Our Prime Mortgage Loansgenerally are securitized on a non-recourse basis, while Prime Home Equity andNonprime Loans generally are securitized with limited recourse for creditlosses. During the nine months ended September 30, 2006, we securitized $33.0billion in Nonprime Mortgage and Prime Home Equity Loans with limited recoursefor credit losses. Our exposure to credit losses related to our limitedrecourse securitization activities is limited to the carrying value of oursubordinated interests and to 

89

----

thecontractual limit of reimbursable losses under our corporate guarantees lessthe recorded liability for such guarantees. For a further discussion of ourexposure to credit risk, see the section in this Report entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—CreditRisk Management.”

We do not believe that anyof our off-balance sheet arrangements have had, or are reasonably likely tohave, a current or future material effect on our financial condition, resultsof operations, liquidity, capital expenditures or capital resources.

***ContractualObligations***

Thefollowing table summarizes our significant contractual obligations at September 30,2006, with the exception of short-term borrowing arrangements and pension andpost-retirement benefit plans.

| ** **           | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|----------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| ** **           | ** ** | **(in thousands)**         | ** ** |
| **Obligations:**     |       |                            |       |               |       |               |       |                             |       |      |       |
| Notes payable        |       | $                               | 18,161,849 |               | $          | 26,181,090         |       | $                                | 9,147,071  |      | $          | 2,542,814 |   | $ | 56,032,824 |   |
| Time deposits        |       | $                               | 23,337,201 |               | $          | 4,218,637          |       | $                                | 1,128,163  |      | $          | 1,733,257 |   | $ | 30,417,258 |   |
| Operating leases     |       | $                               | 184,461    |               | $          | 278,420            |       | $                                | 117,424    |      | $          | 30,144 |   | $ | 610,449 |   |
| Purchase obligations |       | $                               | 99,605     |               | $          | 25,094             |       | $                                | 3,039      |      | $          | 590 |   | $ | 128,328 |   |

 

As of September 30,2006, the Company had undisbursed home equity lines of credit and constructionloan commitments of $8.9 billion and $1.7 billion, respectively. As of September 30,2006, outstanding commitments to fund mortgage loans totaled $38.2 billion,outstanding commitments to sell mortgage loans totaled $35.9 billion andoutstanding commitments to buy mortgage loans totaled $16.5 billion.

In connection with theCompany’s underwriting activities, the Company had commitments to purchase andsell new issues of securities aggregating $5.4 billion and $3.9 billion at September 30,2006, respectively.

**Prospective Trends**

***United StatesMortgage Market***

Over the last decade,total mortgage indebtedness in the United States has grown at an average annualrate of 10%. Over the long term, we believe that continued population growth,ongoing developments in the mortgage market and the prospect of relatively lowinterest rates support growth in the market for the foreseeable future. Some ofthe ongoing developments in the mortgage market that should fuel its growthinclude government-sponsored programs targeted to increase homeownership inlow-income and minority communities, the growth in nonprime lending, the growthof prime home equity lending as a major form of consumer finance and theincreasing efficiency of the secondary mortgage market that lowers the overallcost of homeownership. In the short-term however, the U.S. housing market isundergoing a significant contraction and both mortgage origination volumes andgrowth in total mortgage indebtedness is likely to decline.

Over time,the level of complexity in the mortgage lending business has increasedsignificantly due to several factors:

·       Thecontinuing evolution of the secondary mortgage market and demand by borrowershas resulted in a proliferation of mortgage products;

·       Greaterregulation imposed on the industry has resulted in increased costs and the needfor higher levels of specialization; and

90

----

·       Interest rate volatilityhas risen over the last decade. At the same time, homeowners’ propensity torefinance their mortgages has increased as the refinance process has becomemore efficient and cost effective. The combined result has been large swings inthe volume of mortgage loans originated from year to year. These volume swingshave placed significant operational and financial pressures on mortgagelenders.

To compete effectively inthis environment, mortgage lenders must have a very high level of operational,technological and managerial expertise. In addition, the residential mortgagebusiness has become more capital-intensive and therefore access to capital at acompetitive cost is critical. Primarily because of these factors, the industryhas undergone consolidation in recent years.

