**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-Q**

**(Mark One)**

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

**Forthe quarterly period ended March 31, 2006**

**Or**

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

**Forthe transition period from              to              **

**Commissionfile number: 1-8422**

**Countrywide Financial Corporation**

(Exact name of registrantas specified in its charter)

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

 

(Registrant’s telephone number, including area code)

**(818)225-3000**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes x     Noo

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act(check one):

| Large accelerated filer  x | Accelerated filer  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

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

| Class                        | ** ** | **Outstanding at May 4, 2006** |
|------------------------------|------------|-------------------------------------|
| Common Stock $.05  par value |       | 607,615,238                         |

 

 

----

**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QMarch 31, 2006**

**TABLEOF CONTENTS**
|                                        | ** ** | ** **                                                                                                       | ** ** | **Page** |
|----------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I. FINANCIAL INFORMATION** |       | 1                                                                                                                |       |
| Item 1.                                |       | Financial Statements:                                                                                            |       |     |   |
|                                   |       | Consolidated Balance  Sheets—March 31, 2006 and December 31, 2005                                 |       | 1        |   |
|                                   |       | Consolidated Statements of  Earnings—Quarters Ended March 31, 2006 and 2005                            |       | 2        |   |
|                                   |       | Consolidated Statement of  Changes in Shareholders’ Equity—Quarters Ended March 31, 2006 and 2005 |       | 3        |   |
|                                   |       | Consolidated Statements of  Cash Flows—Quarters Ended March 31, 2006 and 2005                          |       | 4        |   |
|                                   |       | Notes to Consolidated Financial  Statements                                                                      |       | 5        |   |
| Item 2.                                |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                      |       | 34       |   |
|                                   |       | Overview                                                                                                         |       | 34       |   |
|                                   |       | Results of Operations  Comparison—Quarters Ended March 31, 2006 and 2005                               |       | 37       |   |
|                                   |       | Quantitative and Qualitative  Disclosures About Market Risk                                                      |       | 58       |   |
|                                   |       | Credit Risk Management                                                                                           |       | 60       |   |
|                                   |       | Loan Servicing                                                                                                   |       | 62       |   |
|                                   |       | Liquidity and Capital Resources                                                                                  |       | 63       |   |
|                                   |       | Off-Balance Sheet Arrangements and Aggregate Contractual  Obligations                                            |       | 65       |   |
|                                   |       | Prospective Trends                                                                                               |       | 66       |   |
|                                   |       | Regulatory Trends                                                                                                |       | 67       |   |
|                                   |       | Implementation of New  Accounting Standards                                                                      |       | 67       |   |
|                                   |       | Factors That May Affect  Our Future Results                                                                 |       | 68       |   |
| Item 3.                                |       | Quantitative and Qualitative  Disclosures About Market Risk                                                      |       | 70       |   |
| Item 4.                                |       | Controls and Procedures                                                                                          |       | 70       |   |
| **PART II. OTHER INFORMATION**    |       | 71                                                                                                               |       |
| Item 2.                                |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                     |       | 71       |   |
| Item 6.                                |       | Exhibits                                                                                                         |       | 71       |   |

 

----

**PART I.FINANCIAL INFORMATION**

**Item 1.   *Financial Statements***

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                                                           | ** ** | **March 31,  2006**                                  | ** **  | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                           | ** ** | **(Unaudited)**                                           | ** **  |
| ** **                                                                                                                                                                                                                                                                                                           | ** ** | **(in thousands, except share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                                           | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Cash                                                                                                                                                                                                                                                                                                                 |       | $                                                         | 2,644,621   |                        | $          | 1,031,108 |   |
| Mortgage loans held for  sale                                                                                                                                                                                                                                                                                        |       | 32,067,881                                                |        | 36,808,185                  |       |
| Trading securities  owned, at fair value                                                                                                                                                                                                                                                                             |       | 11,050,549                                                |        | 10,314,384                  |       |
| Trading securities  pledged as collateral, at fair value                                                                                                                                                                                                                                                             |       | 1,022,396                                                 |        | 668,189                     |       |
| Securities purchased under  agreements to resell, securities borrowed  and federal funds sold                                                                                                                                                                                                                        |       | 21,516,259                                                |        | 23,317,361                  |       |
| Loans held for  investment, net of allowance for loan losses of $172,271 and $189,201,  respectively                                                                                                                                                                                                                 |       | 74,107,611                                                |        | 69,865,447                  |       |
| Investments in other  financial instruments, at fair value                                                                                                                                                                                                                                                           |       | 11,111,631                                                |        | 11,260,725                  |       |
| Mortgage servicing  rights, at fair value                                                                                                                                                                                                                                                                            |       | 14,171,804                                                |        | —                      |       |
| Mortgage servicing  rights, net                                                                                                                                                                                                                                                                                      |       | —                                                    |        | 12,610,839                  |       |
| Premises and equipment,  net                                                                                                                                                                                                                                                                                         |       | 1,338,293                                                 |        | 1,279,659                   |       |
| Other assets                                                                                                                                                                                                                                                                                                         |       | 8,561,011                                                 |        | 7,929,473                   |       |
| Total assets                                                                                                                                                                                                                                                                                                         |       | $                                                         | 177,592,056 |                        | $          | 175,085,370 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Notes payable                                                                                                                                                                                                                                                                                                        |       | $                                                         | 72,554,228  |                        | $          | 76,187,886 |   |
| Securities sold under  agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                     |       | 32,599,845                                                |        | 34,153,205                  |       |
| Deposit liabilities                                                                                                                                                                                                                                                                                                  |       | 45,377,942                                                |        | 39,438,916                  |       |
| Accounts payable and  accrued liabilities                                                                                                                                                                                                                                                                            |       | 5,920,045                                                 |        | 6,358,158                   |       |
| Trading securities sold,  not yet purchased, at fair value                                                                                                                                                                                                                                                           |       | 3,393,128                                                 |        | 2,285,171                   |       |
| Income taxes payable                                                                                                                                                                                                                                                                                                 |       | 4,240,615                                                 |        | 3,846,174                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                    |       | 164,085,803                                               |        | 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, 605,011,658 shares and 600,169,268  shares at March 31, 2006 and December 31, 2005, respectively;  outstanding, 604,786,813 shares and 600,030,686 shares at March 31, 2006  and December 31, 2005, respectively |       | 30,251                                                    |        | 30,008                      |       |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                          |       | 3,071,443                                                 |        | 2,954,019                   |       |
| Accumulated other  comprehensive (loss) income                                                                                                                                                                                                                                                                       |       | (26,403                                                   | )           | 61,114                      |       |
| Retained earnings                                                                                                                                                                                                                                                                                                    |       | 10,430,962                                                |        | 9,770,719                   |       |
| Total shareholders’  equity                                                                                                                                                                                                                                                                                     |       | 13,506,253                                                |        | 12,815,860                  |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                                                      |       | $                                                         | 177,592,056 |                        | $          | 175,085,370 |   |

 

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

1

----

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS**

| ** **                                                                                      | ** ** | **Quarters Ended March 31,**                        | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                                                                                      | ** ** | **(Unaudited)**                                                    | ** ** |
| ** **                                                                                      | ** ** | **(in thousands, except per share data)** | ** ** |
| **Revenues**                                                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Gain on sale of loans and securities                                                            |       |                                                               | $          | 1,361,178 |   |   | $ | 1,361,751 |   |
| Interest income                                                                                 |       |                                                               | 2,593,758  |   |   | 1,486,930 |   |
| Interest expense                                                                                |       |                                                               | (1,899,323 | ) |   | (995,937 | ) |
| Net interest income                                                                             |       |                                                               | 694,435    |   |   | 490,993 |   |
| Provision for loan losses                                                                       |       |                                                               | (63,138    | ) |   | (19,622 | ) |
| Net interest income after provision for loan losses                                             |       |                                                               | 631,297    |   |   | 471,371 |   |
| Loan servicing fees and other income from mortgage  servicing rights and retained interests     |       |                                                               | 1,199,887  |   |   | 972,358 |   |
| Realization of expected cash flows from mortgage  servicing rights                              |       |                                                               | (738,567   | ) |   | — |   |
| Amortization of mortgage servicing rights                                                       |       |                                                               | —     |   |   | (472,187 | ) |
| Change in fair value of mortgage servicing rights                                               |       |                                                               | 978,281    |   |   | — |   |
| Recovery of mortgage servicing rights                                                           |       |                                                               | —     |   |   | 452,434 |   |
| Impairment of retained interests                                                                |       |                                                               | (120,654   | ) |   | (137,070 | ) |
| Servicing hedge losses                                                                          |       |                                                               | (885,870   | ) |   | (552,292 | ) |
| Net loan servicing fees and other income from  mortgage servicing rights and retained interests |       |                                                               | 433,077    |   |   | 263,243 |   |
| Net insurance premiums earned                                                                   |       |                                                               | 279,793    |   |   | 199,518 |   |
| Other                                                                                           |       |                                                               | 130,603    |   |   | 109,002 |   |
| Total revenues                                                                                  |       |                                                               | 2,835,948  |   |   | 2,404,885 |   |
| **Expenses**                                                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Compensation                                                                                    |       |                                                               | 1,074,818  |   |   | 786,479 |   |
| Occupancy and other office                                                                      |       |                                                               | 245,331    |   |   | 188,656 |   |
| Insurance claims                                                                                |       |                                                               | 124,042    |   |   | 75,935 |   |
| Advertising and promotion                                                                       |       |                                                               | 60,230     |   |   | 55,179 |   |
| Other                                                                                           |       |                                                               | 212,164    |   |   | 149,639 |   |
| Total expenses                                                                                  |       |                                                               | 1,716,585  |   |   | 1,255,888 |   |
| Earnings before  income taxes                                                                   |       |                                                               | 1,119,363  |   |   | 1,148,997 |   |
| Provision for income taxes                                                                      |       |                                                               | 435,852    |   |   | 460,145 |   |
| **NET EARNINGS**                                                                                |       |                                                               | $          | 683,511 |   |   | $ | 688,852 |   |
| Basic                                                                                           |       |                                                               | $          | 1.14 |   |   | $ | 1.18 |   |
| Diluted                                                                                         |       |                                                               | $          | 1.10 |   |   | $ | 1.13 |   |

 

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

2

----

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

| ** **                                                                          | ** ** | **Number of  Shares of  Common Stock**     | ** **  | **Common  Stock** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                                          | ** ** | **(Unaudited)**                                           | ** **  |
| ** **                                                                          | ** ** | **(in thousands, except share data)** | ** **  |
| **Balance  at December 31, 2004**                                              |       |                                                      | 581,648,881 |              |       |                              | $          | 29,085                                                    |       |                   |       | $         | 2,570,402  |   |   |   | $ | 118,943 |   |   | $ | 7,591,646 |   | $ | 10,310,076 |   |
| Comprehensive income:                                                               |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net earnings for  the period                                                        |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 688,852 |   | 688,852 |   |
| Other comprehensive  income (loss), net of tax:                                     |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized  losses from available-for-sale securities                           |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (48,544 | ) |   | — |   | (48,544 | ) |
| Net unrealized  gains from cash flow hedging instruments                       |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | 7,331 |   |   | — |   | 7,331 |   |
| Net change in  foreign currency translation adjustment                              |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (5,058 | ) |   | — |   | (5,058 | ) |
| Total  comprehensive income                                                         |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 642,581 |   |
| Issuance of stock  pursuant to stock-based compensation plans                       |       |                                                      | 3,599,585   |              |       |                              | 181        |                                                      |       |                   | 45,958     |      |       |   | — |   |   | — |   | 46,139 |   |
| Tax benefit of  stock options exercised                                        |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 24,796     |      |       |   | — |   |   | — |   | 24,796 |   |
| Issuance of common  stock, net of treasury stock                                    |       |                                                      | 193,077     |              |       |                              | 10         |                                                      |       |                   | 6,637      |      |       |   | — |   |   | — |   | 6,647 |   |
| Issuance of common  stock for conversion of convertible debt                        |       |                                                      | 770,268     |              |       |                              | 39         |                                                      |       |                   | 1,566      |      |       |   | — |   |   | — |   | 1,605 |   |
| Tax benefit of  interest on conversion of convertible debt                     |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 1,938      |      |       |   | — |   |   | — |   | 1,938 |   |
| Cash dividends  paid—$0.14 per common share                               |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (81,735 | ) | (81,735 | ) |
| **Balance  at March 31, 2005**                                                 |       |                                                      | 586,211,811 |              |       |                              | $          | 29,315                                                    |       |                   |       | $         | 2,651,297  |   |   |   | $ | 72,672 |   |   | $ | 8,198,763 |   | $ | 10,952,047 |   |
| **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                                                        |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 683,511 |   | 683,511 |   |
| Other comprehensive  income (loss), net of tax:                                     |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized  losses from available-for-sale securities                           |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (80,984 | ) |   | — |   | (80,984 | ) |
| Net unrealized  losses from cash flow hedging instruments                           |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (7,647 | ) |   | — |   | (7,647 | ) |
| Net change in  foreign currency translation adjustment                              |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | 1,114 |   |   | — |   | 1,114 |   |
| Total  comprehensive income                                                         |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 595,994 |   |
| Issuance of stock  pursuant to stock-based compensation plans                       |       |                                                      | 4,147,375   |              |       |                              | 212        |                                                      |       |                   | 87,441     |      |       |   | — |   |   | — |   | 87,653 |   |
| Tax benefit of  stock options exercised                                        |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 22,000     |      |       |   | — |   |   | — |   | 22,000 |   |
| Issuance of common  stock, net of treasury stock                                    |       |                                                      | 193,884     |              |       |                              | 10         |                                                      |       |                   | 6,539      |      |       |   | — |   |   | — |   | 6,549 |   |
| Issuance of common  stock for conversion of convertible debt                        |       |                                                      | 414,868     |              |       |                              | 21         |                                                      |       |                   | 1,444      |      |       |   | — |   |   | — |   | 1,465 |   |
| Cash dividends  paid—$0.15 per common share                               |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (90,333 | ) | (90,333 | ) |
| **Balance  at March 31, 2006**                                                 |       |                                                      | 604,786,813 |              |       |                              | $          | 30,251                                                    |       |                   |       | $         | 3,071,443  |   |   |   | $ | (26,403 | ) |   | $ | 10,430,962 |   | $ | 13,506,253 |   |

 

