**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-Q**

| **(Mark One)** | ** **                                                                                               |
|----------------|----------------------------------------------------------------------------------------------------------|
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |

 

**For the quarterly period ended June 30, 2006**

**Or**

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom              to              **

**Commission file 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 check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x     Noo

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act (check one):

Large acceleratedfiler x      Acceleratedfiler o      Non-accelerated filer o

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act):

Yes o      No x

Indicate the number of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicable date.

| Class                        | ** ** | **Outstanding at August 1, 2006** |
|------------------------------|------------|----------------------------------------|
| Common Stock $.05  par value |       | 612,018,305                            |

 

 

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**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QJune 30, 2006**

**TABLE OF CONTENTS**

|                                         | ** ** | ** **                                                                                                        | ** ** | **Page** |
|-----------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.  FINANCIAL INFORMATION** |       |  1                                                                                                           |
| Item  1.                                |       | Financial  Statements:                                                                                            |       |     |
|                                    |       | Consolidated  Balance Sheets—June 30, 2006 and December 31, 2005                                   |       |  1  |
|                                    |       | Consolidated Statements of Earnings—Three and Six  Months Ended June 30, 2006 and 2005                  |       |  2  |
|                                    |       | Consolidated Statement of Changes in Shareholders’  Equity—Six Months Ended June 30, 2006 and 2005 |       |  3  |
|                                    |       | Consolidated Statements of Cash Flows—Six Months Ended  June 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                       |       | 36       |
|                                    |       | Overview                                                                                                          |       | 36       |
|                                    |       | Results of Operations Comparison—Quarters Ended  June 30, 2006 and 2005                                 |       | 40       |
|                                    |       | Results of Operations Comparison—Six Months Ended  June 30, 2006 and 2005                               |       | 62       |
|                                    |       | Quantitative and Qualitative Disclosures About Market  Risk                                                       |       | 78       |
|                                    |       | Credit  Risk Management                                                                                           |       | 81       |
|                                    |       | Loan  Servicing                                                                                                   |       | 84       |
|                                    |       | Liquidity and Capital Resources                                                                                   |       | 85       |
|                                    |       | Off-Balance Sheet Arrangements and Aggregate  Contractual Obligations                                             |       | 86       |
|                                    |       | Prospective  Trends                                                                                               |       | 87       |
|                                    |       | Regulatory  Trends                                                                                                |       | 89       |
|                                    |       | New Accounting Standards                                                                                          |       | 89       |
|                                    |       | Factors That May Affect Our Future Results                                                                   |       | 91       |
| Item 3.                                 |       | Quantitative and Qualitative Disclosures About Market  Risk                                                       |       | 92       |
| Item 4.                                 |       | Controls and Procedures                                                                                           |       | 92       |
| **PART II.  OTHER INFORMATION**    |       | 93                                                                                                                |
| Item 2.                                 |       | Unregistered Sales of Equity Securities and Use of Proceeds                                                       |       | 93       |
| Item 4.                                 |       | Submission of Matters to a Vote of Security Holders                                                               |       | 93       |
| Item 6.                                 |       | Exhibits                                                                                                          |       | 94       |

 

 

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**PART I.FINANCIAL INFORMATION**

**Item1.**                        *Financial Statements*

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                                                         | ** ** | **June 30,  2006**                                   | ** **  | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                         | ** ** | **(Unaudited)**                                           | ** **  |
| ** **                                                                                                                                                                                                                                                                                                         | ** ** | **(in thousands, except share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                                         | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Cash                                                                                                                                                                                                                                                                                                               |       | $                                                         | 2,369,346   |                        | $          | 1,031,108 |   |
| Mortgage loans held for  sale                                                                                                                                                                                                                                                                                      |       | 35,390,972                                                |        | 36,808,185                  |       |
| Trading securities  owned, at fair value                                                                                                                                                                                                                                                                           |       | 14,212,594                                                |        | 10,314,384                  |       |
| Trading securities  pledged as collateral, at fair value                                                                                                                                                                                                                                                           |       | 1,143,122                                                 |        | 668,189                     |       |
| Securities purchased  under agreements to resell, securities borrowed and federal funds sold                                                                                                                                                                                                                       |       | 25,285,191                                                |        | 23,317,361                  |       |
| Loans held for  investment, net of allowance for loan losses of $183,581 and $189,201,  respectively                                                                                                                                                                                                               |       | 79,807,599                                                |        | 69,865,447                  |       |
| Investments in other  financial instruments, at fair value                                                                                                                                                                                                                                                         |       | 11,596,534                                                |        | 11,260,725                  |       |
| Mortgage servicing  rights, at fair value                                                                                                                                                                                                                                                                          |       | 15,320,575                                                |        | —                      |       |
| Mortgage servicing  rights, net                                                                                                                                                                                                                                                                                    |       | —                                                    |        | 12,610,839                  |       |
| Premises and equipment,  net                                                                                                                                                                                                                                                                                       |       | 1,469,203                                                 |        | 1,279,659                   |       |
| Other assets                                                                                                                                                                                                                                                                                                       |       | 8,389,327                                                 |        | 7,929,473                   |       |
| Total assets                                                                                                                                                                                                                                                                                                       |       | $                                                         | 194,984,463 |                        | $          | 175,085,370 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Notes payable                                                                                                                                                                                                                                                                                                      |       | $                                                         | 76,527,368  |                        | $          | 76,187,886 |   |
| Securities sold under  agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                        |       | 38,161,225                                                |        | 34,153,205                  |       |
| Deposit liabilities                                                                                                                                                                                                                                                                                                |       | 50,552,049                                                |        | 39,438,916                  |       |
| Accounts payable and  accrued liabilities                                                                                                                                                                                                                                                                          |       | 7,742,575                                                 |        | 6,358,158                   |       |
| Trading securities sold,  not yet purchased, at fair value                                                                                                                                                                                                                                                         |       | 3,077,327                                                 |        | 2,285,171                   |       |
| Income taxes payable                                                                                                                                                                                                                                                                                               |       | 4,626,962                                                 |        | 3,846,174                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                  |       | 180,687,506                                               |        | 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, 611,020,036 shares and  600,169,268 shares at June 30, 2006 and December 31, 2005,  respectively; outstanding, 610,744,980 shares and 600,030,686 shares at  June 30, 2006 and December 31, 2005, respectively |       | 30,551                                                    |        | 30,008                      |       |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                        |       | 3,268,420                                                 |        | 2,954,019                   |       |
| Accumulated other comprehensive  (loss) income                                                                                                                                                                                                                                                                     |       | (63,840                                                   | )           | 61,114                      |       |
| Retained earnings                                                                                                                                                                                                                                                                                                  |       | 11,061,826                                                |        | 9,770,719                   |       |
| Total shareholders’  equity                                                                                                                                                                                                                                                                                   |       | 14,296,957                                                |        | 12,815,860                  |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                                                    |       | $                                                         | 194,984,463 |                        | $          | 175,085,370 |   |

 

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

1

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

| ** **                                                                                      | ** ** | **Three Months  Ended June 30,**                                 | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                      | ** ** | **(Unaudited)  (in thousands, except per share data)** | ** ** |
| **Revenues**                                                                                    |       |                                                                            |       |                                          |       |   |   |   |   |
| Gain on sale of loans and securities                                                            |       | $                                                                               | 1,527,450  |                                          | $          | 1,145,409 |   | $ | 2,888,628 |   | $ | 2,507,160 |   |
| Interest income                                                                                 |       | 2,845,580                                                                       |       | 1,770,642                                     |       | 5,439,338 |   | 3,257,572 |   |
| Interest expense                                                                                |       | (2,155,106                                                                      | )          | (1,229,234                                    | )          | (4,054,429 | ) | (2,225,171 | ) |
| Net interest income                                                                             |       | 690,474                                                                         |       | 541,408                                       |       | 1,384,909 |   | 1,032,401 |   |
| Provision for loan losses                                                                       |       | (61,898                                                                         | )          | (17,101                                       | )          | (125,036 | ) | (36,723 | ) |
| Net interest income after provision for loan losses                                             |       | 628,576                                                                         |       | 524,307                                       |       | 1,259,873 |   | 995,678 |   |
| Loan servicing fees and other income from mortgage  servicing rights and retained interests     |       | 1,207,159                                                                       |       | 1,019,149                                     |       | 2,407,046 |   | 1,991,507 |   |
| Realization of expected cash flows from mortgage  servicing rights                              |       | (768,132                                                                        | )          | —                                        |       | (1,506,699 | ) | — |   |
| Amortization of mortgage servicing rights                                                       |       | —                                                                          |       | (482,373                                      | )          | — |   | (954,560 | ) |
| Change in fair value of mortgage servicing rights                                               |       | 569,002                                                                         |       | —                                        |       | 1,547,283 |   | — |   |
| Impairment of mortgage servicing rights                                                         |       | —                                                                          |       | (1,281,340                                    | )          | — |   | (828,906 | ) |
| Recovery (impairment) of retained interests                                                     |       | 51,498                                                                          |       | (97,629                                       | )          | (69,156 | ) | (234,699 | ) |
| Servicing hedge (losses) gains                                                                  |       | (621,074                                                                        | )          | 1,147,158                                     |       | (1,506,944 | ) | 594,866 |   |
| Net loan servicing fees and other income from  mortgage servicing rights and retained interests |       | 438,453                                                                         |       | 304,965                                       |       | 871,530 |   | 568,208 |   |
| Net insurance premiums earned                                                                   |       | 284,226                                                                         |       | 215,478                                       |       | 564,019 |   | 414,996 |   |
| Other                                                                                           |       | 121,511                                                                         |       | 117,784                                       |       | 252,114 |   | 226,786 |   |
| Total revenues                                                                                  |       | 3,000,216                                                                       |       | 2,307,943                                     |       | 5,836,164 |   | 4,712,828 |   |
| **Expenses**                                                                                    | ** ** | ** **                                                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Compensation                                                                                    |       | 1,143,707                                                                       |       | 850,143                                       |       | 2,218,525 |   | 1,636,622 |   |
| Occupancy and other office                                                                      |       | 261,080                                                                         |       | 225,137                                       |       | 506,411 |   | 413,793 |   |
| Insurance claims                                                                                |       | 102,809                                                                         |       | 88,786                                        |       | 226,851 |   | 164,721 |   |
| Advertising and promotion                                                                       |       | 65,686                                                                          |       | 53,615                                        |       | 125,916 |   | 108,794 |   |
| Other                                                                                           |       | 232,911                                                                         |       | 155,381                                       |       | 445,075 |   | 305,020 |   |
| Total expenses                                                                                  |       | 1,806,193                                                                       |       | 1,373,062                                     |       | 3,522,778 |   | 2,628,950 |   |
| Earnings before  income taxes                                                                   |       | 1,194,023                                                                       |       | 934,881                                       |       | 2,313,386 |   | 2,083,878 |   |
| Provision for income taxes                                                                      |       | 471,833                                                                         |       | 368,423                                       |       | 907,685 |   | 828,568 |   |
| **NET EARNINGS**                                                                                |       | $                                                                               | 722,190    |                                          | $          | 566,458 |   | $ | 1,405,701 |   | $ | 1,255,310 |   |
| Basic                                                                                           |       | $                                                                               | 1.19       |                                          | $          | 0.96 |   | $ | 2.32 |   | $ | 2.14 |   |
| Diluted                                                                                         |       | $                                                                               | 1.15       | ­                                        | $          | 0.92 |   | $ | 2.25 |   | $ | 2.05 |   |

 

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

2

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**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                                                        |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 1,255,310 |   | 1,255,310 |   |
| Other comprehensive  income (loss), net of tax:                                     |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized  gains from available-for-sale securities                            |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | 36,738 |   |   | — |   | 36,738 |   |
| Net unrealized  gains from cash flow hedging instruments                       |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | 2,824 |   |   | — |   | 2,824 |   |
| Net change in  foreign currency translation adjustment                              |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (15,541) |   |   | — |   | (15,541) |   |
| Total  comprehensive income                                                         |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 1,279,331 |   |
| Issuance of stock  pursuant to stock-based compensation plans                       |       |                                                      | 10,137,698  |              |       |                              | 511        |                                                      |       |                   | 142,008    |      |       |   | — |   |   | — |   | 142,519 |   |
| Tax benefit of  stock options exercised                                             |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 74,312     |      |       |   | — |   |   | — |   | 74,312 |   |
| Issuance of common  stock, net of treasury stock                                    |       |                                                      | 440,335     |              |       |                              | 22         |                                                      |       |                   | 15,366     |      |       |   | — |   |   | — |   | 15,388 |   |
| Issuance of common  stock for conversion of convertible debt                        |       |                                                      | 803,461     |              |       |                              | 40         |                                                      |       |                   | 2,065      |      |       |   | — |   |   | — |   | 2,105 |   |
| Tax benefit of  interest on conversion of convertible debt                     |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 1,939      |      |       |   | — |   |   | — |   | 1,939 |   |
| Cash dividends  paid—$0.29 per common share                               |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (170,036) |   | (170,036) |   |
| **Balance  at June 30, 2005**                                                  |       |                                                      | 593,030,375 |              |       |                              | $          | 29,658                                                    |       |                   |       | $         | 2,806,092  |   |   |   | $ | 142,964 |   |   | $ | 8,676,920 |   | $ | 11,655,634 |   |
| **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                                                        |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 1,405,701 |   | 1,405,701 |   |
| Other comprehensive  income (loss), net of tax:                                     |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized  losses from available-for-sale securities                           |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (127,156) |   |   | — |   | (127,156) |   |
| Net unrealized  losses from cash flow hedging instruments                           |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (9,918) |   |   | — |   | (9,918) |   |
| Net change in  foreign currency translation adjustment                              |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | 12,120 |   |   | — |   | 12,120 |   |
| Total  comprehensive income                                                         |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 1,280,747 |   |
| Issuance of stock  pursuant to stock-based compensation plans                       |       |                                                      | 9,811,695   |              |       |                              | 498        |                                                      |       |                   | 232,775    |      |       |   | — |   |   | — |   | 233,273 |   |
| Tax benefit of  stock options exercised                                             |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 62,343     |      |       |   | — |   |   | — |   | 62,343 |   |
| Issuance of common  stock, net of treasury stock                                    |       |                                                      | 487,731     |              |       |                              | 24         |                                                      |       |                   | 17,839     |      |       |   | — |   |   | — |   | 17,863 |   |
| Issuance of common  stock for conversion of convertible debt                        |       |                                                      | 414,868     |              |       |                              | 21         |                                                      |       |                   | 1,444      |      |       |   | — |   |   | — |   | 1,465 |   |
| Cash dividends  paid—$0.30 per common share                               |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (181,659) |   | (181,659) |   |
| **Balance  at June 30, 2006**                                                  |       |                                                      | 610,744,980 |              |       |                              | $          | 30,551                                                    |       |                   |       | $         | 3,268,420  |   |   |   | $ | (63,840) |   |   | $ | 11,061,826 |   | $ | 14,296,957 |   |

 

 

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

3

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

| ** **                                                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                     | ** ** | **(Unaudited)**                                   | ** ** |
| ** **                                                                                                     | ** ** | **(in thousands)**                           | ** ** |
| **Cash flows from operating activities:**                                                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net earnings                                                                                                   |       | $                                                 | 1,405,701  |   | $ | 1,255,310 |   |
| Adjustments to reconcile  net earnings to net cash used by operating activities:                               |       |                                              |       |   |   |
| Gain on sale of  loans and securities                                                                          |       | (2,888,628                                        | )          | (2,507,160 | ) |
| Accretion of  discount on securities                                                                           |       | (233,832                                          | )          | (194,797 | ) |
| Interest  capitalized on loans                                                                                 |       | (273,469                                          | )          | (17,452 | ) |
| Accretion of fair  value adjustments and discount on notes payable                                             |       | (57,913                                           | )          | (13,511 | ) |
| Net change in fair  value of hedged notes payable and related interest-rate and foreign-currency  swaps        |       | 8,408                                             |       | 1,203 |   |
| Amortization of  deferred fees on time deposits                                                                |       | 9,594                                             |       | 6,421 |   |
| Amortization of  deferred premiums, discounts, fees and costs, net                                             |       | 160,938                                           |       | 82,176 |   |
| Provision for loan  losses                                                                                     |       | 125,036                                           |       | 36,723 |   |
| Change in fair  value of mortgage servicing rights                                                             |       | (1,547,283                                        | )          | — |   |
| Change in MSR  value due to realization of expected cash flows from mortgage servicing  rights                 |       | 1,506,699                                         |       | — |   |
| Amortization of  mortgage servicing rights                                                                     |       | —                                            |       | 954,560 |   |
| Impairment of  mortgage servicing rights                                                                       |       | —                                            |       | 335,476 |   |
| Changes in fair value  of mortgage servicing rights attributable to hedged risk                                |       | —                                            |       | 493,430 |   |
| Impairment of  retained interests                                                                              |       | 84,054                                            |       | 173,341 |   |
| Depreciation and  other amortization                                                                           |       | 124,641                                           |       | 125,968 |   |
| Stock-based  compensation expense                                                                              |       | 82,182                                            |       | 19,207 |   |
| Provision for deferred  income taxes                                                                           |       | 676,286                                           |       | 535,751 |   |
| Origination and  purchase of loans and mortgage-backed securities held for sale                                |       | (209,604,399                                      | )          | (188,906,332 | ) |
| Proceeds from sale  and principal repayments of loans and mortgage-backed securities                           |       | 211,183,272                                       |       | 184,830,141 |   |
| Increase in  trading securities                                                                                |       | (4,272,282                                        | )          | (2,642,632 | ) |
| Decrease  (increase) in investments in other financial instruments                                             |       | 847,640                                           |       | (1,123,799 | ) |
| Increase in other  assets                                                                                      |       | (486,897                                          | )          | (412,851 | ) |
| Increase in  accounts payable and accrued liabilities                                                          |       | 1,362,244                                         |       | 1,261,677 |   |
| Increase  (decrease) in trading securities sold, not yet purchased, at fair value                              |       | 792,156                                           |       | (196,814 | ) |
| Increase in income  taxes payable                                                                              |       | 152,585                                           |       | 130,991 |   |
| Net cash used by  operating activities                                                                         |       | (843,267                                          | )          | (5,772,973 | ) |
| **Cash flows from investing activities:**                                                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Increase in  securities purchased under agreements to resell, federal funds sold and  securities borrowed |       | (1,967,830                                        | )          | (8,551,760 | ) |
| Additions to loans  held for investment, net                                                                   |       | (10,692,342                                       | )          | (22,968,583 | ) |
| Sales of loans  held for investment                                                                            |       | 64,876                                            |       | — |   |
| Additions to  investments in other financial instruments                                                       |       | (2,264,291                                        | )          | (3,782,769 | ) |
| Proceeds from sale  and repayment of investments in other financial instruments                                |       | 1,951,013                                         |       | 3,700,750 |   |
| Purchases of  mortgage servicing rights                                                                        |       | (8,067                                            | )          | (197,040 | ) |
| Purchase of  premises and equipment, net                                                                       |       | (287,142                                          | )          | (268,306 | ) |
| Net cash used by  investing activities                                                                         |       | (13,203,783                                       | )          | (32,067,708 | ) |
| **Cash flows from financing activities:**                                                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net (decrease)  increase in short-term borrowings                                                              |       | (3,893,137                                        | )          | 1,449,310 |   |
| Issuance of  long-term debt                                                                                    |       | 13,486,181                                        |       | 12,254,530 |   |
| Repayment of  long-term debt                                                                                   |       | (9,366,919                                        | )          | (5,397,588 | ) |
| Net increase in  securities sold under agreements to repurchase and federal  funds purchased              |       | 4,008,020                                         |       | 19,075,448 |   |
| Net increase in  deposit liabilities                                                                           |       | 11,103,539                                        |       | 10,581,339 |   |
| Excess tax benefits  related to stock option payments                                                          |       | 60,309                                            |       | 74,312 |   |
| Issuance of common  stock                                                                                      |       | 168,954                                           |       | 138,700 |   |
| Payment of  dividends                                                                                          |       | (181,659                                          | )          | (170,036 | ) |
| Net cash provided  by financing activities                                                                     |       | 15,385,288                                        |       | 38,006,015 |   |
| Net increase in  cash                                                                                          |       | 1,338,238                                         |       | 165,334 |   |
| Cash at beginning  of period                                                                                   |       | 1,031,108                                         |       | 751,237 |   |
| Cash at end of  period                                                                                         |       | $                                                 | 2,369,346  |   | $ | 916,571 |   |

 

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

4

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**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 Home Loans, Inc.(“CHL”) and other subsidiaries (collectively, the “Company”), is engaged inmortgage lending and other finance-related businesses, including mortgagebanking, retail banking and mortgage warehouse lending, dealing in securities,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 six months ended June 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 reflected in the prior yearconsolidated financial statements have been reclassified to conform to currentyear 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 of Financial Assets andExtinguishments of Liabilities,” (“SFAS 140”). SFAS 156 changes SFAS 140 byrequiring that Mortgage Servicing Rights (“MSRs”) be initially recognized attheir fair value and by providing the option to either: (1) carry MSRs atfair value with changes in fair value recognized in earnings; or (2) continuerecognizing periodic amortization expense and assess the MSRs for impairment asoriginally required by SFAS 140. This option may be applied by class ofservicing asset or liability.

SFAS156 is effective for all separately recognized servicing assets and liabilitiesacquired or issued after the beginning of an entity’s fiscal year that beginsafter September 15, 2006, with early adoption permitted. The Company haschosen to adopt SFAS 156 effective January 1, 2006. The Company hasidentified MSRs relating to residential mortgage loans as a class of servicingrights and has elected to apply fair value accounting to these MSRs. Presentlythis class represents all of the Company’s MSRs. SFAS 156 requires that anyadjustment necessary to record MSRs at fair value at adoption be recognized in 

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

beginning shareholders’ equity. Accordingly, thefollowing adjustment was made to the opening balances of MSRs, income taxespayable 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, “Accountingfor Derivative Instruments and Hedging Activities,” (“SFAS 133”) no longerapply to the risk management activities of the Company’s MSRs. Therefore,concurrent with the election to carry MSRs at fair value, the Company discontinuedfair value hedge accounting under SFAS 133 related to its MSRs.

**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.

Thefollowing table summarizes the basic and diluted earnings per share calculationsfor the periods indicated:

| ** **                                    | ** ** | **Three Months Ended June 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    |       | $                                                                  | 722,190    |   | 607,831 |   |   | $ | 1.19 |   |   | $ | 566,458 |   | 588,538 |   |   | $ | 0.96 |   |   |
| Effect of  dilutive securities:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures                        |       | —                                                             |       | — |   |   |   |   |   | 83 |   | 2,140 |   |   |   |   |   |
| Dilutive stock options                        |       | —                                                             |       | 18,779 |   |   |   |   |   | — |   | 24,310 |   |   |   |   |   |
| Diluted earnings and  earnings per share |       | $                                                                  | 722,190    |   | 626,610 |   |   | $ | 1.15 |   |   | $ | 566,541 |   | 614,988 |   |   | $ | 0.92 |   |   |

 

6

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

 

| ** **                                    | ** ** | **Six Months Ended June 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    |       | $                                                                  | 1,405,701  |   | 604,725 |   |   | $ | 2.32 |   |   | $ | 1,255,310 |   | 585,884 |   |   | $ | 2.14 |   |   |
| Effect of  dilutive securities:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures                        |       | 15                                                                 |       | 109 |   |   |   |   |   | 191 |   | 2,430 |   |   |   |   |   |
| Dilutive stock options                        |       | —                                                             |       | 18,639 |   |   |   |   |   | — |   | 25,153 |   |   |   |   |   |
| Diluted earnings and  earnings per share |       | $                                                                  | 1,405,716  |   | 623,473 |   |   | $ | 2.25 |   |   | $ | 1,255,501 |   | 613,467 |   |   | $ | 2.05 |   |   |

 

During the quarters ended June 30,2006 and 2005, stock options to purchase 72,890 shares and 25,500 shares,respectively, were outstanding but not included in the computation of earningsper share because they were anti-dilutive. During the six months ended June 30,2006 and 2005, stock options to purchase 123,940 shares and 30,300 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-Based Payment,”(“SFAS 123R”), an amendment of FASB Statement No. 123, “Accounting forStock-Based Compensation,” using the modified prospective application approach.In accordance with SFAS 123R, the Company began charging the unamortized valueof previously granted employee stock options to compensation expense during thecurrent period. For awards after January 1, 2006 made toretirement-eligible employees that vest upon retirement, the Company isrequired under SFAS 123R to immediately charge the associated value to expense.The value of grants after January 1, 2006 to other employees must beamortized over the lesser of (a) the nominal vesting period or (b) foroptions that vest upon retirement, the period until the grantee becomesretirement-eligible.

As of June 30, 2006, the Company has issued stockoptions and shares of restricted stock that, depending on the year granted andother factors, have different vesting requirements. Generally, stock optionsissued before 2004 vest over a period of three to four years and expire five orten years after the grant date. Stock options awarded in 2004 become vestedupon attainment of specific earnings performance targets and, in any event,four and a half years after the grant date regardless of attainment of theearnings targets and expire five years after the date of grant. Generally,stock options granted in 2005 were fully vested. Stock options and stockappreciation rights awarded in 2006 generally vest over a three-year period andexpire five to ten years after grant date. Off-cycle awards and awards to newhires have various vesting schedules. Generally, restricted stock vests over aperiod of three years although some restricted stock awards granted in 2004 hada performance-based component similar to the stock options granted that year.

The impact of adopting SFAS 123R for the three and sixmonths ended June 30, 2006, was a charge of approximately $36.9 millionand $50.0 million, respectively ($24.3 million, net of tax, or $0.04 perdiluted share and $34.3 million, net of tax or $0.05 per diluted share)respectively to compensation expense. The 

7

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

remaining unrecognizedcompensation cost related to unvested awards as of June 30, 2006, was$134.0 million and the weighted average period of time over which thiscost will be recognized is 1.7 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  June 30, 2005**          | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                              | ** ** | **(in thousands, except  per share data)** | ** ** |
| Net Earnings:                                                           |       |                                                           |       |                                                |       |   |   |   |   |
| As reported                                                             |       |                                                           | $          | 566,458                                             |       |   |   | $ | 1,255,310 |   |   |
| Add: Stock-based compensation included in net  earnings, net of taxes   |       |                                                           | 133        |                                                |       |   | 2,036 |   |   |
| Deduct: Stock-based employee compensation under SFAS  123, net of taxes |       |                                                           | (67,070    | )                                                   |       |   | (80,213 | ) |   |
| Pro forma                                                               |       |                                                           | $          | 499,521                                             |       |   |   | $ | 1,177,133 |   |   |
| Basic Earnings  Per Share:                                              |       |                                                           |       |                                                |       |   |   |   |   |
| As reported                                                             |       |                                                           | $          | 0.96                                                |       |   |   | $ | 2.14 |   |   |
| Pro forma                                                               |       |                                                           | $          | 0.85                                                |       |   |   | $ | 2.01 |   |   |
| Diluted Earnings  Per Share:                                            |       |                                                           |       |                                                |       |   |   |   |   |
| As reported                                                             |       |                                                           | $          | 0.92                                                |       |   |   | $ | 2.05 |   |   |
| Pro forma                                                               |       |                                                           | $          | 0.81                                                |       |   |   | $ | 1.92 |   |   |

 

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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted Average  Assumptions:   |       |                                            |       |                                          |       |   |   |   |   |
| Dividend yield                   |       | 1.65                                            | %          | 1.70                                          | %          | 1.65 | % | 1.70 | % |
| Expected volatility              |       | 29.64                                           | %          | 32.50                                         | %          | 29.66 | % | 32.50 | % |
| Risk-free interest rate          |       | 4.72                                            | %          | 4.15                                          | %          | 4.72 | % | 4.15 | % |
| Expected life (in years)(1)      |       | 4.28                                            |       | 3.13                                          |       | 4.27 |   | 3.14 |   |
| Per-share fair  value of options |       | $                                               | 10.16      |                                          | $          | 6.95 |   | $ | 10.14 |   | $ | 6.95 |   |
| Weighted-average  exercise price |       | $                                               | 36.46      |                                          | $          | 32.60 |   | $ | 36.45 |   | $ | 32.61 |   |

----

(1)          Beginning in the secondquarter of 2005, expected employee tenure and exercise experience aredetermined by option pricing model.

The Company began using a lattice model to estimatethe fair value of the certain stock awards (i.e., stock appreciation rights andoptions) in the second quarter of 2006. The lattice model was deemed to provide a better estimate of the fairvalue of those awards because it permits probabilities to be assigned to futurechanges in key assumptions (e.g., risk-free interest rate, stock volatility,and dividend rate).  It also 

8

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

derives an expected termthat captures patterns of early exercise by participants prior to the end ofthe stated terms of those awards.