Today, large andsophisticated financial institutions dominate the residential mortgageindustry. According to the trade publication *InsideMortgage Finance*, the top 5 originators produced 47% of all loansoriginated during the first nine months of the calendar year 2006, as comparedto 48% during the nine months ended December 31, 2005.

Theloan volume for the top five originators, according to *Inside Mortgage Finance*, is as follows:

| **Institution**              | ** ** | ** **             | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  December 31, 2005** | ** ** |
|------------------------------|------------|------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                   | ** ** | **(in billions)** | ** ** |
| *Countrywide*                |       |                   | $          | 334                                                           |       |                                                         |       | $ | 399 |   |   |
| Wells Fargo Home  Mortgage   |       |                   | 311        |                                                          |       |                                                         | 320        |   |   |
| Washington Mutual            |       |                   | 154        |                                                          |       |                                                         | 192        |   |   |
| CitiMortgage(1)              |       |                   | 133        |                                                          |       |                                                         | —     |   |   |
| Chase Home  Finance          |       |                   | 129        |                                                          |       |                                                         | 145        |   |   |
| Bank of America  Mortgage(1) |       |                   | —     |                                                          |       |                                                         | 126        |   |   |
| Total for Top  Five          |       |                   | $          | 1,061                                                         |       |                                                         |       | $ | 1,182 |   |   |

----

(1)          Comparative data not includedfor quarter in which the institution was not in the top five originators.

We believe consolidation will continue, as theaforementioned market forces will continue to drive out weak competitors. We believeCountrywide will benefit from consolidation through increased market share andenhanced ability to recruit talented personnel.

Recently, well-capitalized Wall Street investmentbanking firms have increased their participation in the mortgage bankingbusiness. We expect the entrance of these firms to the marketplace to increasecompetition in the near-term, especially in the nonconforming and nonprime loanproducts.

Compared to Countrywide,the other industry leaders are less reliant on the secondary mortgage market asan outlet for adjustable-rate mortgages, due to their greater portfolio lendingcapacity. This could place us at a competitive disadvantage in the future ifthe demand for adjustable-rate mortgages continues, and either the secondarymortgage market does not continue to provide a competitive outlet for theseloans, or we are unable to sustain an adequate portfolio lending capacity.

***Housing Appreciation***

Increasing housing valuesaffect us in several positive ways. Rising housing values point to healthydemand for purchase-money mortgage financing and increased average loanbalances and to a reduction in the risk of loss on sale of foreclosed realestate in the event a loan defaults. However, as housing values appreciate,prepayments of existing mortgages tend to increase as mortgagors look tomonetize the additional equity in their homes. Over the last several years, thehousing price index has significantly outpaced the consumer price index and growthin personal income. Consequently, we expect housing values to increase at aslower rate in the coming years than in the past several years. Although theremay 

91

----

be somemarkets that experience housing price depreciation, we believe that pricedepreciation will not occur nationwide for an extended time period. Over thelong term, we expect that housing appreciation will be positively correlatedwith both consumer price inflation and growth in personal income.

***Regulatory Trends***

The regulatory environments in which we operate havean impact on the activities in which we may engage, how the activities may becarried out and the profitability of those activities. Therefore, changes tolaws, regulations or regulatory policies can affect whether and to what extent weare able to operate profitably. For example, proposed local, state and federallegislation targeted at predatory lending could have the unintended consequenceof raising the cost or otherwise reducing the availability of mortgage creditfor those potential borrowers with less than prime-quality credit histories.This could result in a reduction of otherwise legitimate nonprime lendingopportunities. In addition, there may be future local, state and federallegislation that restricts our ability to communicate with and solicit businessfrom current and prospective customers in such a way that we are not able tooriginate new loans or sell other products at current profit margins.