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

3

----

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                                                | ** ** | **Quarters Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                                                                                                | ** ** | **(Unaudited)**                             | ** ** |
| ** **                                                                                                                | ** ** | **(in thousands)**                     | ** ** |
| **Cash flows from operating activities:**                                                                                 |       |                                        |       |   |   |
| Net earnings                                                                                                              |       | $                                           | 683,511    |   | $ | 688,852 |   |
| Adjustments to reconcile  net earnings to net cash provided by operating activities:                                      |       |                                        |       |   |   |
| Gain on sale of  loans and securities                                                                                     |       | (1,361,178                                  | )          | (1,361,751 | ) |
| Accretion of  discount on securities                                                                                      |       | (16,127                                     | )          | (104,806 | ) |
| Interest  capitalized on loans held for investment                                                                        |       | (109,433                                    | )          | (4,323 | ) |
| Accretion of fair  value adjustments and discount on notes payable                                                        |       | (40,558                                     | )          | (6,843 | ) |
| Net change in fair  value of hedged notes payable and related interest-rate and foreign-currency  swaps                   |       | (2,543                                      | )          | 1,242 |   |
| Amortization of  deferred fees on time deposits                                                                           |       | 4,319                                       |       | 2,623 |   |
| Amortization of  deferred premiums, discounts and fees, net                                                               |       | 69,465                                      |       | 31,719 |   |
| Provision for loan  losses                                                                                                |       | 63,138                                      |       | 19,622 |   |
| Amortization of  mortgage servicing rights                                                                                |       | —                                      |       | 472,187 |   |
| Recovery of  mortgage servicing rights                                                                                    |       | —                                      |       | (452,434 | ) |
| Changes in fair  value of mortgage servicing rights                                                                       |       | (978,281                                    | )          | — |   |
| Change in MSR value  due to realization of expected cash flows from mortgage servicing  rights                            |       | 738,567                                     |       | — |   |
| Impairment of  retained interests                                                                                         |       | 123,982                                     |       | 121,208 |   |
| Depreciation and other  amortization                                                                                      |       | 62,189                                      |       | 46,783 |   |
| Stock-based  compensation expense                                                                                         |       | 26,640                                      |       | 8,681 |   |
| Provision for  deferred income taxes                                                                                      |       | 357,931                                     |       | 333,342 |   |
| Origination and  purchase of loans and mortgage-backed securities held for sale                                           |       | (98,372,317                                 | )          | (83,502,615 | ) |
| Proceeds from sale  and principal repayments of loans and mortgage-backed securities                                      |       | 102,874,507                                 |       | 80,374,847 |   |
| (Increase)  decrease in trading securities                                                                                |       | (1,035,108                                  | )          | 2,326,608 |   |
| Decrease in  investments in other financial instruments                                                                   |       | 127,769                                     |       | 322,166 |   |
| (Increase)  decrease in other assets                                                                                      |       | (645,956                                    | )          | 422,057 |   |
| (Decrease)  increase in accounts payable and accrued liabilities                                                          |       | (458,274                                    | )          | 58,748 |   |
| Increase in  trading securities sold, not yet purchased, at fair value                                                    |       | 1,107,957                                   |       | 319,779 |   |
| Increase in income  taxes payable                                                                                         |       | 50,062                                      |       | 76,442 |   |
| Net cash provided  by operating activities                                                                                |       | 3,270,262                                   |       | 194,134 |   |
| **Cash flows from investing activities:**                                                                                 |       |                                        |       |   |   |
| Decrease  (increase) in securities purchased under agreements to resell, federal funds  sold and securities borrowed |       | 1,801,102                                   |       | (7,917,186 | ) |
| Additions to loans  held for investment, net                                                                              |       | (4,248,656                                  | )          | (8,053,874 | ) |
| Sales of loans  held for investment                                                                                       |       | 52,787                                      |       | — |   |
| Additions to  investments in other financial instruments                                                                  |       | (1,176,641                                  | )          | (3,001,758 | ) |
| Proceeds from sale  and repayment of investments in other financial instruments                                           |       | 1,221,123                                   |       | 1,110,347 |   |
| Purchases of  mortgage servicing rights                                                                                   |       | (1,911                                      | )          | (95,417 | ) |
| Purchase of  premises and equipment, net                                                                                  |       | (106,405                                    | )          | (141,439 | ) |
| Net cash used by  investing activities                                                                                    |       | (2,458,601                                  | )          | (18,099,327 | ) |
| **Cash flows from financing activities:**                                                                                 |       |                                        |       |   |   |
| Net (decrease)  increase in short-term borrowings                                                                         |       | (2,187,767                                  | )          | 967,395 |   |
| Issuance of  long-term debt                                                                                               |       | 5,558,307                                   |       | 3,785,000 |   |
| Repayment of  long-term debt                                                                                              |       | (6,949,264                                  | )          | (2,879,147 | ) |
| Net (decrease)  increase in securities sold under agreements to repurchase and federal funds purchased               |       | (1,553,360                                  | )          | 10,382,889 |   |
| Net increase in  deposit liabilities                                                                                      |       | 5,934,707                                   |       | 5,663,908 |   |
| Tax benefit of  stock options exercised                                                                                   |       | 22,000                                      |       | 24,796 |   |
| Issuance of common  stock                                                                                                 |       | 67,562                                      |       | 44,105 |   |
| Payment of  dividends                                                                                                     |       | (90,333                                     | )          | (81,735 | ) |
| Net cash provided  by financing activities                                                                                |       | 801,852                                     |       | 17,907,211 |   |
| Net increase in  cash                                                                                                     |       | 1,613,513                                   |       | 2,018 |   |
| Cash at beginning  of period                                                                                              |       | 1,031,108                                   |       | 751,237 |   |
| Cash at end of period                                                                                                     |       | $                                           | 2,644,621  |   | $ | 753,255 |   |

 

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

4

----

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

**Note 1—Basis ofPresentation**

Countrywide Financial Corporation (“Countrywide”) is aholding company which, through its principal subsidiary, Countrywide 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 quarter ended March 31,2006 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2006. For further information, including adescription of the Company’s significant accounting policies, refer to theconsolidated financial statements and notes thereto included in the AnnualReport on Form 10-K for the year ended December 31, 2005 forthe Company (the “2005 Annual Report”).

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

**Note 2—Adoption of Statement ofFinancial Accounting Standards No.156, “Accounting for Servicing of FinancialAssets” (“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.

SFAS 156 is effective forall separately recognized servicing assets and liabilities acquired or issuedafter the beginning of an entity’s fiscal year that begins after September 15,2006, with early adoption permitted. The Company has chosen to adopt SFAS 156effective January 1, 2006. The Company has identified MSRs relating toresidential mortgage loans as a class of servicing rights and has elected toapply fair value accounting to these MSRs. Presently this class represents allof the Company’s MSRs. SFAS 156 requires that any adjustment necessary torecord MSRs at fair value at adoption be recognized in 

5

----

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

beginningshareholders’ equity. Accordingly, the following adjustment was made to theopening balances of MSRs, income taxes payable and retained earnings:

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

 

As a result of adoptingSFAS 156 and applying fair value accounting to MSRs, the hedge accountingprovisions of Statement of Financial Accounting Standards No. 133, “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 Companydiscontinued fair 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 sharecalculations for the periods indicated:

| ** **                                    | ** ** | **Quarters Ended March 31,**                        | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **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    |       | $                                                                  | 683,511    |   | 601,585 |   |   | $ | 1.14 |   |   | $ | 688,852 |   | 583,201 |   |   | $ | 1.18 |   |   |
| Effect of  dilutive securities:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures                        |       | 15                                                                 |       | 219 |   |   |   |   |   | 109 |   | 2,531 |   |   |   |   |   |
| Dilutive stock options                        |       | —                                                             |       | 18,528 |   |   |   |   |   | — |   | 24,944 |   |   |   |   |   |
| Diluted earnings and  earnings per share |       | $                                                                  | 683,526    |   | 620,332 |   |   | $ | 1.10 |   |   | $ | 688,961 |   | 610,676 |   |   | $ | 1.13 |   |   |

 

During the quarters ended March 31,2006 and 2005, stock options to purchase 187,209 shares and 31,500 shares,respectively, were outstanding but not included in the computation of dilutedearnings per share because they were anti-dilutive.

***Stock-Based Compensation***

During the current period, the Company adoptedStatement of Financial Accounting Standards No. 123R, “Share-BasedPayment,” (“SFAS 123R”), an amendment of FASB Statement No. 123, 

6

----

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

“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 to retirementeligible employees that vest upon retirement, the Company is required underSFAS 123R to immediately charge the associated value to expense. The value ofgrants after January 1, 2006 to other employees must be amortized over thelesser of (a) the nominal vesting period or (b) for options that vestupon retirement, the period until the grantee becomes retirement-eligible.

As of March 31, 2006, the Company has issuedstock options and shares of restricted stock that, depending on the yeargranted and other factors, have different vesting requirements. Generally,stock options issued before 2004 vest over a period of three to four years andexpire five or ten years after the grant date. Stock options awarded in 2004become vested upon attainment of specific earnings performance targets and, inany event, four and a half years after the grant date regardless of attainmentof the earnings targets and expire five years after the date of grant. Generally,stock options granted in 2005 were fully vested. Off-cycle awards and awards tonew hires have various vesting schedules. Generally, restricted stock vestsover a period of three years although some restricted stock awards granted in2004 had a performance based component similar to the stock options grantedthat year.

The impact of adopting SFAS 123R for the three monthsended March 31, 2006, was a charge of approximately $13.1 million ($10.0million, net of tax, or $0.02 per diluted share) to compensation expense. Theremaining unrecognized compensation cost related to unvested awards as of March 31,2006, was $41.3 million and the weighted average period of time over which thiscost will be recognized is 1.3 years.

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

| ** **                                                                   | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **(In thousands,  except per share data)**       | ** ** |
| Net Earnings:                                                                |       |                                             |       |   |   |
| As reported                                                                  |       |                                             | $          | 688,852 |   |   |
| Add: Stock-based compensation included in net earnings,  net of taxes   |       |                                             | 1,903      |   |   |
| Deduct: Stock-based employee compensation under  SFAS 123, net of taxes |       |                                             | (12,884    | ) |   |
| Pro forma                                                                    |       |                                             | $          | 677,871 |   |   |
| Basic Earnings  Per Share:                                                   |       |                                             |       |   |   |
| As reported                                                                  |       |                                             | $          | 1.18 |   |   |
| Pro forma                                                                    |       |                                             | $          | 1.16 |   |   |
| Diluted Earnings Per  Share:                                                 |       |                                             |       |   |   |
| As reported                                                                  |       |                                             | $          | 1.13 |   |   |
| Pro forma                                                                    |       |                                             | $          | 1.11 |   |   |

 

Beginning in the second quarter of 2005, the Companybegan using a variant of the Black-Scholes-Merton option-pricing model thattakes into account enhanced estimates of employee tenure and exercise 

7

----

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

experience to estimate thefair value of the options. For purposes of this pro-forma disclosure, the fairvalue of each option grant is amortized to periodic compensation expense overthe options’ vesting period.

The weighted-average assumptions used to value theoption grants and the resulting average estimated values were as follows:

| ** **                       | ** ** | **Quarters Ended  March 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|
| ** **                       | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Weighted Average  Assumptions:   |       |                                    |       |   |   |
| Dividend yield                   |       | 1.70                                    | %          | 1.10 | % |
| Expected volatility              |       | 32.50                                   | %          | 34.62 | % |
| Risk-free interest rate          |       | 4.56                                    | %          | 3.80 | % |
| Expected life (in years)(1)      |       | 2.81                                    |       | 5.00 |   |
| Weighted-average  exercise price |       | $                                       | 35.34      |   | $ | 36.08 |   |
| Per-share fair value of  options |       | $                                       | 6.70       |   | $ | 11.93 |   |

----

(1)          Beginningin the second quarter of 2005, expected employee tenure and exercise experienceare determined by option pricing model.

Thetable below summarizes stock option activity and related information for thequarter ended March 31, 2006:

| ** **                                  | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | ** **                 | ** ** | ** **                                  | ** ** | **(in years)**                                  | ** ** | **(in thousands)**             | ** ** |
| Outstanding  options at beginning of period |       | 58,424,402                 |       |                                        | $          | 20.06                                                |       |                                |       |   |   |   |   |   |   |   |
| Options granted                             |       | 94,141                     |       |                                        | 35.34      |                                                 |       |                                |       |   |   |   |   |   |   |
| Options exercised                           |       | (2,697,834                 | )          |                                        | 12.77      |                                                 |       |                                |       |   |   |   |   |   |   |
| Options expired or cancelled                |       | (172,025                   | )          |                                        | 22.34      |                                                 |       |                                |       |   |   |   |   |   |   |
| Outstanding  options at end of period       |       | 55,648,684                 |       |                                        | $          | 20.43                                                |       |                                |       | 5.08 |   |   |   | $ | 888,923 |   |   |
| Options  exercisable                        |       | 39,470,372                 |       |                                        | $          | 19.34                                                |       |                                |       | 4.97 |   |   |   | $ | 673,411 |   |   |

 

Stockoption exercise activity for the quarter ended March 31, 2006 and 2005 issummarized below:

| ** **      | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------|------------|-----------------------------------------|------------|
| ** **      | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(in thousands)**                 | ** ** |
| Cash proceeds   |       | $                                       | 34,449     |   | $ | 19,804 |   |
| Intrinsic value |       | $                                       | 60,086     |   | $ | 70,662 |   |

 

8

----

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

Thetable below summarizes restricted stock activity and related information for thequarter ended March 31, 2006: 

| ** **                                           | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average Grant  Date Fair  Value** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|----------------------------------------------------------|------------|
| Outstanding  restricted stock at beginning of period |       |                       | 838,443    |                                                     |       |   | $ | 26.37 |   |   |
| Restricted stock granted                             |       |                       | 194,095    |                                                     |       |   | 30.03 |   |   |
| Restricted stock vested                              |       |                       | (301,792   | )                                                        |       |   | 23.48 |   |   |
| Restricted stock cancelled                           |       |                       | (3,016     | )                                                        |       |   | 18.86 |   |   |
| Outstanding restricted  stock at end of period       |       |                       | 727,730    |                                                     |       |   | $ | 28.57 |   |   |

 

**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.

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, Mortgage Loan Inventory, MSRs andretained interests and trading securities, as well as a portion of its debt.Interest rate risk relating to the Company’s portfolio of loans held forinvestment is managed by funding these assets with liabilities of similarduration or using derivative instruments whose valuation changes, when combinedwith the characteristics of the managed liability, create repricingcharacteristics that more closely reflect the repricing behaviors of thoseassets.

***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 (“IRLC”). TheMortgage Loan Inventory is comprised of mortgage loans and Mortgage-BackedSecurities (“MBS”) held by the Company pending sale. IRLCs guarantee the rateand points on the underlying mortgage or group of mortgages for a specifiedperiod. IRLCs are derivative instruments and are recorded at fair value withchanges in fair value recognized in current period earnings (as a component ofgain on sale of loans and securities). To manage this risk the Company usesderivative instruments in its risk management activities related to the IRLCsand Mortgage Loan Inventory including: forward sales/purchases of MBS, longcall/put options on MBS, long call/put options on Treasury Futures, short Eurodollarfutures contracts, total rate of return swaps and credit default swaps. Certainof these instruments qualify as fair value hedges of mortgage loans under SFAS133.

9

----

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

During the quarter ended March 31,2006, the interest rate risk management activities associated with 68% of thefixed-rate mortgage loan inventory and 44% of the adjustable-rate mortgage loaninventory were accounted for as fair value hedges. The Company recognizedpre-tax losses of $17.1 million and a pre-tax gain of $5.1 million, representingthe ineffective portion of such fair value hedges of its mortgage inventory,for the quarters ended March 31, 2006 and 2005, respectively. Theseamounts, along with the change in the fair value of the derivative instrumentsthat were not designated as hedge instruments, are included in gain on sale ofloans and securities in the consolidated statements of 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 financialinstruments, including derivatives, which generally increase in aggregate valuewhen interest rates decline. This portfolio of financial instruments iscollectively referred to herein as the “Servicing Hedge.”

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 instrumentsare combined to mitigate the overall risk portfolio of the MSRs and retainedinterests, which is actively managed by the Company on a daily basis.

Thederivatives included in the Servicing Hedge are free standing under SFAS 133and the change in value of such derivatives is recorded in current period earningsas Servicing Hedge gains or losses.The following table summarizes the notionalamounts of derivative contracts included in the Servicing Hedge:

| ** **                                   | ** ** | **Balance,  December 31,  2005** | ** ** | **Additions** | ** ** | **Dispositions/  Expirations** | ** ** | **Balance,  March 31,  2006** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|---------------|------------|--------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **(in millions)**                | ** ** |
| Interest Rate  Swaps                         |       |                                  | $          | 53,850        |       |                           |       | $                                  | 13,085     |   |   |   | $ | (9,200 | ) |   |   | $ | 57,735 |   |   |
| Interest Rate  Swaptions                     |       |                                  | 50,425     |          |       |                           | 24,500     |                               |       |   | (23,625 | ) |   |   | 51,300 |   |   |
| Mortgage Forward  Rate Agreements            |       |                                  | 31,125     |          |       |                           | 24,250     |                               |       |   | (26,625 | ) |   |   | 28,750 |   |   |
| Long Call Options  on Interest Rate  Futures |       |                                  | 17,500     |          |       |                           | 8,500      |                               |       |   | (17,500 | ) |   |   | 8,500 |   |   |
| Long Treasury  Futures                       |       |                                  | 1,160      |          |       |                           | 1,000      |                               |       |   | (2,160 | ) |   |   | — |   |   |
| Interest Rate Caps                           |       |                                  | 300        |          |       |                           | —     |                               |       |   | — |   |   |   | 300 |   |   |

 

10

----

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

The Servicing Hedge is intended to reduce the impacton reported earnings of changes in the fair value of MSRs and retainedinterests that generally results from changes in mortgage rates. Shouldmortgage rates increase, the value of the MSRs and retained interests isexpected to increase while the value of the Servicing Hedge is expected todecrease.