Thetable below summarizes stock options and stock appreciation rights activity andrelated information for the six months ended June 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                             |       | 13,852,660                 |       |                                        | 36.45      |                                                 |       |                                |       |   |   |   |   |   |   |
| Exercised                           |       | (7,882,174                 | )          |                                        | 15.96      |                                                 |       |                                |       |   |   |   |   |   |   |
| Expired or cancelled                |       | (331,590                   | )          |                                        | 25.04      |                                                 |       |                                |       |   |   |   |   |   |   |
| Outstanding at  end of period       |       | 64,063,298                 |       |                                        | $          | 24.08                                                |       |                                |       | 5.01 |   |   |   | $ | 915,295 |   |   |
| Exercisable                         |       | 42,713,869                 |       |                                        | $          | 20.15                                                |       |                                |       | 4.92 |   |   |   | $ | 778,301 |   |   |

 

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

| ** **      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(in thousands)**                         | ** ** |
| Cash Proceeds   |       | $                                               | 91,357     |                                          | $          | 84,240 |   | $ | 125,806 |   | $ | 104,044 |   |
| Intrinsic Value |       | $                                               | 110,952    |                                          | $          | 141,072 |   | $ | 171,038 |   | $ | 211,734 |   |

 

Thetable below summarizes restricted stock activity and related information forthe six months ended June 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                                                 |       |                       | 355,370    |                                                    |       |   | 34.53 |   |   |
| Shares vested                                                  |       |                       | (457,109   | )                                                       |       |   | 23.30 |   |   |
| Shares cancelled                                               |       |                       | (10,504    | )                                                       |       |   | 27.47 |   |   |
| Outstanding shares of  restricted stock at end of period       |       |                       | 726,200    |                                                    |       |   | $ | 32.27 |   |   |

 

**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.

9

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

From an enterpriseperspective, the Company manages interest rate risk through the naturalcounterbalance of its mortgage banking loan production and servicingbusinesses. The Company also uses various financial 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. Interest rate risk relating to the Company’sportfolio of loans held for investment is managed by funding these assets withliabilities of similar duration or using derivative instruments whose valuationchanges, when combined with the characteristics of the managed liability,create repricing characteristics that more closely reflect the repricingbehaviors of those assets.

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

*Description of RiskManagement Activities*

The Company is exposed to price risk relative to itsMortgage Loan Inventory and its interest rate lock commitments (“IRLCs”).  IRLCs guarantee the rate and points on theunderlying mortgage or group of mortgages for a specified period. IRLCs arederivative instruments and are recorded at fair value with changes in fairvalue recognized in current period earnings (as a component of gain on sale ofloans and securities). To manage this risk the Company uses derivativeinstruments in its risk management activities related to the IRLCs and MortgageLoan Inventory including: forward sales/purchases of MBS, long call/put optionson MBS, long call/put options on Treasury Futures, short Eurodollar futurescontracts, total rate of return swaps and credit default swaps. Certain ofthese hedging relationships qualify as fair value hedges of mortgage loansunder SFAS 133.

During the six monthsended June 30, 2006, the interest rate risk management activitiesassociated with 61% of the fixed-rate mortgage loan inventory and 49% of theadjustable-rate mortgage loan inventory were accounted for as fair valuehedges. The Company recognized pre-tax losses of $34.9 million and $21.2million, representing the ineffective portion of such fair value hedges of itsmortgage inventory, for the six months ended June 30, 2006 and 2005,respectively. These amounts, along with the change in the fair value of thederivative instruments that were not designated as hedge instruments, areincluded in gain on sale of loans and securities in the consolidated statementsof earnings.

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

*Description of RiskManagement Activities*

MSRs and retained interests, specificallyinterest-only securities and residual securities, are generally subject to aloss in value, or impairment, when mortgage interest rates decline. The fairvalue of MSRs and retained interests reflect the present value of cash flowstreams that are closely linked to the expected life of the underlying loanservicing portfolio. Declining mortgage interest rates generally precipitateincreased mortgage refinancing activity, which decreases the expected life ofthe loans in the servicing portfolio, thereby decreasing the value of the MSRsand retained interests. Reductions in the value of these assets affectsearnings through recognition of reduction of these assets’ fair values for MSRsand for retained interest accounted for as trading securities and throughimpairment charges for retained interests accounted for as available-for-salesecurities. To moderate the effect of changes in value of MSRs and retainedinterests on earnings, the Company maintains a portfolio of financial instruments,including 

10

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

derivatives, whichgenerally increase in aggregate value when interest rates decline. Thisportfolio of financial instruments is collectively referred to herein as the “ServicingHedge.”

During the three months ended June 30, 2005, aportion of the Servicing Hedge qualified as a fair value hedge under SFAS 133. Theportion of the Servicing Hedge that qualified as a fair value hedge coveredapproximately 29% of the risk associated with a change in fair value of theMSRs attributable to changes in interest rates of up to 50 basis points. At noother time during the six months ended June 30, 2006 and 2005 has anyportion of the Servicing Hedge qualified as a hedge under SFAS 133. For the sixmonths ended June 30, 2005, the Company recognized a loss of $11.6 millionin earnings, which represents the amount of hedge ineffectiveness for theportion of the Servicing Hedge that qualified as a fair value hedge under SFAS133. There was no portion of the related hedge instruments’ gain or loss thatwas excluded from the assessment of hedge effectiveness.

The Company currently uses financial instruments inits Servicing Hedge including: interest rate swaps, receiver/payor swaptions,mortgage forward rate agreements, long call/put options on Treasury andEurodollar futures, long Treasury futures, interest rate caps and interest ratefloors.

These instruments are combined to mitigate the overallrisk portfolio of the MSRs and retained interests, which is actively managed bythe Company on a daily basis.

Thefollowing table summarizes the notional amounts of derivative contractsincluded in the Servicing Hedge:

| ** **                                  | ** ** | **Balance,  December 31,  2005** | ** ** | **Additions** | ** ** | **Dispositions/  Expirations** | ** ** | **Balance,  June 30,  2006** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|---------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **(in millions)**                | ** ** |
| Interest Rate  Swaps                        |       |                                  | $          | 53,850        |       |                           |       | $                                 | 29,910     | ­­ |   |   | $ | (54,850 | ) |   | $ | 28,910 |   |
| Interest Rate  Swaptions                    |       |                                  | 50,425     |          |       |                           | 52,000     |                              |       |   | (33,625 | ) |   | 68,800 |   |
| Mortgage Forward  Rate Agreements           |       |                                  | 31,125     |          |       |                           | 32,750     |                              |       |   | (43,625 | ) |   | 20,250 |   |
| Long Call Options  on Interest Rate Futures |       |                                  | 17,500     |          |       |                           | 19,250     |                              |       |   | (30,000 | ) |   | 6,750 |   |
| Long Put Options  on Interest Rate Futures  |       |                                  | —     |          |       |                           | 3,500      |                              |       |   | — |   |   | 3,500 |   |
| Long Treasury  Futures                      |       |                                  | 1,160      |          |       |                           | 1,000      |                              |       |   | (2,160 | ) |   | — |   |
| Interest Rate Caps                          |       |                                  | 300        |          |       |                           | —     |                              |       |   | (300 | ) |   | — |   |
|                                             |            |                                       |            |               |            |                                |            |                                   |            |  |  |  |  |  |  |  |  |  |  |

 

The Servicing Hedge isintended to reduce the impact on reported earnings of changes in the fair valueof MSRs and retained interests that generally result from changes in mortgagerates. Should mortgage rates increase, the value of the MSRs and retainedinterests is expected to increase while the value of the Servicing Hedge isexpected to decrease.

***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 $3.7 billion asof June 30, 2006) and to enable the Company to convert a portion of itsforeign currency-denominated fixed and floating-rate, long-term debt to U.S.dollar LIBOR-based floating-rate debt (notional amount of $4.6 billion as of June 30,2006). These transactions are generally designated as fair value hedges underSFAS 133. For the six months ended June 30, 2006 and 2005, theCompany recognized a pre-tax gain of 

11

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

$8.4 million andpre-tax gain of $1.2 million, respectively, representing the ineffectiveportion of such fair value hedges of debt. The change in fair value of theinterest rate swap contracts together with the change in debt designated asfair value hedges are included in interest expense in the consolidatedstatements of earnings.

The Company enters into interest rate swap contractswhich enable it to convert a portion of its floating-rate, long-term debtto fixed-rate, long-term debt (notional amount of $0.1 billion as of June 30,2006). These transactions are designated as cash flow hedges under SFAS 133.For the six months ended June 30, 2006 and 2005, the Company recognized nopre-tax gain or loss on the ineffective portion of cash flow hedges. As of June 30,2006, deferred net gains or losses on derivative instruments included inaccumulated other comprehensive income that are expected to be reclassified to earningsduring the next twelve months are not considered to be material.

Payments on interest rateswaps are based on a specified notional amount. In connection with the debtfair value hedges, the Company has entered into swap agreements in which therate received is fixed and the rate paid is adjustable and is indexed to LIBOR(“Receiver Swap”). In connection with the debt cash flow hedges, the Companyhas entered into swap agreements in which the rate paid is fixed and the ratereceived is adjustable and is indexed to LIBOR (“Payor Swap”).

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

The Company enters intointerest rate swap contracts that have the effect of converting a portion ofits fixed-rate deposit liabilities to LIBOR-based variable-rate depositliabilities. These transactions are designated as fair value hedges. For thesix months ended June 30, 2006, the Company recognized a pre-tax loss of$0.4 million, representing the ineffectiveness relating to these swaps. For thesix months ended June 30, 2005, the Company recognized a pre-tax loss of$1.7 million representing the ineffective portion of such fair value hedges.

***Risk Management Activities Related to theBroker-Dealer Securities Trading Portfolio***

In connection with itsbroker-dealer activities, the Company maintains a trading portfolio of fixed-incomesecurities, primarily MBS. The Company is exposed to price changes in itstrading portfolio arising from interest rate changes during the period it holdsthe securities. To manage this risk, the Company uses derivative instrumentsincluding: forward sales/purchases of To-Be Announced (“TBA”) MBS, short/longfutures contracts, total rate of return swaps, interest rate swaps, and longput/call options on futures contracts. The changes in fair value of derivativecontracts used in the interest rate management related to trading activitiesare recorded as a component of the gain on sale of loans and securities in theconsolidated statements of earnings.

12

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**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:

| ** **                                         | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| Prime mortgage                                     |       |                    | $          | 21,850,216                  |       |   | $ | 27,085,467 |   |
| Nonprime mortgage                                  |       |                    | 6,437,155  |                        |       | 6,736,946 |   |
| Prime home equity                                  |       |                    | 6,081,361  |                        |       | 1,948,874 |   |
| Commercial real  estate loans                      |       |                    | 1,012,233  |                        |       | 1,089,262 |   |
| Deferred  premiums, discounts, fees and costs, net |       |                    | 10,007     |                        |       | (52,364 | ) |
|                                               |       |                    | $          | 35,390,972                  |       |   | $ | 36,808,185 |   |

 

At June 30, 2006, the Company had pledged $7.7billion and $0.5 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:

| ** **                                            | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Mortgage  pass-through securities:                    |       |                    |       |                        |       |
| Fixed-rate                                            |       | $                       | 7,815,672  |                        | $          | 5,638,161 |   |
| Adjustable-rate                                       |       | 766,935                 |       | 915,302                     |       |
| Total mortgage pass-through securities                |       | 8,582,607               |       | 6,553,463                   |       |
| Collateralized  mortgage obligations                  |       | 2,797,643               |       | 2,377,764                   |       |
| U.S. Treasury  securities                             |       | 1,475,636               |       | 1,037,749                   |       |
| Asset-backed  securities                              |       | 1,104,284               |       | 234,818                     |       |
| Obligations of  U.S. Government-sponsored enterprises |       | 773,009                 |       | 429,726                     |       |
| Interest-only  stripped securities                    |       | 332,591                 |       | 255,127                     |       |
| Mark-to-market on  TBA securities                     |       | 182,596                 |       | 77,094                      |       |
| Negotiable  certificates of deposit                   |       | 6,072                   |       | 296                         |       |
| Other                                                 |       | 101,278                 |       | 16,536                      |       |
|                                                  |       | $                       | 15,355,716 |                        | $          | 10,982,573 |   |

 

As of June 30, 2006, $12.4 billion of the Company’strading securities had been pledged as collateral for financing purposes, ofwhich the counterparty had the contractual right to sell or re-pledge $1.1billion.

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.

13

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

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

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

| ** **                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Securities  purchased under agreements to resell |       | $                       | 18,388,926 |                        | $          | 18,536,475 |   |
| Securities borrowed                              |       | 6,771,265               |       | 4,740,886                   |       |
| Federal funds  sold                              |       | 125,000                 |       | 40,000                      |       |
|                                             |       | $                       | 25,285,191 |                        | $          | 23,317,361 |   |

 

As of June 30, 2006, the Company had acceptedcollateral with a fair value of $46.7 billion that it had the contractualability to sell or re-pledge, including $20.6 billion related to amounts offsetby securities sold under agreements to repurchase under master nettingarrangements. As of June 30, 2006, the Company had re-pledged $42.7billion of such collateral for financing purposes.

As of December 31, 2005,the Company had accepted collateral with a fair value of $33.7 billion that ithad the contractual ability to sell or re-pledge, including $12.1 billionrelated to amounts offset by securities sold under agreements to repurchaseunder master netting arrangements. As of December 31, 2005, the Companyhad re-pledged $28.3 billion of such collateral for financing purposes.

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

Loansheld for investment include the following:

| ** **                                                          | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Mortgage loans:                                                     |       |                    |       |                        |       |
| Prime                                                               |       | $                       | 55,433,612 |                        | $          | 48,655,066 |   |
| Prime home equity                                                   |       | 19,081,303              |       | 14,990,615                  |       |
| Nonprime                                                            |       | 9,290                   |       | 157,528                     |       |
| Commercial real estate  loans                                       |       | 63,483                  |       | —                      |       |
| Total mortgage loans                                                |       | 74,587,688              |       | 63,803,209                  |       |
| Warehouse lending  advances secured by mortgage loans               |       | 2,871,511               |       | 3,943,046                   |       |
| Defaulted  mortgage loans repurchased from securitizations          |       | 1,361,242               |       | 1,370,169                   |       |
|                                                                |       | 78,820,441              |       | 69,116,424                  |       |
| Purchase premium  and deferred loan origination fees and costs, net |       | 1,170,739               |       | 938,224                     |       |
| Allowance for  loan losses                                          |       | (183,581                | )          | (189,201                    | )          |
| Loans held for  investment, net                                     |       | $                       | 79,807,599 |                        | $          | 69,865,447 |   |

 

Mortgage loans held for investment totaling $59.2billion and $52.2 billion were pledged to secure Federal Home Loan Bank (“FHLB”)advances at June 30, 2006 and December 31, 2005, respectively.

14

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

Mortgage loans held for investment totaling $3.1billion and $2.0 billion were pledged to secure an unused borrowing facilitywith the Federal Reserve Bank (“FRB”) at June 30, 2006 and December 31,2005, respectively.

The Company had accepted collateral of $3.0 billionand $4.1 billion securing warehouse-lending advances that it had thecontractual ability to re-pledge as of June 30, 2006 and December 31,2005, respectively. No such mortgage loan collateral had been re-pledged as of June 30,2006 and December 31, 2005.

Changesin the allowance for loan losses were as follows:

| ** **                                                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                                                             | ** ** | **(in thousands)**                       | ** ** |
| Balance,  beginning of period                                                                          |       | $                                             | 189,201    |   | $ | 125,046 |   |
| Provision for  loan losses                                                                             |       | 125,036                                       |       | 36,723 |   |
| Net charge-offs                                                                                        |       | (125,181                                      | )          | (5,807 | ) |
| Reclassification  of allowance for unfunded commitments from accounts payable and accrued  liabilities |       | 5,362                                         |       | — |   |
| Other adjustments                                                                                      |       | (10,837                                       | )          | — |   |
| Balance, end of period                                                                                 |       | $                                             | 183,581    |   | $ | 155,962 |   |

 

15

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**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:

| ** **                                                                                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **(in thousands)** | ** ** |
| Available-for-sale  securities:                                                            |       |                    |       |                        |       |
| Mortgage-backed securities                                                                 |       | $                       | 6,284,875  |                        | $          | 6,866,520 |   |
| Obligations of U.S. Government-sponsored enterprises                                       |       | 654,121                 |       | 547,715                     |       |
| Municipal bonds                                                                            |       | 370,000                 |       | 369,748                     |       |
| U.S. Treasury securities                                                                   |       | 184,290                 |       | 144,951                     |       |
| Other                                                                                      |       | 2,858                   |       | 3,109                       |       |
| Subtotal                                                                                   |       | 7,496,144               |       | 7,932,043                   |       |
| Interests  retained in securitization accounted for as available-for-sale securities:      |       |                    |       |                        |       |
| Prime interest-only and principal-only securities                                          |       | 301,439                 |       | 323,368                     |       |
| Nonprime residual securities                                                               |       | 158,993                 |       | 206,033                     |       |
| Prime home equity line of credit transferor’s  interest                               |       | 154,632                 |       | 158,416                     |       |
| Prepayment penalty bonds                                                                   |       | 87,463                  |       | 112,492                     |       |
| Prime home equity residual securities                                                      |       | 73,772                  |       | 124,377                     |       |
| Prime home equity interest-only securities                                                 |       | 12,610                  |       | 15,136                      |       |
| Prime residual securities                                                                  |       | 11,590                  |       | 21,383                      |       |
| Nonprime interest-only securities                                                          |       | 5,860                   |       | 9,455                       |       |
| Subordinated mortgage-backed pass-through securities                                       |       | 1,846                   |       | 2,059                       |       |
| Total interests retained in securitization accounted  for as available-for-sale securities |       | 808,205                 |       | 972,719                     |       |
| Total available-for-sale securities                                                        |       | 8,304,349               |       | 8,904,762                   |       |
| Interests retained in  securitization accounted for as trading securities:                 |       |                    |       |                        |       |
| Prime home equity residual securities                                                      |       | 731,262                 |       | 757,762                     |       |
| Prime interest-only and principal-only securities                                          |       | 455,759                 |       | 180,216                     |       |
| Prime home equity line of credit transferor’s  interest                               |       | 337,156                 |       | 95,514                      |       |
| Nonprime residual securities                                                               |       | 304,734                 |       | 341,106                     |       |
| Prepayment penalty bonds                                                                   |       | 45,955                  |       | —                      |       |
| Prime residual securities                                                                  |       | 32,848                  |       | 43,244                      |       |
| Prime home equity interest-only securities                                                 |       | 20,665                  |       | —                      |       |
| Interest rate swaps                                                                        |       | 14,434                  |       | 782                         |       |
| Total interests retained in securitization accounted  for as trading securities            |       | 1,942,813               |       | 1,418,624                   |       |
| Hedging instruments and  mortgage pipeline derivatives:                                    |       |                    |       |                        |       |
| Mortgage servicing related                                                                 |       | 912,268                 |       | 741,156                     |       |
| Notes payable related                                                                      |       | 252,828                 |       | 107,085                     |       |
| Mortgage loans held for sale and pipeline related                                          |       | 184,276                 |       | 89,098                      |       |
| Total investments  in other financial instruments                                          |       | $                       | 11,596,534 |                        | $          | 11,260,725 |   |

 

16

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

At June 30, 2006, the Company had pledged $0.9billion 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$2.1 billion of MBS to secure securities sold under agreements to repurchase,which the counterparty had the contractual right to re-pledge and $0.3 billionof MBS to secure an unused borrowing facility with the FRB.

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

| ** **                                            | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**         | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**     | ** ** |
| Mortgage-backed  securities                           |       | $                           | 6,500,923  |   |   | $ | 2,558 |   |   | $ | (218,606 | ) | $ | 6,284,875 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 666,622                     |       |   | 65 |   |   | (12,566 | ) | 654,121 |   |
| Municipal bonds                                       |       | 378,098                     |       |   | 141 |   |   | (8,239 | ) | 370,000 |   |
| U.S. Treasury  securities                             |       | 185,586                     |       |   | 759 |   |   | (2,055 | ) | 184,290 |   |
| Interests  retained in securitization                 |       | 709,232                     |       |   | 127,754 |   |   | (28,781 | ) | 808,205 |   |
| Other                                                 |       | 2,860                       |       |   | — |   |   | (2 | ) | 2,858 |   |
|                                                  |       | $                           | 8,443,321  |   |   | $ | 131,277 |   |   | $ | (270,249 | ) | $ | 8,304,349 |   |

 

| ** **                                            | ** ** | **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

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

TheCompany’s available-for-sale securities in an unrealized loss position are asfollows:

| ** **                                            | ** ** | **June 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.                           |       | $                                      | 2,487,906  |   | $ | (69,413 | ) | $ | 3,729,313 |   | $ | (149,193 | ) | $ | 6,217,219 |   | $ | (218,606 | ) |
| Obligations of U.S.  Government-sponsored enterprises |       | 399,290                                |       | (4,966 | ) | 231,321 |   | (7,600 | ) | 630,611 |   | (12,566 | ) |
| Municipal bonds                                       |       | 245,931                                |       | (4,864 | ) | 107,712 |   | (3,375 | ) | 353,643 |   | (8,239 | ) |
| U.S. Treasury  securities                             |       | 96,546                                 |       | (977 | ) | 66,827 |   | (1,078 | ) | 163,373 |   | (2,055 | ) |
| Interests  retained in securitization                 |       | 136,774                                |       | (24,608 | ) | 15,637 |   | (4,173 | ) | 152,411 |   | (28,781 | ) |
| Other                                                 |       | 48                                     |       | (2 | ) | — |   | — |   | 48 |   | (2 | ) |
| Total impaired  securities                            |       | $                                      | 3,366,495  |   | $ | (104,830 | ) | $ | 4,150,810 |   | $ | (165,419 | ) | $ | 7,517,305 |   | $ | (270,249 | ) |

 

| ** **                                            | ** ** | **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 Committeeassesses securities classified as available-for sale for other-than-temporaryimpairment on a quarterly basis. This assessment evaluates whether the Companyintends and is able to recover the amortized cost of the securities when takinginto account the Company’s present investment objectives and liquidityrequirements. The impairment reflected in these securities is a result of achange in market interest rates. Management has the intent and ability to holdthese securities until they recover their amortized cost. Accordingly,other-than-temporary impairment related to these securities has not beenrecognized as of June 30, 2006 and December 31, 2005.

18

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

Grossgains and losses realized on the sales of available-for-sale securities are asfollows:

| ** **                                                | ** ** | **Six Months Ended  June 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                                      |       | —                                        |       | 13 |   |
| Gross realized losses                                     |       | (51                                           | )          | — |   |
| Net                                                       |       | (51                                           | )          | 13 |   |
| Municipal bonds:                                          |       |                                          |       |   |   |
| Gross realized gains                                      |       | 33                                            |       | — |   |
| Gross realized losses                                     |       | (159                                          | )          | (100 | ) |
| Net                                                       |       | (126                                          | )          | (100 | ) |
| Interests  retained in securitization:                    |       |                                          |       |   |   |
| Gross realized gains                                      |       | 4,778                                         |       | 9,837 |   |
| Gross realized losses                                     |       | —                                        |       | (53 | ) |
| Net                                                       |       | 4,778                                         |       | 9,784 |   |
| Other:                                                    |       |                                          |       |   |   |
| Gross realized gains                                      |       | —                                        |       | 1,253 |   |
| Gross realized losses                                     |       | —                                        |       | — |   |
| Net                                                       |       | —                                        |       | 1,253 |   |
| Total gains and  losses on available-for-sale securities: |       |                                          |       |   |   |
| Gross realized gains                                      |       | 4,811                                         |       | 11,134 |   |
| Gross realized losses                                     |       | (210                                          | )          | (269 | ) |
| Net                                                       |       | $                                             | 4,601      |   | $ | 10,865 |   |

 

**Note 10—MortgageServicing Rights**

As noted in “Note 2—Adoption of Statement of FinancialAccounting Standards No.156, Accounting For Servicing of Financial Assets,” theCompany adopted SFAS 156 effective January 1, 2006. As a result ofadopting SFAS 156 all separately recognized MSRs created in the securitizationof, or in the sale of loans after December 31, 2005 are recognized initiallyat fair value. All MSRs are subsequently carried at fair value with changes infair value recognized in current period earnings.

19

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

Theactivity in MSRs carried at fair value is as follows:

| ** **                                                               | ** ** | **Six Months Ended  June 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 |   |   |
| Purchases of servicing assets                                            |       |                                                    | 8,067      |   |   |
| Servicing resulting from transfers of financial  assets                  |       |                                                    | 2,551,169  |   |   |
| Change in fair value:                                                    |       |                                                    |       |   |   |
| Due to changes in valuation inputs or assumptions in  valuation model(1) |       |                                                    | 1,547,283  |   |   |
| Other changes in fair value(2)                                           |       |                                                    | (1,506,699 | ) |   |
| Mortgage  Servicing Rights, at fair value                                |       |                                                    | $          | 15,320,575 |   |   |

----

(1)          Principallyreflects changes in discount rates and prepayment speed assumptions, primarilydue to changes in interest rates.

(2)          Representschanges due to realization of expected cash flows.

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

| ** **                                                           | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                           | ** ** | **(in thousands)**                                 | ** ** |
| **Mortgage Servicing Rights**                                        | ** ** |                                                    | ** ** | ** ** |   |
| Balance at beginning of  period                                      |       |                                                    | $          | 9,820,511 |   |   |
| Additions                                                            |       |                                                    | 2,421,203  |   |   |
| Amortization                                                         |       |                                                    | (954,560   | ) |   |
| Change in fair value  attributable to hedged risk                    |       |                                                    | (493,430   | ) |   |
| Application of valuation  allowance to write down impaired MSRs      |       |                                                    | (39,860    | ) |   |
| Balance before valuation  allowance at end of period                 |       |                                                    | 10,753,864 |   |   |
| **Valuation Allowance for Impairment of Mortgage  Servicing Rights** | ** ** |                                                    | ** ** | ** ** |   |
| Balance at beginning of  period                                      |       |                                                    | (1,090,582 | ) |   |
| Additions                                                            |       |                                                    | (335,476   | ) |   |
| Application of valuation  allowance to write down impaired MSRs      |       |                                                    | 39,860     |   |   |
| Balance at end of period                                             |       |                                                    | (1,386,198 | ) |   |
| **Mortgage  Servicing Rights, net**                                  |       |                                                    | $          | 9,367,666 |   |   |

 

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 0.50% 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 

20

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

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 assumptions and prepayment assumptions used in ourdiscounted cash flow model are based on our empirical data drawn from thehistorical performance of our MSRs, which we believe are consistent withassumptions used by market participants valuing similar MSRs, and from dataobtained on the performance of similar MSRs. The key assumptions used in thevaluation of MSRs include mortgage prepayment speeds and the discount rate(projected LIBOR plus option-adjusted spread). These variables can, and generallywill, change from quarter to quarter as market conditions and projectedinterest rates change. The current market data utilized in the MSR valuationprocess and in the assessment of the reasonableness of our valuation isobtained from MSR trades, MSR broker valuations, prices of interest-onlysecurities, and peer group MSR valuation surveys.

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 tomodel predictions, benchmarking to commercially available models and ongoingperformance monitoring.

**Note 11—Other Assets**

Otherassets include the following:

| ** **                                                                   | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| Investments in  FRB and FHLB stock                                           |       | $                       | 1,498,398  |                        |       | $ | 1,334,100 |   |   |
| Reimbursable  servicing advances, net                                        |       | 1,486,602               |       |                        | 1,947,046  |   |   |
| Securities  broker-dealer receivables                                        |       | 1,140,355               |       |                        | 392,847    |   |   |
| Interest  receivable                                                         |       | 889,706                 |       |                        | 777,966    |   |   |
| Receivables from  custodial accounts                                         |       | 743,618                 |       |                        | 629,075    |   |   |
| Restricted cash                                                              |       | 406,973                 |       |                        | 429,556    |   |   |
| Capitalized  software, net                                                   |       | 315,569                 |       |                        | 331,454    |   |   |
| Cash surrender  value of assets held in trust for deferred compensation plan |       | 299,375                 |       |                        | 224,884    |   |   |
| Prepaid expenses                                                             |       | 255,804                 |       |                        | 187,377    |   |   |
| Real estate  acquired in settlement of loans                                 |       | 146,027                 |       |                        | 110,499    |   |   |
| Receivables from  sale of securities                                         |       | 87,675                  |       |                        | 325,327    |   |   |
| Derivative margin  accounts                                                  |       | 51,854                  |       |                        | 296,005    |   |   |
| Other assets                                                                 |       | 1,067,371               |       |                        | 943,337    |   |   |
|                                                                         |       | $                       | 8,389,327  |                        |       | $ | 7,929,473 |   |   |

 

The Company had pledged $1.0 billion and $0.1 billionof securities broker-dealer receivables to secure securities sold underagreements to repurchase at June 30, 2006 and December 31, 2005,respectively.