On September 29, 2006,Federal bank regulators issued final Interagency Guidance on NontraditionalMortgage Product Risks (“Guidance”), which is only applicable to federallychartered lenders and their affiliates, such as Countrywide and itssubsidiaries. The Guidance is applicable to all residential mortgage loanproducts that allow borrowers to defer repayment of principal or interest,except HELOCs and reverse mortgages. The Guidance covers a number of topicsrelated to loan terms and underwriting standards, portfolio and risk managementpractices (including third-party originations and secondary market activity),and consumer protection issues (including marketing and disclosures). Since theGuidance only applies to lenders who are federally insured depositoryinstitutions and their affiliates, it remains unclear whether the Guidance willchange the overall competitive landscape in the mortgage industry.Additionally, it is unclear whether we will be subjected to different guidanceacross different jurisdictions in which we operate. 

***New Accounting Standards***

InFebruary 2006, the FASB issued Statement of Financial Accounting StandardsNo. 155, *Accounting for Certain Hybrid FinancialInstruments* (“SFAS 155”), an amendment of SFAS 133 andSFAS 140. This statement:

·       establishesa requirement to evaluate interests in securitized financial instruments thatcontain an embedded derivative requiring bifurcation;

·       permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;

·       clarifieswhich interest-only strips and principal-only strips are not subject to SFAS133; and

·       clarifiesthat concentration of credit risks in the form of subordination are notembedded derivatives.

SFAS 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The adoption of SFAS 155 is not expectedto have a significant impact on the consolidated financial position or earningsof the Company.

During July 2006, the Financial AccountingStandards Board issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (“FIN 48”). FIN 48 was issued toclarify the requirements of Statement of Financial Accounting StandardsNo. 109, Accounting for Income Taxes, relating to the recognition ofincome tax benefits.

92

----

FIN 48 provides atwo-step approach to recognizing and measuring tax benefits when the benefits’realization is uncertain. The first step is to determine whether the benefit isto be recognized; the second step is to determine the amount to be recognized:

·       Incometax benefits should be recognized when, based on the technical merits of a taxposition, the entity believes that if a dispute arose with the taxing authorityand were taken to a court of last resort, it is more likely than not (i.e. aprobability of greater than 50 percent) that the tax position would besustained as filed; and

·       Ifa position is determined to be more likely than not of being sustained, thereporting enterprise should recognize the largest amount of tax benefit that isgreater than 50 percent likely of being realized upon ultimate settlement withthe taxing authority.

FIN 48 is applicable to Countrywide beginning in thefirst quarter of 2007. The cumulative effect of applying the provisions ofFIN 48 upon adoption will be reported as an adjustment to beginningretained earnings. The adoption of FIN 48 is not expected to have a significantimpact on the consolidated financial position or earnings of the Company.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 provides a framework for measuring fair value when suchmeasurements are utilized for accounting purposes. The framework focuses on anexit price in the principal (or, alternatively, the most advantageous) marketdetermined in an orderly transaction between willing market participants. SFAS157 establishes a three-tiered fair value hierarchy with the highest tier(Level 1) representing quoted prices for identical assets or liabilities in anactive market and the lowest tier (Level 3) representing estimated values basedon unobservable inputs. Under SFAS 157, related disclosures are segregated forassets and liabilities measured at fair value based on the level used withinthe hierarchy to determine their fair values. For the Company, SFAS 157 iseffective January 1, 2008, with early adoption permitted as of January 1, 2007.The Company has not yet determined whether it will adopt SFAS 157 early or theexpected financial impact, if any, upon adoption.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans*(“SFAS 158”), an amendment of FASB Statement Nos. 87, 88, 106, and 132(R). SFAS158 requires a liability (or an asset) to be recorded that reflects theunderfunded (or overfunded) status of its postretirement benefit plans. Theportion of that liability (or asset) that has not been recognized in earningsshall be offset against Accumulated Other Comprehensive Income (a component ofequity), net of taxes. SFAS 158 also requires the measurement date for thoseobligations to coincide with an entity’s fiscal year-end, which is themeasurement date currently used by the Company. SFAS 158 is effective as ofDecember 31, 2006. The Company currently estimates that an additional liabilitywill be recorded upon adoption of SFAS 158 that is not expected to exceed $100million.