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

The Company acquires 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 $2.4 billion asof March 31, 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 $4.4 billion as of March 31,2006). These transactions are generally designated as fair value hedges underSFAS 133. For the quarters ended March 31, 2006 and 2005, the Companyrecognized a pre-tax gain of $4.5 million and pre-tax gain of $0.8million, respectively, representing the ineffective portion of such fair valuehedges of debt. The change in fair value of the interest rate swap contractstogether with the change in debt designated as fair value hedges are includedin interest expense in the consolidated statements of earnings.

The Company acquires 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 $1.0 billion as of March 31,2006) and to convert a portion of its foreign currency-denominated, fixed-rate,long-term debt to U.S. dollar fixed-rate debt (notional amount of $0.6 billionas of March 31, 2006). These transactions are designated as cash flowhedges under SFAS 133. For the quarters ended March 31, 2006 and 2005, theCompany recognized no pre-tax gain or loss on the ineffective portion of cashflow hedges. As of March 31, 2006, deferred net gains or losses onderivative instruments included in accumulated other comprehensive income thatare expected to be reclassified as earnings during the next 12 months are notconsidered 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 swap agreements in which the ratereceived is fixed and the rate paid is adjustable and is indexed to LIBOR (“ReceiverSwap”). In connection with the debt cash flow hedges, the Company has enteredswap agreements in which the rate paid is fixed and the rate received isadjustable and is indexed to LIBOR (“Payor Swap”).

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

The Company acquiresinterest 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 thequarter ended March 31, 2006, the Company recognized a pre-tax gain of$0.1 million, representing the ineffectiveness relating to these swaps. For thequarter ended March 31, 2005, the Company recognized no pre-tax gain orloss on the ineffective portion of such fair value hedges of depositliabilities.

11

----

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

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

*Description of RiskManagement Activities*

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 utilizes derivativeinstruments including: forward sales/purchases of To-Be Announced (“TBA”) MBS,short/long futures contracts, total rate of return swaps, interest rate swaps,and long put/call options on futures contracts.

**Note 5—MortgageLoans Held for Sale**

Mortgageloans held for sale include the following:

| ** **                                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**  | ** ** |
| Prime mortgage                              |       | $                        | 20,711,681 |                        | $          | 27,085,467 |   |
| Nonprime mortgage                           |       | 5,275,381                |       | 6,736,946                   |       |
| Prime home equity                           |       | 5,027,027                |       | 1,948,874                   |       |
| Commercial real  estate loans               |       | 1,051,605                |       | 1,089,262                   |       |
| Deferred  premiums, discounts and fees, net |       | 2,187                    |       | (52,364                     | )          |
|                                        |       | $                        | 32,067,881 |                        | $          | 36,808,185 |   |

 

At March 31, 2006, the Company had pledged $10.6billion and $0.7 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.

12

----

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

**Note 6—TradingSecurities**

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

| ** **                                            | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)**  | ** ** |
| Mortgage pass-through  securities:                    |       |                     |       |                        |       |
| Fixed-rate                                            |       | $                        | 5,774,887  |                        | $          | 5,638,161 |   |
| Adjustable-rate                                       |       | 843,448                  |       | 915,302                     |       |
| Total mortgage pass-through securities                |       | 6,618,335                |       | 6,553,463                   |       |
| Collateralized  mortgage obligations                  |       | 2,525,694                |       | 2,377,764                   |       |
| U.S. Treasury  securities                             |       | 1,418,363                |       | 1,037,749                   |       |
| Obligations of  U.S. Government-sponsored enterprises |       | 687,430                  |       | 429,726                     |       |
| Interest-only  stripped securities                    |       | 328,574                  |       | 255,127                     |       |
| Asset-backed  securities                              |       | 284,694                  |       | 234,818                     |       |
| Mark-to-market on  TBA securities                     |       | 204,234                  |       | 77,094                      |       |
| Negotiable  certificates of deposit                   |       | 3,718                    |       | 296                         |       |
| Other                                                 |       | 1,903                    |       | 16,536                      |       |
|                                                  |       | $                        | 12,072,945 |                        | $          | 10,982,573 |   |

 

As of March 31, 2006, $9.9 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 $1.0billion.

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

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

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

| ** **                                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**  | ** ** |
| Securities  purchased under agreements to resell |       | $                        | 14,859,451 |                        | $          | 18,536,475 |   |
| Securities  borrowed                             |       | 6,506,808                |       | 4,740,886                   |       |
| Federal funds  sold                              |       | 150,000                  |       | 40,000                      |       |
|                                             |       | $                        | 21,516,259 |                        | $          | 23,317,361 |   |

 

As of March 31, 2006, the Company had acceptedcollateral with a fair value of $40.0 billion that it had the contractualability to sell or re-pledge, including $18.5 billion related to amounts offsetby securities sold under agreements to repurchase under master nettingarrangements. As of March 31, 2006, the Company had re-pledged $35.9billion of such collateral for financing purposes.

13

----

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

As of December 31,2005, the Company had accepted collateral with a fair value of $33.7 billionthat it had the contractual ability to sell or re-pledge, including $12.1billion related to amounts offset by securities sold under agreements 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:

| ** **                                                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **(in thousands)**  | ** ** |
| Mortgage loans:                                            |       |                     |       |                        |       |
| Prime                                                      |       | $                        | 53,463,593 |                        | $          | 48,617,139 |   |
| Prime home equity                                          |       | 14,963,131               |       | 14,990,615                  |       |
| Nonprime                                                   |       | 324,040                  |       | 157,528                     |       |
| Total mortgage loans                                       |       | 68,750,764               |       | 63,765,282                  |       |
| Warehouse lending  advances secured by mortgage loans      |       | 3,054,762                |       | 3,943,046                   |       |
| Defaulted  mortgage loans repurchased from securitizations |       | 1,440,236                |       | 1,370,169                   |       |
|                                                       |       | 73,245,762               |       | 69,078,497                  |       |
| Purchase premium  and deferred loan origination costs, net |       | 1,034,120                |       | 938,224                     |       |
| Allowance for  loan losses                                 |       | (172,271                 | )          | (151,274                    | )          |
| Loans held for  investment, net                            |       | $                        | 74,107,611 |                        | $          | 69,865,447 |   |

 

Mortgage loans held for investment totaling $54.7billion and $52.2 billion were pledged to secure Federal Home Loan Bank (“FHLB”)advances at March 31, 2006 and December 31, 2005, respectively.

Mortgage loans held for investment totaling $2.7billion and $2.0 billion were pledged to secure an unused borrowing facilitywith the Federal Reserve Bank (“FRB”) at March 31, 2006 and December 31,2005, respectively.

The Company had accepted collateral of $3.2 billionand $4.1 billion securing warehouse-lending advances that it had thecontractual ability to re-pledge as of March 31, 2006 and December 31,2005, respectively. No such mortgage loan collateral had been re-pledged as of March 31,2006 and December 31, 2005.

14

----

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

Changesin the allowance for the loan losses were as follows:

| ** **                                                                                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                                                           | ** ** | **(in thousands)**                 | ** ** |
| Balance,  beginning of period                                                                        |       | $                                       | 189,201    |   | $ | 125,046 |   |
| Portion of  beginning allowance allocated to other assets(1)                                         |       | (37,927                                 | )          | — |   |
|                                                                                                 |       | 151,274                                 |       | 125,046 |   |
| Provision for  loan losses                                                                           |       | 63,138                                  |       | 19,622 |   |
| Net charge-offs                                                                                      |       | (28,494                                 | )          | (9,752 | ) |
| Reclassification  of allowance for unfunded commitments to accounts payable and accrued  liabilities |       | (2,810                                  | )          | — |   |
| Other adjustments                                                                                    |       | (10,837                                 | )          | — |   |
| Balance, end of period                                                                               |       | $                                       | 172,271    |   | $ | 134,916 |   |

----

(1)   Loans heldfor investment at December 31, 2005, included loans that had beenliquidated through foreclosure or deed-in lieu of foreclosure as of that date.Accordingly, the allowance for loan losses totaling $37.9 million relatedto $54.2 million in loans has been charged off in connection with thetransfer of such loans to real estate acquired in settlement of loans.

15

----

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

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

Investmentsin other financial instruments include the following:

| ** **                                                                                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **(in thousands)**  | ** ** |
| Available-for-sale  securities:                                                            |       |                     |       |                        |       |
| Mortgage-backed securities                                                                 |       | $                        | 6,581,362  |                        | $          | 6,866,520 |   |
| Obligations of U.S. Government-sponsored enterprises                                       |       | 562,121                  |       | 547,715                     |       |
| Municipal bonds                                                                            |       | 379,238                  |       | 369,748                     |       |
| U.S. Treasury securities                                                                   |       | 144,115                  |       | 144,951                     |       |
| Other                                                                                      |       | 2,859                    |       | 3,109                       |       |
| Subtotal                                                                                   |       | 7,669,695                |       | 7,932,043                   |       |
| Interests  retained in securitization accounted for as available-for-sale securities:      |       |                     |       |                        |       |
| Prime interest-only and principal-only securities                                          |       | 319,461                  |       | 323,368                     |       |
| Nonprime residual securities                                                               |       | 172,698                  |       | 206,033                     |       |
| Prime home equity line of credit transferor’s  interest                               |       | 157,997                  |       | 158,416                     |       |
| Prime home equity residual securities                                                      |       | 97,908                   |       | 124,377                     |       |
| Prepayment penalty bonds                                                                   |       | 85,425                   |       | 112,492                     |       |
| Prime residual securities                                                                  |       | 14,890                   |       | 21,383                      |       |
| Prime home equity interest-only securities                                                 |       | 12,872                   |       | 15,136                      |       |
| Nonprime interest-only securities                                                          |       | 7,786                    |       | 9,455                       |       |
| Subordinated mortgage-backed pass-through securities                                       |       | 1,941                    |       | 2,059                       |       |
| Total interests retained in securitization accounted  for as available-for-sale securities |       | 870,978                  |       | 972,719                     |       |
| Total available-for-sale securities                                                        |       | 8,540,673                |       | 8,904,762                   |       |
| Interests  retained in securitization accounted for as trading securities:                 |       |                     |       |                        |       |
| Prime home equity residual securities                                                      |       | 693,057                  |       | 757,762                     |       |
| Prime interest-only and principal-only securities                                          |       | 318,571                  |       | 180,216                     |       |
| Prime home equity line of credit transferor’s  interest                               |       | 262,300                  |       | 95,514                      |       |
| Nonprime residual securities                                                               |       | 243,796                  |       | 341,106                     |       |
| Prime residual securities                                                                  |       | 39,497                   |       | 43,244                      |       |
| Prepayment penalty bonds                                                                   |       | 24,407                   |       | —                      |       |
| Prime home equity interest-only securities                                                 |       | 19,209                   |       | —                      |       |
| Interest rate swaps                                                                        |       | 8,833                    |       | 782                         |       |
| Total interests retained in securitization accounted  for as trading securities            |       | 1,609,670                |       | 1,418,624                   |       |
| Hedging instruments and  mortgage pipeline derivatives:                                    |       |                     |       |                        |       |
| Mortgage servicing                                                                         |       | 679,280                  |       | 741,156                     |       |
| Mortgage loans held for sale                                                               |       | 180,826                  |       | 89,098                      |       |
| Notes payable                                                                              |       | 101,182                  |       | 107,085                     |       |
| Total investments  in other financial instruments                                          |       | $                        | 11,111,631 |                        | $          | 11,260,725 |   |

 

16

----

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

At March 31, 2006, the Company had pledged $1.0billion of MBS to secure securities sold under agreements to repurchase, whichthe counterparty had the contractual right to re-pledge and $0.3 billion of MBSto secure an unused borrowing facility with the FRB.

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:

| ** **                                            | ** ** | **March 31, 2006** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**          | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**      | ** ** |
| Mortgage-backed  securities                           |       | $                            | 6,748,172  |   |   | $ | 2,897 |   |   | $ | (169,707 | ) | $ | 6,581,362 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 571,947                      |       |   | 11 |   |   | (9,837 | ) | 562,121 |   |
| Municipal bonds                                       |       | 384,873                      |       |   | 342 |   |   | (5,977 | ) | 379,238 |   |
| U.S. Treasury  securities                             |       | 144,889                      |       |   | 948 |   |   | (1,722 | ) | 144,115 |   |
| Interests  retained in securitization                 |       | 750,922                      |       |   | 141,619 |   |   | (21,563 | ) | 870,978 |   |
| Other                                                 |       | 2,859                        |       |   | — |   |   | — |   | 2,859 |   |
|                                                  |       | $                            | 8,603,662  |   |   | $ | 145,817 |   |   | $ | (208,806 | ) | $ | 8,540,673 |   |

 

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

 

17

----

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

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

| ** **                                            | ** ** | **March 31, 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                           |       | $                                      | 2,668,950  |   |   | $ | (49,942 | ) |   | $ | 3,804,340 |   | $ | (119,765 | ) | $ | 6,473,290 |   | $ | (169,707 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       | 316,403                                |       |   | (3,112 | ) |   | 215,692 |   | (6,725 | ) | 532,095 |   | (9,837 | ) |
| Municipal bonds                                       |       | 225,803                                |       |   | (2,969 | ) |   | 118,826 |   | (3,008 | ) | 344,629 |   | (5,977 | ) |
| U.S. Treasury  securities                             |       | 95,257                                 |       |   | (971 | ) |   | 35,670 |   | (751 | ) | 130,927 |   | (1,722 | ) |
| Interests  retained in securitization                 |       | 100,078                                |       |   | (15,285 | ) |   | 72,610 |   | (6,278 | ) | 172,688 |   | (21,563 | ) |
| Other                                                 |       | 48                                     |       |   | — |   |   | — |   | — |   | 48 |   | — |   |
| Total impaired  securities                            |       | $                                      | 3,406,539  |   |   | $ | (72,279 | ) |   | $ | 4,247,138 |   | $ | (136,527 | ) | $ | 7,653,677 |   | $ | (208,806 | ) |

 

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

 

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

18

----

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

Gross gains and losses realized on the sales ofavailable-for-sale securities are as follows:

| ** **                                                | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                 | ** ** |
| Mortgage-backed  securities:                              |       |                                    |       |   |   |
| Gross realized gains                                      |       | $                                       | —     |   | $ | 16 |   |
| Gross realized losses                                     |       | —                                  |       | (51 | ) |
| Net                                                       |       | —                                  |       | (35 | ) |
| Obligations of U.S.  Government-sponsored enterprises:    |       |                                    |       |   |   |
| Gross realized gains                                      |       | —                                  |       | 13 |   |
| Gross realized losses                                     |       | (50                                     | )          | — |   |
| Net                                                       |       | (50                                     | )          | 13 |   |
| Municipal bonds:                                          |       |                                    |       |   |   |
| Gross realized gains                                      |       | 33                                      |       | — |   |
| Gross realized losses                                     |       | (30                                     | )          | (100 | ) |
| Net                                                       |       | 3                                       |       | (100 | ) |
| Interests retained in  securitization:                    |       |                                    |       |   |   |
| Gross realized gains                                      |       | —                                  |       | 4,147 |   |
| Gross realized losses                                     |       | —                                  |       | — |   |
| Net                                                       |       | —                                  |       | 4,147 |   |
| Other:                                                    |       |                                    |       |   |   |
| Gross realized gains                                      |       | —                                  |       | 1,253 |   |
| Gross realized losses                                     |       | —                                  |       | — |   |
| Net                                                       |       | —                                  |       | 1,253 |   |
| Total gains and losses  on available-for-sale securities: |       |                                    |       |   |   |
| Gross realized gains                                      |       | 33                                      |       | 5,429 |   |
| Gross realized losses                                     |       | (80                                     | )          | (151 | ) |
| Net                                                       |       | $                                       | (47        | ) | $ | 5,278 |   |

 

**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 recognizedinitially at fair value. All MSRs are subsequently carried at fair value withchanges in fair value recognized in current period earnings.