21

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

**Note 12—NotesPayable**

Notespayable consists of the following:

| ** **                        | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Federal Home Loan  Bank advances  |       | $                       | 29,875,000 |                        | $          | 26,350,000 |   |
| Medium-term notes:                |       |                    |       |                        |       |
| Floating rate                     |       | 14,471,182              |       | 14,466,765                  |       |
| Fixed-rate                        |       | 11,263,546              |       | 11,503,592                  |       |
|                              |       | 25,734,728              |       | 25,970,357                  |       |
| Asset-backed  commercial paper    |       | 7,088,487               |       | 12,367,496                  |       |
| Unsecured  commercial paper       |       | 5,418,524               |       | 6,248,508                   |       |
| Secured revolving  line of credit |       | 519,443                 |       | 2,865,152                   |       |
| Asset-backed  secured financings  |       | 4,024,595               |       | 22,998                      |       |
| Unsecured bank  loans             |       | 1,159,267               |       | 730,000                     |       |
| Junior  subordinated debentures   |       | 1,041,020               |       | 1,085,191                   |       |
| Subordinated debt                 |       | 1,500,000               |       | 500,000                     |       |
| Convertible  securities           |       | —                  |       | 10,544                      |       |
| LYONs convertible  debentures     |       | —                  |       | 2,037                       |       |
| Other                             |       | 166,304                 |       | 35,603                      |       |
|                              |       | $                       | 76,527,368 |                        | $          | 76,187,886 |   |

 

***Master Trust Facility***

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 will fund the purchase of notes backed by CWLreceivables and issued by a master trust by issuing extendable asset-backedcommercial paper. The Company is expected to incur an interest cost equal tothe rates of such commercial paper plus 6.3 basis points, plus any other legalfees and expenses related to liquidity and facility operations. There were noborrowings under this facility during the period ended June 30, 2006.

***Federal Home Loan Bank Advances***

During the six months ended June 30, 2006, theCompany obtained $8.4 billion of advances from the FHLB. Of these advances,$7.8 billion were fixed-rate and $0.6 billion were adjustable-rate. At June 30,2006, the Company had pledged $59.2 billion of mortgage loans to secure itsoutstanding FHLB advances and provide the ability to obtain future advances.

At December 31, 2005,the Company had pledged $52.2 billion of mortgage loans to secure itsoutstanding FHLB advances and provide the ability to obtain future advances.

22

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

***Medium-Term Notes***

Duringthe six months ended June 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 |       |                                             | 2,844,989  |                   |       |                   | 122,945    |   |   | 2,967,934 |   |   | 5.17 | % |   | 6.30 | % | May, 2007 |   | April, 2036 |   |
| CFC Euro          |       |                                             | 1,091,881  |                   |       |                   | —     |   |   | 1,091,881 |   |   | 5.29 | % |   | 5.70 | % | March, 2007 |   | February, 2011 |   |
| Total             |       |                                             | $          | 3,936,870              |       |                   |       | $ | 199,311 |   |   | $ | 4,136,181 |   |   |   |   |   |   |   |   |   |   |   |

 

The $0.2 billion of fixed-rate medium-term notesissued by the Company during the six months ended June 30, 2006 wereeffectively converted to floating-rate debt using interest rate swaps.

During the six months ended June 30, 2006, theCompany redeemed $4.5 billion of maturing medium-term notes.

As of June 30, 2006,$4.8 billion of foreign currency-denominated medium-term notes wereoutstanding. Such notes are denominated in Pounds Sterling, Canadian Dollars, AustralianDollars, Euros, Swiss Francs and Singapore Dollars. These notes have beeneffectively 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 SLNsbear interest at prevailing money market rates approximating LIBOR. The SLNprograms’ capacities, based on aggregate commitments from underlying creditenhancers, totaled $30.7 billion at June 30, 2006.

For the six months ended June 30,2006, the average borrowings under these facilities totaled $20.3 billion andthe weighted-average interest rate of the SLNs was 4.82%. At June 30,2006, the weighted-average interest rate of the SLNs was 5.21% and the Companyhad pledged $7.7 billion in mortgage loan inventory to secure the SLNs.

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

As of June 30, 2006, the Company had unsecuredcredit agreements (revolving credit facilities) with a group of commercialbanks permitting the Company to borrow an aggregate maximum amount of $12.0billion. The primary purpose of these credit facilities is to provide liquiditysupport for the Company’s commercial paper program.

For the six months ended June 30,2006 the average borrowings under this facility totaled $7.0 billion and theweighted average interest rate was 4.86%. At June 30, 2006 theweighted-average interest rate was 5.32%.

23

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

***Secured Revolving Line of Credit***

During 2004, the Companyformed a special purpose entity (“SPE”) for the purpose of financing inventorywith funding provided by a group of bank-sponsored conduits that are financedthrough the issuance of asset-backed commercial paper. The entity incursinterest based on prevailing money market rates approximating the cost of asset-backedcommercial paper. At June 30, 2006, the entity had aggregate commitmentsfrom the bank-sponsored conduits totaling $10.6 billion and had $0.4 billion ofoutstanding borrowings, secured by $0.5 billion of mortgage loans held forsale. For the six months ended June 30, 2006, the average borrowings underthis facility totaled $1.6 billion and the weighted-average interest rate was4.61%. At June 30, 2006, the weighted-average interest rate was 5.13%.

***Asset-Backed Secured Financings***

The Company has recordedcertain securitization transactions as secured borrowings as of June 30,2006 and December 31, 2005 because they did not qualify for salestreatment under SFAS 140. The amounts accounted for as secured borrowingstotaled $4.0 billion and $23.0 million at June 30, 2006 and December 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.

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:

| ** **                                                                     | ** ** | **June 30, 2006**     | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **Countrywide  Capital I** | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**         | ** ** |
| Balance Sheet:                                                                 |       |                            |       |   |   |   |   |   |   |
| Junior subordinated debentures receivable                                      |       |                            | $          | 307,457 |   |   |   | $ | 205,291 |   |   |
| Other assets                                                                   |       |                            | 1,031      |   |   |   | 692 |   |   |
| Total assets                                                                   |       |                            | $          | 308,488 |   |   |   | $ | 205,983 |   |   |
| Notes payable                                                                  |       |                            | $          | 9,224 |   |   |   | $ | 6,173 |   |   |
| Other liabilities                                                              |       |                            | 1,031      |   |   |   | 692 |   |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       |                            | 298,233    |   |   |   | 199,118 |   |   |
| Shareholder’s equity                                                      |       |                            | —     |   |   |   | — |   |   |
| Total liabilities  and shareholder’s equity                               |       |                            | $          | 308,488 |   |   |   | $ | 205,983 |   |   |

 

24

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

 

| ** **                                                                     | ** ** | **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 |   |   |

 

| ** **                 | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                         | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                                 | ** ** |
| Statement of  Earnings:    |       |                                                    |       |   |   |   |   |   |   |
| Revenues                   |       |                                                    | $          | 12,416 |   |   |   | $ | 8,321 |   |   |
| Expenses                   |       |                                                    | (12,416    | ) |   |   | (8,321 | ) |   |
| Provision for income taxes |       |                                                    | —     |   |   |   | — |   |   |
| Net earnings               |       |                                                    | $          | — |   |   |   | $ | — |   |   |

 

| ** **                 | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                         | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                                 | ** ** |
| Statement of  Earnings:    |       |                                                    |       |   |   |   |   |   |   |
| Revenues                   |       |                                                    | $          | 12,416 |   |   |   | $ | 8,321 |   |   |
| Expenses                   |       |                                                    | (12,416    | ) |   |   | (8,321 | ) |   |
| Provision for income taxes |       |                                                    | —     |   |   |   | — |   |   |
| Net earnings               |       |                                                    | $          | — |   |   |   | $ | — |   |   |

 

***Subordinated Debt***

In May 2006, the Company issued $1.0 billion of6.25% fixed rate unsecured subordinated notes maturing May 2016. The notesrank subordinate and junior to all of the Company’s senior indebtedness, andrank senior to the Company’s junior subordinated debentures underlying theCompany’s trust preferred securities.

During the year ended December 31, 2005, theCompany issued $0.5 billion of unsecured subordinated notes maturing April 1,2011. The notes pay interest quarterly at a floating rate and are callable onor after April 1, 2006.  The noteswere called on July 3, 2006.

At June 30, 2006, theweighted-average interest rate was 5.74%.

25

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

***Convertible Securities and LYONs ConvertibleDebentures***

In February 2001, the Company issued zero-couponLiquid Yield Option Notes (“LYONs”) with an aggregate face value of $675million, or $1,000 per note, due February 8, 2031. The LYONs were issuedat a discount to yield 1.0% to maturity, or 8.25% to the first call date. Undercertain conditions, the LYONs were convertible into the Company’s common stockat the rate of 46.3 shares per $1,000 note.

In September 2004, the Company completed anexchange offer, through which LYONs were exchanged for convertible securitieswith terms similar to the LYONs, except for a provision to allow settlement incash and stock upon the debentures’ conversion. As a result of the exchangeoffer, $637.2 million or 94.7% of the outstanding LYONs were exchanged forconvertible securities during the year ended December 31, 2004.

During the quarter ended March 31,2006, the Company converted the remaining debt outstanding through the paymentof cash and 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:

| ** **                                      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Securities sold  under agreements to repurchase |       | $                       | 37,711,225 |                        | $          | 33,284,205 |   |
| Federal funds  purchased                        |       | 450,000                 |       | 869,000                     |       |
|                                            |       | $                       | 38,161,225 |                        | $          | 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 loans andsecurities. All securities underlying repurchase agreements are held insafekeeping by broker-dealers or banks. All agreements are to repurchase thesame or substantially identical securities.

At June 30, 2006, repurchase agreements weresecured by $12.4 billion of trading securities, $42.7 billion ofsecurities purchased under agreements to resell and securities borrowed, $0.9billion in investments in other financial instruments, and $1.0 billion ofother assets. At June 30, 2006, $20.6 billion of the pledged securitiespurchased under agreements to resell and securities borrowed related to amountsoffset against securities sold under agreements to repurchase pursuant tomaster netting agreements.

At December 31, 2005, repurchase agreements weresecured by $9.0 billion of trading securities, $28.3 billion of securitiespurchased under agreements to resell and securities borrowed, $2.1 billion ininvestments in other financial instruments, and $0.1 billion of other assets.At December 31, 2005, $12.1 billion of the pledged securitiespurchased under agreements to resell and securities borrowed related to amountsoffset against securities sold under agreements to repurchase pursuant tomaster netting agreements.

26

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

**Note 14—DepositLiabilities**

The following table summarizes deposit balances:

| ** **                                                | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)** | ** ** |
| Time deposits:                                            |       |                    |       |                        |       |
| Retail                                                    |       | $                       | 17,115,775 |                        | $          | 13,434,338 |   |
| Brokered                                                  |       | 10,925,457              |       | 7,442,073                   |       |
| Company-controlled  custodial deposit accounts            |       | 15,523,341              |       | 13,200,801                  |       |
| Money market  accounts                                    |       | 5,797,604               |       | 4,466,195                   |       |
| Non-interest-bearing  checking accounts                   |       | 1,267,170               |       | 926,645                     |       |
| Savings accounts                                          |       | 1,077                   |       | 823                         |       |
|                                                      |       | 50,630,424              |       | 39,470,875                  |       |
| Basis adjustment through application of hedge  accounting |       | (78,375                 | )          | (31,959                     | )          |
|                                                      |       | $                       | 50,552,049 |                        | $          | 39,438,916 |   |

 

**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 “Federal Reserve”).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.

At June 30,2006 and December 31, 2005, the Company and the Bank’s regulatory capitalratios and amounts and minimum required capital ratios for the Company and theBank to maintain a “well capitalized” status were as follows:

| ** **               | ** ** | **June 30, 2006**                      | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 7.0 | % |   | $ | 13,957,894 |   |   | 7.1 | % |   | $ | 6,044,838 |   |
| Risk-Based  Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 10.9 | % |   | $ | 13,957,894 |   |   | 11.0 | % |   | $ | 6,044,838 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 12.8 | % |   | $ | 16,294,990 |   |   | 11.3 | % |   | $ | 6,208,326 |   |

----

(1)          Minimum required toqualify as “well capitalized.”

27

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

 

| ** **               | ** ** | **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.”

**Note 16—SupplementalCash Flow Information**

Thefollowing table presents supplemental cash flow information:

| ** **                                                                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                                           | ** ** | **(in thousands)**                           | ** ** |
| Cash used to pay  interest                                                                                                           |       | $                                                 | 4,000,000  |   | $ | 2,069,166 |   |
| Cash used to pay  income taxes                                                                                                       |       | 20,115                                            |       | 88,152 |   |
| Non-cash investing  activities:                                                                                                      |       |                                              |       |   |   |
| Transfer of loans from loans held for investment to  mortgage loans held for sale                                                    |       | 672,809                                           |       | — |   |
| Unrealized (loss) gain on available-for-sale  securities, foreign currency translation adjustments and cash flow hedges,  net of tax |       | (124,954                                          | )          | 24,021 |   |
| Retention of other financial instruments in  securitization transactions                                                             |       | 765,319                                           |       | 909,718 |   |
| Servicing resulting from transfer of financial  assets                                                                               |       | 2,551,169                                         |       | 2,224,162 |   |
| Non-cash financing  activities:                                                                                                      |       |                                              |       |   |   |
| Decrease in Mortgage Loans Held in SPEs 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                                             |       | 2,105 |   |
| Tax effect of interest on conversion of convertible  debt                                                                            |       | —                                            |       | 1,939 |   |
|                                                                                                                                      |            |                                                   |            |  |  |  |  |

 

**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 threedistinct sectors: 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 

28

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

divisions are: theConsumer Markets Lending Division, the Full Spectrum Lending Division, theWholesale Lending Division and the Correspondent Lending Division. The ConsumerMarkets and Full Spectrum Lending Divisions source mortgage loans directly withconsumers through the Company’s retail branch network and call centers, as wellas through real estate agents and homebuilders. The Wholesale Lending Divisionsources mortgage loans primarily from mortgage brokers. The CorrespondentLending Division acquires mortgage loans from other mortgage lenders, includingfinancial 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.

The Banking Segment’s operations include theinvestment and fee-based activities of Countrywide Bank together with theactivities of Countrywide Warehouse Lending. Countrywide Bank invests primarilyin mortgage loans sourced from the Loan Production Sector. CountrywideWarehouse Lending provides third-party mortgage lenders with temporaryfinancing 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, CountrywideCapital Markets Asia Ltd, Countrywide Alternative Investments Inc., CSC Futures Inc.,Countrywide Capital Markets Asia (H.K.) Limited and CAA Management 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; UKValuation Limited, a provider of property valuationservices in the UK; Countrywide International Technology Holdings Limited, alicensor of loan origination processing, servicing and residential real estatevalue assessment technology; and CFC India Private Limited, a provider of callcenter, data processing and information technology related services.

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

29

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

Included in thetables below labeled “Other” are the holding company activities and certainreclassifications to conform management reporting to the consolidated financialstatements:

| ** **              | ** ** | **Quarter Ended June 30, 2006** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                             | ** ** |
| Revenues:               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                   | 1,489,484  |   | $ | 271,131 |   |   | $ | 78,765 |   |   | $ | 1,839,380 |   | $ | 623,656 |   | $ | 192,263 |   | $ | 311,950 |   |   | $ | 15,202 |   |   | $ | 17,765 |   | $ | 3,000,216 |   |
| Intersegment            |       | (7,040                                              | )          | 230,265 |   |   | — |   |   | 223,225 |   | (179,946 | ) | 65,419 |   | — |   |   | — |   |   | (108,698 | ) | — |   |
| Total Revenues          |       | $                                                   | 1,482,444  |   | $ | 501,396 |   |   | $ | 78,765 |   |   | $ | 2,062,605 |   | $ | 443,710 |   | $ | 257,682 |   | $ | 311,950 |   |   | $ | 15,202 |   |   | $ | (90,933 | ) | $ | 3,000,216 |   |
| Pre-tax Earnings (Loss) |       | $                                                   | 324,564    |   | $ | 279,283 |   |   | $ | 26,225 |   |   | $ | 630,072 |   | $ | 325,371 |   | $ | 157,590 |   | $ | 88,747 |   |   | $ | 2,820 |   |   | $ | (10,577 | ) | $ | 1,194,023 |   |
| Total Assets            |       | $                                                   | 35,317,511 |   | $ | 23,634,973 |   |   | $ | 89,407 |   |   | $ | 59,041,891 |   | $ | 85,962,550 |   | $ | 49,355,886 |   | $ | 2,393,146 |   |   | $ | 175,314 |   |   | $ | (1,944,324 | ) | $ | 194,984,463 |   |

 

| ** **              | ** ** | **Quarter Ended June 30, 2005** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                             | ** ** |
| Revenues:               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       |                                                | $          | 1,219,873 |   |   | $ | 191,536 |   |   | $ | 69,233 |   |   | $ | 1,480,642 |   | $ | 408,967 |   | $ | 147,844 |   | $ | 248,972 |   |   | $ | 56,203 |   |   | $ | (34,685 | ) | $ | 2,307,943 |   |
| Intersegment            |       |                                                | 17,372     |   |   | 83,870 |   |   | — |   |   | 101,242 |   | (63,941 | ) | 30,270 |   | — |   |   | — |   |   | (67,571 | ) | — |   |
| Total Revenues          |       |                                                | $          | 1,237,245 |   |   | $ | 275,406 |   |   | $ | 69,233 |   |   | $ | 1,581,884 |   | $ | 345,026 |   | $ | 178,114 |   | $ | 248,972 |   |   | $ | 56,203 |   |   | $ | (102,256 | ) | $ | 2,307,943 |   |
| Pre-tax Earnings (Loss) |       |                                                | $          | 409,135 |   |   | $ | 89,103 |   |   | $ | 28,211 |   |   | $ | 526,449 |   | $ | 251,161 |   | $ | 104,851 |   | $ | 57,708 |   |   | $ | 5,321 |   |   | $ | (10,609 | ) | $ | 934,881 |   |
| Total Assets            |       |                                                | $          | 26,303,095 |   |   | $ | 16,306,919 |   |   | $ | 63,538 |   |   | $ | 42,673,552 |   | $ | 69,712,488 |   | $ | 43,541,171 |   | $ | 2,027,559 |   |   | $ | 262,995 |   |   | $ | 400,056 |   | $ | 158,617,821 |   |

 

30

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

 

| ** **              | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|-------------------------|------------|-------------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                        | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                                     | ** ** |
| Revenues:               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                           | 2,852,573  |   | $ | 565,534 |   | $ | 150,393 |   | $ | 3,568,500 |   | $ | 1,209,264 |   | $ | 380,031 |   | $ | 615,097 |   |   | $ | 50,280 |   |   | $ | 12,992 |   | $ | 5,836,164 |   |
| Intersegment            |       | (28,530                                                     | )          | 405,698 |   | — |   | 377,168 |   | (313,922 | ) | 140,774 |   | — |   |   | — |   |   | (204,020 | ) | — |   |
| Total Revenues          |       | $                                                           | 2,824,043  |   | $ | 971,232 |   | $ | 150,393 |   | $ | 3,945,668 |   | $ | 895,342 |   | $ | 520,805 |   | $ | 615,097 |   |   | $ | 50,280 |   |   | $ | (191,028 | ) | $ | 5,836,164 |   |
| Pre-tax Earnings (Loss) |       | $                                                           | 608,713    |   | $ | 528,001 |   | $ | 48,432 |   | $ | 1,185,146 |   | $ | 666,457 |   | $ | 313,163 |   | $ | 153,690 |   |   | $ | 12,988 |   |   | $ | (18,058 | ) | $ | 2,313,386 |   |
| Total Assets            |       | $                                                           | 35,317,511 |   | $ | 23,634,973 |   | $ | 89,407 |   | $ | 59,041,891 |   | $ | 85,962,550 |   | $ | 49,355,886 |   | $ | 2,393,146 |   |   | $ | 175,314 |   |   | $ | (1,944,324 | ) | $ | 194,984,463 |   |

 

| ** **              | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|-------------------------|------------|-------------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                        | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                                     | ** ** |
| Revenues:               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                           | 2,687,834  |   | $ | 320,784 |   | $ | 129,825 |   | $ | 3,138,443 |   | $ | 742,620 |   | $ | 317,270 |   | $ | 472,441 |   |   | $ | 111,317 |   |   | $ | (69,263 | ) | $ | 4,712,828 |   |
| Intersegment            |       | 957                                                         |       | 144,107 |   | — |   | 145,064 |   | (101,296 | ) | 64,753 |   | — |   |   | — |   |   | (108,521 | ) | — |   |
| Total Revenues          |       | $                                                           | 2,688,791  |   | $ | 464,891 |   | $ | 129,825 |   | $ | 3,283,507 |   | $ | 641,324 |   | $ | 382,023 |   | $ | 472,441 |   |   | $ | 111,317 |   |   | $ | (177,784 | ) | $ | 4,712,828 |   |
| Pre-tax Earnings (Loss) |       | $                                                           | 1,143,792  |   | $ | 106,292 |   | $ | 47,996 |   | $ | 1,298,080 |   | $ | 467,101 |   | $ | 226,898 |   | $ | 112,285 |   |   | $ | 9,360 |   |   | $ | (29,846 | ) | $ | 2,083,878 |   |
| Total Assets            |       | $                                                           | 26,303,095 |   | $ | 16,306,919 |   | $ | 63,538 |   | $ | 42,673,552 |   | $ | 69,712,488 |   | $ | 43,541,171 |   | $ | 2,027,559 |   |   | $ | 262,995 |   |   | $ | 400,056 |   | $ | 158,617,821 |   |

 

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

**Note 18—SummarizedFinancial Information**

Summarizedfinancial information for Countrywide Financial Corporation (parent only) andsubsidiaries is as follows:
|                                                                                                   | ** ** | **June 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                                                                      |       | $                                                           | —     |   |   | $ | 29,448,068 |   |   | $ | 5,958,259 |   | $ | (15,355 | ) | $ | 35,390,972 |   |
| Trading securities                                                                                |       | —                                                      |       |   | 332,591 |   |   | 15,210,342 |   | (187,217 | ) | 15,355,716 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       | —                                                      |       |   | — |   |   | 26,814,927 |   | (1,529,736 | ) | 25,285,191 |   |
| Loans held for investment,  net                                                                   |       | —                                                      |       |   | 4,281,509 |   |   | 75,533,616 |   | (7,526 | ) | 79,807,599 |   |
| Investments in other financial instruments                                                        |       | 84,370                                                      |       |   | 2,539,605 |   |   | 9,022,600 |   | (50,041 | ) | 11,596,534 |   |
| Mortgage servicing rights, at fair value                                                |       | —                                                      |       |   | 15,314,322 |   |   | 6,253 |   | — |   | 15,320,575 |   |
| Other assets                                                                                      |       | 34,362,110                                                  |       |   | 10,233,748 |   |   | 10,064,934 |   | (42,432,916 | ) | 12,227,876 |   |
| Total assets                                                                                      |       | $                                                           | 34,446,480 |   |   | $ | 62,149,843 |   |   | $ | 142,610,931 |   | $ | (44,222,791 | ) | $ | 194,984,463 |   |
| Notes payable                                                                                     |       | $                                                           | 19,745,154 |   |   | $ | 28,597,669 |   |   | $ | 34,855,531 |   | $ | (6,670,986 | ) | $ | 76,527,368 |   |
| Securities sold under agreements to repurchase  and federal funds  purchased                 |       | —                                                      |       |   | 227,467 |   |   | 39,462,497 |   | (1,528,739 | ) | 38,161,225 |   |
| Deposit liabilities                                                                               |       | —                                                      |       |   | — |   |   | 50,657,724 |   | (105,675 | ) | 50,552,049 |   |
| Other liabilities                                                                                 |       | 404,369                                                     |       |   | 29,122,490 |   |   | 7,628,799 |   | (21,708,794 | ) | 15,446,864 |   |
| Equity                                                                                            |       | 14,296,957                                                  |       |   | 4,202,217 |   |   | 10,006,380 |   | (14,208,597 | ) | 14,296,957 |   |
| Total liabilities  and equity                                                                     |       | $                                                           | 34,446,480 |   |   | $ | 62,149,843 |   |   | $ | 142,610,931 |   | $ | (44,222,791 | ) | $ | 194,984,463 |   |

 

32

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

 
|                                        | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | (37,720 | ) |   |   | $ | 3,465,004 |   |   | $ | 2,729,582 |   | $ | (320,702 | ) |   | $ | 5,836,164 |   |   |
| Expenses                               |       |                                                        | 6,591      |   |   |   | 2,583,343 |   |   | 1,232,856 |   | (300,012 | ) |   | 3,522,778 |   |   |
| (Benefit) provision for income  taxes  |       |                                                        | (18,121    | ) |   |   | 344,756 |   |   | 589,346 |   | (8,296 | ) |   | 907,685 |   |   |
| Equity in net earnings of subsidiaries |       |                                                        | 1,431,891  |   |   |   | — |   |   | — |   | (1,431,891 | ) |   | — |   |   |
| Net earnings                           |       |                                                        | $          | 1,405,701 |   |   |   | $ | 536,905 |   |   | $ | 907,380 |   | $ | (1,444,285 | ) |   | $ | 1,405,701 |   |   |

 
|                                                                                                   | ** ** | **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 |   |
| Other assets                                                                                      |       | 29,460,533                                                  |       |   | 8,748,527 |   |   | 13,305,967 |   | (41,274,787 | ) | 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 |   |

 

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

 
|                                        | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | 3,752 |   |   |   | $ | 3,161,922 |   |   | $ | 1,770,439 |   | $ | (223,285 | ) |   | $ | 4,712,828 |   |   |
| Expenses                               |       |                                                        | 12,830     |   |   |   | 1,890,920 |   |   | 929,999 |   | (204,799 | ) |   | 2,628,950 |   |   |
| (Benefit) provision for income taxes   |       |                                                        | (4,002     | ) |   |   | 514,525 |   |   | 325,575 |   | (7,530 | ) |   | 828,568 |   |   |
| Equity in net earnings of subsidiaries |       |                                                        | 1,260,386  |   |   |   | — |   |   | — |   | (1,260,386 | ) |   | — |   |   |
| Net earnings                           |       |                                                        | $          | 1,255,310 |   |   |   | $ | 756,477 |   |   | $ | 514,865 |   | $ | (1,271,342 | ) |   | $ | 1,255,310 |   |   |

 

**Note 19—Borrower andInvestor Custodial Accounts**

As of June 30, 2006and December 31, 2005, the Company managed $24.1 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, $16.7 billion and $14.0billion, respectively, were deposited at the Bank, of which $15.5 billion and$13.2 billion, respectively were interest bearing and included in the Company’sdeposit liabilities as custodial deposit accounts with an additional $1.2billion and $0.8 billion, respectively included in deposit liabilities innon-interest bearing checking accounts. The remaining balances were depositedwith other depository institutions.

**Note 20—Legal Proceedings**

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—Loan Commitments**

As of June 30, 2006and December 31, 2005, the Company had undisbursed home equity lines ofcredit commitments of $8.9 billion and $7.2 billion, respectively, as well asundisbursed construction loan commitments of $1.6 billion and $1.5 billion,respectively. As of June 30, 2006, outstanding commitments to fundmortgage loans totaled $42.8 billion.

**Note 22—Subsequent Events**

On July 3, 2006, the Company called $0.5 billionof unsecured subordinated notes maturing April 1, 2011.

On July 25, 2006, theCompany announced that its Board of Directors declared a dividend of$0.15 per common share payable August 31, 2006 to shareholders ofrecord on August 15, 2006.

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

**Note 23—Recently IssuedAccounting Pronouncements**

In February 2006,the FASB issued Statement of Financial Accounting Standards No. 155, “Accountingfor Certain Hybrid Financial Instruments” (“SFAS 155”), an amendment ofSFAS 133 and SFAS 140. This statement:

·       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;

·       establishesa requirement to evaluate interests in securitized financial instruments thatcontain an embedded derivative requiring bifurcation; 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 Company has not determined thefinancial impact of the adoption of SFAS 155.

During July 2006, the Financial AccountingStandards Board adopted 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, “Accountingfor Income Taxes”, relating to the recognition of income tax benefits.

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. Management is assessing the effect of the adoption of FIN 48on the Company.

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**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 presently organizeour businesses into five segments—Mortgage Banking, Banking, Capital Markets,Insurance and Global Operations. Our goal is to continue as a leader inmortgage banking and use this leadership position to take advantage ofmeaningful opportunities that build upon this business and provide sources ofearnings that tend to be sustainable in various interest rate environments.

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

***Second Quarter Results***

The second quarter of 2006 was characterized by bothrising interest rates and a relatively flat yield curve. The amount of totalU.S. mortgage originations nationally declined 9% when compared to the secondquarter of 2005; however, due to market share increases, our mortgage loanproduction in the second quarter of 2006 declined only 3% from the secondquarter of 2005.

Our consolidated net earnings for the second quarterof 2006 were $722.2 million, an increase of 27% from 2005’s second quarter netearnings of $566.5 million. The increase in our earnings resultedprimarily from a 20% increase in the pre-tax profitability of our MortgageBanking Segment and a 30% increase in pre-tax profitability of our BankingSegment driven by an increase in average earning assets.