In September 2006, the Securitiesand Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB108”), *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*.SAB 108 provides the SEC staff’s views regarding the process of quantifyingfinancial statement mis statements. It requires the use of two differentapproaches to quantifying misstatements—(1) the rollover approach and (2) theiron curtain approach—when assessing whether such a misstatement is material tothe current period financial statements. The rollover approach focuses on theimpact on the income statement of a misstatement originating in the currentreporting period. The iron curtain approach focuses on the cumulative effect onthe balance sheet as of the end of the current reporting period of uncorrectedmisstatements regardless of when they originated. If a material misstatement isquantified under either approach, SAB 108 would require a correction to bemade. Depending on the magnitude of the correction with respect to the currentperiod financial statements, the correction could result in changes tofinancial statements for prior periods. SAB 108 will be effective for 

93

----

theCompany’s fiscal year ending December 31, 2006. At this time, the Company doesnot expect the application of SAB 108 to have a significant effect on its previouslyreported financial statements or the financial statements for the period ofadoption.

**Factors ThatMay Affect Our Future Results**

We makeforward-looking statements in this Report and in other reports we file with theSEC. In addition, we make forward-looking statements in press releases and ourmanagement may make forward-looking statements orally to analysts,investors, the media and others. Generally, forward-looking statements include:

·       Projectionsof our revenues, income, earnings per share, capital structure or otherfinancial items

·       Descriptionsof our plans or objectives for future operations, products or services

·       Forecastsof future economic performance, interest rates, profit margins and our share offuture markets

·       Descriptionsof assumptions underlying or relating to any of the foregoing.

Forward-looking statements give management’sexpectation about the future and are not guarantees. Words like “believe,”“expect,” “anticipate,” “promise,” “plan” and other expressions or words of similarmeanings, as well as future or conditional verbs such as “will,” “would,”“should,” “could” or “may” are generally intended to identify forward-lookingstatements. There are a number of factors, many of which are beyond ourcontrol, that could cause actual results to differ significantly frommanagement’s expectations. Some of these factors are discussed below.

Readers are cautioned not to place undue reliance onforward-looking statements. Forward-looking statements speak only as of thedate they are made. We do not undertake to update them to reflect changes thatoccur after the date they are made.

Factors that couldcause actual results to differ materially from historical results or thoseanticipated include, but are not limited to the following:

·       Changesin general business, economic, market and political conditions from thoseexpected

·       Thelevel and volatility of interest rates as well as the shape of the yield curve

·       Ourinability to effectively implement our business strategies or manage the volatilityinherent in the mortgage banking business

·       Ineffectivenessof our hedging activities

·       Thefact that our accounting policies and methods are fundamental to how we reportour financial condition and results of operations, and they may require managementto make estimates about matters that are inherently uncertain

·       Thelevel of competition in each of our business segments

·       Negativepublic opinion that could damage our reputation

·       Changesin generally accepted accounting principles or in the legal, regulatory andlegislative environments in the markets in which the Company operates

·       Incompleteor inaccurate information provided by customers and counterparties, or adversechanges in the financial condition of our customers and counterparties

·       Operationalrisk

94

----

·       Failureto attract and retain a highly skilled workforce

·       Ageneral decline in U.S. housing prices or in activity in the U.S. housingmarket

·       Aloss of investment-grade credit ratings, which may result in increased cost ofdebt or loss of access to corporate debt markets

·       Areduction in the availability of secondary markets for our mortgage loanproducts

·       Areduction in government support of homeownership

·       Achange in our relationship with the housing-related government agencies and governmentsponsored enterprises (“GSEs”)

·       Changesin regulations or the occurrence of other events that impact the business,operation or prospects of GSEs

·       Theoccurrence of natural disasters or other events or circumstances that couldimpact our operations or could impact the level of claims in the InsuranceSegment.

Other risk factors aredescribed elsewhere herein as well as in other reports and documents that wefile with or furnish to the SEC including the Company’s Annual Report onForm 10-K. Other factors that could also cause results to differfrom our expectations may not be described in any such report or document. Eachof these factors could by itself, or together with one or more other factors,adversely affect our business, results of operations and/or financialcondition.

**Item 3.**                        *Quantitative and Qualitative Disclosures About Market Risk*

In response to this Item,the information set forth on pages 82 to 84 of this Form 10-Qis incorporated herein by reference.