19

----

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

Theactivity in MSRs carried at fair value is as follows:

| ** **                                                               | ** ** | **Quarter Ended  March 31, 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                                            |       |                                             | 1,911      |   |   |
| Servicing resulting from transfers of financial  assets                  |       |                                             | 1,209,424  |   |   |
| Change in fair  value:                                                   |       |                                             |       |   |   |
| Due to changes in valuation inputs or assumptions in  valuation model(1) |       |                                             | 978,281    |   |   |
| Other changes in fair value(2)                                           |       |                                             | (738,567   | ) |   |
| Balance at end of  period                                                |       |                                             | $          | 14,171,804 |   |   |

----

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

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

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

| ** **                                                           | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **(in thousands)**                          | ** ** |
| **Mortgage Servicing Rights**                                        |       |                                             |       |   |   |
| Balance at beginning of period                                       |       |                                             | $          | 9,820,511 |   |   |
| Additions                                                            |       |                                             | 1,036,781  |   |   |
| Amortization                                                         |       |                                             | (472,187   | ) |   |
| Balance before valuation allowance at end of period                  |       |                                             | 10,385,105 |   |   |
| **Valuation Allowance for  Impairment of Mortgage Servicing Rights** |       |                                             |       |   |   |
| Balance at beginning of period                                       |       |                                             | (1,090,582 | ) |   |
| Additions                                                            |       |                                             | 452,434    |   |   |
| Balance at end of period                                             |       |                                             | (638,148   | ) |   |
| **Mortgage Servicing Rights, net**                                   |       |                                             | $          | 9,746,957 |   |   |

 

The value of MSRs is derived from the net positivecash flows associated with the servicing contracts. The Company receives aservicing fee ranging generally from 0.125% to 0.50% annually on the remainingoutstanding principal balances of the loans (“contractually specified servicingfee”). The Company generally receives other remuneration consisting of theability to earn interest on collected funds during the period the funds areheld pending remittance to investors, as well as rights to variousmortgagor-contracted fees such as late charges, reconveyance charges and prepaymentpenalties. Contractually specified servicing fees, late charges, prepaymentpenalties and other ancillary fees are recorded as a 

20

----

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

component of servicingfees and other income from MSRs and retained interests in the consolidatedstatements of earnings.

Our MSR valuation process combines the use of asophisticated discounted cash flow model and extensive analysis of currentmarket data to arrive at an estimate of fair value at each balance sheet date.The cash flow assumptions and prepayment assumptions used in our discountedcash flow model are based on our empirical data drawn from the historicalperformance of our MSRs, which we believe are consistent with assumptions usedby market participants valuing similar MSRs, and from data obtained on the performanceof similar MSRs. The key assumptions used in the valuation of MSRs includemortgage prepayment speeds and the discount rate (projected LIBOR plusoption-adjusted spread). These variables can, and generally will, change fromquarter to quarter as market conditions and projected interest rates change.The current market data utilized in the MSR valuation process and in theassessment of the reasonableness of our valuation is obtained from MSR trades,MSR broker valuations, prices of interest-only securities, and peer group MSRvaluation 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—OtherAssets**

Otherassets include the following:

| ** **                                                                   | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **(in thousands)**  | ** ** |
| Reimbursable servicing  advances, net                                        |       | $                        | 1,674,041  |                        |       | $ | 1,947,046 |   |   |
| Securities broker-dealer  receivables                                        |       | 1,415,753                |       |                        | 392,847    |   |   |
| Investments in FRB and FHLB  stock                                           |       | 1,364,083                |       |                        | 1,334,100  |   |   |
| Interest receivable                                                          |       | 862,783                  |       |                        | 777,966    |   |   |
| Receivables from  custodial accounts                                         |       | 612,594                  |       |                        | 629,075    |   |   |
| Restricted cash                                                              |       | 439,426                  |       |                        | 429,556    |   |   |
| Capitalized software,  net                                                   |       | 314,014                  |       |                        | 331,454    |   |   |
| Cash surrender value of  assets held in trust for deferred compensation plan |       | 230,922                  |       |                        | 224,884    |   |   |
| Prepaid expenses                                                             |       | 223,734                  |       |                        | 187,377    |   |   |
| Real estate acquired in  settlement of loans                                 |       | 152,745                  |       |                        | 110,499    |   |   |
| Receivables from sale of  securities                                         |       | 144,609                  |       |                        | 325,327    |   |   |
| Derivative margin accounts                                                   |       | 68,995                   |       |                        | 296,005    |   |   |
| Other assets                                                                 |       | 1,057,312                |       |                        | 943,337    |   |   |
|                                                                         |       | $                        | 8,561,011  |                        |       | $ | 7,929,473 |   |   |

 

The Company had pledged$1.4 billion and $0.1 billion of securities broker-dealer receivables to securesecurities sold under agreements to repurchase at March 31, 2006 and December 31,2005, respectively.

21

----

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

**Note 12—Notes Payable**

Notes payable consists ofthe following:

| ** **                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(in thousands)**  | ** ** |
| FHLB advances                    |       | $                        | 27,000,000 |                        | $          | 26,350,000 |   |
| Medium-term  notes:              |       |                     |       |                        |       |
| Floating rate                    |       | 14,452,828               |       | 14,466,765                  |       |
| Fixed-rate                       |       | 11,609,212               |       | 11,503,592                  |       |
|                             |       | 26,062,040               |       | 25,970,357                  |       |
| Asset-backed commercial paper    |       | 10,049,162               |       | 12,367,496                  |       |
| Unsecured commercial paper       |       | 3,434,125                |       | 6,248,508                   |       |
| Secured revolving line of credit |       | 723,569                  |       | 2,865,152                   |       |
| Asset-backed secured financings  |       | 3,246,294                |       | 22,998                      |       |
| Unsecured bank loans             |       | 450,000                  |       | 730,000                     |       |
| Junior subordinated debentures   |       | 1,051,782                |       | 1,085,191                   |       |
| Subordinated debt                |       | 500,000                  |       | 500,000                     |       |
| Convertible securities           |       | —                   |       | 10,544                      |       |
| LYONs convertible debentures     |       | —                   |       | 2,037                       |       |
| Other                            |       | 37,256                   |       | 35,603                      |       |
|                             |       | $                        | 72,554,228 |                        | $          | 76,187,886 |   |

 

***Federal Home Loan Bank Advances***

During the quarter ended March 31, 2006, theCompany obtained $2.9 billion of advances from the FHLB, which were allfixed-rate. At March 31, 2006, the Company had pledged $54.7 billion ofmortgage loans to secure its outstanding FHLB advances and provide the abilityto 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.

***Medium-Term Notes***

Duringthe quarter ended March 31, 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 |       |                                             | 1,600,000  |                   |       |                   | 54,425     |   |   | 1,654,425 |   |   | 4.96 | % |   | 6.00 | % | February, 2008 |   | March, 2026 |   |
| CHL Euro          |       |                                             | 927,516    |                   |       |                   | —     |   |   | 927,516 |   |   | 4.85 | % |   | 5.28 | % | March, 2007 |   | February, 2011 |   |
| Total             |       |                                             | $          | 2,527,516              |       |                   |       | $ | 130,791 |   |   | $ | 2,658,307 |   |   |   |   |   |   |   |   |   |   |   |

 

The $0.1 billion of fixed-rate medium-term notesissued by the Company during the quarter ended March 31, 2006 wereeffectively converted to floating-rate debt using interest rate swaps.

During the quarter ended March 31, 2006, theCompany redeemed $2.5 billion of maturing medium-term notes.

22

----

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

As of March 31, 2006,$5.0 billion of foreign currency-denominated medium-term notes were outstanding.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 March 31, 2006.

For the quarter ended March 31,2006, the average borrowings under these facilities totaled $14.5 billion andthe weighted-average interest rate of the SLNs was 4.60%. At March 31,2006, the weighted-average interest rate of the SLNs was 4.76% and the Companyhad pledged $10.6 billion in mortgage loan inventory to secure the SLNs.

***Unsecured Commercial Paper***

The Company issuesunsecured commercial paper using revolving credit facilities with a group ofbanks. The agreement allows the Company to borrow a maximum amount of $9.2billion. For the quarter ended March 31, 2006 the average borrowings underthis facility totaled $6.7 billion and the weighted average interest rate was4.61%. At March 31, 2006 the weighted-average interest rate was 4.85%.

***Asset-Backed Secured Financings***

The Company has recordedcertain securitization transactions as secured borrowings as of March 31,2006 and December 31, 2005 because they did not qualify for salestreatment under SFAS 140 at these dates. The amounts accounted for as securedborrowings totaled $3.2 billion and $23.0 million at March 31, 2006 and December 31,2005, respectively.

***Secured Revolving Line of Credit***

During 2004, the Companyformed a special purpose entity for the purpose of financing inventory withfunding 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 ofasset-backed commercial paper. At March 31, 2006, the entity had aggregatecommitments from the bank-sponsored conduits totaling $10.1 billion and had$0.7 billion of outstanding borrowings, secured by $0.7 billion of mortgageloans held for sale. For the quarter ended March 31, 2006, the averageborrowings under this facility totaled $2.2 billion and the weighted-averageinterest rate was 4.46%. At March 31, 2006, the weighted-average interestrate was 4.65%.

***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-

23

----

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

consolidated subsidiarytrusts. The trusts finance their holdings of the junior subordinated debenturesby issuing Company-guaranteed capital securities.

The Companyguarantees CHL’s indebtedness to two of the subsidiary trusts, CountrywideCapital I and Countrywide Capital III, which are excluded from the Company’sconsolidated financial statements. Following is summarized information forthose trusts:

| ** **                                                                     | ** ** | **March 31, 2006**    | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **Countrywide  Capital I** | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**         | ** ** |
| Balance Sheet:                                                                 |       |                            |       |   |   |   |   |   |   |
| Junior subordinated debentures receivable                                      |       |                            | $          | 307,435 |   |   |   | $ | 205,280 |   |   |
| Other assets                                                                   |       |                            | 7,216      |   |   |   | 4,841 |   |   |
| Total assets                                                                   |       |                            | $          | 314,651 |   |   |   | $ | 210,121 |   |   |
| Notes payable                                                                  |       |                            | $          | 9,224 |   |   |   | $ | 6,172 |   |   |
| Other liabilities                                                              |       |                            | 7,216      |   |   |   | 4,841 |   |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       |                            | 298,211    |   |   |   | 199,108 |   |   |
| Shareholder’s equity                                                      |       |                            | —     |   |   |   | — |   |   |
| Total liabilities  and shareholder’s equity                               |       |                            | $          | 314,651 |   |   |   | $ | 210,121 |   |   |

 

| ** **                 | ** ** | **Quarter Ended  March 31, 2006** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                  | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                          | ** ** |
| Statement of Earnings:     |       |                                             |       |   |   |   |   |   |   |
| Revenues                   |       |                                             | $          | 6,208 |   |   |   | $ | 4,161 |   |   |
| Expenses                   |       |                                             | (6,208     | ) |   |   | (4,161 | ) |   |
| Provision for income taxes |       |                                             | —     |   |   |   | — |   |   |
| Net earnings               |       |                                             | $          | — |   |   |   | $ | — |   |   |

 

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

 

24

----

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

| ** **                 | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                  | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                          | ** ** |
| Statement of Earnings:     |       |                                             |       |   |   |   |   |   |   |
| Revenues                   |       |                                             | $          | 6,208 |   |   |   | $ | 4,160 |   |   |
| Expenses                   |       |                                             | (6,208     | ) |   |   | (4,160 | ) |   |
| Provision for income taxes |       |                                             | —     |   |   |   | — |   |   |
| Net earnings               |       |                                             | $          | — |   |   |   | $ | — |   |   |

 

***Subordinated Debt***

During the year ended December 31,2005, the Company 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 notes are unsecured obligations of the Companyand rank subordinated and junior to all of Countrywide’s senior indebtedness.None of these notes were converted to fixed-rate debt using interest rateswaps. At March 31, 2006, the weighted-average interest rate was 5.26%.

***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. Sinceinception and during the year ended December 31, 2005, LYONs andconvertible securities with a face value totaling $658.8 million and $84.8million, respectively were surrendered for conversion by the security holders.

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:

| ** **                                      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**  | ** ** |
| Securities sold  under agreements to repurchase |       | $                        | 31,724,845 |                        | $          | 33,284,205 |   |
| Federal funds  purchased                        |       | 875,000                  |       | 869,000                     |       |
|                                            |       | $                        | 32,599,845 |                        | $          | 34,153,205 |   |

 

25

----

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

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

At March 31, 2006, repurchase agreements weresecured by $9.9 billion of trading securities, $35.9 billion of securitiespurchased under agreements to resell and securities borrowed, $1.0 billion ininvestments in other financial instruments, and $1.4 billion of other assets.At March 31, 2006, $18.5 billion of the pledged securities purchased underagreements to resell and securities borrowed related to amounts offset againstsecurities sold under agreements to repurchase pursuant to master nettingagreements.

At December 31, 2005,repurchase agreements were secured by $9.0 billion of trading securities, $28.3 billionof securities purchased under agreements to resell and securities borrowed,$2.1 billion in investments in other financial instruments, and $0.1 billion ofother assets. At December 31, 2005, $12.1 billion of the pledgedsecurities purchased under agreements to resell and securities borrowed relatedto amounts offset against securities sold under agreements to repurchasepursuant to master netting agreements.

**Note 14—DepositLiabilities**

Thefollowing table summarizes deposit balances:

| ** **                                                | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)**  | ** ** |
| Time deposits:                                            |       |                     |       |                        |       |
| Retail                                                    |       | $                        | 15,404,450 |                        | $          | 13,434,338 |   |
| Brokered                                                  |       | 9,442,152                |       | 7,442,073                   |       |
| Company-controlled  custodial deposit accounts            |       | 14,434,653               |       | 13,200,801                  |       |
| Money market  accounts                                    |       | 4,907,895                |       | 4,466,195                   |       |
| Non-interest-bearing  checking accounts                   |       | 1,243,159                |       | 926,645                     |       |
| Savings accounts                                          |       | 1,145                    |       | 823                         |       |
|                                                      |       | 45,433,454               |       | 39,470,875                  |       |
| Basis adjustment through application of hedge  accounting |       | (55,512                  | )          | (31,959                     | )          |
|                                                      |       | $                        | 45,377,942 |                        | $          | 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.