The increase in ourMortgage Banking Segment’s pre-tax profitability was primarily due to improvedprofitability in our Loan Servicing Sector partially offset by a decline in thepre-tax profitability of our Loan Production Sector. Our Loan Servicing Sectorbenefited primarily from an increase in the value of our MSRs and otherretained interests, net of the Servicing Hedge. Our Loan Production Sector wasaffected by increased operating expenses as the Company continued to build itsmortgage loan production capacity, but this negative result was partiallyoffset by an increase in revenues.

***Mortgage Market***

The mortgage lending business is the primary source ofour revenues and earnings. As a result, the dominant external influences on ouroperating results are the demand for mortgage loans in the U.S., which isaffected by such factors as prevailing mortgage interest rates and the strengthof the U.S. housing market, and economic factors affecting borrowers’ abilityto repay the loans we either hold or sell with credit enhancements provided.

For the quarter and six months ended June 30,2006,we estimate that total U.S. residential mortgage production was $767billion and $1,431 billion, respectively, compared to $845 billion and $1,518billion for the quarter and six months ended June 30, 2005, respectively. Basedon these internal mortgage market estimates, we increased our market share to15.2% for the current quarter from 14.2% in the year-ago period. However, ourmarket share decreased from 15.6% in the quarter ended March 31, 2006. Thedecrease in market share from the first quarter of 2006 was due to a decline inour Correspondent Lending division market share that resulted from aggressivepricing that we were not willing to match.

Third party forecasterspredict total U.S. mortgage production for 2006 to be between $2.38 trillionand $2.41 trillion, compared to $2.9 trillion in 2005. Due to differences inproducts represented and estimation methods, mortgage market estimates vary. Weestimate the mortgage market for 2006 to be $2.6 trillion compared to $3.3trillion in 2005.

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***Loan Production***

Our total loan production volume decreased during thesecond quarter although at a slower rate than the decline in the mortgagemarket. Our adjustable rate loan production has decreased from 50% of the totalproduction in the quarter ended June 30, 2005 to 47% in the currentquarter, reflecting the decreased relative attractiveness of these loanscompared to fixed-rate loans as the yield curve flattens. The trend is alsoreflected in our pay-option loan production, which has decreased from approximately21% of our loan production during the quarter ended June 30, 2005, toapproximately 17% of our production during the quarter ended June 30, 2006.Approximately 72% of the pay-option arms originated in the quarter ended June 30,2006 were retained in our Bank’s investment loan portfolio.

Pay-option loans differfrom “traditional” monthly-amortizing loans by providing borrowers with theoption to make fully amortizing, interest-only, or “negative-amortizing”payments.  Our underwriting standardsspecify that a borrower must qualify for a pay-option loan at the loan’s fullyamortizing payment based on fully indexed interest rates. These requirementsnotwithstanding, the lower initial payment requirements of pay-option loans mayincrease the credit risk inherent in our loans held for investment as therequired monthly payments for pay-option loans eventually increase. Borrowersmay be less able to pay the increased amounts and, therefore, more likely todefault on the loan, than a borrower using a more traditionalmonthly-amortizing loan. Our exposure to this higher credit risk is increasedby 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 not fully documented. Our pay-option investment loanportfolio borrowers had, at the time the loans were originated, average FICOscores (a measure of borrower creditworthiness) of 721 and originalloan-to-value and combined loan-to-values of 75% and 78%, respectively. Webelieve this product is an attractive portfolio investment as the higher creditrisk inherent in pay-option loans is balanced by higher expected returnsrelative to other first mortgage loan products.

***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 mortgage servicing rights (“MSRs”). Wemanage interest rate risk through the natural counterbalance of our loanproduction operations and our investment in MSRs, as well as with variousfinancial instruments including derivatives.

·       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 our residential mortgage lending activities in both theMortgage Banking and Banking Segments. Credit risk is the potential forfinancial loss resulting from the failure of a borrower or an institution tohonor its contractual obligations to us. Credit risk has historically 

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mostdirectly affected our investment in other financial instruments that are creditsubordinated to other securities. As our investment in mortgage loans held forinvestment increases, credit risk related to these loans is becoming a moreprominent component of our credit risk profile. In addition, as we engage inmore direct sales of loans (vs. securitizations), the representations andwarranties made in such transactions increase the amount of credit risk weretain. 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.

***Liquidity and Capital***

Our liquidity and financing requirements aresignificant. We meet these requirements in a variety of ways, including use ofthe public corporate debt and equity markets, mortgage- and asset-backedsecurities markets, and through the financing activities of our Bank, such as,deposit-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 businessesand meet our financing needs is influenced by regulatory agency and public debtrating agency capital requirements. These requirements influence the nature ofthe financing we are able to obtain, the assets in which we invest and the rateat which we are able to grow. At June 30, 2006, we exceeded the regulatorycapital requirements to be classified as “well capitalized,” with a tier 1leverage capital ratio of 7.0% and total risk based ratio of 12.8%. Our publicratings were classified “investment grade,” with long-term ratings of A, A3 andA by Standard & Poors, Moody’s Investors Service and Fitch,respectively.

***Competition***

The mortgage industrycontinues to undergo consolidation and we expect this trend to continue. Themortgage-lending industry is dominated by large, sophisticated financialinstitutions. To compete effectively in the future, we will be required tomaintain a high level of operational, technological, and managerial expertise,as well as an ability to attract capital at a competitive cost. We believe thatwe will 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 accounting policies involve the following three areas: 1)accounting for gains on sales of loans and securities; 2) accounting for MSRsand retained interests, including valuation of these retained interests; and 3)accounting for derivatives and our related interest rate risk managementactivities.

Effective January 1,2006, we adopted Statement of Financial Accounting Standards No. 156—Accountingfor Servicing of Financial Assets (“SFAS 156”), which amends Statement ofFinancial Accounting Standards No. 140 - Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”).SFAS 156 changes the accounting for, and reporting of, the recognition andmeasurement of separately recognized servicing assets and liabilities.Accordingly, the adoption of SFAS 156 has changed the Company’s accountingpolicies relating to gain on sale of loans and securities and the accountingfor MSRs subsequent to their initial recognition, effective January 1,2006. A 

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discussionof the critical accounting policies applied through December 31, 2005 isincluded in 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. Depending on the type ofsecuritization, we may also retain interests, including interest-onlysecurities, 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 relative fairvalues. The gain on sale we report is the difference between the proceeds wereceive from the sale and the cost allocated to the securities or loans sold.The proceeds include cash and other assets obtained (MSRs) less any liabilitiesincurred (i.e., liabilities for representations and warranties or otherrecourse 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.

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     |   |

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(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.

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***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 June 30, 2006 and 2005***

***Consolidated Earnings Performance***

Net earnings for the quarter ended June 30, 2006were $722.2 million, a 27% increase from the year-ago period. Our dilutedearnings per share were $1.15, a 25% increase from the year-ago period.

The increase in our earnings resulted primarily froman increase in the profitability of our Mortgage Banking Segment which producedpre-tax earnings of $630.1 million for the quarter ended June 30, 2006, up20% from the same period last year. The increase in the profitability of ourMortgage Banking Segment was primarily due to improved profitability in ourLoan Servicing Sector primarily as a result of improvement in the changes invalue of our MSRs and retained interests, net of the Servicing Hedge. Theincrease in the Servicing Sector was partially offset by a decline in theprofitability of our Loan Production Sector, caused by increased operatingexpenses but partially mitigated by an increase in gain on sale of loans andsecurities.

The Banking Segmentproduced pre-tax earnings of $325.4 million, an increase of 30% from the year-agoperiod. The increase in profitability of our Banking Segment was primarily dueto a 37% increase in average interest-earning assets at Countrywide Bank overthis period.

**Operating SegmentResults**

Pre-taxearnings (loss) by segment are summarized below:
|                        | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in thousands)**                | ** ** |
| Mortgage Banking:      |       |                                   |       |   |   |
| Loan Production        |       | $                                      | 324,564    |   | $ | 409,135 |   |
| Loan Servicing         |       | 279,283                                |       | 89,103 |   |
| Loan Closing Services  |       | 26,225                                 |       | 28,211 |   |
| Total Mortgage Banking |       | 630,072                                |       | 526,449 |   |
| Banking                |       | 325,371                                |       | 251,161 |   |
| Capital Markets        |       | 157,590                                |       | 104,851 |   |
| Insurance              |       | 88,747                                 |       | 57,708 |   |
| Global Operations      |       | 2,820                                  |       | 5,321 |   |
| Other                  |       | (10,577                                | )          | (10,609 | ) |
| Total                  |       | $                                      | 1,194,023  |   | $ | 934,881 |   |

 

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

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Mortgage loan productionby segment and product, net of intercompany sales, is summarized below:
|                                           | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in millions)**                 | ** ** |
| Segment:                                  |       |                                   |       |   |   |
| Mortgage Banking                          |       | $                                      | 103,635    |   | $ | 101,154 |   |
| Capital Markets - Conduit acquisitions(1) |       | 6,613                                  |       | 3,126 |   |
| Banking Operations                        |       | 6,361                                  |       | 16,067 |   |
| Total Mortgage Loan Fundings              |       | 116,609                                |       | 120,347 |   |
| Commercial real estate                    |       | 997                                    |       | 732 |   |
|                                      |       | $                                      | 117,606    |   | $ | 121,079 |   |
| Product:                                  |       |                                   |       |   |   |
| Prime Mortgage                            |       | $                                      | 92,942     |   | $ | 98,852 |   |
| Prime Home Equity                         |       | 12,461                                 |       | 11,059 |   |
| Nonprime Mortgage                         |       | 11,206                                 |       | 10,436 |   |
| Commercial real estate                    |       | 997                                    |       | 732 |   |
|                                      |       | $                                      | 117,606    |   | $ | 121,079 |   |

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(1)          Acquisitions from thirdparties

Thefollowing table summarizes loan production by purpose and by interest ratetype:
|                         | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                 | ** ** |
| **Purpose:**            |       |                                   |       |   |   |
| Non-purchase            |       | $                                      | 61,738     |   | $ | 59,975 |   |
| Purchase                |       | 55,868                                 |       | 61,104 |   |
|                    |       | $                                      | 117,606    |   | $ | 121,079 |   |
| **Interest Rate Type:** |       |                                   |       |   |   |
| Fixed Rate              |       | $                                      | 60,672     |   | $ | 53,784 |   |
| Adjustable Rate         |       | 56,934                                 |       | 67,295 |   |
|                    |       | $                                      | 117,606    |   | $ | 121,079 |   |

 

**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 expect the natural counterbalance of these sectorsto continue to reduce the impact of changes in mortgage interest rates on ourearnings.

***Loan Production Sector***

The Loan Production Sector sources mortgage loansthrough the four production divisions of Countrywide Home Loans (“CHL”)—ConsumerMarkets, Wholesale Lending, Correspondent Lending and Full Spectrum Lending.These loans are funded through one of these divisions and, beginning in thethird quarter of 2005, through Countrywide Bank.

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Thefollowing table summarizes Mortgage Banking loan production by channel, byMortgage Loan type, by purpose and by interest rate type:
|                                      | ** ** | **Quarters Ended  June 30,(1)** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in millions)**                    | ** ** |
| **Channel:**                         |       |                                      |       |   |   |
| Originated:                          |       |                                      |       |   |   |
| Consumer Markets                     |       | $                                         | 32,539     |   | $ | 30,509 |   |
| Wholesale Lending                    |       | 23,879                                    |       | 19,613 |   |
| Full Spectrum Lending                |       | 8,750                                     |       | 5,913 |   |
| Total originated                     |       | 65,168                                    |       | 56,035 |   |
| Purchased—Correspondent Lending |       | 38,467                                    |       | 45,119 |   |
| ** **                           |       | $                                         | 103,635    |   | $ | 101,154 |   |
| **Mortgage Loan Type:**              |       |                                      |       |   |   |
| Prime Mortgage                       |       | $                                         | 82,229     |   | $ | 84,609 |   |
| Prime Home Equity                    |       | 11,235                                    |       | 6,875 |   |
| Nonprime Mortgage                    |       | 10,171                                    |       | 9,670 |   |
|                                 |       | $                                         | 103,635    |   | $ | 101,154 |   |
| **Purpose:**                         |       |                                      |       |   |   |
| Non-purchase                         |       | $                                         | 54,080     |   | $ | 50,097 |   |
| Purchase                             |       | 49,555                                    |       | 51,057 |   |
|                                 |       | $                                         | 103,635    |   | $ | 101,154 |   |
| **Interest Rate Type:**              |       |                                      |       |   |   |
| Fixed Rate                           |       | $                                         | 55,383     |   | $ | 50,453 |   |
| Adjustable Rate                      |       | 48,252                                    |       | 50,701 |   |
|                                 |       | $                                         | 103,635    |   | $ | 101,154 |   |

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(1)          Includes $17.7 billionof loans funded by Countrywide Bank during the quarter ended June 30, 2006.The Bank did not fund any loans for the Mortgage Banking Segment during thequarter ended June 30, 2005.

Mortgage Banking loan production volume for thequarter ended June 30, 2006 increased 2% from the year-ago period as aresult of increased market share in our originated channels. Our market shareof purchased production (Correspondent Lending) declined as a result of aggressivepricing that we were not willing to meet. Although purchased productiondeclined in the current quarter compared to the year ago quarter, mortgages topurchase homes sourced through our origination channels increased $1.2 billion,or 4%.

The Consumer Markets Division’s commissioned salesforce contributed $12.2 billion in purchase originations during the quarterended June 30, 2006, an 8% decrease from the year-ago period. Purchaseproduction generated by the commissioned sales force represented 76% of theConsumer Markets Division’s total purchase production for the quarter ended June 30,2006. The Consumer Markets Division continues to expand its commissioned salesforce, which emphasizes purchase loan production, to 6,432 at June 30,2006, an increase of 1,047, or 19%, over the year-ago period. This Division’sbranch network has grown to 745 branch offices at June 30, 2006, anincrease of 129 offices from June 30, 2005.

The Wholesale Lending and Full Spectrum LendingDivisions also continue to increase their sales forces as a means to increasemarket share. At June 30, 2006, the sales force in the Wholesale LendingDivision numbered 1,483, an increase of 28% compared to June 30, 2005. TheFull Spectrum Lending Division expanded its commissioned sales force to 4,872,an increase of 46%, compared to June 30, 2005 

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and has expanded itsbranch network to 215 branch offices at June 30, 2006, an increase of 36offices over the year-ago period.

In the quarter ended June 30, 2006, 47% of ourloan production was adjustable-rate in comparison to 50% in the year-agoperiod. The decrease in amount of adjustable-rate production reflects theincrease in short-term interest rates during the current period and therelatively flat yield curve, increasing the relative attractiveness offixed-rate financing.

Thepre-tax earnings of the Loan Production Sector are summarized below:
|                                         | ** ** | **Quarters Ended June 30,**       | ** **  |
|-----------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                              | ** ** | **2006**                                         | ** **  | **2005** | ** ** |
| ** **                              | ** ** | **Amount**                                       | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** **  |
| Revenues:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                | 1,061,492   |   |   |   |   |   | $ | 801,046 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 236,191                                          |        |   |   |   |   | 270,022 |   |   |   |   |   |
| Prime Home Equity                       |       | 184,761                                          |        |   |   |   |   | 166,177 |   |   |   |   |   |
| Total revenues                          |       | 1,482,444                                        |        |   | 1.43 | % |   | 1,237,245 |   |   | 1.22 | % |   |
| Expenses:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 646,999                                          |        |   | 0.63 | % |   | 488,385 |   |   | 0.48 | % |   |
| Other operating                         |       | 374,335                                          |        |   | 0.36 | % |   | 251,587 |   |   | 0.25 | % |   |
| Allocated corporate                     |       | 136,546                                          |        |   | 0.13 | % |   | 88,138 |   |   | 0.09 | % |   |
| Total expenses                          |       | 1,157,880                                        |        |   | 1.12 | % |   | 828,110 |   |   | 0.82 | % |   |
| Pre-tax earnings                        |       | $                                                | 324,564     |   |   | 0.31 | % |   | $ | 409,135 |   |   | 0.40 | % |   |
| Total Mortgage Banking  loan production |       | $                                                | 103,635,000 |   |   |   |   |   | $ | 101,154,000 |   |   |   |   |   |

 

Revenues (in dollars and expressed as a percentage ofmortgage loans produced) increased from the year-ago-period driven primarily byimproved Prime Mortgage loan revenues. The gain on sale of Prime Mortgage loansbenefited from tightening credit spreads (the difference between the yield onthe loan and the yield of a U.S. Treasury Security with the same average life).In the quarter ended June 30, 2006, $95.0 billion of mortgage loans, or92% of Mortgage Banking loan production, was sold compared to $100.3 billion ofmortgage loans, or 99% of Mortgage Banking loan production, in the quarterended June 30, 2005.

Expenses (in dollars and as a percentage of loansproduced) increased from the year-ago period, primarily due to increasedcompensation and occupancy costs incurred to accommodate growth in loanproduction capacity made to support the achievement of our long-term objectiveof market share growth. While we continue to expand our loan productioncapacity, we are also adjusting staffing and occupancy levels in markets wheredeclines in production require such adjustments.

During the quarter ended June 30, 2006, the LoanProduction Sector operated at approximately 90% of planned operationalcapacity, compared to 100% during the year-ago period. The primary capacityconstraint in our loan origination activities is the number of loan operationspersonnel we have on staff. Therefore, we measure planned capacity bymultiplying the number of our loan operations personnel by the number of loanswe expect each loan operations staff person to process under normal conditions.Management adjusts staffing levels to account for changes in the current andprojected near-term mortgage market. We plan to continue building our salesstaff as a primary means to increase our market share, particularly forpurchase loans.

43

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Thefollowing table summarizes the number of people included in the Loan ProductionSector workforce:
|                                         | ** ** | **Workforce at  June 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| Sales                                   |       | 16,472                               |       | 12,727 |   |
| Operations:                             |       |                                 |       |   |   |
| Regular employees                       |       | 11,039                               |       | 10,347 |   |
| Temporary staff                         |       | 1,453                                |       | 1,795 |   |
|                                    |       | 12,492                               |       | 12,142 |   |
| Administration  and support             |       | 3,551                                |       | 2,524 |   |
| Total Loan  Production Sector workforce |       | 32,515                               |       | 27,393 |   |

 

***Loan Servicing Sector***

The Loan Servicing Sector includes approximately 7,400employees who service the 7.8 million mortgage loans in our servicingportfolio. The Loan Servicing Sector’s results include fees and other incomeearned and expenses incurred for servicing loans for others; the financialperformance of our investments in MSRs and retained interests and associatedrisk management activities; and profits from subservicing activities. Thelong-term performance of this sector is affected primarily by the level of interestrates, the corresponding effect on the level of projected and actualprepayments in our servicing portfolio, our operational effectiveness and ourability to manage interest rate risk.

Our servicing portfolio grew to $1,196.7 billion at June 30,2006, a 24% increase from June 30, 2005. At the same time, the overallweighted-average note rate of loans in our servicing portfolio increased to6.3% from 5.9% at June 30, 2005.

44

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Thefollowing table summarizes the results for the Loan Servicing Sector:
|                                                                      | ** ** | **Quarters Ended June 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                               |       | $                                                | 939,778       |   |   | 0.324 | % |   | $ | 761,269 |   |   | 0.333 | % |   |
| Miscellaneous  fees                                                  |       | 134,607                                          |          |   | 0.046 | % |   | 117,215 |   |   | 0.051 | % |   |
| Income from  retained interests                                      |       | 128,542                                          |          |   | 0.044 | % |   | 108,140 |   |   | 0.047 | % |   |
| Escrow balance  income                                               |       | 207,154                                          |          |   | 0.071 | % |   | 77,259 |   |   | 0.034 | % |   |
| Realization of  expected cash flows from mortgage servicing rights   |       | (767,751                                         | )             |   | (0.264 | )% |   | — |   |   | — |   |   |
| Amortization of  mortgage servicing  rights                          |       | —                                           |          |   | — |   |   | (482,373 | ) |   | (0.211 | )% |   |
| Operating  revenues                                                  |       | 642,330                                          |          |   | 0.221 | % |   | 581,510 |   |   | 0.254 | % |   |
| Change in fair  value of mortgage servicing rights    |       | 568,585                                          |          |   | 0.196 | % |   | — |   |   | — |   |   |
| Impairment of  mortgage servicing rights                             |       | —                                           |          |   | — |   |   | (1,281,340 | ) |   | (0.560 | )% |   |
| Recovery  (impairment) of retained interests                         |       | 51,531                                           |          |   | 0.018 | % |   | (97,481 | ) |   | (0.042 | )% |   |
| Servicing hedge  (losses) gains                                      |       | (621,074                                         | )             |   | (0.214 | )% |   | 1,147,158 |   |   | 0.501 | % |   |
| Valuation changes, net of Servicing Hedge        |       | (958                                             | )             |   | (0.000 | )% |   | (231,663 | ) |   | (0.101 | )% |   |
| Total servicing revenues                                             |       | 641,372                                          |          |   | 0.221 | % |   | 349,847 |   |   | 0.153 | % |   |
| Operating  expenses                                                  |       | 187,444                                          |          |   | 0.065 | % |   | 161,255 |   |   | 0.070 | % |   |
| Allocated  corporate expenses                                        |       | 21,405                                           |          |   | 0.007 | % |   | 15,006 |   |   | 0.007 | % |   |
| Total servicing expenses                                             |       | 208,849                                          |          |   | 0.072 | % |   | 176,261 |   |   | 0.077 | % |   |
| Interest expense                                                     |       | 153,240                                          |          |   | 0.053 | % |   | 84,483 |   |   | 0.037 | % |   |
| Pre-tax earnings                                                     |       | $                                                | 279,283       |   |   | 0.096 | % |   | $ | 89,103 |   |   | 0.039 | % |   |
| Average servicing  portfolio                                         |       | $                                                | 1,161,569,000 |   |   |   |   |   | $ | 915,582,000 |   |   |   |   |   |

----

(1)          Annualized

Pre-tax earnings in the Loan Servicing Sector were$279.3 million during the quarter ended June 30, 2006, an improvement of$190.2 million from the year-ago period. The increase in pre-tax earnings isdue to improvement in Valuation Changes, net of the Servicing Hedge, which was consistentwith the structure of the Servicing Hedge and the increase in interest ratesduring the quarter and improvement in operating revenues due mainly to a largerservicing portfolio and higher escrow balance benefit resulting from anincrease in the escrow earnings rate. These improvements were partially reducedby increased interest expense related to larger average investments inservicing sector assets and increased cost of debt.

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.

45

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***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 Sectorbut to third parties as well.

The LandSafe companiesproduced $26.2 million in pre-tax earnings in the quarter ended June 30,2006, representing a decrease of 7% from the year-ago period. The decrease inLandSafe’s pre-tax earnings was primarily due to the decline in the mortgagemarket.

**Banking Segment**

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

The Bank also produces loans for sale through ourMortgage Banking Segment. As this activity is a mortgage banking activity, themortgage loan production and the income relating to the sale of these loans isincluded in the Mortgage Banking Segment.

TheBanking Segment achieved pre-tax earnings of $325.4 million during the quarterended June 30, 2006, compared to $251.2 million for the year-ago period.Following is the composition of pre-tax earnings by component:
|                                                  | ** ** | **Quarters Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                       | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                | ** ** |
| Banking  Operations                              |       | $                                      | 328,742    |   | $ | 238,195 |   |
| Countrywide Warehouse  Lending (“CWL”) |       | 13,406                                 |       | 20,965 |   |
| Allocated  corporate expenses(1)                 |       | (16,777                                | )          | (7,999 | ) |
| Total Banking  Segment pre-tax earnings          |       | $                                      | 325,371    |   | $ | 251,161 |   |

----

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

Thefollowing table shows total Banking Operations loan production volume bychannel:
|                        | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in millions)**                 | ** ** |
| Correspondent  Lending |       | $                                      | 3,453      |   | $ | 5,361 |   |
| Wholesale Lending      |       | 2,906                                  |       | 7,638 |   |
| Consumer Markets       |       | 2                                      |       | 3,068 |   |
|                   |       | $                                      | 6,361      |   | $ | 16,067 |   |

 

46

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Therevenues and expenses of Banking Operations are summarized in the followingtable:
|                                                      | ** ** | **Quarters Ended  June 30,**             | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(dollar amounts in   thousands)** | ** ** |
| Interest income                                      |       | $                                                  | 1,240,805  |   | $ | 735,021 |   |
| Interest expense                                     |       | (819,707                                           | )          | (433,683 | ) |
| Net interest income                                  |       | 421,098                                            |       | 301,338 |   |
| Provision for loan  losses                           |       | (35,807                                            | )          | (20,265 | ) |
| Net interest income  after provision for loan losses |       | 385,291                                            |       | 281,073 |   |
| Non-interest income                                  |       | 37,670                                             |       | 37,397 |   |
| Non-interest expense                                 |       | (94,219                                            | )          | (80,275 | ) |
| Pre-tax earnings                                     |       | $                                                  | 328,742    |   | $ | 238,195 |   |
| Efficiency ratio(1)                                  |       | 21                                                 | %          | 24 | % |
| After-tax return on  average assets                  |       | 0.99                                               | %          | 0.99 | % |

----

(1)          Non-interest expensedivided by the sum of net interest income plus non-interest income. The Bank’sefficiency ratio reflects the expensestructure resulting from its relationship with CHL. If Countrywide Bank were a stand-aloneentity, the nature and amount of its expenses would differ from those reported.For example, the fulfillment fees paid by Countrywide Bank to the Loan ProductionSector for origination costs incurred on mortgage loans funded by CountrywideBank are generally determined onan incremental cost basis which is lessthan would be incurred in an arms-length transaction.

47

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The change in net interest income of BankingOperations is summarized below:
|                                                   | ** ** | **Quarters Ended June 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)                                 |       | $                                                | 70,778,676 |   | $ | 1,136,342 |   |   | 6.43 | % |   | $ | 49,526,239 |   | $ | 644,818 |   |   | 5.21 | % |   |
| Securities available-for-sale(2)                  |       | 5,960,904                                        |       | 73,652 |   |   | 4.94 | % |   | 6,642,434 |   | 74,830 |   |   | 4.51 | % |   |
| Short-term investments                            |       | 740,425                                          |       | 9,117 |   |   | 4.94 | % |   | 482,324 |   | 3,470 |   |   | 2.89 | % |   |
| FHLB securities and FRB stock                     |       | 1,413,274                                        |       | 21,694 |   |   | 5.63 | % |   | 1,034,056 |   | 11,903 |   |   | 4.62 | % |   |
| Total earning assets                              |       | 78,893,279                                       |       | 1,240,805 |   |   | 6.29 | % |   | 57,685,053 |   | 735,021 |   |   | 5.10 | % |   |
| Allowance for loan losses                         |       | (131,426                                         | )          |   |   |   |   |   |   | (59,999 | ) |   |   |   |   |   |   |
| Other assets                                      |       | 1,190,491                                        |       |   |   |   |   |   |   | 421,285 |   |   |   |   |   |   |   |
| Total non interest-earning  assets                |       | 1,059,065                                        |       |   |   |   |   |   |   | 361,286 |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                                | 79,952,344 |   |   |   |   |   |   |   | $ | 58,046,339 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits                             |       | $                                                | 5,198,123  |   | 61,012 |   |   | 4.71 | % |   | $ | 2,189,110 |   | 18,019 |   |   | 3.30 | % |   |
| Savings                                           |       | 1,069                                            |       | 3 |   |   | 1.29 | % |   | 1,118 |   | 4 |   |   | 1.35 | % |   |
| Company-controlled custodial deposits        |       | 15,817,734                                       |       | 191,521 |   |   | 4.86 | % |   | 10,447,296 |   | 74,420 |   |   | 2.86 | % |   |
| Time deposits                                     |       | 26,490,658                                       |       | 298,237 |   |   | 4.52 | % |   | 15,184,893 |   | 130,382 |   |   | 3.44 | % |   |
| Total interest-bearing  deposits                  |       | 47,507,584                                       |       | 550,773 |   |   | 4.65 | % |   | 27,822,417 |   | 222,825 |   |   | 3.21 | % |   |
| FHLB advances                                     |       | 23,122,143                                       |       | 244,904 |   |   | 4.25 | % |   | 20,456,319 |   | 169,851 |   |   | 3.33 | % |   |
| Other borrowed funds                              |       | 1,908,181                                        |       | 24,030 |   |   | 5.05 | % |   | 5,289,171 |   | 41,007 |   |   | 3.11 | % |   |
| Total borrowed funds                              |       | 25,030,324                                       |       | 268,934 |   |   | 4.31 | % |   | 25,745,490 |   | 210,858 |   |   | 3.29 | % |   |
| Total interest-bearing  liabilities               |       | 72,537,908                                       |       | 819,707 |   |   | 4.53 | % |   | 53,567,907 |   | 433,683 |   |   | 3.25 | % |   |
| Non  interest-bearing liabilities and equity:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking                     |       | 1,258,320                                        |       |   |   |   |   |   |   | 244,226 |   |   |   |   |   |   |   |
| Other liabilities                                 |       | 750,367                                          |       |   |   |   |   |   |   | 638,495 |   |   |   |   |   |   |   |
| Shareholder’s equity                         |       | 5,405,749                                        |       |   |   |   |   |   |   | 3,595,711 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity |       | 7,414,436                                        |       |   |   |   |   |   |   | 4,478,432 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s equity   |       | $                                                | 79,952,344 |   |   |   |   |   |   |   | $ | 58,046,339 |   |   |   |   |   |   |   |
| Net interest  income                              |       |                                             |       | $ | 421,098 |   |   |   |   |   |   |   | $ | 301,338 |   |   |   |   |   |
| Net interest  spread(3)                           |       |                                             |       |   |   |   | 1.76 | % |   |   |   |   |   |   | 1.85 | % |   |
| Net interest margin(4)                            |       |                                             |       |   |   |   | 2.12 | % |   |   |   |   |   |   | 2.09 | % |   |

----

(1)        Average balances include nonaccrual loans.