**Item 4.**                        *Controls and Procedures*

**Disclosure Controlsand Procedures**

We have conducted anevaluation, with the participation of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as ofthe end of the period covered by this quarterly report as required by paragraph(b) of Rules 13a-15 and 15d-15 under the Exchange Act.Based on their evaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective in ensuring that material information relating to the Company,including our consolidated subsidiaries, is made known to the Chief ExecutiveOfficer and Chief Financial Officer by others within those entities during theperiod in which this quarterly report on Form 10-Q was beingprepared.

**Internal Controlover Financial Reporting**

***Changes to Internal Control over Financial Reporting***

There has been no change in our internal control overfinancial reporting during the quarter ended September 30, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting, except for the implementation of a derivativeaccounting system. Management believes that the derivative accounting systemenhances the Company’s internal control over financial reporting.

95

----

**PART II. OTHERINFORMATION**

**Item 2.   *Unregistered Sales of Equity Securities and Use of Proceeds***

Thefollowing table shows Company repurchases of its common stock for each calendarmonth during the nine months ended September 30, 2006.

| **Calendar Month** | ** ** | ** ** | ** ** | **Total Number of  Shares  Purchased**(1)(2) | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plan  or Program(1)** | ** ** | **Maximum Number  of Shares That May  Yet be Purchased  Under the Plan or  Program(1)** | ** ** |
|-------------------------|------------|------------|------------|--------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| January                 |       |       | 17,108     |                                                   |       |                                         | $          | 35.44                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| February                |       |       | 36,600     |                                                   |       |                                         | $          | 35.19                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| March                   |       |       | 32,555     |                                                   |       |                                         | $          | 35.66                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| April                   |       |       | 41,832     |                                                   |       |                                         | $          | 36.99                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| May                     |       |       | 311        |                                                   |       |                                         | $          | 41.30                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| June                    |       |       | 8,068      |                                                   |       |                                         | $          | 37.28                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| July                    |       |       | 282        |                                                   |       |                                         | $          | 35.77                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| August                  |       |       | 1,379      |                                                   |       |                                         | $          | 34.17                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| September               |       |       | 1,885      |                                                   |       |                                         | $          | 35.47                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |
| Total                   |       |       | 140,020    |                                                   |       |                                         | $          | 36.00                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |

----

(1)          Theshares indicated in this table represent only the withholding of a portion ofrestricted shares to cover taxes on vested restricted shares.

(2)          The Board of Directorshas authorized a share repurchase program of up to $2.5 billion. In connectionwith this program, the Company intends to repurchase $1 billion to $2 billionof its common stock in the fourth quarter of 2006 financed through the issuanceof enhanced trust preferred securities.

**Item 6.**   *Exhibits*

(a)         Exhibits

See Index of Exhibits on page 98.

96

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                               |     |     | COUNTRYWIDE FINANCIAL  CORPORATION |
|-------------------------------|----------|----------|------------------------------------|
|                          |     |     | (Registrant)                       |
| Dated:  November 7, 2006 |     |     | By:                                | /s/  DAVID SAMBOL |
|                          |     |     |                               | David Sambol |
| * *                      | * * | * * | * *                           | *President  and Chief Operating Officer* |
| Dated:  November 7, 2006 |     |     | By:                                | /s/  ERIC P. SIERACKI |
|                          |     |     |                               | Eric P. Sieracki |
|                          | * * | * * | * *                           | *Executive  Managing Director and Chief Financial Officer* |

 

97

----

**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QSeptember 30, 2006**

**INDEXOF EXHIBITS**

| ExhibitNo. | ** ** | **Description**                                                                                                                                                                       |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.63       |       | First Supplemental Trust  Deed, between the Company, as Issuer, Countrywide Home Loans, Inc., as  Guarantor and Deutsche Trustee Company Limited, as Trustee, dated August 31,  2006. |
| 12.1       |       | Computation of  the Ratio of Earnings to Fixed Charges.                                                                                                                               |
| 31.1       |       | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                       |
| 31.2       |       | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                            |
| 32.1       |       | Certification of  Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.                                                                                                    |
| 32.2       |       | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350.                                                                                                    |

 

98

----