26

----

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

At March 31,2006 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:

| ** **               | ** ** | **March 31, 2006**                     | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 6.8 | % |   | $ | 13,187,557 |   |   | 7.2 | % |   | $ | 5,597,873 |   |
| Risk-Based  Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 11.6 | % |   | $ | 13,187,557 |   |   | 12.0 | % |   | $ | 5,597,873 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 12.7 | % |   | $ | 14,477,045 |   |   | 12.3 | % |   | $ | 5,732,138 |   |

----

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

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

----

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

27

----

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

**Note 16—SupplementalCash Flow Information**

Thefollowing table presents supplemental cash flow information:

| ** **                                                                                                                     | ** ** | **Quarters Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                                                                                                     | ** ** | **(in thousands)**                     | ** ** |
| Cash used to pay  interest                                                                                                     |       | $                                           | 1,861,937  |   | $ | 944,704 |   |
| Cash used to pay  income taxes                                                                                                 |       | 6,269                                       |       | 21,267 |   |
| Non-cash  investing activities:                                                                                                |       |                                        |       |   |   |
| Unrealized loss on available-for-sale securities,  foreign  currency translation adjustments and cash flow hedges, net  of tax |       | (87,517                                     | )          | (46,271 | ) |
| Servicing resulting from transfer of financial  assets                                                                         |       | 1,209,424                                   |       | 941,364 |   |
| Retention of other financial instruments in  securitization transactions                                                       |       | 285,253                                     |       | 469,524 |   |
| Non-cash  financing activities:                                                                                                |       |                                        |       |   |   |
| Decrease in Mortgage Loans Held in SPEs and  asset-backed secured financings                                                   |       | —                                      |       | (10,563,299 | ) |
| Issuance of common stock for conversion of  convertible debt                                                                   |       | 1,465                                       |       | 1,605 |   |
| Tax effect of interest on conversion of convertible  debt                                                                      |       | —                                      |       | 1,938 |   |
| Remeasurement of fair  value upon adoption of SFAS 156, net of tax                                                        |       | 67,065                                      |       | — |   |
|                                                                                                                                |            |                                             |            |  |  |  |  |

 

**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 divisions are: the Consumer Markets Lending Division, theFull Spectrum Lending Division, the Wholesale Lending Division and theCorrespondent Lending Division. The Consumer Markets and Full Spectrum LendingDivisions source mortgage loans directly from consumers through the Company’sretail branch network and call centers, as well as through real estate agentsand homebuilders. The Wholesale Lending Division sources mortgage loansprimarily from mortgage brokers. The Correspondent Lending Division acquiresmortgage loans from other mortgage lenders, including financial institutions.

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

28

----

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

The Banking Segment’s operations include theinvestment and fee-based activities of Countrywide Bank 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 primarily includes theoperations of Countrywide Securities Corporation, a registered broker-dealerspecializing in the mortgage securities market. It also includes the operationsof Countrywide Asset Management Corporation, Countrywide Commercial Real EstateFinance Inc., Countrywide Servicing Exchange, CCM International Ltd, CCM AsiaLtd, Countrywide Alternative Investments and CSC Futures, 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

----

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

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

| ** **              | ** ** | **Quarter Ended March 31, 2006** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 1,347,106  |   | $ | 294,705 |   | $ | 71,628 |   | $ | 1,713,439 |   | $ | 585,607 |   | $ | 203,752 |   | $ | 303,147 |   |   | $ | 35,078 |   |   | $ | (5,075 | ) | $ | 2,835,948 |   |
| Intersegment            |       | (5,507                                               | )          | 175,131 |   | — |   | 169,624 |   | (133,975 | ) | 59,371 |   | — |   |   | — |   |   | (95,020 | ) | — |   |
| Total Revenues          |       | $                                                    | 1,341,599  |   | $ | 469,836 |   | $ | 71,628 |   | $ | 1,883,063 |   | $ | 451,632 |   | $ | 263,123 |   | $ | 303,147 |   |   | $ | 35,078 |   |   | $ | (100,095 | ) | $ | 2,835,948 |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 284,149    |   | $ | 248,718 |   | $ | 22,207 |   | $ | 555,074 |   | $ | 341,086 |   | $ | 155,573 |   | $ | 64,943 |   |   | $ | 10,168 |   |   | $ | (7,481 | ) | $ | 1,119,363 |   |
| Total Assets            |       | $                                                    | 30,995,635 |   | $ | 22,676,131 |   | $ | 78,042 |   | $ | 53,749,808 |   | $ | 79,879,555 |   | $ | 41,628,089 |   | $ | 2,304,310 |   |   | $ | 148,927 |   |   | $ | (118,633 | ) | $ | 177,592,056 |   |

 

| ** **              | ** ** | **Quarter Ended March 31, 2005** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 1,467,960  |   | $ | 129,248 |   | $ | 60,592 |   | $ | 1,657,800 |   | $ | 333,654 |   | $ | 169,426 |   | $ | 223,469 |   |   | $ | 55,114 |   |   | $ | (34,578 | ) | $ | 2,404,885 |   |
| Intersegment            |       | (16,414                                              | )          | 60,237 |   | — |   | 43,823 |   | (37,356 | ) | 34,483 |   | — |   |   | — |   |   | (40,950 | ) | — |   |
| Total Revenues          |       | $                                                    | 1,451,546  |   | $ | 189,485 |   | $ | 60,592 |   | $ | 1,701,623 |   | $ | 296,298 |   | $ | 203,909 |   | $ | 223,469 |   |   | $ | 55,114 |   |   | $ | (75,528 | ) | $ | 2,404,885 |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 734,657    |   | $ | 17,189 |   | $ | 19,785 |   | $ | 771,631 |   | $ | 215,940 |   | $ | 122,047 |   | $ | 54,577 |   |   | $ | 4,039 |   |   | $ | (19,237 | ) | $ | 1,148,997 |   |
| Total Assets            |       | $                                                    | 25,190,922 |   | $ | 15,965,261 |   | $ | 59,297 |   | $ | 41,215,480 |   | $ | 54,560,495 |   | $ | 38,908,055 |   | $ | 1,865,056 |   |   | $ | 282,260 |   |   | $ | 201,695 |   | $ | 137,033,041 |   |

 

30

 

----

**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:

| ** **                                                                                        | ** ** | **March 31, 2006**                                | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)**                                     | ** ** |
| **Balance Sheets:**                                                                               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans held for sale                                                                      |       | $                                                           | —     |   |   | $ | 28,683,481 |   |   | $ | 3,454,372 |   | $ | (69,972 | ) | $ | 32,067,881 |   |
| Trading securities                                                                                |       | —                                                      |       |   | 328,574 |   |   | 11,770,735 |   | (26,364 | ) | 12,072,945 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       | —                                                      |       |   | — |   |   | 22,329,558 |   | (813,299 | ) | 21,516,259 |   |
| Loans held for investment, net                                                                    |       | —                                                      |       |   | 5,056,614 |   |   | 69,056,199 |   | (5,202 | ) | 74,107,611 |   |
| Investments in other financial instruments                                                        |       | 10,065                                                      |       |   | 2,153,574 |   |   | 9,015,622 |   | (67,630 | ) | 11,111,631 |   |
| Mortgage servicing rights, at fair value                                                |       | —                                                      |       |   | 14,165,587 |   |   | 6,217 |   | — |   | 14,171,804 |   |
| Other assets                                                                                      |       | 29,478,612                                                  |       |   | 10,223,696 |   |   | 12,623,605 |   | (39,781,988 | ) | 12,543,925 |   |
| Total assets                                                                                      |       | $                                                           | 29,488,677 |   |   | $ | 60,611,526 |   |   | $ | 128,256,308 |   | $ | (40,764,455 | ) | $ | 177,592,056 |   |
| Notes payable                                                                                     |       | $                                                           | 15,582,086 |   |   | $ | 31,737,788 |   |   | $ | 34,692,964 |   | $ | (9,458,610 | ) | $ | 72,554,228 |   |
| Securities sold under agreements to repurchase  and federal funds purchased             |       | —                                                      |       |   | 1,043,191 |   |   | 32,369,732 |   | (813,078 | ) | 32,599,845 |   |
| Deposit liabilities                                                                               |       | —                                                      |       |   | — |   |   | 45,464,710 |   | (86,768 | ) | 45,377,942 |   |
| Other liabilities                                                                                 |       | 400,338                                                     |       |   | 23,719,998 |   |   | 6,372,022 |   | (16,938,570 | ) | 13,553,788 |   |
| Equity                                                                                            |       | 13,506,253                                                  |       |   | 4,110,549 |   |   | 9,356,880 |   | (13,467,429 | ) | 13,506,253 |   |
| Total liabilities  and equity                                                                     |       | $                                                           | 29,488,677 |   |   | $ | 60,611,526 |   |   | $ | 128,256,308 |   | $ | (40,764,455 | ) | $ | 177,592,056 |   |

 

| ** **                             | ** ** | **Quarter Ended March 31, 2006**        | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | (10,060 | ) |   |   | $ | 1,703,605 |   |   | $ | 1,340,357 |   |   | $ | (197,954 | ) |   |   | $ | 2,835,948 |   |   |
| Expenses                               |       |                                                        | 4,103      |   |   |   | 1,234,457 |   |   | 611,887 |   |   | (133,862 | ) |   |   | 1,716,585 |   |   |
| (Benefit) provision for income taxes   |       |                                                        | (5,573     | ) |   |   | 176,662 |   |   | 290,034 |   |   | (25,271 | ) |   |   | 435,852 |   |   |
| Equity in net earnings of subsidiaries |       |                                                        | 692,101    |   |   |   | — |   |   | — |   |   | (692,101 | ) |   |   | — |   |   |
| Net earnings                           |       |                                                        | $          | 683,511 |   |   |   | $ | 292,486 |   |   | $ | 438,436 |   |   | $ | (730,922 | ) |   |   | $ | 683,511 |   |   |

31

----

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

 

| ** **                                                                                        | ** ** | **December                31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **Countrywide  Financial  Corporation  (Parent Only)**                                                          | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)**                                                                                              | ** ** |
| **Balance Sheets:**                                                                               |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans held for sale                                                                      |       | $                                                                                                                    | —     |   |   | $ | 35,349,126 |   |   | $ | 1,445,383 |   | $ | 13,676 |   | $ | 36,808,185 |   |
| Trading securities                                                                                |       | —                                                                                                               |       |   | 255,127 |   |   | 10,729,483 |   | (2,037 | ) | 10,982,573 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       | —                                                                                                               |       |   | 710,000 |   |   | 24,171,178 |   | (1,563,817 | ) | 23,317,361 |   |
| Loans held for investment, net                                                                    |       | —                                                                                                               |       |   | 5,588,767 |   |   | 64,279,238 |   | (2,558 | ) | 69,865,447 |   |
| Investments in other financial instruments                                                        |       | 7,324                                                                                                                |       |   | 1,969,097 |   |   | 9,284,304 |   | — |   | 11,260,725 |   |
| Mortgage servicing rights, net                                                               |       | —                                                                                                               |       |   | 12,604,453 |   |   | 6,386 |   | — |   | 12,610,839 |   |
| 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 |   |

 

| ** **                             | ** ** | **Quarter Ended March 31, 2005**        | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | (2,515 | ) |   |   | $ | 1,670,689 |   |   |   | $ | 832,839 |   |   |   | $ | (96,128 | ) |   |   | $ | 2,404,885 |   |   |
| Expenses                               |       |                                                        | 6,771      |   |   |   | 885,460 |   |   |   | 448,221 |   |   |   | (84,564 | ) |   |   | 1,255,888 |   |   |
| (Benefit) provision for income taxes   |       |                                                        | (3,714     | ) |   |   | 318,144 |   |   |   | 150,318 |   |   |   | (4,603 | ) |   |   | 460,145 |   |   |
| Equity in net earnings of subsidiaries |       |                                                        | 694,424    |   |   |   | — |   |   |   | — |   |   |   | (694,424 | ) |   |   | — |   |   |
| Net earnings                           |       |                                                        | $          | 688,852 |   |   |   | $ | 467,085 |   |   |   | $ | 234,300 |   |   |   | $ | (701,385 | ) |   |   | $ | 688,852 |   |   |

 

32

----

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

**Note 19—Borrower and Investor Custodial Accounts**

As of March 31, 2006and December 31, 2005, the Company managed $23.4 billion and $22.0billion, respectively, of off-balance sheet borrower and investor custodialcash accounts. Of these amounts, $14.4 billion and $13.2 billion,respectively, were deposited at the Bank and were included in the Company’sdeposit liabilities, with the remaining balances deposited with otherdepository institutions. These custodial accounts arise in connection with theCompany’s mortgage servicing activities.

**Note 20—Legal Proceedings**

Countrywide and certainsubsidiaries are defendants in various legal proceedings involving matters generallyincidental to their businesses. Although it is difficult to predict theultimate outcome of these proceedings, management believes, based ondiscussions with counsel, that any ultimate liability will not materiallyaffect the consolidated financial position or results of operations orliquidity of the Company.

**Note 21—Loan Commitments**

As of March 31, 2006and December 31, 2005, the Company had undisbursed home equity lines ofcredit commitments of $7.5 billion and $7.2 billion, respectively, as well asundisbursed construction loan commitments of $1.4 billion and $1.5 billion,respectively. As of March 31, 2006, outstanding commitments to fundmortgage loans totaled $42.3 billion.

**Note 22—Subsequent Events**

On April 27, 2006,the Company announced that its Board of Directors declared a dividend of$0.15 per common share payable May 31, 2006 to shareholders of recordon May 12, 2006.

**Note 23—Recently Issued Accounting Pronouncements**

InFebruary 2006, the FASB issued Statement of Financial Accounting Standards No.155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), anamendment of SFAS 133 and SFAS 140. This statement:

·  permits fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation;

·  clarifies which interest-only strips andprincipal-only strips are not subject to SFAS 133; 

·  establishes a requirement to evaluateinterests in securitized financial instruments that contain an embeddedderivative requiring bifurcation;

·  clarifies that concentration of credit risksin the form of subordination are not embedded derivatives; and 

·  amends SFAS 140 to eliminate the prohibitionon a QSPE from holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.  

SFAS 155 is effective forall financial instruments acquired or issued after the beginning of an entity'sfirst fiscal year that begins after September 15, 2006.  The Company has not determined the financialimpact of the adoption of SFAS 155.

33

----

**Item 2.   *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

**Overview**

Countrywide is a diversified financial servicescompany engaged in mortgage-finance related businesses. We presently organizeour businesses into five business segments—Mortgage Banking, Banking, CapitalMarkets, Insurance and Global Operations. Our goal is to continue as a leaderin the mortgage banking business and to use this leadership position to takeadvantage of meaningful opportunities that build upon this business and providesources of earnings that tend to be sustainable in various interest rateenvironments.

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

***First Quarter Results***

The first quarter of 2006 was characterized by bothrising interest rates and a relatively flat yield curve. This interest rateenvironment caused a decline in the amount of mortgage originations nationallywhen compared to both the first quarter of 2005 and the immediately precedingquarter; however, due to market share increases, our mortgage loan productionin the first quarter of 2006 increased from the first quarter of 2005. The interestrate environment that prevailed in the quarter ended March 31, 2006 alsohad a negative effect on mortgage loan production profitability when comparedto the quarter ended March 31, 2005 as a result of increased pricecompetition. However, the profitability of our loan production activitiesimproved when compared to the fourth quarter of 2005 because of improvements inmarket conditions. Our consolidated net earnings for the first quarter of 2006were $683.5 million, a decrease of 1% from 2005’s first quarter net earnings of$688.9 million. The decrease in our earnings resulted primarily from a 28%decrease in the profitability of our Mortgage Banking Segment, partially offsetby a 58% increase in profitability of our Banking Segment.

The decline in ourMortgage Banking Segment’s profitability was primarily due to a decline in theprofitability of our Loan Production Sector, partially offset by improvedprofitability in our Loan Servicing Sector. Our Loan Production Sector wasaffected by lower margins combined with increased operating expenses as theCompany continued to build its mortgage loan production capacity. Our LoanServicing Sector benefited from growth in our servicing portfolio, an increasein escrow balance earnings and an increase in the value of our MSRs and otherretained interests, net of the Servicing Hedge. The decline in our MortgageBanking Segment’s profitability was partially offset by an increase inprofitability of our Banking Segment due primarily to a 68% increase in averageinterest-earning assets in our Banking Operations from the year-ago period.

***Mortgage Market***

The mortgage banking business continues to be theprimary source of our revenues and earnings. As a result, the dominant externalinfluence on our operating results is the demand for mortgage loans in theU.S., which is affected by such factors as prevailing mortgage interest ratesand the strength of the U.S. housing market.