(2)        Average balances and yields for securities available-for-sale arebased on average amortized cost computed on the settlement date basis.

(3)        Calculated as yield on total average interest-earning assets lessrate on total average interest-bearing liabilities.

48

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(4)        Calculated as annualized net interest income divided by totalaverage 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. Changes attributable to (i) changesin volume (changes in average outstanding balances multiplied by the priorperiod’s rate), (ii) changes in rate (changes in average interest ratemultiplied by the prior period’s volume), and (iii) changes in rate/volume(changes in rate times the change in volume)—which were allocatedproportionately to the changes in volume and the changes in rate and includedin the relevant column below—were as follows:

| ** **                         | ** ** | **June 30, 2006 vs. June 30, 2005** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Increase (Decrease) Due to**                     | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Volume**                                                        | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                         | ** ** | **(in thousands)**                                           | ** ** |
| Interest-earning assets:           |       |                                                              |       |   |   |   |   |   |   |
| Mortgage loans                     |       | $                                                                 | 291,892    |   | $ | 199,632 |   |   | $ | 491,524 |   |   |
| Securities available-for-sale      |       | (8,060                                                            | )          | 6,882 |   |   | (1,178 | ) |   |
| Short-term investments             |       | 2,424                                                             |       | 3,223 |   |   | 5,647 |   |   |
| Other investments                  |       | 5,160                                                             |       | 4,631 |   |   | 9,791 |   |   |
| Total interest income              |       | $                                                                 | 291,416    |   | $ | 214,368 |   |   | $ | 505,784 |   |   |
| Interest-bearing  liabilities:     |       |                                                              |       |   |   |   |   |   |   |
| Money market deposits              |       | $                                                                 | 32,822     |   | $ | 10,171 |   |   | $ | 42,993 |   |   |
| Savings                            |       | —                                                            |       | (1 | ) |   | (1 | ) |   |
| Escrow deposits                    |       | 49,593                                                            |       | 67,508 |   |   | 117,101 |   |   |
| Time deposits                      |       | 118,379                                                           |       | 49,476 |   |   | 167,855 |   |   |
| Total interest expense             |       | 200,794                                                           |       | 127,154 |   |   | 327,948 |   |   |
| FHLB advances                      |       | 24,093                                                            |       | 50,960 |   |   | 75,053 |   |   |
| Other borrowed  funds              |       | (34,492                                                           | )          | 17,515 |   |   | (16,977 | ) |   |
| Total borrowed funds               |       | (10,399                                                           | )          | 68,475 |   |   | 58,076 |   |   |
| Total interest-bearing liabilities |       | 190,395                                                           |       | 195,629 |   |   | 386,024 |   |   |
| Net interest  income               |       | $                                                                 | 101,021    |   | $ | 18,739 |   |   | $ | 119,760 |   |   |

 

The increase in net interest income is primarily dueto a $21.2 billion or 37% increase in average interest-earning assets, combinedwith a 3 basis point increase in net interest margin.

Banking Operations increased its investment inpay-option loans during the quarter ended June 30, 2006. These loans haveinterest rates that adjust monthly and minimum required payments that adjustannually, resulting in the potential for negative amortization. Minimum monthlypayments may 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 adequate to repay a loan, thefully amortizing loan payment amount is re-established after either five or tenyears and again every five years thereafter. Assuming today’s interest ratesremain unchanged, borrowers who consistently make the minimum required paymentwill have the ability to make less than the full interest payment for three tofour years, at which time the negative amortization cap will be reached and anew monthly payment amount will be required. The resulting payment adjustmentcould be substantial. Our underwriting standards conform to those required tomake the pay-option loans salable into the secondary market at the date of funding,including a requirement that the borrower meet secondary market debt-serviceratio tests based on the borrower making the fully amortizing loan paymentassuming the loan’s interest rate is fully indexed. (A fully indexed note rateequals the sum of the current index rate plus the margin applicable to theloan.)

49

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Following is a summary ofpay-option loans held for investment by Banking Operations:

| ** **                                                      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(in thousands)** | ** ** |
| Total pay-option loan  portfolio                                |       | $                       | 34,226,440 |                        | $          | 26,101,306 |   |
| Pay-option loans with accumulated negative  amortization:       |       |                    |       |                        |       |
| Principal                                                       |       | $                       | 25,016,353 |                        | $          | 13,963,721 |   |
| Accumulated negative  amortization (from original loan balance) |       | $                       | 300,759    |                        | $          | 74,748 |   |
| Average original  loan-to-value ratio(1)                        |       | 75                      | %          | 75                          | %          |
| Average combined  loan-to-value ratio(2)                        |       | 78                      | %          | 78                          | %          |
| Average original FICO  score                                    |       | 721                     |       | 720                         |       |
| Loans delinquent 90 days  or more                               |       | 0.19                    | %          | 0.10                        | %          |

----

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

(2)        The ratio of the lower of the appraised value or purchase price ofthe property to the amount of all loans secured by the property.

The Banking Operations provision for loan lossesincreased by $15.5 million during the quarter ended June 30, 2006 comparedto the quarter ended June 30, 2005. This increase reflects currentportfolio growth, along with seasoning of loans acquired during the past yearsof rapid portfolio growth. The provision for loan losses and the relatedallowance for loan losses is impacted by many factors, including economicconditions (for example, housing prices, interest rates and unemploymentrates), the borrower’s credit profile, the loan’s payment requirements, andloan seasoning and prepayments.

50

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Thecomposition of the Banking Operations balance sheets was as follows:

| ** **                                                                       | ** ** | **June 30, 2006**                     | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **Amount**                                      | ** ** | **Rate**                        | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                                                       | ** ** | **(dollar amounts in millions)** | ** ** |
| **Assets**                                                                       |       |                                            |       |                            |       |   |   |   |   |
| Short-term investments                                                           |       | $                                               | 179        |                            | 4.72       | % | $ | 245 |   | 4.08 | % |
| Mortgage loans, net of allowance for loan losses of  $157 and $103, respectively |       | 75,470                                          |       | 6.87                            | %          | 64,279 |   | 6.11 | % |
| Securities available-for-sale                                                    |       | 5,601                                           |       | 4.98                            | %          | 6,251 |   | 5.02 | % |
| FHLB securities and FRB stock                                               |       | 1,497                                           |       | 5.63                            | %          | 1,333 |   | 4.73 | % |
| Total interest-earning assets                                                    |       | 82,747                                          |       | 6.71                            | %          | 72,108 |   | 5.98 | % |
| Other assets                                                                     |       | 1,499                                           |       |                            |       | 919 |   |   |   |
| Total assets                                                                     |       | $                                               | 84,246     |                            |       |   | $ | 73,027 |   |   |   |
| **Liabilities and Equity**                                                       |       |                                            |       |                            |       |   |   |   |   |
| Deposits:(1)                                                                     |       |                                            |       |                            |       |   |   |   |   |
| Customer                                                                         |       | $                                               | 33,761     |                            | 4.68       | % | $ | 25,300 |   | 4.09 | % |
| Company-controlled escrow deposit accounts                                       |       | 15,598                                          |       | 5.31                            | %          | 13,333 |   | 4.18 | % |
| FHLB advances                                                                    |       | 25,659                                          |       | 4.48                            | %          | 26,267 |   | 3.88 | % |
| Other borrowings                                                                 |       | 1,288                                           |       | 5.27                            | %          | 1,280 |   | 4.23 | % |
| Total interest-bearing liabilities                                               |       | 76,306                                          |       | 4.75                            | %          | 66,180 |   | 4.03 | % |
| Other liabilities                                                                |       | 2,339                                           |       |                            |       | 1,574 |   |   |   |
| Shareholder’s equity                                                        |       | 5,601                                           |       |                            |       | 5,273 |   |   |   |
| Total liabilities and equity                                                     |       | $                                               | 84,246     |                            |       |   | $ | 73,027 |   |   |   |
| Primary spread(2)                                                                |       |                                            |       | 1.96                            | %          |   |   | 1.95 | % |
| Nonaccrual loans                                                                 |       | $                                               | 233        |                            |       |   | $ | 151 |   |   |   |

----

(1)        Includes inter-company deposits.

(2)        Calculated as the yield on total interest-earning assets less therate on total interest-bearing liabilities.

The Banking Segment alsoincludes the operations of CWL. CWL’s pre-tax earnings decreased by$7.6 million during the quarter ended June 30, 2006 in comparison tothe year-ago period, primarily due to a 19% decrease in average mortgagewarehouse advances. Such average advances decreased to $4.3 billion in thequarter ended June 30, 2006 from $5.3 billion in the year-ago period,primarily due to an overall decrease in activity with Mortgage Banking Segmentcustomers. At June 30, 2006, warehouse lending advances were $2.9 billionand had an average yield of 6.3% during the quarter ended June 30, 2006.

**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $157.6 million for the quarter ended June 30, 2006, an increase of$52.7 million, or 50%, from the year-ago period driven by a 45% increase inrevenues.

51

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

| ** **                   | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in thousands)**                | ** ** |
| Revenues:                    |       |                                   |       |   |   |
| Conduit                      |       | $                                      | 104,239    |   | $ | 72,361 |   |
| Underwriting                 |       | 78,958                                 |       | 56,713 |   |
| Commercial real estate       |       | 27,850                                 |       | 9,584 |   |
| Securities trading           |       | 26,619                                 |       | 24,353 |   |
| Brokering                    |       | 9,485                                  |       | 9,037 |   |
| Other                        |       | 10,531                                 |       | 6,066 |   |
| Total revenues               |       | 257,682                                |       | 178,114 |   |
| Expenses:                    |       |                                   |       |   |   |
| Operating expenses           |       | 92,942                                 |       | 69,617 |   |
| Allocated corporate expenses |       | 7,150                                  |       | 3,646 |   |
| Total expenses               |       | 100,092                                |       | 73,263 |   |
| Pre-tax earnings             |       | $                                      | 157,590    |   | $ | 104,851 |   |

 

During the quarter ended June 30,2006, the Capital Markets Segment generated revenues totaling $104.2 millionfrom its conduit activities, primarily managing the acquisition and sale orsecuritization of whole loans on behalf of CHL. Conduit revenues for thereporting period increased 44% in comparison to the year-ago period because ofan increase in volume and margins associated primarily with adjustable-rate andnonprime products.

Underwriting revenuesincreased $22.2 million over the year-ago period because of increasedunderwriting volume of third-party collateral and an increase in margins.

During the currentreporting period, the commercial real estate finance activities of the CapitalMarkets Segment generated revenues totaling $27.9 million primarily from salesof commercial real estate loans compared to $9.6 million in the year-agoperiod. The increase in revenue was due to an increase in the volume of loanssold, an increase in margins due to improved market conditions and to a changein product mix.

Total securities tradingvolume increased 5% over the year-ago period. Securities trading revenueincreased 9% due to an increase in trading volume and trading margins inmortgage-backed securities.

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

| ** **                       | ** ** | **Quarters Ended  June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(in millions)**                 | ** ** |
| Mortgage-backed  securities      |       | $                                      | 570,878    |   | $ | 467,375 |   |
| Asset-backed  securities         |       | 29,061                                 |       | 35,535 |   |
| Other                            |       | 26,582                                 |       | 15,154 |   |
| Subtotal(1)                      |       | 626,521                                |       | 518,064 |   |
| U.S. Treasury  securities        |       | 307,815                                |       | 369,430 |   |
| Total securities  trading volume |       | $                                      | 934,336    |   | $ | 887,494 |   |

----

(1)        Approximately 15% and 17% of the segment’s non-U.S. Treasurysecurities trading volume was with CHL during each of the quarters ended June 30,2006 and 2005, respectively.

52

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**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $31.0 million over theyear-ago period, to $88.7 million during the quarter ended June 30, 2006.The following table shows pre-tax earnings by business line:

| ** **                                | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**                | ** ** |
| Balboa  Reinsurance Company               |       | $                                      | 52,661     |   | $ | 36,940 |   |
| Balboa Life and  Casualty Operations(1)   |       | 44,569                                 |       | 25,490 |   |
| Allocated  corporate expenses             |       | (8,483                                 | )          | (4,722 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                      | 88,747     |   | $ | 57,708 |   |

----

(1)        Includes the Balboa Life and Casualty Group and the CountrywideInsurance Services Group.

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Quarters Ended  June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**                | ** ** |
| Balboa  Reinsurance Company          |       | $                                      | 55,156     |   | $ | 43,149 |   |
| Balboa Life and  Casualty Operations |       | 229,070                                |       | 172,329 |   |
| Total net  insurance premiums earned |       | $                                      | 284,226    |   | $ | 215,478 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                           | ** ** | **Quarters Ended June 30,**       | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company          |       | $                                                | 9,660      |   |   | 18 | % |   | $ | 12,874 |   |   | 30 | % |   |
| Balboa Life and  Casualty Operations |       | 93,149                                           |       |   | 41 | % |   | 75,912 |   |   | 44 | % |   |
| Total insurance  claim expenses      |       | $                                                | 102,809    |   |   |   |   |   | $ | 88,786 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $52.7million in pre-tax earnings, an increase of 43% over the year-ago period,driven primarily by an increase in policy renewal rates, growth of 16% in themortgage loans included in our loan servicing portfolio that are covered byreinsurance contracts, and an increase in the premiums ceded.

Our Life and Casualty insurance business producedpre-tax earnings of $44.6 million, an increase of $19.1 million, or 75%, fromthe year-ago period. The increase in earnings was driven by a $56.7 million or33% increase in net earned premiums during the quarter ended June 30, 2006in comparison to the year-ago period partially offset by a $17.2 millionincrease in insurance claim expense. The increase in net earned premiums wasprimarily attributable to a growth in voluntary homeowners and auto insurance.Insurance claim expenses decreased as a percentage of net earned premiums, dueto a reduction in the loss reserves on hurricane-related claims in comparisonto the year-ago period.

Our Life and Casualtyinsurance operations manage insurance risk by reinsuring portions of such risk.Balboa seeks to earn profits by capitalizing on Countrywide’s customer base andinstitutional relationships, as well as through operating efficiencies andsound underwriting.

53

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**Global OperationsSegment**

Global Operations pre-taxearnings totaled $2.8 million during the quarter ended June 30, 2006, adecrease of $2.5 million from the year-ago period. The decrease in earnings wasprimarily 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 June 30,**       | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                   | ** ** | ** **                                       | ** ** | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                   | ** ** | **Loans Sold**                              | ** ** | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** |
| ** **                   | ** ** | **(dollar amounts in thousands)** | ** ** |
| Mortgage Banking:            |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage  Loans        |       | $                                                | 79,175,113 |   | $ | 972,089 |   |   | 1.23 | % |   | $ | 84,935,552 |   | $ | 673,853 |   |   | 0.79 | % |   |
| Nonprime Mortgage  Loans     |       | 9,895,562                                        |       | 200,003 |   |   | 2.02 | % |   | 11,480,764 |   | 218,243 |   |   | 1.90 | % |   |
| Prime Home Equity  Loans:    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial Sales                |       | 4,702,418                                        |       | 91,809 |   |   | 1.95 | % |   | 3,019,619 |   | 90,576 |   |   | 3.00 | % |   |
| Subsequent draws             |       | 1,198,709                                        |       | 44,017 |   |   | 3.67 | % |   | 881,099 |   | 30,947 |   |   | 3.51 | % |   |
|                         |       | 5,901,127                                        |       | 135,826 |   |   | 2.30 | % |   | 3,900,718 |   | 121,523 |   |   | 3.12 | % |   |
| Total Production Sector      |       | 94,971,802                                       |       | 1,307,918 |   |   | 1.38 | % |   | 100,317,034 |   | 1,013,619 |   |   | 1.01 | % |   |
| Reperforming loans           |       | 103,515                                          |       | 682 |   |   | 0.66 | % |   | 224,414 |   | 7,337 |   |   | 3.27 | % |   |
|                         |       | $                                                | 95,075,317 |   | 1,308,600 |   |   | 1.38 | % |   | $ | 100,541,448 |   | 1,020,956 |   |   | 1.02 | % |   |
| Capital Markets:             |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)        |       | $                                                | 17,911,575 |   | 97,203 |   |   | 0.54 | % |   | $ | 15,659,113 |   | 62,205 |   |   | 0.40 | % |   |
| Underwriting                 |       | N/A                                              |       | 73,506 |   |   | N/A |   |   | N/A |   | 46,265 |   |   | N/A |   |   |
| Commercial real  estate      |       | $                                                | 1,015,885  |   | 23,666 |   |   | 2.33 | % |   | $ | 485,565 |   | 9,905 |   |   | 2.04 | % |   |
| Securities trading and other |       | N/A                                              |       | 13,478 |   |   | N/A |   |   | N/A |   | (12,828 | ) |   | N/A |   |   |
|                         |       |                                             |       | 207,853 |   |   |   |   |   |   |   | 105,547 |   |   |   |   |   |
| Other                        |       | N/A                                              |       | 10,997 |   |   | N/A |   |   | N/A |   | 18,906 |   |   | N/A |   |   |
|                         |       |                                             |       | $ | 1,527,450 |   |   |   |   |   |   |   | $ | 1,145,409 |   |   |   |   |   |

----

(1)        Includes loans purchased from the Mortgage Banking Segment.

The increase in Capital Markets’ gain on sale relatedto its conduit activities was due to increased sales volume due to increasedsourcing of collateral from third parties and an increase in margins resultingfrom a shift in sales of loans to those with higher margins combined with anincrease in demand for these products. The increase in Capital Markets’ gain onsale related to its commercial real estate activities was due to an increase inthe volume of loans sold and an increase in margins on such loans resultingfrom a change in mix of loans towards higher margin products. 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 naturally shift toward gain on sale ofsecurities. During the quarter ended 

54

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June 30, 2006 theyield curve was flatter than in the year-ago period, which resulted in a shiftin trading revenues from interest income to gain on sale.

Forthe Mortgage Banking Segment, the effects of changes in the volume of loansales and the rate of gain on sale (as a percentage of loans sold) on theamount of gain on sale is summarized in the following table:

| ** **               | ** ** | **Quarters Ended  June 30, 2006 vs. June 30, 2005** | ** ** |
|--------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Increase (Decrease) Due to**                                          | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Loans Sold**                                                                    | ** ** | **Gain on Sale Rate** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(in thousands)**                                                                | ** ** |
| Mortgage Banking:        |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans     |       |                                                                                   | $          | (48,460 | ) |   |   | $ | 346,696 |   |   | $ | 298,236 |   |
| Nonprime Mortgage Loans  |       |                                                                                   | (31,441    | ) |   |   | 13,201 |   |   | (18,240 | ) |
| Prime Home Equity Loans: |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Initial Sales            |       |                                                                                   | 39,642     |   |   |   | (38,409 | ) |   | 1,233 |   |
| Subsequent draws         |       |                                                                                   | 11,606     |   |   |   | 1,464 |   |   | 13,070 |   |
|                     |       |                                                                                   | 51,248     |   |   |   | (36,945 | ) |   | 14,303 |   |
| Total Production Sector  |       |                                                                                   | (28,653    | ) |   |   | 322,952 |   |   | 294,299 |   |
| Reperforming loans       |       |                                                                                   | (2,681     | ) |   |   | (3,974 | ) |   | (6,655 | ) |
| Total Mortgage  Banking  |       |                                                                                   | $          | (31,334 | ) |   |   | $ | 318,978 |   |   | $ | 287,644 |   |

 

Gain on sale of Prime Mortgage Loans increased in thequarter ended June 30, 2006 as compared to the quarter ended June 30,2005 due primarily to increased margins on such loans resulting from tighteningcredit spreads. These positive results were partially offset by lower sales ofsuch loans.

Gain on sale of Nonprime Mortgage Loans decreased inthe quarter ended June 30, 2006 as compared to 2005 due primarily to lowersales of such loans, partially offset by an increase in margins resulting fromimproved hedge performance.

Gain on sale of Prime Home Equity Loans increased inthe quarter ended June 30, 2006 as compared to the year-ago period dueprimarily to an increase in sales of such loans, partially offset by decreasedmargins on such loans, reflecting continuing competitive conditions in themarketplace.

Reperforming loans arereinstated loans that had previously defaulted and were repurchased frommortgage securities we issued. Gain on sale of these loans decreased due to areduction in volume sold combined with a decrease in margin resulting from thesale of loans with lower credit quality along with increased price competitionfor these loans.

55

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

Netinterest income is summarized below:

| ** **                                           | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                | ** ** |
| Net interest  income (expense):                      |       |                                   |       |   |   |
| Banking Segment loans and securities                 |       | $                                      | 436,547    |   | $ | 318,234 |   |
| Mortgage Banking Segment loans and securities        |       | 107,301                                |       | 155,688 |   |
| Loan Servicing Sector:                               |       |                                   |       |   |   |
| Net interest income on custodial balances            |       | 207,154                                |       | 77,259 |   |
| Interest expense                                     |       | (139,685                               | )          | (100,692 | ) |
| Capital Markets Segment securities inventory         |       | 17,802                                 |       | 40,778 |   |
| Other                                                |       | 61,355                                 |       | 50,141 |   |
| Net interest income                                  |       | 690,474                                |       | 541,408 |   |
| Provision for loan losses                            |       | (61,898                                | )          | (17,101 | ) |
| Net interest  income after provision for loan losses |       | $                                      | 628,576    |   | $ | 524,307 |   |

 

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 $83.2billion during the quarter ended June 30, 2006, an increase of $20.2billion, or 32% over the year-ago period. Net interest margin increasedto 2.10% during the quarter ended June 30, 2006 from 2.02% during thequarter ended June 30, 2005.

The decrease in net interest income from MortgageBanking Segment loans and securities reflects 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 June 30, 2006, reducingthe net interest margin.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate from 2.86% duringthe quarter ended June 30, 2005 to 5.13% during the quarter ended June 30,2006, and due to an increase of $0.9 billion in average custodial balances overthe year-ago period. We are required to pass through monthly interest tosecurity holders on paid-off loans 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$79.4 million and $75.7 million in the quarters ended June 30, 2006 and2005, respectively.

Interest expense allocated to the Loan Servicing Sectorincreased primarily due to the effect of an increase in total Servicing Sectorassets, combined with rising interest rates.

The decrease in net interest income from the CapitalMarkets securities portfolio is attributable to a decrease in the net interestmargin from 0.46% in the quarter ended June 30, 2005 to 0.26% in thequarter ended June 30, 2006, partially offset by a 14% increase in theaverage inventory of securities held. The decrease in the net interest marginearned on the securities portfolio is primarily due to a flattening of theyield curve which was evidenced by a larger increase in short-term financingrates versus the increase in rates in the longer-term securities held by theCapital Markets Segment. The decline in net interest income was more thanoffset by an increase in gain on sale.

The increase in the provision for loan losses is dueto the continuing growth and seasoning of the Banking Segment’s loan portfolio,along with deteriorating credit performance of loans held for investment in ourMortgage Banking Segment.

56

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Nonaccrualloans, foreclosed assets and the allowance for loan losses at period end aresummarized as follows:

| ** **                                                                               | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                                                               | ** ** | **(in thousands)** | ** ** |
| Nonaccrual loans:(1)                                                                     |       |                    |       |                        |       |                    |       |   |   |
| Mortgage loans:                                                                          |       |                    |       |                        |       |                    |       |   |   |
| Nonprime                                                                                 |       | $                       | 362,508    |                        |       | $                       | 325,257    |   |   | $ | 296,016 |   |
| Prime                                                                                    |       | 267,900                 |       |                        | 347,476    |                    |       | 250,039 |   |
| Prime home equity                                                                        |       | 104,028                 |       |                        | 110,040    |                    |       | 17,165 |   |
| Subtotal                                                                                 |       | 734,436                 |       |                        | 782,773    |                    |       | 563,220 |   |
| Warehouse lending advances                                                               |       | —                  |       |                        | —     |                    |       | — |   |
| Defaulted FHA-insured and VA-guaranteed mortgage  loans repurchased from securities |       | 472,299                 |       |                        | 465,599    |                    |       | 600,940 |   |
| Total nonaccrual loans                                                                   |       | 1,206,735               |       |                        | 1,248,372  |                    |       | 1,164,160 |   |
| Real estate acquired in settlement of loans                                              |       | 146,027                 |       |                        | 110,499    |                    |       | 59,976 |   |
| Total nonaccrual loans and foreclosed assets                                             |       | $                       | 1,352,762  |                        |       | $                       | 1,358,871  |   |   | $ | 1,224,136 |   |
| Nonaccrual loans as a  percentage of loans held for investment:                          |       |                    |       |                        |       |                    |       |   |   |
| Total                                                                                    |       | 1.5                     | %          |                        | 1.8        | %                       |       | 1.9 | % |
| Excluding loans FHA-insured and VA-guaranteed loans                                      |       | 0.9                     | %          |                        | 1.1        | %                       |       | 0.9 | % |
| Allowance for loan  losses                                                               |       | $                       | 183,581    |                        |       | $                       | 189,201    |   |   | $ | 155,962 |   |
| Allowance for loan  losses as a percentage of nonaccrual loans:                          |       |                    |       |                        |       |                    |       |   |   |
| Total                                                                                    |       | 15.2                    | %          |                        | 15.2       | %                       |       | 13.4 | % |
| Excluding loans FHA-insured and VA-guaranteed loans                                      |       | 25.0                    | %          |                        | 24.2       | %                       |       | 27.7 | % |
| Allowance for loan losses  as a percentage of loans held for investment                  |       | 0.2                     | %          |                        | 0.3        | %                       |       | 0.3 | % |

----

(1)        This amount excludes $414.3 million, $473.9 million and $48.7 million,of government-insured loans eligible for repurchase from Ginnie Mae securitiesissued by us at June 30, 2006, December 31, 2005, and June 30,2005, respectively. Our servicing agreement with Ginnie Mae allows us torepurchase loans that are delinquent more than 90 days instead of continuing toadvance the delinquent interest to the security holders. These amounts areincluded in loans held for investment as Countrywide has the option ofrepurchasing the loans from the securities and is required to include suchloans on its balance sheets. However, we do not include these loans in our nonaccrualbalances because we have not exercised the option to repurchase the loans.

The increase in theallowance for loan losses from June 30, 2005 is due mainly to continuinggrowth and seasoning of the Bank’s loan portfolio partially offset by a reductionin the reserve requirements for loans held for investment in the MortgageBanking Segment. The reduction in the reserve requirements in the MortgageBanking Segment is the result of liquidation or write down and transfer to heldfor sale. The provision for loan losses and the related allowance for loanlosses is impacted by many factors, including economic conditions (for example,housing prices, interest rates and unemployment rates), the borrower’s creditprofile, the loan’s payment requirements, and loan seasoning and prepayments.

57

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

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

| ** **                                                             | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                      | 939,778    |   | $ | 761,269 |   |
| Income from  retained interests                                        |       | 128,542                                |       | 108,140 |   |
| Late charges                                                           |       | 61,923                                 |       | 55,851 |   |
| Prepayment  penalties                                                  |       | 58,148                                 |       | 46,610 |   |
| Global Operations  Segment subservicing fees                           |       | 502                                    |       | 27,203 |   |
| Ancillary fees                                                         |       | 18,266                                 |       | 20,076 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                      | 1,207,159  |   | $ | 1,019,149 |   |

----

(1)        Includes contractually specified servicing fees

The increase in servicing fees, net of guarantee fees,was principally due to a 27% 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 June 30,2005 to 0.324% during the quarter ended June 30, 2006.

The increase in incomefrom retained interests was due primarily to a 29% increase in the average investmentin these assets from the quarter ended June 30, 2005 to the quarter ended June 30,2006 partially offset by reduction of the yield on such instruments from 23% inthe year ago quarter to 21% in the current quarter.  The yield excludes any impairment charges orrecoveries, which are included in recoveries and 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 June 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 $768.1 million during the quarter ended June 30, 2006.

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

We recorded an increase inthe fair value of the MSRs in the quarter ended June 30, 2006 of$569.0 million primarily as a result of the effect of rising mortgagerates on the fair value of MSRs during the quarter.