For the quarter ended March 31, 2006, total U.S.residential mortgage production was estimated at $610 billion, compared to $669billion for the quarter ended March 31, 2005. Based on internal mortgagemarket estimates, we increased our market share to 17.0% for the currentquarter from 13.7% in the year-ago period. We believe that we increased ourshare of the mortgage market due to operational effectiveness resulting fromlarger sales operations rather than aggressive pricing.

Third party forecasterspredict total U.S. mortgage production for 2006 to be between $2.2 trillion and$2.4 trillion, compared to $2.8 trillion in 2005. Due to differences inproducts represented and estimation 

34

----

methods,mortgage market estimates vary. We estimate the mortgage market for 2006 to be$2.6 trillion compared to $3.3 trillion in 2005.

***Loan Production***

Our total loan production volume increased during thefirst quarter because we increased our share of a smaller mortgage market. Ouradjustable rate loan production has decreased from 53% of the total to 50%,reflecting the decreased relative attractiveness of these loans compared tofixed-rate loans as the yield curve flattens. While adjustable rate productionhas decreased as a percentage of total production, pay option loans havecontinued to increase their representation in adjustable-rate production, fromapproximately 17% of our loan production during the quarter ended March 31,2005, to approximately 19% of our production during the quarter ended March 31,2006.

Pay-option loans differfrom “traditional” monthly-amortizing loans by providing borrowers with theoption to make fully amortizing, interest-only, or “negative-amortizing”payments. We view these loans as a profitable product that does not createdisproportionate credit risk. Our pay-option loan portfolio has very highinitial loan quality, with original average FICO scores (a measure of creditrating) of 721 and original loan-to-value and combined loan-to-values of 75%and 78%, respectively. We only originate pay-option loans to borrowerswho can qualify at the loan’s fully indexed interest rates. This high creditquality notwithstanding, lower initial payment requirements of pay-option loansmay increase the credit risk inherent in our loans held for investment. This isbecause when the required monthly payments for pay-option loans eventuallyincrease (in a period not to exceed 10 years), borrowers may be less ableto pay the increased amounts and, therefore, more likely to default on theloan, than a borrower using a more traditional monthly-amortizing loan.

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

The principal market risk we face is interest raterisk—the risk that the value of our assets or liabilities or our net interestincome will change due to changes in interest rates. Market risk is mostdirectly reflected in the value of our interest rate lock commitments,inventory of loans held for sale, trading securities, investment in otherfinancial instruments and mortgage servicing rights (“MSRs”). We manage marketrisk primarily through the natural counterbalance of our loan productionoperations and our investment in MSRs, as well as with various financialinstruments including derivatives. The primary objective of our interest raterisk management activities is to reduce the variability of earnings caused bychanges in interest rates.

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 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. We manage mortgage credit riskby underwriting our mortgage loan production to secondary market standards andby limiting credit recourse to Countrywide in our loan sales and securitizationtransactions.

***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. Theobjective of our liquidity management is to ensure that adequate, diverse andreliable sources of cash are available to meet our funding needs on a 

35

----

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 and the rate at which we are able to grow. AtMarch 31, 2006, we exceeded the regulatory capital requirements to beclassified as “well capitalized,” with a tier 1 leverage capital ratio of 6.8%and total risk based ratio of 12.7%. Our public ratings were classified “investmentgrade,” with long-term ratings of A, A3 and A 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 Accounting Policies**

The accounting policieswith the greatest impact on our financial condition and results of operations,and which require the most judgment, pertain to our mortgage securitizationactivities, our investments in MSRs and retained interests, and our use ofderivatives to manage interest rate risk. Our critical accounting policiesinvolve the following three areas: 1) accounting for gains on sales of loansand securities; 2) accounting for MSRs and retained interests, includingvaluation of these retained interests; and 3) accounting for derivatives andour related interest rate risk management activities.

During the current period,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 156changes the accounting for, and reporting of, the recognition and measurementof separately recognized servicing assets and liabilities. Accordingly, theadoption of SFAS 156 has changed the Company’s accounting policies relating togain on sale of loans and securities and the accounting for MSRs subsequent totheir initial recognition effective January 1, 2006. A discussion of thecritical accounting policies applied through December 31, 2005, areincluded in our 2005 Annual Report.

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

Most of the mortgage loanswe produce are sold in the secondary mortgage market, primarily in the form ofsecurities and to a lesser extent as whole loans. When we sell loans in thesecondary mortgage market, we generally do not sell the MSRs that are created. Dependingon the type of securitization, we may 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 relativeestimated fair values. The gain on sale we report is the difference between theproceeds we receive from the sale, which includes cash and other assetsobtained (MSRs) and the cost allocated to the securities or loans sold. Thetiming of such gain recognition is dependent on meeting very specificaccounting criteria and, as a result, the gain on sale may be recorded in adifferent accounting period from when the transfer is completed.

36

----

Hereis an example of how this accounting works: 

| Carrying value of  mortgage loans underlying a security(1)                           |   | $       | 1,000,000 |   |
|--------------------------------------------------------------------------------------|--------|---------|-----------|--------|
| Fair values:                                                                         |   |    |      |
| Security                                                                             |   | $       | 998,000   |   |
| MSRs                                                                                 |   | 10,000  |      |
| Retained interests                                                                   |   | 4,000   |      |
| Sales proceeds:                                                                      |   |    |      |
| Cash                                                                                 |   | $       | 998,000   |   |
| MSRs                                                                                 |   | 10,000  |      |
|                                                                                 |   | $       | 1,008,000 |   |
| Fair value used to allocate basis:                                                   |   |    |      |
| Loans sold                                                                           |   | $       | 1,008,000 |   |
| Retained interests                                                                   |   | 4,000   |      |
|                                                                                 |   | $       | 1,012,000 |   |
| Computation of gain on sale of security:                                             |   |    |      |
| Sales proceeds                                                                       |   | $       | 1,008,000 |   |
| Less: Cost allocated to loans sold ($1,000,000  ́  ($1,008,000÷$1,012,000)) |   | 996,047 |      |
| Gain on sale                                                                         |   | $       | 11,953    |   |
| Initial recorded value  of retained interests ($1,000,000 - $996,047)                |   | $       | 3,953     |   |

----

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

***Accounting for MSRs and Retained Interests***

Effective January 1, 2006, we adopted SFAS 156and we have elected to account for MSRs relating to residential mortgages atfair value with changes in fair value recorded in current period earnings. Therefore,we no longer record periodic amortization or evaluate MSRs for impairment. 

Retained interests arecarried at estimated fair value. Retained interests are designated as tradingor available-for-sale securities at the time of securitization. Changes in fairvalue of retained interests accounted for as trading securities are recognizedin current-period earnings. Changes in fair value of retained interestsclassified as available-for-sale securities are recognized as a component ofshareholders’ equity (net of tax). If a security classified asavailable-for-sale is impaired and the impairment is deemed to be other thantemporary, the impairment is recognized in current-period earnings. Once werecord this impairment, we recognize subsequent increases in the value of theseretained interests in earnings over the estimated remaining life of theinvestment through a higher effective yield.

***Results ofOperations Comparison—Quarters Ended March 31, 2006 and 2005***

***Consolidated Earnings Performance***

Net earnings for the quarter ended March 31, 2006were $683.5 million, a 1% decrease from the year-ago period. Our dilutedearnings per share were $1.10, a 3% decrease from the year-ago period. 

The decrease in our earnings resulted primarily from adecrease in the profitability of our Mortgage Banking Segment which producedpre-tax earnings of $555.1 million for the quarter ended March 31, 2006, adecrease of 28% from the same period last year. The decrease in theprofitability of our Mortgage 

37

----

Banking Segment wasprimarily due to a decline in the profitability of our Loan Production Sector,which was the result of lower margins combined with increased operatingexpenses as the Company continued to build its production infrastructure. Thisdecline in the Production Sector pre-tax earnings was partially offset byimproved profitability in our Loan Servicing Sector resulting from a 30%increase in our average servicing portfolio, a $129.5 million increase in escrowbalance income and an increase in the value of our MSRs and other retainedinterest, net of the Servicing Hedge. 

The Banking Segmentproduced pre-tax earnings of $341.1 million, an increase of 58% from the year-agoperiod. The increase in profitability of our Banking Segment was primarily dueto a 68% increase in average interest-earning assets at Countrywide Bank fromthe year-ago period.

**Operating SegmentResults**

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

| ** **             | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in thousands)**                 | ** ** |
| Mortgage Banking:      |       |                                    |       |   |   |
| Loan Production        |       | $                                       | 284,149    |   | $ | 734,657 |   |
| Loan Servicing         |       | 248,718                                 |       | 17,189 |   |
| Loan Closing Services  |       | 22,207                                  |       | 19,785 |   |
| Total Mortgage Banking |       | 555,074                                 |       | 771,631 |   |
| Banking                |       | 341,086                                 |       | 215,940 |   |
| Capital Markets        |       | 155,573                                 |       | 122,047 |   |
| Insurance              |       | 64,943                                  |       | 54,577 |   |
| Global Operations      |       | 10,168                                  |       | 4,039 |   |
| Other                  |       | (7,481                                  | )          | (19,237 | ) |
| Total                  |       | $                                       | 1,119,363  |   | $ | 1,148,997 |   |

 

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

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

| ** **              | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| Segment:                |       |                                    |       |   |   |
| Mortgage Banking        |       | $                                       | 93,452     |   | $ | 78,749 |   |
| Banking                 |       | 5,959                                   |       | 8,521 |   |
| Capital Markets:        |       |                                    |       |   |   |
| Conduit acquisitions(1) |       | 4,007                                   |       | 4,190 |   |
| Commercial real estate  |       | 966                                     |       | 564 |   |
|                    |       | $                                       | 104,384    |   | $ | 92,024 |   |
| Product:                |       |                                    |       |   |   |
| Prime Mortgage          |       | $                                       | 83,150     |   | $ | 72,877 |   |
| Prime Home Equity       |       | 11,063                                  |       | 8,763 |   |
| Nonprime Mortgage       |       | 9,205                                   |       | 9,820 |   |
| Commercial real estate  |       | 966                                     |       | 564 |   |
|                    |       | $                                       | 104,384    |   | $ | 92,024 |   |

----

(1)          Acquisitions from thirdparties

38

----

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

| ** **              | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**            |       |                                    |       |   |   |
| Non-purchase            |       | $                                       | 57,424     |   | $ | 50,477 |   |
| Purchase                |       | 46,960                                  |       | 41,547 |   |
|                    |       | $                                       | 104,384    |   | $ | 92,024 |   |
| **Interest Rate Type:** |       |                                    |       |   |   |
| Fixed Rate              |       | $                                       | 52,583     |   | $ | 43,322 |   |
| Adjustable Rate         |       | 51,801                                  |       | 48,702 |   |
|                    |       | $                                       | 104,384    |   | $ | 92,024 |   |

 

**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 produces mortgage loansthrough the four production divisions of Countrywide Home Loans (“CHL”)—ConsumerMarkets, Wholesale Lending, Correspondent Lending and Full Spectrum Lending,and, beginning in the third quarter of 2005, through Countrywide Bank.

Mortgage Banking loan production volume for thequarter ended March 31, 2006 increased 19% from the year-ago period.Purchase and non-purchase loan production grew 18% and 19%, respectively,resulting from an increase in market share. The increase in purchase loans issignificant because this component of the mortgage market has historicallyoffered relatively stable growth, averaging 12% per year over the last 10years. The non-purchase, or refinance, component of the mortgage market ishighly volatile because it is driven almost exclusively by prevailing mortgageinterest rates.

Thefollowing table summarizes Mortgage Banking loan production by purpose and by interestrate type:

| ** **              | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**            |       |                                    |       |   |   |
| Non-purchase            |       | $                                       | 51,520     |   | $ | 43,335 |   |
| Purchase                |       | 41,932                                  |       | 35,414 |   |
|                    |       | $                                       | 93,452     |   | $ | 78,749 |   |
| **Interest Rate Type:** |       |                                    |       |   |   |
| Fixed Rate              |       | $                                       | 52,472     |   | $ | 40,198 |   |
| Adjustable Rate         |       | 40,980                                  |       | 38,551 |   |
|                    |       | $                                       | 93,452     |   | $ | 78,749 |   |

 

39

----

In the quarter ended March 31, 2006, 44% of ourloan production was adjustable-rate in comparison to 49% in the year-agoperiod. The decrease in adjustable-rate production reflects the increase inshort-term interest rates during the current period and the relativelyflat yield curve, increasing the relative attractiveness of fixed-ratefinancing.

Thevolume of Nonprime Mortgage and Prime Home Equity Loans produced (which isincluded in our total volume of loans produced) increased 19% during thequarter ended March 31, 2006 compared to the year-ago period. Details areshown in the following table:

| ** **               | ** ** | **Quarters Ended  March 31,**     | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(dollar amounts  in millions)** | ** ** |
| Prime Home Equity  Loans |       | $                                           | 9,528      |   | $ | 6,619 |   |
| Nonprime Mortgage  Loans |       | 8,099                                       |       | 8,187 |   |
|                     |       | $                                           | 17,627     |   | $ | 14,806 |   |

 

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

| ** **                              | ** ** | **Quarters Ended March 31,**            | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **Amount**                                             | ** ** | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | ** (dollar amounts in thousands)** | ** ** |
| Revenues:                               |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                      | 1,003,369  |   |   |   |   |   | $ | 873,230 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 183,933                                                |       |   |   |   |   | 395,006 |   |   |   |   |   |
| Prime Home Equity                       |       | 154,297                                                |       |   |   |   |   | 183,310 |   |   |   |   |   |
| Total revenues                          |       | 1,341,599                                              |       |   | 1.44 | % |   | 1,451,546 |   |   | 1.84 | % |   |
| Expenses:                               |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 597,232                                                |       |   | 0.64 | % |   | 420,592 |   |   | 0.53 | % |   |
| Other operating                         |       | 317,669                                                |       |   | 0.34 | % |   | 209,924 |   |   | 0.27 | % |   |
| Allocated corporate                     |       | 142,549                                                |       |   | 0.16 | % |   | 86,373 |   |   | 0.11 | % |   |
| Total expenses                          |       | 1,057,450                                              |       |   | 1.14 | % |   | 716,889 |   |   | 0.91 | % |   |
| Pre-tax earnings                        |       | $                                                      | 284,149    |   |   | 0.30 | % |   | $ | 734,657 |   |   | 0.93 | % |   |
| Total Mortgage Banking  loan production |       | $                                                      | 93,452,000 |   |   |   |   |   | $ | 78,749,000 |   |   |   |   |   |

 

Despite an increase in loan production, revenues (indollars and expressed as a percentage of mortgage loans produced) decreasedfrom the year-ago period. Production Sector revenues were affected by marketprice pressure and by the effect of flattening of the yield curve on the netinterest income earned while we hold loans for sale. Normally, a decline in netinterest income caused by a flatter yield curve would be mitigated by anincrease in gain on sale, but in the current quarter this was hindered bypricing pressure. In the quarter ended March 31, 2006, $89.7 billion ofmortgage loans, or 96% of Mortgage Banking loan production, was sold comparedto $75.4 billion of mortgage loans, or 96% of Mortgage Banking loan production,in the quarter ended March 31, 2005.

Expenses increased from the year-ago period, primarilydue to increased compensation and occupancy costs incurred to accommodategrowth in loan production and to expand our loan production operations tosupport the achievement of our long-term objective of market share growth.

40

----

During the quarter ended March 31, 2006, the LoanProduction Sector operated at approximately 88% of planned operationalcapacity, compared to 102% during the year-ago period. This decline reflectsthe seasonal slowdown in loan production, which we expect to reverse later inthe year. The seasonal slowdown in the quarter ended March 31, 2005 wasmuted by higher nonpurchase production due primarily to lower interest rates. Theprimary capacity constraint in our loan origination activities is the number ofloan operations personnel we have on staff. Therefore, we measure plannedcapacity by multiplying the number of our loan operations personnel by thenumber of loans we expect each loan operations staff person to process undernormal conditions. Management adjusts staffing levels to account for changes inthe current and projected near-term mortgage market. We plan to continuebuilding our sales staff as a primary means to increase our market share,particularly for purchase loans.