***Amortization of Mortgage Servicing Rights***

We recorded amortization of MSRs of $482.4 million, oran annual rate of 18.6%, during the quarter ended June 30, 2005. Theamortization rate of the MSRs was dependent on the forecasted prepayment speedsat the beginning of the quarter.

58

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***Impairment of Mortgage Servicing Rights***

During the quarter ended June 30,2005, we recorded impairment of MSRs of $1,281.3 million, primarily driven bythe decrease in mortgage interest rates at the end of the period.

***Recovery/Impairment of Retained Interests***

In the quarters ended June 30,2006 and 2005, we recorded increased values of retained interests of $51.5million and recognized impairment of retained interests of $97.6 million,respectively. The increase in value was a result of the beneficial impact ofrising interest rates on the estimated cash flows underlying our interest-onlyand residual securities combined with a reduction in market required yields oncertain residual securities.

***Servicing Hedge Losses/Gains***

The Servicing Hedge is designed so that the income orloss it generates mitigates the change in value of MSRs and retained intereststhat is recorded in current period earnings. The values of the derivatives thatconstitute the primary components of the Servicing Hedge are tied to long-termTreasury, mortgage and swap rate indices. These rates increased during thequarter ended June 30, 2006. As a result, the Servicing Hedge incurred aloss of $621.1 million, including $112 million of time value decay on theoptions included in the Servicing Hedge. In the quarter ended June 30,2005, these rates declined. As a result, the Servicing Hedge achieved a gain of$1,147.2 million, including $149 million of time value decay.

In a stable interest rateenvironment, we expect to incur no significant declines in value other than therealization of cash flows from the MSRs; however, we expect to incur expensesrelated to the Servicing Hedge caused primarily by time value decay on optionsused in the hedge. The level of Servicing Hedge gains or losses in any perioddepends on various factors such as the size and composition of the hedge, theshape of the yield curve and the level of implied interest rate volatility.

***Net Insurance Premiums Earned***

An increase in premiumsearned on the voluntary homeowners and auto lines of business along with anincrease in reinsurance premiums earned contributed to the $68.7 millionincrease in net insurance premiums earned.

***Other Revenue***

Otherrevenue consisted of the following:
|                                                                | ** ** | **Quarters Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**                | ** ** |
| Appraisal fees,  net                                           |       | $                                      | 34,823     |   | $ | 26,192 |   |
| Credit report  fees, net                                       |       | 19,611                                 |       | 20,495 |   |
| Title services                                                 |       | 10,147                                 |       | 11,094 |   |
| Insurance agency  commissions                                  |       | 7,756                                  |       | 6,787 |   |
| Global Operations  Segment processing fees                     |       | 2,697                                  |       | 14,309 |   |
| (Decrease)  increase in cash surrender value of life insurance |       | (2,491                                 | )          | 1,837 |   |
| Other                                                          |       | 48,968                                 |       | 37,070 |   |
| Total other  revenue                                           |       | $                                      | 121,511    |   | $ | 117,784 |   |

 

59

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***Compensation Expenses***

Compensationexpenses increased $293.6 million, or 35%, during the quarter ended June 30,2006 as compared to the year-ago period as summarized below:
|                                     | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(in thousands)**                | ** ** |
| Base salaries                       |       | $                                      | 590,636    |   | $ | 474,988 |   |
| Incentive bonus  and commissions    |       | 509,223                                |       | 483,651 |   |
| Payroll taxes and  benefits         |       | 225,545                                |       | 138,517 |   |
| Deferral of loan  origination costs |       | (181,697                               | )          | (247,013 | ) |
| Total  compensation expenses        |       | $                                      | 1,143,707  |   | $ | 850,143 |   |

 

Averageworkforce by segment is summarized below:
|                                               | ** ** | **Quarters Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Mortgage Banking                              |       | 41,472                                 |       | 33,847 |   |
| Banking                                       |       | 2,374                                  |       | 1,663 |   |
| Capital Markets                               |       | 775                                    |       | 603 |   |
| Insurance                                     |       | 2,102                                  |       | 2,008 |   |
| Global Operations                             |       | 2,041                                  |       | 2,477 |   |
| Corporate  Administration                     |       | 7,290                                  |       | 5,703 |   |
| Average  workforce, including temporary staff |       | 56,054                                 |       | 46,301 |   |

 

In the Loan Production Sector, compensation expensesincreased $99.3 million, or 14%, prior to the deferral of loan originationcosts, because of a 23% increase in average staff to provide the capacity toincrease loan production and to expand our operations to support our long-termobjective of market share growth.

In the Loan Servicing Sector, compensation expenserose $23.1 million, or 33%, to accommodate a 13% increase in the number ofloans serviced. Compensation expenses increased in most other business segmentsand corporate areas, reflecting growth in the Company.

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 origination costs decreased due to a decrease in the SFAS 91 deferralrate.

60

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***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:
|                                            | ** ** | **Quarters Ended  June 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                | ** ** |
| Office and  equipment rentals              |       | $                                      | 55,497     |   | $ | 44,076 |   |
| Depreciation  expense                      |       | 49,827                                 |       | 64,419 |   |
| Utilities                                  |       | 43,905                                 |       | 34,452 |   |
| Postage and  courier service               |       | 31,043                                 |       | 23,993 |   |
| Office supplies                            |       | 19,375                                 |       | 18,115 |   |
| Dues and  subscriptions                    |       | 17,939                                 |       | 11,324 |   |
| Repairs and  maintenance                   |       | 16,869                                 |       | 10,421 |   |
| Other                                      |       | 26,625                                 |       | 18,337 |   |
| Total occupancy  and other office expenses |       | $                                      | 261,080    |   | $ | 225,137 |   |

 

Occupancy and other officeexpenses for the quarter ended June 30, 2006 increased by 16%, or $35.9million, primarily to accommodate a 21% increase in the average workforce.

***Insurance Claim Expenses***

Insurance claim expenseswere $102.8 million for the quarter ended June 30, 2006 as compared to$88.8 million for the year-ago period. The increase in insurance claim expenseswas due mainly to growth in our insurance book of business caused primarily byan increase in voluntary insurance which has a higher loss ratio thanlender-placed lines of business.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 23% from the quarter ended June 30, 2005, as a resultof the increasing competition for lending business as the mortgage marketdeclines.

***Other Operating Expenses***

Otheroperating expenses are summarized below:
|                                                      | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                | ** ** |
| Legal,  consulting, accounting and auditing expenses |       | $                                      | 63,141     |   | $ | 25,977 |   |
| Insurance  commission expense                        |       | 45,508                                 |       | 36,699 |   |
| Travel and  entertainment                            |       | 38,205                                 |       | 24,366 |   |
| Losses on  servicing-related advances                |       | 18,161                                 |       | 23,528 |   |
| Insurance                                            |       | 13,905                                 |       | 11,101 |   |
| Taxes and  licenses                                  |       | 13,582                                 |       | 11,369 |   |
| Software  amortization and impairment                |       | 12,653                                 |       | 15,558 |   |
| Other                                                |       | 57,772                                 |       | 45,043 |   |
| Deferral of loan  origination costs                  |       | (30,016                                | )          | (38,260 | ) |
| Total other  operating expenses                      |       | $                                      | 232,911    |   | $ | 155,381 |   |

 

61

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***Results ofOperations Comparison—Six Months Ended June 30, 2006 and 2005***

***Consolidated Earnings Performance***

Net earnings for the six months ended June 30,2006 were $1,405.7 million, a 12% increase from the year-ago period. Ourdiluted earnings per share were $2.25, a 10% 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 $666.5million, an increase of 43% from the year-ago period and an increase inour Capital Markets Segment which produced pre-tax earnings of $313.2 million,an increase of 38% from the year-ago period. The increase in profitability ofour Banking Segment was primarily due to a 50% increase in averageinterest-earning assets at Countrywide Bank from the year-ago period.

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 $1,185.1 million for the six months ended June 30, 2006, adecrease of 9% 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 revenues fromhigher production volume was more than offset by increased operating expensesas the Company continued to build its production capacity. This decline in theProduction Sector pre-tax earnings was partially offset by improvedprofitability in our Loan Servicing Sector resulting from an increase in thevalues of MSRs and retained interests, net of the related Servicing Hedge.

**Operating SegmentResults**

Pre-taxearnings (loss) by segment are summarized below:
|                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|
| ** **             | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in thousands)**                       | ** ** |
| Mortgage Banking:      |       |                                          |       |   |   |
| Loan Production        |       | $                                             | 608,713    |   | $ | 1,143,792 |   |
| Loan Servicing         |       | 528,001                                       |       | 106,292 |   |
| Loan Closing Services  |       | 48,432                                        |       | 47,996 |   |
| Total Mortgage Banking |       | 1,185,146                                     |       | 1,298,080 |   |
| Banking                |       | 666,457                                       |       | 467,101 |   |
| Capital Markets        |       | 313,163                                       |       | 226,898 |   |
| Insurance              |       | 153,690                                       |       | 112,285 |   |
| Global Operations      |       | 12,988                                        |       | 9,360 |   |
| Other                  |       | (18,058                                       | )          | (29,846 | ) |
| Total                  |       | $                                             | 2,313,386  |   | $ | 2,083,878 |   |

 

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

62

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Mortgageloan production by segment and product, net of intercompany sales, issummarized below:
|                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in millions)**                        | ** ** |
| Segment:                                  |       |                                          |       |   |   |
| Mortgage Banking                          |       | $                                             | 197,087    |   | $ | 179,903 |   |
| Banking Operations                        |       | 12,320                                        |       | 24,588 |   |
| Capital Markets - Conduit acquisitions(1) |       | 10,620                                        |       | 7,316 |   |
| Total Mortgage Loan Fundings              |       | 220,027                                       |       | 211,807 |   |
| Commercial real estate                    |       | 1,963                                         |       | 1,296 |   |
|                                      |       | $                                             | 221,990    |   | $ | 213,103 |   |
| Product:                                  |       |                                          |       |   |   |
| Prime Mortgage                            |       | $                                             | 176,092    |   | $ | 171,729 |   |
| Prime Home Equity                         |       | 23,524                                        |       | 19,822 |   |
| Nonprime Mortgage                         |       | 20,411                                        |       | 20,256 |   |
| Commercial real estate                    |       | 1,963                                         |       | 1,296 |   |
|                                      |       | $                                             | 221,990    |   | $ | 213,103 |   |

----

(1)          Acquisitions from thirdparties

Thefollowing table summarizes loan production by purpose and by interest ratetype:
|                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                        | ** ** |
| **Purpose:**            |       |                                          |       |   |   |
| Non-purchase            |       | $                                             | 119,162    |   | $ | 110,452 |   |
| Purchase                |       | 102,828                                       |       | 102,651 |   |
|                    |       | $                                             | 221,990    |   | $ | 213,103 |   |
| **Interest Rate Type:** |       |                                          |       |   |   |
| Fixed Rate              |       | $                                             | 113,255    |   | $ | 97,106 |   |
| Adjustable Rate         |       | 108,735                                       |       | 115,997 |   |
|                    |       | $                                             | 221,990    |   | $ | 213,103 |   |

 

**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 sixmonths ended June 30, 2006, increased 10% from the year-ago period.Purchase and non-purchase loan production grew 6% and 13%, respectively,resulting from an increase in market share.

63

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Thefollowing table summarizes Mortgage Banking loan production by channel, byMortgage Loan type, by purpose and by interest rate type:
|                                      | ** ** | **Six Months Ended  June 30,(1)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in millions)**                           | ** ** |
| **Channel:**                         |       |                                             |       |   |   |
| Originated:                          |       |                                             |       |   |   |
| Consumer Markets                     |       | $                                                | 59,000     |   | $ | 54,206 |   |
| Wholesale Lending                    |       | 44,758                                           |       | 36,970 |   |
| Full Spectrum Lending                |       | 16,063                                           |       | 10,301 |   |
| Total originated                     |       | 119,821                                          |       | 101,477 |   |
| Purchased—Correspondent Lending |       | 77,266                                           |       | 78,426 |   |
|                                 |       | $                                                | 197,087    |   | $ | 179,903 |   |
| **Mortgage Loan Type:**              |       |                                             |       |   |   |
| Prime Mortgage                       |       | $                                                | 158,054    |   | $ | 148,552 |   |
| Prime Home Equity                    |       | 20,763                                           |       | 13,494 |   |
| Nonprime Mortgage                    |       | 18,270                                           |       | 17,857 |   |
|                                 |       | $                                                | 197,087    |   | $ | 179,903 |   |
| **Purpose:**                         |       |                                             |       |   |   |
| Non-purchase                         |       | $                                                | 105,600    |   | $ | 93,432 |   |
| Purchase                             |       | 91,487                                           |       | 86,471 |   |
|                                 |       | $                                                | 197,087    |   | $ | 179,903 |   |
| **Interest Rate Type:**              |       |                                             |       |   |   |
| Fixed Rate                           |       | $                                                | 107,855    |   | $ | 90,651 |   |
| Adjustable Rate                      |       | 89,232                                           |       | 89,252 |   |
|                                 |       | $                                                | 197,087    |   | $ | 179,903 |   |

 

----

(1)          Includes $24.3 billionof loans funded by Countrywide Bank during the six months ended June 30,2006. The Bank did not fund any loans for the Mortgage Banking Segment duringthe six months ended June 30, 2005.

64

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Thepre-tax earnings of the Loan Production Sector are summarized below:
|                                         | ** ** | **Six Months Ended June 30,** | ** **  |
|-----------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                              | ** ** | **2006**                                          | ** **  | **2005** | ** ** |
| ** **                              | ** ** | **Amount**                                        | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)**  | ** **  |
| Revenues:                               |       |                                              |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                 | 2,064,861   |   |   |   |   |   | $ | 1,674,276 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 420,124                                           |        |   |   |   |   | 665,028 |   |   |   |   |   |
| Prime Home Equity                       |       | 339,058                                           |        |   |   |   |   | 349,487 |   |   |   |   |   |
| Total revenues                          |       | 2,824,043                                         |        |   | 1.43 | % |   | 2,688,791 |   |   | 1.49 | % |   |
| Expenses:                               |       |                                              |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 1,227,070                                         |        |   | 0.62 | % |   | 886,398 |   |   | 0.49 | % |   |
| Other operating                         |       | 709,165                                           |        |   | 0.36 | % |   | 484,090 |   |   | 0.27 | % |   |
| Allocated corporate                     |       | 279,095                                           |        |   | 0.14 | % |   | 174,511 |   |   | 0.09 | % |   |
| Total expenses                          |       | 2,215,330                                         |        |   | 1.12 | % |   | 1,544,999 |   |   | 0.85 | % |   |
| Pre-tax earnings                        |       | $                                                 | 608,713     |   |   | 0.31 | % |   | $ | 1,143,792 |   |   | 0.64 | % |   |
| Total Mortgage Banking  loan production |       | $                                                 | 197,087,000 |   |   |   |   |   | $ | 179,903,000 |   |   |   |   |   |

 

Revenues increased from the year-ago period primarilydriven by higher volume of loans produced and sold combined with improved PrimeMortgage loan revenues. The gain on sale of Prime Mortgage loans benefited fromtightening credit spreads. This benefit was partially offset by the effect ofcontinuing competitive pressure on Nonprime Mortgage Loans and Prime HomeEquity Loans gain on sale and by reduced net interest income earned on loansheld for sale caused by the effect of the flattening yield curve. In the sixmonths ended June 30, 2006, $185.7 billion of mortgage loans, or 94% ofMortgage Banking loan production, was sold compared to $176.5 billion ofmortgage loans, or 98% of Mortgage Banking loan production, during the sixmonths ended June 30, 2005.

Expenses increased from the year-ago period, primarilydue to increased compensation and occupancy costs incurred to accommodate growthin loan production capacity to support the achievement of our long-termobjective of market share growth.

During the six months ended June 30, 2006, theLoan Production Sector operated at approximately 85% of planned operationalcapacity, compared to 95% during the year-ago period.

The Correspondent Lending Division decreased itsoverall loan production volume because of increased competition in the agencyconforming and pay-option loan market.

The Consumer MarketsDivision’s commissioned sales force contributed $22.1 billion in purchaseoriginations during the six months ended June 30, 2006, a 1% decrease fromthe year-ago period. Purchase production generated by the commissioned salesforce represented 77% of the Consumer Markets Division’s total purchaseproduction for the six months ended June 30, 2006.

65

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***Loan Servicing Sector***

Thefollowing table summarizes the results for the Loan Servicing Sector:
|                                                                      | ** ** | **Six Months Ended June 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                               |       | $                                                 | 1,853,240     |   |   | 0.325 | % |   | $ | 1,481,586 |   |   | 0.334 | % |   |
| Miscellaneous  fees                                                  |       | 278,990                                           |          |   | 0.049 | % |   | 231,859 |   |   | 0.052 | % |   |
| Income from  retained interests                                      |       | 262,515                                           |          |   | 0.046 | % |   | 225,115 |   |   | 0.051 | % |   |
| Escrow balance  income                                               |       | 367,181                                           |          |   | 0.064 | % |   | 107,788 |   |   | 0.024 | % |   |
| Realization of  expected cash flows from mortgage servicing rights   |       | (1,505,929                                        | )             |   | (0.264 | )% |   | — |   |   | — |   |   |
| Amortization of  mortgage servicing rights                           |       | —                                            |          |   | — |   |   | (954,560 | ) |   | (0.215 | )% |   |
| Operating revenues                                                   |       | 1,255,997                                         |          |   | 0.220 | % |   | 1,091,788 |   |   | 0.246 | % |   |
| Change in fair  value of mortgage servicing rights    |       | 1,546,646                                         |          |   | 0.271 | % |   | — |   |   | — |   |   |
| Impairment of  mortgage servicing rights                             |       | —                                            |          |   | — |   |   | (828,906 | ) |   | (0.187 | )% |   |
| Impairment of  retained interests                                    |       | (68,583                                           | )             |   | (0.012 | )% |   | (236,094 | ) |   | (0.053 | )% |   |
| Servicing hedge  (losses) gains                                      |       | (1,506,944                                        | )             |   | (0.264 | )% |   | 594,866 |   |   | 0.134 | % |   |
| Valuation changes, net of Servicing Hedge        |       | (28,881                                           | )             |   | (0.005 | )% |   | (470,134 | ) |   | (0.106 | )% |   |
| Total servicing revenues                                             |       | 1,227,116                                         |          |   | 0.215 | % |   | 621,654 |   |   | 0.140 | % |   |
| Operating  expenses                                                  |       | 372,923                                           |          |   | 0.065 | % |   | 309,427 |   |   | 0.070 | % |   |
| Allocated  corporate expenses                                        |       | 44,583                                            |          |   | 0.008 | % |   | 29,215 |   |   | 0.006 | % |   |
| Total servicing expenses                                             |       | 417,506                                           |          |   | 0.073 | % |   | 338,642 |   |   | 0.076 | % |   |
| Interest expense                                                     |       | 281,609                                           |          |   | 0.049 | % |   | 176,720 |   |   | 0.040 | % |   |
| Pre-tax earnings                                                     |       | $                                                 | 528,001       |   |   | 0.093 | % |   | $ | 106,292 |   |   | 0.024 | % |   |
| Average servicing  portfolio                                         |       | $                                                 | 1,140,989,000 |   |   |   |   |   | $ | 887,742,000 |   |   |   |   |   |

----

(1)        Annualized

Pre-tax earnings in the LoanServicing Sector were $528.0 million during the six months ended June 30,2006, an improvement of $421.7 million from the year-ago period. The increasein pre-tax earnings is due to  improvedvaluation changes, net of the Servicing Hedge, and improvement in operatingrevenues due mainly to a larger portfolio and higher escrow balance benefitresulting from an increase in the escrow earnings rate. These improvements werepartially reduced by increased interest expense related to a larger averageinvestment in Servicing Sector assets and increased cost of debt.

***Loan Closing Services Sector***

The LandSafe companiesproduced $48.4 million in pre-tax earnings in the six months ended June 30,2006, representing an increase of 1% from the year-ago period.

66

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**Banking Segment**

TheBanking Segment achieved pre-tax earnings of $666.5 million during the sixmonths ended June 30, 2006, compared to $467.1 million for the year-agoperiod. Following is the composition of pre-tax earnings by component:

| ** **                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(in thousands)**                       | ** ** |
| Banking  Operations                     |       | $                                             | 659,473    |   | $ | 444,068 |   |
| CWL                                     |       | 31,532                                        |       | 38,257 |   |
| Allocated  corporate expenses(1)        |       | (24,548                                       | )          | (15,224 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                             | 666,457    |   | $ | 467,101 |   |

----

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

Thefollowing table shows total Banking Operations loan production volume bydivision, primarily sourced by the Mortgage Banking Segment:

| ** **             | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|
| ** **             | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in millions)**                        | ** ** |
| Correspondent  Lending |       | $                                             | 5,790      |   | $ | 8,770 |   |
| Wholesale Lending      |       | 5,676                                         |       | 11,723 |   |
| Consumer Markets       |       | 854                                           |       | 4,095 |   |
|                   |       | $                                             | 12,320     |   | $ | 24,588 |   |

 

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

| ** **                                          | ** ** | **Six Months Ended  June 30,**      | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(dollar amounts in   thousands)** | ** ** |
| Interest income                                     |       | $                                                  | 2,363,269  |   | $ | 1,285,290 |   |
| Interest expense                                    |       | (1,523,871                                         | )          | (733,954 | ) |
| Net interest income                                 |       | 839,398                                            |       | 551,336 |   |
| Provision for  loan losses                          |       | (63,433                                            | )          | (26,671 | ) |
| Net interest income after provision for loan losses |       | 775,965                                            |       | 524,665 |   |
| Non-interest  income                                |       | 73,483                                             |       | 67,638 |   |
| Non-interest expense                                |       | (189,975                                           | )          | (148,235 | ) |
| Pre-tax earnings                                    |       | $                                                  | 659,473    |   | $ | 444,068 |   |
| Efficiency ratio(1)                                 |       | 21                                                 | %          | 24 | % |
| After-tax return on  average assets                 |       | 1.03                                               | %          | 1.02 | % |

----

(1)        Non-interest expense divided by the sum of net interest income plusnon-interest income. The Bank’s efficiency ratio reflects the expense structureresulting from its relationship with CHL. If Countrywide Bank were a stand-aloneentity, the nature and amount of its expenses would differ from those reported.For example, the fulfillment fees paid by Countrywide Bank to the Loan ProductionSector for origination costs incurred on mortgage loans funded by CountrywideBank are generally determined on an incremental cost basis which is less thanwould be incurred in an arms-length transaction.

67

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Thechange in net interest income of the Banking Operations is summarized below:

| ** **                                        | ** ** | **Six Months Ended June 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)                                 |       | $                                                 | 68,427,489 |   | $ | 2,157,342 |   |   | 6.32 | % |   | $ | 43,423,406 |   | $ | 1,121,865 |   |   | 5.18 | % |   |
| Securities available-for-sale(2)                  |       | 6,104,385                                         |       | 154,121 |   |   | 5.05 | % |   | 5,987,847 |   | 135,557 |   |   | 4.53 | % |   |
| Short-term investments                            |       | 565,344                                           |       | 13,441 |   |   | 4.79 | % |   | 498,832 |   | 6,651 |   |   | 2.69 | % |   |
| FHLB securities and FRB stock                     |       | 1,383,792                                         |       | 38,365 |   |   | 5.59 | % |   | 946,107 |   | 21,217 |   |   | 4.52 | % |   |
| Total earning assets                              |       | 76,481,010                                        |       | 2,363,269 |   |   | 6.19 | % |   | 50,856,192 |   | 1,285,290 |   |   | 5.07 | % |   |
| Allowance for loan losses                         |       | (119,361                                          | )          |   |   |   |   |   |   | (55,324 | ) |   |   |   |   |   |   |
| Other assets                                      |       | 1,061,392                                         |       |   |   |   |   |   |   | 713,297 |   |   |   |   |   |   |   |
| Total non interest-earning assets                 |       | 942,031                                           |       |   |   |   |   |   |   | 657,973 |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                                 | 77,423,041 |   |   |   |   |   |   |   | $ | 51,514,165 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits                             |       | $                                                 | 5,015,153  |   | 112,421 |   |   | 4.52 | % |   | $ | 2,000,914 |   | 31,334 |   |   | 3.16 | % |   |
| Savings                                           |       | 1,094                                             |       | 5 |   |   | 1.05 | % |   | 1,374 |   | 10 |   |   | 1.51 | % |   |
| Company-controlled custodial deposits             |       | 14,649,621                                        |       | 337,373 |   |   | 4.64 | % |   | 9,330,549 |   | 122,758 |   |   | 2.65 | % |   |
| Time deposits                                     |       | 24,640,209                                        |       | 534,803 |   |   | 4.38 | % |   | 13,453,466 |   | 222,912 |   |   | 3.34 | % |   |
| Total interest-bearing deposits                   |       | 44,306,077                                        |       | 984,602 |   |   | 4.48 | % |   | 24,786,303 |   | 377,014 |   |   | 3.07 | % |   |
| FHLB advances                                     |       | 23,869,819                                        |       | 490,125 |   |   | 4.14 | % |   | 18,633,055 |   | 301,519 |   |   | 3.26 | % |   |
| Other borrowed funds                              |       | 2,061,491                                         |       | 49,144 |   |   | 4.81 | % |   | 3,781,701 |   | 55,421 |   |   | 2.96 | % |   |
| Total borrowed funds                              |       | 25,931,310                                        |       | 539,269 |   |   | 4.19 | % |   | 22,414,756 |   | 356,940 |   |   | 3.21 | % |   |
| Total interest-bearing liabilities                |       | 70,237,387                                        |       | 1,523,871 |   |   | 4.38 | % |   | 47,201,059 |   | 733,954 |   |   | 3.14 | % |   |
| Non  interest-bearing liabilities and equity:     |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking                     |       | 1,109,690                                         |       |   |   |   |   |   |   | 171,272 |   |   |   |   |   |   |   |
| Other liabilities                                 |       | 730,038                                           |       |   |   |   |   |   |   | 841,799 |   |   |   |   |   |   |   |
| Shareholder’s equity                         |       | 5,345,926                                         |       |   |   |   |   |   |   | 3,300,035 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity |       | 7,185,654                                         |       |   |   |   |   |   |   | 4,313,106 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s equity   |       | $                                                 | 77,423,041 |   |   |   |   |   |   |   | $ | 51,514,165 |   |   |   |   |   |   |   |
| Net interest  income                              |       |                                              |       | $ | 839,398 |   |   |   |   |   |   |   | $ | 551,336 |   |   |   |   |   |
| Net interest  spread(3)                           |       |                                              |       |   |   |   | 1.81 | % |   |   |   |   |   |   | 1.93 | % |   |
| Net interest margin(4)                            |       |                                              |       |   |   |   | 2.17 | % |   |   |   |   |   |   | 2.16 | % |   |

----

(1)        Average balances include nonaccrual loans.

68

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(2)        Average balances and yields for securities available-for-sale arebased on average amortized cost computed on the settlement date basis.

(3)        Calculated as yield on total average interest-earning assets lessrate on total average interest-bearing liabilities.

(4)        Calculated as annualized net interest income divided by totalaverage 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. Changes attributable to (i) changesin volume (changes in average outstanding balances multiplied by the priorperiod’s rate), (ii) changes in rate (changes in average interest ratemultiplied by the prior period’s volume), and (iii) changes in rate/volume(changes in rate times the change in volume)—which were allocatedproportionately to the changes in volume and the changes in rate and includedin the relevant column below—were as follows:

| ** **                         | ** ** | **June 30, 2006 vs. June 30, 2005** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Increase (Decrease) Due to**                     | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Volume**                                                        | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                         | ** ** | **(in thousands)**                                           | ** ** |
| Interest-earning assets:           |       |                                                              |       |   |   |   |   |   |   |
| Mortgage loans                     |       | $                                                                 | 704,332    |   | $ | 331,145 |   |   | $ | 1,035,477 |   |   |
| Securities available-for-sale      |       | 2,682                                                             |       | 15,882 |   |   | 18,564 |   |   |
| Short-term investments             |       | 988                                                               |       | 5,802 |   |   | 6,790 |   |   |
| Other investments                  |       | 11,318                                                            |       | 5,830 |   |   | 17,148 |   |   |
| Total interest income              |       | $                                                                 | 719,320    |   | $ | 358,659 |   |   | $ | 1,077,979 |   |   |
| Interest-bearing  liabilities:     |       |                                                              |       |   |   |   |   |   |   |
| Money market deposits              |       | $                                                                 | 63,033     |   | $ | 18,054 |   |   | $ | 81,087 |   |   |
| Savings                            |       | (2                                                                | )     |  (3 | )  |   |  (5 | ) |   |
| Escrow deposits                    |       | 92,652                                                            |       | 121,963 |   |   | 214,615 |   |   |
| Time deposits                      |       | 227,204                                                           |       | 84,687 |   |   | 311,891 |   |   |
| Total interest expense             |       | 382,887                                                           |       | 224,701 |   |   | 607,588 |   |   |
| FHLB advances                      |       | 96,386                                                            |       | 92,220 |   |   | 188,606 |   |   |
| Other borrowed funds               |       | (31,854                                                           | )          | 25,577 |   |   | (6,277 | ) |   |
| Total borrowed funds               |       | 64,532                                                            |       | 117,797 |   |   | 182,329 |   |   |
| Total interest-bearing liabilities |       | 447,419                                                           |       | 342,498 |   |   | 789,917 |   |   |
| Net interest  income               |       | $                                                                 | 271,901    |   | $ | 16,161 |   |   | $ | 288,062 |   |   |

 

The increase in net interest income is primarily dueto a $25.6 billion or 50% increase in average interest-earning assets. Netinterest margin was comparable to the prior period.

The Banking Operation’s provision for loan lossesincreased by $36.8 million during the six months ended June 30, 2006,compared to the six months ended June 30, 2005. This increase reflectscurrent portfolio growth, along with providing for seasoning of loans acquiredduring the past years of rapid portfolio growth.

As part of the operationof the Banking Segment, CWL’s pre-tax earnings decreased by $6.7 million duringthe six months ended June 30, 2006, in comparison to the year-ago period,primarily due to an 8% decrease in average mortgage warehouse advances, whichresulted primarily from an overall decrease in activity with Mortgage BankingSegment customers.

69

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**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $313.2 million for the six months ended June 30, 2006, an increase of$86.3 million, or 38%, from the year-ago period driven by a 36% increase inrevenues mainly due to an increase in conduit, underwriting and securitiestrading revenues.

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

| ** **                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in thousands)**                       | ** ** |
| Revenues:                    |       |                                          |       |   |   |
| Conduit                      |       | $                                             | 226,840    |   | $ | 168,349 |   |
| Underwriting                 |       | 150,170                                       |       | 108,270 |   |
| Securities trading           |       | 61,283                                        |       | 43,767 |   |
| Commercial real estate       |       | 44,113                                        |       | 38,591 |   |
| Brokering                    |       | 16,142                                        |       | 15,246 |   |
| Other                        |       | 22,257                                        |       | 7,800 |   |
| Total revenues               |       | 520,805                                       |       | 382,023 |   |
| Expenses:                    |       |                                          |       |   |   |
| Operating expenses           |       | 196,413                                       |       | 147,353 |   |
| Allocated corporate expenses |       | 11,229                                        |       | 7,772 |   |
| Total expenses               |       | 207,642                                       |       | 155,125 |   |
| Pre-tax earnings             |       | $                                             | 313,163    |   | $ | 226,898 |   |

 

During the six months ended June 30, 2006, theCapital Markets Segment generated revenues totaling $226.8 million from itsconduit activities, primarily managing the acquisition and sale orsecuritization of whole loans on behalf of CHL. Conduit revenues for thereporting period increased 35% in comparison to the year-ago period because ofan increase in volume and margins associated primarily with adjustable-rateproducts and an increase in the volume of nonprime products, partially offsetby a decrease in margins of nonprime products.

Underwriting revenues increased $41.9 million over theyear-ago period because of increased underwriting to third parties.

Total securities trading volume increased 11% over theyear-ago period. Securities trading revenue increased 40% due to an increase intrading margins and a shift in trading mix to higher-margin securities.

During the six months ended June 30, 2006, thecommercial real estate finance activities of the Capital Markets Segmentgenerated revenues totaling $44.1 million primarily from sales of commercialreal estate loans compared to $38.6 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.

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

| ** **                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(in millions)**                        | ** ** |
| Mortgage-backed  securities      |       | $                                             | 1,099,228  |   | $ | 887,736 |   |
| Asset-backed  securities         |       | 61,737                                        |       | 69,900 |   |
| Other                            |       | 86,799                                        |       | 34,546 |   |
| Subtotal(1)                      |       | 1,247,764                                     |       | 992,182 |   |
| U.S. Treasury  securities        |       | 664,927                                       |       | 723,933 |   |
| Total securities  trading volume |       | $                                             | 1,912,691  |   | $ | 1,716,115 |   |

----

(1)        Approximately 14% and 17% of the segment’snon-U.S. Treasury securities trading volume was with CHL during each of the sixmonths ended June 30, 2006 and 2005, respectively.

**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $41.4 million over the year-agoperiod, to $153.7 million during the six months ended June 30, 2006. Thefollowing table shows pre-tax earnings by business line:

| ** **                                | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**                       | ** ** |
| Balboa  Reinsurance Company               |       | $                                             | 99,158     |   | $ | 80,060 |   |
| Balboa Life and  Casualty Operations(1)   |       | 67,348                                        |       | 42,807 |   |
| Allocated  corporate expenses             |       | (12,816                                       | )          | (10,582 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                             | 153,690    |   | $ | 112,285 |   |

----

(1)        Includes the Balboa Life and Casualty Group and the CountrywideInsurance Services Group.

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Six Months  Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**                             | ** ** |
| Balboa  Reinsurance Company          |       | $                                                   | 106,951    |   | $ | 86,844 |   |
| Balboa Life and  Casualty Operations |       | 457,068                                             |       | 328,152 |   |
| Total net insurance  premiums earned |       | $                                                   | 564,019    |   | $ | 414,996 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Amount**                                        | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                           | ** ** | **(dollar amounts in thousands)**  | ** ** |
| Balboa  Reinsurance Company          |       | $                                                 | 20,735     |   |   | 19 | % |   | $ | 19,796 |   |   | 23 | % |   |
| Balboa Life and  Casualty Operations |       | 206,116                                           |       |   | 45 | % |   | 144,925 |   |   | 44 | % |   |
| Total insurance  claim expenses      |       | $                                                 | 226,851    |   |   |   |   |   | $ | 164,721 |   |   |   |   |   |

 

71

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Our mortgage reinsurancebusiness produced $99.2 million in pre-tax earnings, an increase of 24% overthe year-ago period, driven primarily by an increase in policy renewal rates,growth of 16% in the mortgage loans included in our loan servicing portfoliothat are covered by reinsurance contracts and an increase in the premiumsceded.

Our Life and Casualtyinsurance business produced pre-tax earnings of $67.3 million, an increase of$24.5 million, or 57%, from the year-ago period. The increase in earnings wasdriven by a $128.9 million or 39% increase in net earned premiums during thesix months ended June 30, 2006, in comparison to the year-ago period,partially offset by an increase in insurance claim expense. The increase in netearned premiums was primarily attributable to an increase in voluntaryhomeowners and auto insurance. Insurance claim expenses as a percentage of netearned premiums was comparable to the year-ago period.

**Global Operations Segment**

Global Operations pre-taxearnings totaled $13.0 million during the six months ended June 30, 2006,an increase of $3.6 million from the year-ago period.

**Detailed Line Item Discussion of Consolidated Revenueand Expense Items**

***Gain on Sale ofLoans and Securities***

Gainon sale of loans and securities is summarized below:

| ** **                   | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------|------------|---------------------------------------------------|-------------|
| ** **                   | ** ** | **2006**                                          | ** **  | **2005** | ** ** |
| ** **                   | ** ** | ** **                                        | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                   | ** ** | **Loans Sold**                               | ** **  | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** |
| ** **                   | ** ** | **(dollar amounts in thousands)**  | ** **  |
| Mortgage Banking:            |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage  Loans        |       | $                                                 | 155,351,689 |   | $ | 1,869,823 |   |   | 1.20 | % |   | $ | 143,856,140 |   | $ | 1,403,198 |   |   | 0.98 | % |   |
| Nonprime Mortgage  Loans     |       | 18,985,834                                        |        | 349,440 |   |   | 1.84 | % |   | 23,967,130 |   | 569,735 |   |   | 2.38 | % |   |
| Prime Home Equity Loans:     |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial Sales                |       | 9,144,944                                         |        | 169,728 |   |   | 1.86 | % |   | 7,045,028 |   | 216,433 |   |   | 3.07 | % |   |
| Subsequent draws             |       | 2,173,660                                         |        | 79,704 |   |   | 3.67 | % |   | 1,669,941 |   | 61,483 |   |   | 3.68 | % |   |
|                         |       | 11,318,604                                        |        | 249,432 |   |   | 2.20 | % |   | 8,714,969 |   | 277,916 |   |   | 3.19 | % |   |
| Total Production Sector      |       | 185,656,127                                       |        | 2,468,695 |   |   | 1.33 | % |   | 176,538,239 |   | 2,250,849 |   |   | 1.27 | % |   |
| Reperforming loans           |       | 247,162                                           |        | 2,661 |   |   | 1.08 | % |   | 683,662 |   | 22,903 |   |   | 3.35 | % |   |
|                         |       | $                                                 | 185,903,289 |   | 2,471,356 |   |   | 1.33 | % |   | $ | 177,221,901 |   | 2,273,752 |   |   | 1.28 | % |   |
| Capital Markets:             |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)        |       | $                                                 | 35,855,029  |   | 210,097 |   |   | 0.59 | % |   | $ | 24,668,124 |   | 143,275 |   |   | 0.58 | % |   |
| Underwriting                 |       | N/A                                               |        | 136,607 |   |   | N/A |   |   | N/A |   | 85,713 |   |   | N/A |   |   |
| Commercial real estate       |       | $                                                 | 1,958,070   |   | 31,229 |   |   | 1.59 | % |   | $ | 1,131,916 |   | 37,600 |   |   | 3.32 | % |   |
| Securities trading and other |       | N/A                                               |        | 17,220 |   |   | N/A |   |   | N/A |   | (43,193 | ) |   | N/A |   |   |
|                         |       |                                              |        | 395,153 |   |   |   |   |   |   |   | 223,395 |   |   |   |   |   |
| Other                        |       | N/A                                               |        | 22,119 |   |   | N/A |   |   | N/A |   | 10,013 |   |   | N/A |   |   |
|                         |       |                                              |        | $ | 2,888,628 |   |   |   |   |   |   |   | $ | 2,507,160 |   |   |   |   |   |

 

----

(1)        Includes loans purchased from the Mortgage Banking Segment.

72

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The increase in Capital Markets’ gain on sale relatedto its conduit activities was due to increased sales of mortgage loans. Thedecrease in Capital Markets’ gain on sale related to its commercial real estateactivities was due to a decrease in margins on such loans partially offset byan increase in sales of such loans. Capital Markets’ revenues from itssecurities trading activities consist of gain on sale and interest income. In asteep yield curve environment, net interest income will comprise a largerpercentage of total securities trading revenue. As the yield curve flattens,the mix of revenues will naturally shift toward gain on sale of securities.During the six months ended June 30, 2006, the yield curve was flatterthan in the year-ago period, which resulted in a shift in trading revenues frominterest income to gain on sale.

Forthe Mortgage Banking Segment, the effects of changes in the volume of loansales and the rate of gain on sale (as a percentage of loans sold) on theamount of gain on sale is summarized in the following table:

| ** **               | ** ** | **Six Months Ended  June 30, 2006 vs. June 30, 2005** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Increase (Decrease) Due to**                                                 | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Loans Sold**                                                                           | ** ** | **Gain on Sale Rate** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(in thousands)**                                                                       | ** ** |
| Mortgage Banking:        |       |                                                                                          |       |   |   |   |   |   |   |
| Prime Mortgage Loans     |       | $                                                                                             | 118,808    |   |   | $ | 347,817 |   |   | $ | 466,625 |   |
| Nonprime Mortgage Loans  |       | (105,599                                                                                      | )          |   | (114,696 | ) |   | (220,295 | ) |
| Prime Home Equity Loans: |       |                                                                                          |       |   |   |   |   |   |   |
| Initial Sales            |       | 53,543                                                                                        |       |   | (100,248 | ) |   | (46,705 | ) |
| Subsequent draws         |       | 18,471                                                                                        |       |   | (250 | ) |   | 18,221 |   |
|                     |       | 72,014                                                                                        |       |   | (100,498 | ) |   | (28,484 | ) |
| Total Production Sector  |       | 85,223                                                                                        |       |   | 132,623 |   |   | 217,846 |   |
| Reperforming loans       |       | (9,812                                                                                        | )          |   | (10,430 | ) |   | (20,242 | ) |
| Total Mortgage  Banking  |       | $                                                                                             | 75,411     |   |   | $ | 122,193 |   |   | $ | 197,604 |   |

 

Gain on sale of Prime Mortgage Loans increased in thesix months ended June 30, 2006, as compared to the six months ended June 30,2005, due primarily to higher margins and to a lesser extent increased sales ofsuch loans. Higher margins resulted from tightening of spreads, which improvedsecondary market conditions.

Gain on sale of Nonprime Mortgage Loans decreased inthe six months ended June 30, 2006, as compared to 2005, due primarily tolower margins resulting from increased pricing competition and to decreasedsales of such loans.

Gain on sale of Prime HomeEquity Loans decreased in the six months ended June 30, 2006, as comparedto the year-ago period due primarily to reduced margins on such loans resultingfrom increased pricing competition, partially offset by increased sales of suchloans.

73

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

Netinterest income is summarized below:

| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                       | ** ** |
| Net interest  income (expense):                      |       |                                          |       |   |   |
| Banking Segment loans and securities                 |       | $                                             | 874,455    |   | $ | 585,594 |   |
| Mortgage Banking Segment loans and securities        |       | 220,627                                       |       | 332,019 |   |
| Loan Servicing Sector:                               |       |                                          |       |   |   |
| Net interest income on custodial balances            |       | 367,181                                       |       | 107,788 |   |
| Interest expense                                     |       | (250,055                                      | )          | (196,559 | ) |
| Capital Markets Segment securities inventory         |       | 50,165                                        |       | 91,688 |   |
| Other                                                |       | 122,536                                       |       | 111,871 |   |
| Net interest income                                  |       | 1,384,909                                     |       | 1,032,401 |   |
| Provision for loan losses                            |       | (125,036                                      | )          | (36,723 | ) |
| Net interest  income after provision for loan losses |       | $                                             | 1,259,873  |   | $ | 995,678 |   |

 

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 $80.9billion during the six months ended June 30, 2006, an increase of $25.2billion, or 45% over the year-ago period. Net interest margin increasedto 2.16% during the six months ended June 30, 2006, from 2.10% during thesix months ended June 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 six months ended June 30, 2006, reducing the net interest margin.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate from 2.64% duringthe six months ended June 30, 2005, to 4.94% during the six months ended June 30,2006, along with an increase of $1.4 billion in average custodial balances overthe year-ago period. We are required to pass through a full month’s interest tosecurity holders on paid-off loans, regardless of the payoff date, at theunderlying security rates, which were substantially higher than the short-termrates earned by us on the payoff float. The amount of such interest passedthrough to the security holders was $149.4 million in the six months ended June 30,2006 and 2005.

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 0.49% in the six months ended June 30, 2005, to 0.33% in thesix months ended June 30, 2006, partially offset by an increase of 10% inthe average inventory of securities held. The decrease in the net interest marginearned on the securities portfolio is primarily due to a flattening of theyield curve which was evidenced by a larger increase in short-term financingrates versus the increase in rates in the longer-term securities held by theCapital Markets Segment. The decline in net interest income was more thanoffset by an increase in gain on sale.

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.

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

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

| ** **                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                       | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                             | 1,853,240  |   | $ | 1,481,586 |   |
| Income from  retained interests                                        |       | 262,515                                       |       | 225,115 |   |
| Late charges                                                           |       | 129,264                                       |       | 112,719 |   |
| Prepayment  penalties                                                  |       | 111,934                                       |       | 79,513 |   |
| Global Operations  Segment subservicing fees                           |       | 11,824                                        |       | 55,730 |   |
| Ancillary fees                                                         |       | 38,269                                        |       | 36,844 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                             | 2,407,046  |   | $ | 1,991,507 |   |

----

(1)        Includes contractually specified servicing fees

The increase in servicing fees, net of guarantee fees,was principally due to a 29% increase in the average servicing portfolio,partially offset by a decrease in the overall annualized net service fee earnedfrom 0.334% of the average portfolio balance during the six months ended June 30,2005, to 0.325% during the six months ended June 30, 2006.

The increase in incomefrom retained interests was due primarily to a 26% 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 six months ended June 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 six months resulted ina value reduction of $1,506.7 million during the six months ended June 30,2006.

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

We recorded an increase inthe fair value of the MSRs in the six months ended June 30, 2006, of$1,547.3 million primarily as a result of the increase in mortgage rates duringthe period.

***Amortization of Mortgage Servicing Rights***

We recorded amortizationof MSRs of $954.6 million, or an annual rate of 18.8%, during the six monthsended June 30, 2005. The amortization rate of the MSRs was dependent onthe forecasted prepayment speeds at the beginning of the period.

***Impairment of Mortgage Servicing Rights***

During the six monthsended June 30, 2005, we recorded impairment of MSRs of $828.9 million,primarily driven by the increase in mortgage interest rates during the period.

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***Impairment of Retained Interests***

In the six months ended June 30,2006 and 2005, we recognized impairment of retained interests of $69.2 millionand $234.7 million, respectively. This impairment was a result of a decline inthe value of such securities due to compression of the interest rate spread onthe residuals we hold because the interest on the collateral is fixed-ratewhile the pass-through rate is floating.

***Servicing Hedge Losses/Gains***

The Servicing Hedge isdesigned so that the income or loss it generates mitigates the change in valueof MSRs and retained interests that is recorded in current period earnings. Thevalues of the derivatives that constitute the primary components of theServicing Hedge are tied to long-term Treasury, mortgage and swap rate indices.These rates increased during the six months ended June 30, 2006. As aresult, the Servicing Hedge incurred a loss of $1,506.9 million, including $245million of time value decay on the options included in the Servicing Hedgeduring the six months ended June 30, 2006. These rates declined during thesix months ended June 30, 2005. As a result, the Servicing Hedge achieveda gain of $594.9 million, including $268 million of time value decay during thesix months ended June 30, 2005.

***Net Insurance Premiums Earned***

Net insurance premiumsincreased $149.0 million as a result of an increase in premiums earned on thevoluntary homeowners and auto lines of business along with an increase inreinsurance premiums earned.

***Other Revenue***

Otherrevenue consisted of the following:

| ** **                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                       | ** ** |
| Appraisal fees,  net                                |       | $                                             | 66,085     |   | $ | 47,757 |   |
| Credit report  fees, net                            |       | 38,957                                        |       | 39,016 |   |
| Title services                                      |       | 20,081                                        |       | 22,652 |   |
| Insurance agency  commissions                       |       | 15,096                                        |       | 11,657 |   |
| Global Operations  Segment processing fees          |       | 12,944                                        |       | 27,293 |   |
| Increase in cash  surrender value of life insurance |       | 4,098                                         |       | 1,189 |   |
| Other                                               |       | 94,853                                        |       | 77,222 |   |
| Total other  revenue                                |       | $                                             | 252,114    |   | $ | 226,786 |   |

 

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***Compensation Expenses***

Compensationexpenses increased $581.9 million, or 36%, during the six months ended June 30,2006 as compared to the year-ago period as summarized below:

| ** **                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(in thousands)**                       | ** ** |
| Base salaries                       |       | $                                             | 1,133,668  |   | $ | 924,355 |   |
| Incentive bonus  and commissions    |       | 965,522                                       |       | 863,231 |   |
| Payroll taxes and  benefits         |       | 459,201                                       |       | 288,055 |   |
| Deferral of loan  origination costs |       | (339,866                                      | )          | (439,019 | ) |
| Total  compensation expenses        |       | $                                             | 2,218,525  |   | $ | 1,636,622 |   |

 

Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Mortgage Banking                              |       | 40,843                                        |       | 32,592 |   |
| Banking                                       |       | 2,297                                         |       | 1,607 |   |
| Capital Markets                               |       | 744                                           |       | 591 |   |
| Insurance                                     |       | 2,123                                         |       | 1,959 |   |
| Global Operations                             |       | 2,226                                         |       | 2,412 |   |
| Corporate  Administration                     |       | 7,091                                         |       | 5,608 |   |
| Average  workforce, including temporary staff |       | 55,324                                        |       | 44,769 |   |

 

In the Loan Production Sector, compensation expensesincreased $240.2 million, or 19%, prior to the deferral of loan originationcosts, because of a 25% increase in average staff to accommodate growth in loanproduction and to expand our capacity to support our long-term objective ofmarket share growth.

In the Loan ServicingSector, compensation expense rose $47.1 million, or 34%, to accommodate a 13%increase in the number of loans serviced. Compensation expenses increased inmost other business segments and corporate areas, reflecting growth in theCompany.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                       | ** ** |
| Office and  equipment rentals              |       | $                                             | 108,639    |   | $ | 86,667 |   |
| Depreciation  expense                      |       | 97,598                                        |       | 97,943 |   |
| Utilities                                  |       | 88,740                                        |       | 69,110 |   |
| Postage and  courier service               |       | 56,260                                        |       | 47,530 |   |
| Office supplies                            |       | 38,121                                        |       | 34,136 |   |
| Dues and subscriptions                     |       | 33,634                                        |       | 23,576 |   |
| Repairs and  maintenance                   |       | 30,021                                        |       | 22,159 |   |
| Other                                      |       | 53,398                                        |       | 32,672 |   |
| Total occupancy  and other office expenses |       | $                                             | 506,411    |   | $ | 413,793 |   |

 

77

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Occupancy and other officeexpenses for the six months ended June 30, 2006, increased by 22%, or$92.6 million, primarily to accommodate a 24% increase in the averageworkforce.

***Insurance Claim Expenses***

Insurance claim expenseswere $226.9 million for the six months ended June 30, 2006, as compared to$164.7 million for the year-ago period. The increase in insurance claimexpenses was due mainly to growth in our insurance book of business causedprimarily by an increase in voluntary insurance, which has a higher loss ratiothan lender-placed lines of business.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 16% from the six months ended June 30, 2005, as aresult of a shift in the mortgage loan production market toward purchaseactivity, which generally requires more advertising and promotion thanrefinance activity, which is customarily driven by increased consumer demandfor mortgages resulting from low interest rates.

***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                       | ** ** |
| Legal,  consulting, accounting and auditing expenses |       | $                                             | 113,503    |   | $ | 53,438 |   |
| Insurance  commission expense                        |       | 90,890                                        |       | 68,269 |   |
| Travel and  entertainment                            |       | 74,562                                        |       | 48,124 |   |
| Losses on  servicing-related advances                |       | 33,401                                        |       | 44,983 |   |
| Taxes and  licenses                                  |       | 28,947                                        |       | 21,909 |   |
| Insurance                                            |       | 28,637                                        |       | 22,750 |   |
| Software  amortization and impairment                |       | 27,071                                        |       | 28,666 |   |
| Other                                                |       | 103,748                                       |       | 84,718 |   |
| Deferral of loan  origination costs                  |       | (55,684                                       | )          | (67,837 | ) |
| Total other  operating expenses                      |       | $                                             | 445,075    |   | $ | 305,020 |   |

 

**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. The overallobjective of our interest rate risk management activities is to reduce thevariability of earnings caused by changes in interest rates. Our CorporateAsset/Liability Management Committee, which is comprised of several of theCompany’s senior financial executives, is responsible for management of thisrisk.

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***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.

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Thefollowing table summarizes the estimated change in fair value of ourinterest-rate-sensitive assets, liabilities and commitments as of June 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 other financial  instruments:                                    |       |                                    |       |   |   |   |   |   |   |
| MSRs and retained interests                                               |       | $                                       | (2,378     | ) | $ | (1,014 | ) | $ | 686 |   | $ | 1,127 |   |
| Impact of  Servicing Hedge:                                               |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                            |       | 176                                     |       | 88 |   | (88 | ) | (175 | ) |
| Swap-based                                                                |       | 2,464                                   |       | 949 |   | (554 | ) | (847 | ) |
| Treasury-based                                                            |       | 259                                     |       | 62 |   | 43 |   | 135 |   |
| MSRs and retained interests, net                                          |       | 521                                     |       | 85 |   | 87 |   | 240 |   |
| Interest rate lock commitments                                            |       | 387                                     |       | 255 |   | (371 | ) | (813 | ) |
| Mortgage Loan Inventory                                                   |       | 1,196                                   |       | 678 |   | (818 | ) | (1,735 | ) |
| Impact of  associated derivative instruments:                             |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                            |       | (1,751                                  | )          | (996 | ) | 1,225 |   | 2,587 |   |
| Treasury-based                                                            |       | 139                                     |       | 53 |   | (11 | ) | (11 | ) |
| Eurodollar-based                                                          |       | (42                                     | )          | (26 | ) | 50 |   | 113 |   |
| Interest rate lock commitments and Mortgage Loan  Inventory, net          |       | (71                                     | )          | (36 | ) | 75 |   | 141 |   |
| Countrywide Bank:                                                         |       |                                    |       |   |   |   |   |   |   |
| Securities portfolio                                                      |       | 196                                     |       | 110 |   | (127 | ) | (264 | ) |
| Mortgage loans                                                            |       | 563                                     |       | 271 |   | (493 | ) | (828 | ) |
| Deposit liabilities                                                       |       | (293                                    | )          | (151 | ) | 155 |   | 312 |   |
| Federal Home Loan Bank advances                                           |       | (168                                    | )          | (51 | ) | 236 |   | 277 |   |
| Countrywide Bank, net                                                     |       | 298                                     |       | 179 |   | (229 | ) | (503 | ) |
| Notes payable and capital securities                                      |       | (626                                    | )          | (303 | ) | 291 |   | 577 |   |
| Impact of  associated derivative instruments:                             |       |                                    |       |   |   |   |   |   |   |
| Swap-based                                                                |       | 175                                     |       | 87 |   | (85 | ) | (168 | ) |
| Notes payable and capital securities, net                                 |       | (451                                    | )          | (216 | ) | 206 |   | 409 |   |
| Insurance company investment portfolios                                   |       | 61                                      |       | 31 |   | (31 | ) | (62 | ) |
| Net change in  fair value related to MSRs and other financial instruments |       | $                                       | 358        |   | $ | 43 |   | $ | 108 |   | $ | 225 |   |
| Net change in fair value  related to broker-dealer trading securities     |       | $                                       | 2          |   | $ | 4 |   | $ | (10 | ) | $ | (25 | ) |
|                                                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes the estimated change in fair value of the Company’sinterest-rate-sensitive assets, liabilities and commitments as of December 31,2005, 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)**                  | ** ** |
| Net change in  fair value related to MSRs and other financial Instruments |       | $                                       | (429       | ) | $ | (419 | ) | $ | 695 |   | $ | 1,333 |   |
| Net change in fair value  related to broker-dealer trading securities          |       | $                                       | (18        | ) | $ | (3 | ) | $ | (11 | ) | $ | (33 | ) |
|                                                                                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 interest rateindex 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 in aforeign currency. We manage the foreign currency risk associated with thesemedium-term notes through cross-currency swap transactions. The terms of thecross-currency swaps have the effect of converting all foreigncurrency-denominated medium-term notes into U.S. dollar obligations, therebyeliminating the associated foreign currency risk. As a result, potentialchanges in the exchange rates of foreign currencies denominating suchmedium-term notes would not have a net financial impact 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***

Nearlyall of the mortgage loans that we originate in our Mortgage Banking Segment aresold into the secondary mortgage market in the form of securities, and to alesser extent in the form of loans. In the case of both securitizations andloan sales, we assume potential liability under the representations andwarranties we make to purchasers and insurers of the loans. In the event of abreach of such representations and warranties, we may be required to eitherrepurchase the mortgage loans with the identified defects or indemnify theinvestor or insurer. In either case, we bear the risk of any subsequent creditloss on the mortgage loans. The liability associated with this risk totaled$307.6 million at June 30, 2006 and $169.8 million at December 31, 2005. Theincrease in this representation and warranty reserve is due mainly to securitizationsin the current period together with an increase in loan sales, which generallyhave more extensive representations and warranties than securitizations. Theexpense of $184.8 million for the six months ended June 30, 2006 associatedwith the reserve for representations and warranties was recorded as a componentof 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 

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Mortgage Loans generallyare securitized on a non-recourse basis, while Prime Home Equity Loans andNonprime Mortgage Loans generally are securitized with limited recourse forcredit losses.

Ourexposure to credit losses related to our recourse securitization activities islimited to the carrying value of our subordinated interests and to thecontractual limit of reimbursable losses under our corporate guarantees lessthe recorded liability for such guarantees. These amounts at June 30, 2006are as follows:

| ** **                                                   | ** ** | **June 30,  2006** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
| Subordinated Interests:                                      |       |                    |       |   |   |
| Prime home equity residual securities                        |       |                    | $          | 805,034 |   |   |
| Prime home equity line of credit transferor’s  interest |       |                    | 491,788    |   |   |
| Nonprime residual securities                                 |       |                    | 463,727    |   |   |
| Prime residual securities                                    |       |                    | 44,438     |   |   |
| Subordinated mortgage-backed pass-through securities         |       |                    | 1,846      |   |   |
|                                                         |       |                    | $          | 1,806,833 |   |   |
| Corporate guarantees in  excess of recorded liability        |       |                    | $          | 438,996 |   |   |

 

Expected future credit losses are considered in thedetermination of the fair value of the residual securities.