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

| ** **                              | ** ** | **Workforce at  March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Sales                                   |       | 17,041                                |       | 13,110 |   |
| Operations:                             |       |                                  |       |   |   |
| Regular employees                       |       | 9,254                                 |       | 7,999 |   |
| Temporary staff                         |       | 1,643                                 |       | 1,023 |   |
|                                    |       | 10,897                                |       | 9,022 |   |
| Production  technology                  |       | 1,330                                 |       | 1,060 |   |
| Administration  and support             |       | 3,272                                 |       | 2,278 |   |
| Total Loan  Production Sector workforce |       | 32,540                                |       | 25,470 |   |

 

Thefollowing table shows total Mortgage Banking loan production volume bydivision:

| ** **             | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in millions)**                  | ** ** |
| Correspondent  Lending |       | $                                       | 37,187     |   | $ | 33,307 |   |
| Consumer Markets       |       | 23,476                                  |       | 23,697 |   |
| Wholesale Lending      |       | 18,876                                  |       | 17,357 |   |
| Full Spectrum  Lending |       | 7,313                                   |       | 4,388 |   |
| Countrywide Bank       |       | 6,600                                   |       | — |   |
|                   |       | $                                       | 93,452     |   | $ | 78,749 |   |

 

The Correspondent Lending division increased itsoverall loan production volume because consumer preference shifted towardsagency conforming and pay-option loans, both of which are products in which thedivision dominates the market.

The Consumer Markets Division’s commissioned salesforce contributed $9.9 billion in purchase originations during the quarterended March 31, 2006, a 9% increase over the year-ago period. Suchpurchase production generated by the commissioned sales force represented 78% ofthe Consumer Markets Division’s total purchase production for the quarter endedMarch 31, 2006. The Consumer Markets Division continues to expand itscommissioned sales force, which emphasizes purchase loan production, to 6,081at March 31, 2006, an increase of 1,203, or 25%, over the year-ago period.This Division’s branch network has grown to 691 branch offices at March 31,2006, an increase of 99 offices from March 31, 2005.

41

----

The Wholesale Lending andFull Spectrum Lending Divisions also continue to increase their sales forces asa means to increase market share. At March 31, 2006, the sales force inthe Wholesale Lending Division numbered 1,412, an increase of 22% compared to March 31,2005. The Full Spectrum Lending Division expanded its commissioned sales forceto 4,537, an increase of 52%, compared to March 31, 2005 and has expandedits branch network to 204 branch offices at March 31, 2006, an increase of36 offices over the year-ago period.

***Loan ServicingSector***

The Loan Servicing Sectorincludes approximately 8,300 employees who service the 7.6 million mortgageloans in our servicing portfolio. The Loan Servicing Sector’s results includefees and other income earned and expenses incurred for servicing loans forothers; the financial performance of our investments in MSRs and retainedinterests and associated risk management activities; and profits fromsubservicing activities in the United States. The long-term performance of thissector is affected primarily by the level of interest rates, the correspondingeffect on the level of projected and actual prepayments in our servicingportfolio, our operational effectiveness and our ability to manage interestrate risk.

Our servicing portfoliogrew to $1,152.7 billion at March 31, 2006, a 29% increase from March 31,2005. At the same time, the overall weighted-average note rate of loans in ourservicing portfolio increased to 6.2% from 5.9% at March 31, 2005.

Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                                         | ** ** | **Quarters Ended March 31,**      | ** **    |
|--------------------------------------------------------------------|------------|--------------------------------------------------|---------------|
| ** **                                                         | ** ** | **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                             |       | $                                                | 913,462       |   |   | 0.326 | % |   | $ | 720,317 |   |   | 0.335 | % |   |
| Miscellaneous  fees                                                |       | 144,383                                          |          |   | 0.052 | % |   | 114,644 |   |   | 0.054 | % |   |
| Income from  retained interests                                    |       | 133,973                                          |          |   | 0.048 | % |   | 116,975 |   |   | 0.054 | % |   |
| Escrow balance  income                                             |       | 160,027                                          |          |   | 0.057 | % |   | 30,529 |   |   | 0.014 | % |   |
| Realization of  expected cash flows from mortgage servicing rights |       | (738,567                                         | )             |   | (0.264 | )% |   | — |   |   | — |   |   |
| Amortization of  mortgage servicing rights                         |       | —                                           |          |   | — |   |   | (472,187 | ) |   | (0.220 | )% |   |
|                                                               |       | 613,278                                          |          |   | 0.219 | % |   | 510,278 |   |   | 0.237 | % |   |
| Change in fair  value of mortgage servicing rights                 |       | 978,450                                          |          |   | 0.349 | % |   | — |   |   | — |   |   |
| Recovery of  mortgage servicing rights                             |       | —                                           |          |   | — |   |   | 452,434 |   |   | 0.210 | % |   |
| Impairment of  retained interests                                  |       | (120,114                                         | )             |   | (0.043 | )% |   | (138,613 | ) |   | (0.064 | )% |   |
| Servicing hedge  losses                                            |       | (885,870                                         | )             |   | (0.316 | )% |   | (552,292 | ) |   | (0.257 | )% |   |
| Change in value, net of servicing hedge                            |       | (27,534                                          | )             |   | (0.010 | )% |   | (238,471 | ) |   | (0.111 | )% |   |
| Total servicing revenues                                           |       | 585,744                                          |          |   | 0.209 | % |   | 271,807 |   |   | 0.126 | % |   |
| Operating  expenses                                                |       | 185,479                                          |          |   | 0.066 | % |   | 148,172 |   |   | 0.069 | % |   |
| Allocated  corporate expenses                                      |       | 23,178                                           |          |   | 0.008 | % |   | 14,209 |   |   | 0.006 | % |   |
| Total servicing expenses                                           |       | 208,657                                          |          |   | 0.074 | % |   | 162,381 |   |   | 0.075 | % |   |
| Interest expense                                                   |       | 128,369                                          |          |   | 0.046 | % |   | 92,237 |   |   | 0.043 | % |   |
| Pre-tax earnings                                                   |       | $                                                | 248,718       |   |   | 0.089 | % |   | $ | 17,189 |   |   | 0.008 | % |   |
| Average servicing  portfolio                                       |       | $                                                | 1,120,409,000 |   |   |   |   |   | $ | 859,902,000 |   |   |   |   |   |

----

(1)          Annualized

42

----

Pre-tax earnings in the Loan Servicing Sector were$248.7 million during the quarter ended March 31, 2006, an improvement of$231.5 million from the year-ago period. The increase in pre-tax earnings isdue to an increase in the average servicing portfolio of 30% resulting in anincrease in servicing and miscellaneous fees; an improvement in escrow balancebenefit resulting primarily from an increase in short-term interest rates andan improvement in the value of our MSRs and retained interests, net of theServicing Hedge.

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.

***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 $22.2 million in pre-tax earnings in the quarter ended March 31,2006, representing an increase of 12% from the year-ago period. The increase inLandSafe’s pre-tax earnings was primarily due to the increase in our loanorigination activity.

**Banking Segment**

The Banking Segment includes the investment andfee-based activities of Countrywide Bank, along with the activities ofCountrywide Warehouse Lending, a provider of mortgage inventory financing toother mortgage bankers. Part of our banking strategy is to hold loans inportfolio rather than immediately selling them into the secondary mortgagemarket. Management believes this strategy will provide a stream of earningsover the life of such loans, create a greater base of future earnings andenhance the stability of earnings growth. In the short term, reportedconsolidated profits will be affected by the reduction in gains that would havebeen recognizable had the loans been sold.

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 $341.1 million during the quarterended March 31, 2006, compared to $215.9 million for the year-ago period.Following is the composition of pre-tax earnings by component:

| ** **                                                                             | ** ** | **Quarters Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                 | ** ** |
| Countrywide Bank  investment and fee-based activities (“Banking Operations”) |       | $                                       | 330,731    |   | $ | 205,873 |   |
| Countrywide  Warehouse Lending (“CWL”)                                       |       | 18,126                                  |       | 17,292 |   |
| Allocated  corporate expenses                                                          |       | (7,771                                  | )          | (7,225 | ) |
| Total Banking  Segment pre-tax earnings                                                |       | $                                       | 341,086    |   | $ | 215,940 |   |

 

43

----

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

| ** **                                          | ** ** | **Quarters Ended  March 31,**            | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(dollar amounts in   thousands)** | ** ** |
| Interest income                                     |       | $                                                  | 1,122,464  |   | $ | 550,269 |   |
| Interest expense                                    |       | (704,164                                           | )          | (300,271 | ) |
| Net interest income                                 |       | 418,300                                            |       | 249,998 |   |
| Provision for  loan losses                          |       | (27,626                                            | )          | (6,406 | ) |
| Net interest income after provision for loan losses |       | 390,674                                            |       | 243,592 |   |
| Non-interest  income                                |       | 35,813                                             |       | 30,241 |   |
| Non-interest  expense                               |       | (95,756                                            | )          | (67,960 | ) |
| Pre-tax earnings                                    |       | $                                                  | 330,731    |   | $ | 205,873 |   |
| Efficiency  ratio(1)                                |       | 19                                                 | %          | 22 | % |
| After-tax return on  average assets                 |       | 1.09                                               | %          | 1.09 | % |

----

(1)          Non-interest expensereduced by mortgage insurance divided by the sum of net interest income plusnon-interest income. The Bank’s efficiency ratio reflects the benefitCountrywide Bank realizes from CHL’s operations in originating mortgage loansand corporate support functions and the pricing of such services.

44

----

Thechange in net interest income is summarized below:

| ** **                                        | ** ** | **Quarters Ended March 31,**      | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **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)                                 |       | $                                                | 66,050,178 |   | $ | 1,021,000 |   |   | 6.20 | % |   | $ | 37,252,763 |   | $ | 477,047 |   |   | 5.15 | % |   |
| Securities available-for-sale(2)                  |       | 6,249,461                                        |       | 80,469 |   |   | 5.15 | % |   | 5,325,987 |   | 60,727 |   |   | 4.56 | % |   |
| Short-term investments                            |       | 388,318                                          |       | 4,324 |   |   | 4.45 | % |   | 515,524 |   | 3,181 |   |   | 2.47 | % |   |
| FHLB securities and FRB stock                     |       | 1,353,981                                        |       | 16,671 |   |   | 4.99 | % |   | 857,181 |   | 9,314 |   |   | 4.40 | % |   |
| Total earning assets                              |       | 74,041,938                                       |       | 1,122,464 |   |   | 6.08 | % |   | 43,951,455 |   | 550,269 |   |   | 5.03 | % |   |
| Allowance for loan losses                         |       | (107,162                                         | )          |   |   |   |   |   |   | (50,597 | ) |   |   |   |   |   |   |
| Other assets                                      |       | 930,857                                          |       |   |   |   |   |   |   | 1,008,554 |   |   |   |   |   |   |   |
| Total non interest-earning assets                 |       | 823,695                                          |       |   |   |   |   |   |   | 957,957 |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                                | 74,865,633 |   |   |   |   |   |   |   | $ | 44,909,412 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits                             |       | $                                                | 4,830,150  |   | 51,409 |   |   | 4.32 | % |   | $ | 1,810,628 |   | 13,315 |   |   | 2.98 | % |   |
| Savings                                           |       | 1,120                                            |       | 2 |   |   | 0.82 | % |   | 1,634 |   | 7 |   |   | 1.62 | % |   |
| Escrow deposits                                   |       | 13,468,530                                       |       | 145,852 |   |   | 4.39 | % |   | 8,201,395 |   | 48,338 |   |   | 2.39 | % |   |
| Time deposits                                     |       | 22,769,200                                       |       | 236,566 |   |   | 4.21 | % |   | 11,702,797 |   | 92,529 |   |   | 3.21 | % |   |
| Total interest-bearing deposits                   |       | 41,069,000                                       |       | 433,829 |   |   | 4.28 | % |   | 21,716,454 |   | 154,189 |   |   | 2.88 | % |   |
| FHLB advances                                     |       | 24,663,071                                       |       | 245,221 |   |   | 3.98 | % |   | 16,789,533 |   | 131,668 |   |   | 3.14 | % |   |
| Other borrowed funds                              |       | 2,216,502                                        |       | 25,114 |   |   | 4.53 | % |   | 2,257,481 |   | 14,414 |   |   | 2.55 | % |   |
| Total borrowed funds                              |       | 26,879,573                                       |       | 270,335 |   |   | 4.02 | % |   | 19,047,014 |   | 146,082 |   |   | 3.07 | % |   |
| Total interest-bearing liabilities                |       | 67,948,573                                       |       | 704,164 |   |   | 4.18 | % |   | 40,763,468 |   | 300,271 |   |   | 2.97 | % |   |
| Non  interest-bearing liabilities and equity:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking                |       | 959,407                                          |       |   |   |   |   |   |   | 97,508 |   |   |   |   |   |   |   |
| Other liabilities                                 |       | 709,481                                          |       |   |   |   |   |   |   | 1,047,362 |   |   |   |   |   |   |   |
| Shareholder’s equity                         |       | 5,248,172                                        |       |   |   |   |   |   |   | 3,001,074 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity |       | 6,917,060                                        |       |   |   |   |   |   |   | 4,145,944 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s equity   |       | $                                                | 74,865,633 |   |   |   |   |   |   |   | $ | 44,909,412 |   |   |   |   |   |   |   |
| Net interest  income                              |       |                                             |       | $ | 418,300 |   |   |   |   |   |   |   | $ | 249,998 |   |   |   |   |   |
| Net interest  spread(3)                           |       |                                             |       |   |   |   | 1.90 | % |   |   |   |   |   |   | 2.06 | % |   |
| Net interest margin(4)                            |       |                                             |       |   |   |   | 2.29 | % |   |   |   |   |   |   | 2.31 | % |   |

----

(1)          Average balances includenonaccrual loans.

(2)          Average balances andyields for securities available-for-sale are based on average amortized costcomputed on the settlement date basis.

45

----

(3)   Calculatedas yield on total average interest-earning assets less rate on total averageinterest-bearing liabilities.

(4)   Calculatedas net interest income divided by total average interest-earning assets.

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

| ** **                         | ** ** | **March 31, 2006 vs March 31, 2005** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Increase (Decrease) Due to**                      | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Volume**                                                         | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                         | ** ** | **(in thousands)**                                            | ** ** |
| Interest-earning assets:           |       |                                                               |       |   |   |   |   |   |   |
| Mortgage loans                     |       | $                                                                  | 408,273    |   | $ | 135,680 |   |   | $ | 543,953 |   |   |
| Securities available-for-sale      |       | 11,309                                                             |       | 8,433 |   |   | 19,742 |   |   |
| Short-term investments             |       | (933                                                               | )          | 2,076 |   |   | 1,143 |   |   |
| Other investments                  |       | 6,038                                                              |       | 1,319 |   |   | 7,357 |   |   |
| Total interest income              |       | $                                                                  | 424,687    |   | $ | 147,508 |   |   | $ | 572,195 |   |   |
| Interest-bearing  liabilities:     |       |                                                               |       |   |   |   |   |   |   |
| Money market deposits              |       | $                                                                  | (30,037    | ) | $ | (8,057 | ) |   | $ | (38,094 | ) |   |
| Savings                            |       | 2                                                                  |       | 3 |   |   | 5 |   |   |
| Escrow deposits                    |       | (42,327                                                            | )          | (55,187 | ) |   | (97,514 | ) |   |
| Time deposits                      |       | (108,126                                                           | )          | (35,911 | ) |   | (144,037 | ) |   |
| Total interest expense             |       | (180,488                                                           | )          | (99,152 | ) |   | (279,640 | ) |   |
| FHLB advances                      |       | (72,273                                                            | )          | (41,280 | ) |   | (113,553 | ) |   |
| Other borrowed funds               |       | 266                                                                |       | (10,966 | ) |   | (10,700 | ) |   |
| Total borrowed funds               |       | (72,007                                                            | )          | (52,246 | ) |   | (124,253 | ) |   |
| Total interest-bearing liabilities |       | (252,495                                                           | )          | (151,398 | ) |   | (403,893 | ) |   |
| Net interest  income               |       | $                                                                  | 172,192    |   | $ | (3,890 | ) |   | $ | 168,302 |   |   |

 

The increase in net interest income is primarily dueto a $30.1 billion or 68% increase in average interest-earning assets,partially offset by a 2 basis point reduction in net interest margin. Netinterest margin experienced slight compression during the quarter ended March 31,2006 from the year-ago period mainly as a result of a lag in the timing of repricingof the Bank’s mortgage loan portfolio compared to the timing of repricing ofits interest-bearing liabilities and to the large volume of loans held by theBank that are earning interest at their reduced introductory interest rates. Thesefactors were partially offset by an increase in net interest margin resultingfrom a change in the mix of the loan portfolio.