Thetotal credit losses incurred for the six months ended June 30, 2006 and2005 related to all of our mortgage loan sales activities are summarized asfollows:

| ** **                                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | **(in thousands)**                       | ** ** |
| Nonprime  securitizations with retained residual interest           |       | $                                             | 38,331     |   | $ | 32,679 |   |
| Prime home equity  securitizations with retained residual  interest |       | 25,251                                        |       | 13,275 |   |
| Repurchased or  indemnified loans                                   |       | 47,003                                        |       | 19,734 |   |
| Nonprime  securitizations with corporate guarantee                  |       | 5,132                                         |       | 7,567 |   |
| Prime home equity  securitizations with corporate guarantee         |       | 2,192                                         |       | 6,180 |   |
| VA losses in  excess of VA guarantee                                |       | 677                                           |       | 1,131 |   |
|                                                                |       | $                                             | 118,586    |   | $ | 80,566 |   |

 

***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 $74.6billion at June 30, 2006. This portfolio is held primarily in our BankingOperations. Of the amount held in the Banking Operations, $3.4 billion of PrimeHome Equity Loans with combined loan-to-value ratios equal to or above 90% 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 primary mortgageinsurance (which is generally required for conventional loans withloan-to-value ratios greater than 80%).

We also provide short-term secured mortgage-loanwarehouse advances to various lending institutions, which totaled $2.9 billionat June 30, 2006. We incurred no credit losses related to this activityduring the six months ended June 30, 2006.

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***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 June 30, 2006, approximately $83.8 billion of mortgageloans in our servicing portfolio are covered by such mortgage reinsurancecontracts. The reinsurance contracts place limits on our maximum exposure tolosses. At June 30, 2006, the maximum aggregate losses under thereinsurance contracts was limited to $750.2 million. We are required to pledgesecurities to cover this potential liability. For the six months ended June 30,2006, we did not experience any losses under our reinsurance contracts.

***Mortgage Loans Held for Sale***

At June 30, 2006,mortgage loans held for sale amounted to $35.4 billion. While the loans are ininventory, we bear credit risk after taking into consideration primary mortgageinsurance (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 June 30, 2006, before and after collateralheld by us, was as follows:

| ** **                                        | ** ** | **June 30,  2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **(in millions)**  | ** ** |
| Aggregate credit  exposure before collateral held |       |                    | $          | 752 |   |   |
| Less: collateral  held                            |       |                    | (294       | ) |   |
| Net aggregate unsecured  credit exposure          |       |                    | $          | 458 |   |   |

 

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

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**Loan Servicing**

Thefollowing table sets forth certain information regarding our servicingportfolio of single-family mortgage loans, including loans and securities heldfor sale, loans held for investment and loans serviced under subservicingagreements, for the periods indicated.

| ** **                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in millions)**                        | ** ** |
| Beginning owned  servicing portfolio |       | $                                             | 1,081,189  |   | $ | 821,475 |   |
| Add: Loan production                 |       | 220,027                                       |       | 211,807 |   |
| Purchased MSRs (bulk  acquisitions)  |       | 172                                           |       | 33,501 |   |
| Less: Runoff(1)                      |       | (126,643                                      | )          | (130,045 | ) |
| Ending owned servicing  portfolio    |       | 1,174,745                                     |       | 936,738 |   |
| Subservicing portfolio               |       | 21,975                                        |       | 27,706 |   |
| Total servicing  portfolio           |       | $                                             | 1,196,720  |   | $ | 964,444 |   |
| MSR portfolio                        |       | $                                             | 1,063,405  |   | $ | 849,057 |   |
| Mortgage loans owned                 |       | 111,340                                       |       | 87,681 |   |
| Subservicing portfolio               |       | 21,975                                        |       | 27,706 |   |
| Total servicing portfolio            |       | $                                             | 1,196,720  |   | $ | 964,444 |   |

 

| ** **                                               | ** ** | **June 30,**      | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(in millions)** | ** ** |
| Composition of owned  servicing portfolio at period end: |       |                   |       |   |   |
| Conventional mortgage                                    |       | $                      | 960,472    |   | $ | 730,509 |   |
| Nonprime Mortgage                                        |       | 112,378                |       | 104,135 |   |
| Prime Home Equity                                        |       | 50,854                 |       | 50,852 |   |
| FHA-insured mortgage                                     |       | 37,618                 |       | 38,288 |   |
| VA-guaranteed mortgage                                   |       | 13,423                 |       | 12,954 |   |
| Total owned portfolio                                    |       | $                      | 1,174,745  |   | $ | 936,738 |   |
| Delinquent mortgage loans(2):                            |       |                   |       |   |   |
| 30 days                                                  |       | 2.24                   | %          | 2.16 | % |
| 60 days                                                  |       | 0.72                   | %          | 0.63 | % |
| 90 days or more                                          |       | 0.96                   | %          | 0.72 | % |
| Total delinquent  mortgage loans                         |       | 3.92                   | %          | 3.51 | % |
| Loans pending  foreclosure(2)                            |       | 0.47                   | %          | 0.39 | % |
| Delinquent mortgage  loans(2):                           |       |                   |       |   |   |
| Conventional                                             |       | 2.11                   | %          | 1.99 | % |
| Nonprime Mortgage                                        |       | 14.41                  | %          | 10.56 | % |
| Prime Home Equity                                        |       | 1.51                   | %          | 1.02 | % |
| Government                                               |       | 12.83                  | %          | 11.85 | % |
| Total delinquent  mortgage loans                         |       | 3.92                   | %          | 3.51 | % |
| Loans pending  foreclosure(2):                           |       |                   |       |   |   |
| Conventional                                             |       | 0.21                   | %          | 0.19 | % |
| Nonprime Mortgage                                        |       | 2.51                   | %          | 1.70 | % |
| Prime Home Equity                                        |       | 0.08                   | %          | 0.04 | % |
| Government                                               |       | 0.99                   | %          | 0.97 | % |
| Total loans pending foreclosure                          |       | 0.47                   | %          | 0.39 | % |

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(1)        Runoff refers to principal repayments on loans.

(2)        Expressed as a percentage of the total number of loans serviced,excluding subserviced loans and loans purchased at a discount due to theirnon-performing status.

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We attribute the overallincrease in delinquencies in our servicing portfolio primarily to increases inthe loans in hurricane-affected areas, which contributed 19 basis points to theincrease, and to a lesser extent to the seasoning of the servicing portfolio.We believe the delinquency rates in our servicing portfolio are consistent withrates for similar 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 $96.1 billion in available sources of short-term liquidity, whichrepresents an increase of $6.4 billion from December 31, 2005. We believewe have adequate financing capacity to meet our currently foreseeable needs.

As part of our strategic capital management and as acost effective means for financing growth, the Company issued $1.0 billion infixed-rate subordinated notes during the second quarter of 2006. Thesesubordinated notes are eligible for Tier 2 regulatory capital treatment andrepresent an efficient and non-dilutive means for supporting the Company’scapital management efforts. Other capital raising alternatives underconsideration to address future needs include various non-dilutive securitiesthat receive a high degree of equity treatment by regulators, credit ratingagencies or both.

At June 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:

| ** **               | ** ** | **June 30, 2006**                      | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 7.0 | % |   | $ | 13,957,894 |   |   | 7.1 | % |   | $ | 6,044,838 |   |
| Risk-Based  Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 10.9 | % |   | $ | 13,957,894 |   |   | 11.0 | % |   | $ | 6,044,838 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 12.8 | % |   | $ | 16,294,990 |   |   | 11.3 | % |   | $ | 6,208,326 |   |

----

(1)        Minimum required to qualify as “wellcapitalized.”

| ** **               | ** ** | **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)        Minimum required to qualify as “wellcapitalized.”

**Cash Flows**

Cash flows used by operating activities was $0.8billion for the six months ended June 30, 2006, compared to $5.8 billionfor the six months ended June 30, 2005. The decrease in net cash flow usedby operations for the six months ended June 30, 2006 compared to the sixmonths ended June 30, 2005 was primarily due to a $5.7 billion netincrease in cash provided related to mortgage loans. In the six months ended June 30,2006 proceeds from the sales of mortgage loans exceeded funds used to originateand 

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purchase mortgage loans by$1.6 billion. In the six months ended June 30, 2005 funds used tooriginate and purchase mortgage loans exceeded proceeds from the sales ofmortgage loans by $4.1 billion. This decrease in cash used by operationswas partially offset by a $1.6 billion increase in cash used to settletrading securities.

Net cash used by investing activities was $13.2billion for the six months ended June 30, 2006, compared to $32.1 billionfor the six months ended June 30, 2005. The decrease in net cash used ininvesting activities was attributable to a $12.3 billion decrease in cash usedto fund loans held for investment combined with a $6.6 billion decrease insecurities purchased under agreements to resell, securities borrowed andfederal funds sold.

Net cash provided byfinancing activities for the six months ended June 30, 2006 totaled$15.4 billion, compared to $38.0 billion for the six months ended June 30,2005. The decrease in cash provided by financing activities was comprised of a$20.4 billion net decrease in short-term borrowings, including securities soldunder agreements to repurchase and a $2.7 billion decrease in long-term debt.

**Off-Balance SheetArrangements and Aggregate Contractual Obligations**

***Off-Balance Sheet Arrangements and Guarantees***

In the ordinary course of our business we engage infinancial transactions that are not reflected on our balance sheet. (See Note 2—“Summaryof Significant Accounting Policies” in the 2005 Annual Report for a descriptionof our consolidation policy.) Such transactions are structured to manage ourinterest rate, credit or liquidity risks, to diversify funding sources or tooptimize our capital.

Substantially all of our off-balance sheetarrangements relate to the securitization of mortgage loans. Our mortgage loansecuritizations are normally structured as sales as specified by Statement ofFinancial Accounting Standards No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”),and as such involve the transfer of the mortgage loans to qualifyingspecial-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 the right to repurchasemortgage loans from the special-purpose entity if the remaining outstandingbalance of the mortgage loans falls to a level where the cost of servicing theloans becomes burdensome in relation to the benefits of servicing.

Our Prime Mortgage Loans generally are securitized ona non-recourse basis, while Prime Home Equity and Nonprime Loans generally aresecuritized with limited recourse for credit losses. During the six monthsended June 30, 2006, we securitized $13.5 billion in Nonprime Mortgage andPrime Home Equity Loans with limited recourse for credit losses. Our exposureto credit losses related to our limited recourse securitization activities islimited to the carrying value of our subordinated interests and to 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.

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***Contractual Obligations***

Thefollowing table summarizes our significant contractual obligations at June 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        |       | $                               | 21,162,879 |               | $          | 28,614,803         |       | $                                | 11,250,380 |      | $          | 2,992,295 |   | $ | 64,020,357 |   |
| Time deposits        |       | $                               | 21,017,482 |               | $          | 4,173,521          |       | $                                | 1,284,589  |      | $          | 1,565,640 |   | $ | 28,041,232 |   |
| Operating leases     |       | $                               | 186,186    |               | $          | 277,020            |       | $                                | 116,082    |      | $          | 29,344 |   | $ | 608,632 |   |
| Purchase obligations |       | $                               | 108,206    |               | $          | 46,640             |       | $                                | 3,849      |      | $          | 655 |   | $ | 159,350 |   |

 

As of June 30, 2006, the Company had undisbursedhome equity lines of credit and construction loan commitments of $8.9 billionand $1.6 billion, respectively. As of June 30, 2006, outstandingcommitments to fund mortgage loans totaled $42.8 billion, outstandingcommitments to sell mortgage loans totaled $34.7 billion and outstandingcommitments to buy mortgage loans totaled $12.7 billion.

In connection with theCompany’s underwriting activities, the Company had commitments to purchase andsell new issues of securities aggregating $36.6 million and $12.2 million at June 30,2006, respectively.

**Prospective Trends**

***United States Mortgage Market***

Over the last decade, total mortgage indebtedness inthe United States has grown at an average annual rate of 10%. We believe thatcontinued population growth, ongoing developments in the mortgage market andthe prospect of relatively low interest rates support growth in the market forthe foreseeable future. Some of the ongoing developments in the mortgage marketthat should fuel its growth include government-sponsored programs targeted toincrease homeownership in low-income and minority communities, the growth innonprime lending, the growth of prime home equity lending as a major form ofconsumer finance and the increasing efficiency of the secondary mortgage marketthat lowers the overall cost of homeownership.

In recent years,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

·       Interestrate volatility has risen over the last decade. At the same time, homeowners’propensity to refinance their mortgages has increased as the refinance processhas become more efficient and cost effective. The combined result has beenlarge swings in the volume of mortgage loans originated from year to year.These volume swings have placed significant operational and financial pressureson mortgage lenders.

To compete effectively in this environment, mortgagelenders must have a very high level of operational, technological andmanagerial expertise. In addition, the residential mortgage business has becomemore capital-intensive and therefore access to capital at a competitive cost iscritical. Primarily because of these factors, the industry has undergoneconsolidation in recent years.

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Today, large and sophisticated financial institutionsdominate the residential mortgage industry. According to the trade publication *Inside Mortgage Finance*, the top 5originators produced 47% of all loans originated during the first six months ofthe calendar year 2006, as compared to 49% during the six months ended December 31,2005.

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

| **Institution**              | ** ** | ** **             | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  December 31, 2005** | ** ** |
|------------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                   | ** ** | **(in billions)** | ** ** |
| *Countrywide*                |       |                   | $          | 220                                                     |       |                                                        |       | $ | 279 |   |   |
| Wells Fargo Home  Mortgage   |       |                   | 207        |                                                    |       |                                                        | 228        |   |   |
| Washington Mutual            |       |                   | 105        |                                                    |       |                                                        | 127        |   |   |
| Chase Home  Finance          |       |                   | 92         |                                                    |       |                                                        | 98         |   |   |
| CitiMortgage(1)              |       |                   | 84         |                                                    |       |                                                        | —     |   |   |
| Bank of America  Mortgage(1) |       |                   | —     |                                                    |       |                                                        | 86         |   |   |
| Total for Top  Five          |       |                   | $          | 708                                                     |       |                                                        |       | $ | 818 |   |   |

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(1)        Comparative data not included for quarter in which the institutionwas not in the top five originators.

We believe consolidation will continue, as theaforementioned market forces will continue to drive out weak competitors. Webelieve Countrywide will benefit from this trend through increased market shareand enhanced ability to recruit talented personnel.

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 values affect us in severalpositive ways. Rising housing values point to healthy demand for purchase-moneymortgage financing and increased average loan balances and to a reduction in therisk of loss on sale of foreclosed real estate in the event a loan defaults.However, as housing values appreciate, prepayments of existing mortgages tendto increase as mortgagors look to monetize the additional equity in theirhomes. Over the last several years, the housing price index has significantlyoutpaced the consumer price index and growth in personal income. Consequently,we expect housing values to increase at a slower rate in the coming years thanin the past several years. Although there may be some markets that experiencehousing price depreciation, we believe that price depreciation will not occurnationwide. Over the long term, we expect that housing appreciation will bepositively correlated with both consumer price inflation and growth in personalincome.

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***Regulatory Trends***

The regulatoryenvironments in which we operate have an impact on the activities in which wemay engage, how the activities may be carried out and the profitability ofthose activities. Therefore, changes to laws, regulations or regulatorypolicies can affect whether and to what extent we are able to operateprofitably. For example, proposed local, state and federal legislation targetedat predatory lending could have the unintended consequence of raising the costor otherwise reducing the availability of mortgage credit for those potentialborrowers with less than prime-quality credit histories. This could result in areduction of otherwise legitimate nonprime lending opportunities. In addition,there may be future local, state and federal legislation that restricts ourability to communicate with and solicit business from current and prospectivecustomers in such a way that we are not able to originate new loans or sellother products in as profitable a manner.

***New AccountingStandards***

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R,“Share-Based Payment” (“SFAS 123R”), an amendment of FASB Statement No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”). This Statement requirescompanies to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant date fair value of the award.SFAS 123R requires measurement of fair value of employee stock options using anoption pricing model that takes into account the awarded options’ uniquecharacteristics.

SFAS 123R requires charging the recognized cost toexpense over the period the employee provides services to earn the award,generally its vesting period.

SFAS 123R’smeasurement requirements for employee stock options are similar to those underthe fair value method of SFAS 123, which is the basis for the proforma stock-based compensation disclosure in “Note 3—Earnings Per Share” in thefinancial statement section of this Report. However, SFAS 123R requires:

·       initialand ongoing estimates of the amount of shares that will vest while SFAS 123provided entities the option of assuming that all shares would vest and then “truingup” compensation cost and expense as shares were forfeited

·       differentmeasurements of awards that contain performance or market conditions

·       distinguishmentof awards between equity and liabilities based on guidance in Statement ofFinancial Accounting Standards No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”.

SFAS 123R also provides for the use of alternativemodels to determine compensation cost related to stock option grants. TheCompany began using a lattice model to estimate the fair value of the certainstock awards (i.e., stock appreciation rights and options) in the secondquarter of 2006.  The lattice model wasdeemed to provide a better estimate of the fair value of those awards becauseit permits probabilities to be assigned to future changes in key assumptions(e.g., risk-free interest rate, stock volatility, and dividend rate).  It also derives an expected term thatcaptures patterns of early exercise by participants prior to the end of thestated terms of those awards.

InFebruary 2006, the FASB issued Statement of Financial Accounting StandardsNo. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS155”), an amendment of SFAS 133 and SFAS 140. This statement:

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

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

·       establishesa requirement to evaluate interests in securitized financial instruments thatcontain an embedded derivative requiring bifurcation; 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 Company has not determined thefinancial impact of the adoption of SFAS 155.

In March 2006, the FASB issued Statement ofFinancial Accounting Standards No. 156, “Accounting for Servicing ofFinancial Assets” (“SFAS 156”), which amends SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities.”(“SFAS 140”) SFAS 156 changes SFAS 140 by requiring that MortgageServicing Rights (“MSRs”) be initially recognized at their fair value and byproviding the option to either: (1) carry MSRs at fair value with changesin fair value recognized in earnings; or (2) continue recognizing periodicamortization expense and assess the MSRs for impairment as was originallyrequired by SFAS 140. This option may be applied by class of servicing asset orliability. The subsequent measurement of MSRs at fair value eliminates the needfor entities that manage risks inherent in MSRs with derivatives to qualify forhedge accounting treatment under SFAS 133. SFAS 156 is effective for allseparately recognized servicing assets and liabilities acquired or issued afterthe beginning of an entity’s fiscal year that begins after September 15,2006, with early adoption permitted. This statement also requires servicingrights to be measured initially at fair value and considered part of theproceeds received in exchange for the sale of assets. We have chosen to earlyadopt this standard in the current quarter and elected fair value accountingfor our existing types of residential mortgage servicing rights. The carryingamount of mortgage servicing rights (“MSRs”) at December 31, 2005 wasadjusted on January 1, 2006 to reflect the change in measurement to fairvalue and is included as a cumulative-effect adjustment to retained earnings asof January 1, 2006 in the amount of $67.1 million.

During July 2006, the Financial AccountingStandards Board adopted 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 tax benefits.

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 toCountrywide beginning in the first quarter of 2007. The cumulative effect ofapplying the provisions of FIN 48 upon adoption will be reported as anadjustment to beginning retained earnings. Management is assessing the effectof the adoption of FIN 48 on the Company.

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**Factors That May AffectOur 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-looking statements.There are a number of factors, many of which are beyond our control, that couldcause actual results to differ significantly from management’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

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

·       Thefact that our accounting policies and methods are fundamental to how we reportour financial condition and results of operations, and they may requiremanagement to 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

·       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

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

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

·       Ineffectivenessof our hedging activities

·       Thelevel and volatility of interest rates

·       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 on Form 10-K.Other factors that could also cause results to differ from our expectations maynot be described in any such report or document. Each of these factors could byitself, or together with one or more other factors, adversely affect ourbusiness, results of operations and/or financial condition.

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

In response to this Item,the information set forth on pages 78 to 81 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 June 30, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**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 six months ended June 30, 2006.

| **Calendar Month** | ** ** | ** ** | ** ** | **Total Number of  Shares  Purchased(1)** | ** ** | **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 |   |   |
| Total                   |       |       | 136,474    |                                                |       |                                         | $          | 36.02                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |

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(1)        The Company has no publicly announced plans orprograms to repurchase its stock. The shares indicated in this table representonly the withholding of a portion of restricted shares to cover taxes on vestedrestricted shares.

**Item 4.   *Submission of Matters to a Vote of Security Holders***

The Annual Meeting of Stockholders of the Company washeld on June 14, 2006. The agenda items for such meeting are shown belowtogether with the vote of the Company’s Common Stock with respect to suchagenda items.

1.      The election of four Class IDirectors to serve until the 2009 Annual Meeting of Stockholders.

| **Class I Nominees** | ** ** | ** **  | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|--------------------------------|------------|-------------|------------|--------------------|------------|-------------------------|------------|
| Kathleen Brown                 |       | 441,848,771 |       |               | 89,197,070 |                    |       |
| Jeffrey M.  Cunningham         |       | 494,535,466 |       |               | 36,510,375 |                    |       |
| Martin R. Melone               |       | 496,992,574 |       |               | 34,053,267 |                    |       |
| Robert T. Parry                |       | 497,435,490 |       |               | 33,610,351 |                    |       |

 

The terms of Angelo R. Mozilo, Stanford L. Kurland,Oscar P. Robertson, Keith P. Russell, Henry G. Cisneros, Robert J. Donato,Michael E. Dougherty and Harley W. Snyder continued after such meeting.

2.      Approval of the Company’s 2006 EquityIncentive Plan.

| Votes For:     |   | 401,013,678 |   |
|----------------|--------|-------------|--------|
| Votes Against: |   | 88,229,156  |   |
| Abstentions:   |   | 4,030,566   |   |

 

3.      Ratification of the appointment of KPMGLLP as the Company’s independent registered public accounting firm.

| Votes For:     |   | 522,131,414 |   |
|----------------|--------|-------------|--------|
| Votes Against: |   | 4,628,319   |   |
| Abstentions:   |   | 4,286,101   |   |

 

93

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4.      Consideration of a stockholder proposalurging the Company’s Board of Directors to adopt a policy that the Company’sstockholders be given an opportunity to annually approve the report of theCompany’s Compensation Committee.

| Votes For:     |   | 210,330,358 |   |
|----------------|--------|-------------|--------|
| Votes Against: |   | 270,565,737 |   |
| Abstentions:   |   | 12,377,307  |   |

 

**Item 6.**   *Exhibits*

(a)    Exhibits

See Index of Exhibits on page 96.

94

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**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: August 7, 2006  |     | By:                                                        | /s/ STANFORD L. KURLAND |   |
|                        |     | Stanford L.  Kurland                                       |                    |
| * *                    | * * | *President  and Chief Operating Officer*                   | * *                |
| Dated: August 7,  2006 |     | By:                                                        | /s/  ERIC P. SIERACKI   |   |
|                        |     | Eric P. Sieracki                                           |                    |
|                        | * * | *Executive  Managing Director and Chief Financial Officer* | * *                |

 

95

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**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QJune 30, 2006**

**INDEXOF EXHIBITS**
| ExhibitNo. | ** ** | **Description** | ** ** |
|------------|------------|-----------------|------------|
|       | 3.         | 7               |       | Bylaws  of the Company, as amended. |   |
|       | 4.         | 61*             |       | Indenture, dated  May 16, 2006, between the Company and The Bank of New York, as Trustee,  relating to the 6.25% Subordinated Notes due May 15, 2016 (incorporated  by reference to Exhibit 4.27 to the Company’s Current Report on  Form 8-K, filed with the SEC on May 16, 2006). |   |
|       | 4.         | 62*             |       | Form of  6.25% Subordinated Note due May 15, 2016 of the Company (incorporated by  reference to Exhibit 4.28 to the Company’s Current Report on Form 8-K,  filed with the SEC on May 16, 2006). |   |
|       | +10.       | 130*            |       | Form of  Stock Appreciation Right Agreement pursuant to the 2000 Equity Incentive Plan  of the Company (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed with the SEC on  April 7, 2006). |   |
|       | +10.       | 131*            |       | Director Emeritus  Agreement dated April 26, 2006 by and between the Company and Ben M.  Enis (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed with the SEC on May 1, 2006). |   |
|       | +10.       | 132*            |       | Director Emeritus  Agreement dated April 26, 2006 by and between the Company and Edwin  Heller (incorporated by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K, filed with the SEC on May 1,  2006). |   |
|       | 10.        | 133*            |       | Five-Year Credit  Agreement, dated as of May 10, 2006, among the Company, Countrywide Home  Loans, Inc., JPMorgan Chase Bank, N.A., as managing administrative  agent, Bank of America, N.A., as administrative agent, ABN AMRO Bank N.V., as  syndication agent, Citibank, N.A., and Deutsche Bank AG New York Branch, as  documentation agents, and the lenders party thereto (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed with the SEC on May 16, 2006). |   |
|       | 10.        | 134*            |       | 364-Day  Credit Agreement, dated as of May 10, 2006, among the Company,  Countrywide Home Loans, Inc., JPMorgan Chase Bank, N.A., as managing  administrative agent, Bank of America, N.A., as administrative agent, ABN  AMRO Bank N.V., as syndication agent, Citibank, N.A., and Deutsche Bank AG  New York Branch, as documentation agents, and the lenders party thereto  (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, filed with the SEC on May 16, 2006). |   |
|       | 10.        | 135*            |       | Third Amendment,  dated as of May 10, 2006, to the Credit Agreement, dated as of  November 19, 2004 (as amended, supplemented or otherwise modified from  time to time), by and among the Company, Countrywide Home Loans, Inc.,  the lenders party thereto, Lloyds TSB Bank, PLC and Societe Generale, as  documentation agents, BNP Paribas, as syndication agent, Barclays Bank PLC,  as administrative agent, and Royal Bank of Canada, as managing administrative  agent (incorporated by reference to Exhibit 10.3 to the Company’s  Current Report on Form 8-K, filed with the SEC on May 16,  2006). |   |
|       | +10.       | 136*            |       | 2006 Equity  Incentive Plan (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed with the SEC on  June 20, 2006). |   |
|       | +10.       | 137*            |       | Form of 2006  Equity Incentive Plan Stock Appreciation Rights Award Agreement (incorporated  by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K, filed with the SEC on June 20, 2006). |   |

96

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| ExhibitNo. | ** ** | **Description** | ** ** |
|------------|------------|-----------------|------------|
|       | +10.       | 138*            |       | Form of  2006 Equity Incentive Plan Restricted Stock Unit Award Agreement  (incorporated by reference to Exhibit 10.3 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006). |   |
|       | +10.       | 139*            |       | Form of 2006  Equity Incentive Plan Restricted Stock Award Agreement (incorporated by  reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K,  filed with the SEC on June 20, 2006). |   |
|       | +10.       | 140*            |       | Form of 2006  Equity Incentive Plan Performance-Based Stock Appreciation Rights Award  Agreement (incorporated by reference to Exhibit 10.5 to the Company’s  Current Report on Form 8-K, filed with the SEC on June 20,  2006). |   |
|       | +10.       | 141*            |       | Form of 2006  Equity Incentive Plan Performance-Based Restricted Stock Unit Award Agreement  (incorporated by reference to Exhibit 10.6 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006). |   |
|       | +10.       | 142*            |       | Form of 2006  Equity Incentive Plan Performance-Based Restricted Stock Award Agreement  (incorporated by reference to Exhibit 10.7 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006). |   |
|       | +10.       | 143*            |       | Form of 2006  Equity Incentive Plan Performance-Based Non-Qualified Stock Option Award  Terms (incorporated by reference to Exhibit 10.8 to the Company’s  Current Report on Form 8-K, filed with the SEC on June 20,  2006). |   |
|       | +10.       | 144*            |       | Form of 2006  Equity Incentive Plan Performance-Based Incentive Stock Option Award Terms  (incorporated by reference to Exhibit 10.9 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006). |   |
|       | +10.       | 145*            |       | Form of 2006  Equity Incentive Plan Non-Qualified Stock Option Award Terms (incorporated by  reference to Exhibit 10.10 to the Company’s Current Report on  Form 8-K, filed with the SEC on June 20, 2006). |   |
|       | +10.       | 146*            |       | Form of 2006  Equity Incentive Plan Incentive Stock Option Award Terms (incorporated by  reference to Exhibit 10.11 to the Company’s Current Report on  Form 8-K, filed with the SEC on June 20, 2006). |   |
|       | +10.       | 147*            |       | Second Amendment  to Amended and Restated Rights Agreement dated June 14, 2006 by and  between the Company and American Stock Transfer & Trust Company  (incorporated by reference to Exhibit 10.12 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006). |   |
|       | +10.       | 148*            |       | Change in Control  Severance Plan, as amended and restated as of June 14, 2006  (incorporated by reference to Exhibit 10.13 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 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. |   |

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*                  Incorporated by reference

+              Constitutes a management contract orcompensatory plan or arrangement

97

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