Countrywide Bank increased its investment inpay-option loans during the quarter ended March 31, 2006. These loans haveinterest rates that adjust monthly and contain features that allow the borrowerto defer making the full interest payment for at least the first year of theloan. Thereafter, minimum monthly payments increase by no more than 71⁄2% peryear unless the unpaid balance increases to a specified limit, which is no morethan 115% of the original loan amount, at which time a new monthly paymentamount adequate to repay the loan over its remaining contractual life isestablished. To ensure that contractual loan payments are adequate to repay aloan, the fully amortizing loan payment amount is re-established after eitherfive or ten years. Our underwriting standards conform to those required to makethe pay-option loans salable into the secondary market at the date of funding,including a requirement that the 

46

----

borrower meet secondarymarket debt-service ratio tests based on the borrower making the fullyamortizing loan payment assuming the loan’s interest rate is fully indexed. (Afully indexed note rate equals the sum of the current index rate plus themargin applicable to the loan.)

Followingis a summary of pay-option loans held for investment by Countrywide Bank:

| ** **                                                      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(in thousands)**  | ** ** |
| Total pay-option  loan portfolio                                |       | $                        | 30,965,164 |                        | $          | 26,101,306 |   |
| Pay-option loans with accumulated negative  amortization:       |       |                     |       |                        |       |
| Principal                                                       |       | $                        | 20,756,425 |                        | $          | 13,963,721 |   |
| Accumulated negative amortization (from original  loan balance) |       | $                        | 168,712    |                        | $          | 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                               |       | 0.13                     | %          | 0.10                        | %          |

----

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

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

The Banking Operation’s provision for loan lossesincreased by $21.2 million during the quarter ended March 31, 2006compared to the quarter ended March 31, 2005. This increase reflectscurrent portfolio growth, along with providing for seasoning of loans acquiredduring the past years of rapid portfolio growth. We expect our provision forloan losses and the related allowance for loan losses to increase as apercentage of our portfolio of loans held for investment as our portfoliocontinues to season. The impact of the increase in the allowance for loanlosses as a percentage of loans receivable is moderated by the addition of newloans to our portfolio.

47

----

Thecomposition of the Banking Operation’s balance sheets was as follows:

| ** **                                 | ** ** | **March 31, 2006**                    | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **Amount**                                      | ** ** | **Rate**                        | ** ** | **  Amount  ** | ** ** | **Rate** | ** ** |
| ** **                                 | ** ** | **(dollar amounts in millions)** | ** ** |
| **Assets**                                 |       |                                            |       |                            |       |   |   |   |   |   |   |
| Short-term investments                     |       | $                                               | 200        |                            | 4.79       | % |   | $ | 245 |   |   | 4.08 | % |
| Mortgage loans                             |       | 69,055                                          |       | 6.48                            | %          |   | 64,279 |   |   | 6.11 | % |
| Securities available-for-sale              |       | 5,920                                           |       | 5.25                            | %          |   | 6,251 |   |   | 5.02 | % |
| FHLB securities and FRB stock         |       | 1,363                                           |       | 5.00                            | %          |   | 1,333 |   |   | 4.73 | % |
| Total interest-earning assets              |       | 76,538                                          |       | 6.35                            | %          |   | 72,108 |   |   | 5.98 | % |
| Other assets                               |       | 1,240                                           |       |                            |       |   | 919 |   |   |   |   |
| Total assets                               |       | $                                               | 77,778     |                            |       |   |   | $ | 73,027 |   |   |   |   |
| **Liabilities and Equity**                 |       |                                            |       |                            |       |   |   |   |   |   |   |
| Deposits:(1)                               |       |                                            |       |                            |       |   |   |   |   |   |   |
| Customer                                   |       | $                                               | 29,688     |                            | 4.31       | % |   | $ | 25,300 |   |   | 4.09 | % |
| Company-controlled escrow deposit accounts |       | 14,624                                          |       | 4.84                            | %          |   | 13,333 |   |   | 4.18 | % |
| FHLB advances                              |       | 25,091                                          |       | 4.17                            | %          |   | 26,267 |   |   | 3.88 | % |
| Other borrowings                           |       | 978                                             |       | 4.82                            | %          |   | 1,280 |   |   | 4.23 | % |
| Total interest-bearing liabilities         |       | 70,381                                          |       | 4.38                            | %          |   | 66,180 |   |   | 4.03 | % |
| Other liabilities                          |       | 2,037                                           |       |                            |       |   | 1,574 |   |   |   |   |
| Shareholder’s equity                  |       | 5,360                                           |       |                            |       |   | 5,273 |   |   |   |   |
| Total liabilities and equity               |       | $                                               | 77,778     |                            |       |   |   | $ | 73,027 |   |   |   |   |
| Primary spread(2)                          |       |                                            |       | 1.97                            | %          |   |   |   |   | 1.95 | % |
| Nonaccrual loans                           |       | $                                               | 187.8      |                            |       |   |   | $ | 151.3 |   |   |   |   |

----

(1)          Includes inter-companydeposits.

(2)          Calculated as rate ontotal interest-earning assets less rate on total interest-bearing liabilities.

The Banking Segment alsoincludes the operations of CWL. CWL’s pre-tax earnings increased by $0.8 millionduring the quarter ended March 31, 2006 in comparison to the year-agoperiod, primarily due to a 6% increase in average mortgage warehouse advances,partially offset by a decrease in the net interest margin due to increasingcompetition in the warehouse lending market. Such average advances increased to$4.6 billion in the quarter ended March 31, 2006 from $4.3 billion in theyear-ago period, primarily due to an overall increase in activity with MortgageBanking Segment customers. At March 31, 2006, warehouse lending advanceswere $3.1 billion.

**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $155.6 million for the quarter ended March 31, 2006, an increase of$33.5 million, or 27%, from the year-ago period driven by a 29% increase inrevenues mainly due to an increase in conduit, underwriting and securitiestrading revenues offset by a decline in revenues from sales of commercial loans.

48

----

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

| ** **                   | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in thousands)**                 | ** ** |
| Revenues:                    |       |                                    |       |   |   |
| Conduit                      |       | $                                       | 122,601    |   | $ | 95,988 |   |
| Underwriting                 |       | 71,212                                  |       | 51,557 |   |
| Securities trading           |       | 34,664                                  |       | 19,414 |   |
| Commercial real estate       |       | 16,263                                  |       | 29,007 |   |
| Brokering                    |       | 6,657                                   |       | 6,209 |   |
| Other                        |       | 11,726                                  |       | 1,734 |   |
| Total revenues               |       | 263,123                                 |       | 203,909 |   |
| Expenses:                    |       |                                    |       |   |   |
| Operating expenses           |       | 103,471                                 |       | 77,736 |   |
| Allocated corporate expenses |       | 4,079                                   |       | 4,126 |   |
| Total expenses               |       | 107,550                                 |       | 81,862 |   |
| Pre-tax earnings             |       | $                                       | 155,573    |   | $ | 122,047 |   |

 

During the quarter ended March 31, 2006, theCapital Markets Segment generated revenues totaling $122.6 million from itsconduit activities, which is primarily from managing the acquisition and saleor securitization of whole loans on behalf of CHL. Conduit revenues for thereporting period increased 28% in comparison to the year-ago period because ofan increase in volume associated primarily with adjustable-rate productspartially offset by a decrease in margins.

Underwriting revenues increased $19.7 million over theyear-ago period because of increased underwriting of CHL securitizations byCapital Markets, partially offset by a decrease in margins.

Total securities trading volume increased 18% over theyear-ago period. Securities trading revenue increased 79% due to an increase intrading margins and a shift in trading mix to higher-margin securities.

During the current reporting period, the commercialreal estate finance activities of the Capital Markets Segment generatedrevenues totaling $16.3 million primarily from sales of commercial real estateloans compared to $29.0 million in the year-ago period. The decrease in revenuewas due to a decrease in margins resulting from price competition and a changein the mix of products sold partially offset by an increase in the volume ofloans sold and the realization of an advisory fee in the current quarter.

Thefollowing table shows the composition of CSC securities trading volume, whichincludes intersegment trades with the mortgage banking operations, byinstrument:

| ** **                          | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(in millions)**                  | ** ** |
| Mortgage-backed  securities         |       | $                                       | 528,350    |   | $ | 420,361 |   |
| U.S. Treasury  securities           |       | 357,112                                 |       | 354,503 |   |
| Asset-backed  securities            |       | 32,676                                  |       | 34,365 |   |
| Other                               |       | 60,217                                  |       | 19,392 |   |
| Total securities  trading volume(1) |       | $                                       | 978,355    |   | $ | 828,621 |   |

----

(1)          Approximately13% and 16% of the segment’s non-U.S. Treasury securities trading volume waswith CHL during each of the quarters ended March 31, 2006 and 2005,respectively.

49

----

**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $10.4 million over theyear-ago period, to $64.9 million. The following table shows pre-tax earningsby business line:

| ** **                                | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**                 | ** ** |
| Balboa  Reinsurance Company               |       | $                                       | 46,497     |   | $ | 43,120 |   |
| Balboa Life and  Casualty Operations(1)   |       | 22,779                                  |       | 17,317 |   |
| Allocated  corporate expenses             |       | (4,333                                  | )          | (5,860 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                       | 64,943     |   | $ | 54,577 |   |

----

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

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**                 | ** ** |
| Balboa Reinsurance  Company          |       | $                                       | 51,795     |   | $ | 43,695 |   |
| Balboa Life and  Casualty Operations |       | 227,998                                 |       | 155,823 |   |
| Total net  insurance premiums earned |       | $                                       | 279,793    |   | $ | 199,518 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                           | ** ** | **Quarters Ended March 31,**      | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ****                                 | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company          |       | $                                                | 11,075     |   |   | 21 | % |   | $ | 6,922 |   |   | 16 | % |   |
| Balboa Life and  Casualty Operations |       | 112,967                                          |       |   | 50 | % |   | 69,013 |   |   | 44 | % |   |
| Total insurance  claim expenses      |       | $                                                | 124,042    |   |   |   |   |   | $ | 75,935 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $46.5million in pre-tax earnings, an increase of 8% over the year-ago period, drivenprimarily by growth of 12% in the mortgage loans included in our loan servicingportfolio that are covered by reinsurance contracts.

Our Life and Casualty insurance business producedpre-tax earnings of $22.8 million, an increase of $5.5 million, or 32%, fromthe year-ago period. The increase in earnings was driven by a 46% increase innet earned premiums during the quarter ended March 31, 2006 in comparisonto the year-ago period, partially offset by an increase in insurance claimexpense expressed as a percentage of net earned premiums. The increase in netearned premiums was primarily attributable to an increase in voluntaryhomeowners and auto insurance. Insurance claim expenses increased as apercentage of net earned premiums, due to an increase in the mix of voluntaryinsurance, which has a higher loss ratio than lender-placed lines of business.

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.

50

----

**Global OperationsSegment**

Global Operations pre-taxearnings totaled $10.2 million, an increase of $6.1 million from the year-agoperiod. The increase in earnings was primarily due to a settlement paymentreceived upon 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 March 31,**      | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **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        |       | $                                                | 76,176,576 |   | $ | 897,734 |   |   | 1.18 | % |   | $ | 58,920,588 |   | $ | 729,345 |   |   | 1.24 | % |   |
| Prime Home Equity Loans:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial Sales                |       | 4,442,526                                        |       | 77,919 |   |   | 1.75 | % |   | 4,025,409 |   | 125,857 |   |   | 3.13 | % |   |
| Subsequent draws             |       | N/A                                              |       | 35,687 |   |   | N/A |   |   | N/A |   | 30,536 |   |   | N/A |   |   |
|                         |       | 4,442,526                                        |       | 113,606 |   |   | 2.56 | % |   | 4,025,409 |   | 156,393 |   |   | 3.89 | % |   |
| Nonprime Mortgage  Loans     |       | 9,090,272                                        |       | 149,437 |   |   | 1.64 | % |   | 12,486,366 |   | 351,492 |   |   | 2.82 | % |   |
| Production Sector            |       | 89,709,374                                       |       | 1,160,777 |   |   | 1.29 | % |   | 75,432,363 |   | 1,237,230 |   |   | 1.64 | % |   |
| Reperforming  Loans          |       | 143,647                                          |       | 1,979 |   |   | 1.38 | % |   | 459,248 |   | 15,566 |   |   | 3.39 | % |   |
|                         |       | $                                                | 89,853,021 |   | 1,162,756 |   |   |   |   |   | $ | 75,891,611 |   | 1,252,796 |   |   |   |   |   |
| Capital Markets:             |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)        |       | $                                                | 17,943,454 |   | 112,894 |   |   | 0.63 | % |   | $ | 9,009,011 |   | 81,070 |   |   | 0.90 | % |   |
| Underwriting                 |       | N/A                                              |       | 63,101 |   |   | N/A |   |   | N/A |   | 39,448 |   |   | N/A |   |   |
| Commercial real   estate     |       | $                                                | 942,185    |   | 7,563 |   |   | 0.80 | % |   | $ | 646,351 |   | 27,695 |   |   | 4.28 | % |   |
| Securities trading and other |       | N/A                                              |       | 3,742 |   |   | N/A |   |   | N/A |   | (30,365 | ) |   | N/A |   |   |
|                         |       |                                             |       | 187,300 |   |   |   |   |   |   |   | 117,848 |   |   |   |   |   |
| Other                        |       | N/A                                              |       | 11,122 |   |   | N/A |   |   | N/A |   | (8,893 | ) |   | N/A |   |   |
|                         |       |                                             |       | $ | 1,361,178 |   |   |   |   |   |   |   | $ | 1,361,751 |   |   |   |   |   |

----

(1)          Includes loans purchasedfrom the Mortgage Banking Segment.

The increase in CapitalMarkets’ gain on sale related to its conduit activities was due to increasedsales of mortgage loans partially offset by a decline in margins. The decreasein 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 quarter ended March 31, 2006 the yield curve was flatter thanin the year-ago period, which resulted in a shift in trading revenues frominterest income to gain on sale.

51

----

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  March 31, 2006 vs. March 31, 2005** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Increase (Decrease) Due to**                                            | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Loans Sold**                                                                      | ** ** | **Gain on Sale Rate** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(in thousands)**                                                                  | ** ** |
| Mortgage Banking:         |       |                                                                                     |       |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans      |       |                                                                                     | $          | 204,802 |   |   |   | $ | (36,413 | ) |   | $ | 168,389 |   |
| Prime Home Equity  Loans: |       |                                                                                     |       |   |   |   |   |   |   |   |   |
| Initial Sales             |       |                                                                                     | 11,948     |   |   |   | (59,886 | ) |   | (47,938 | ) |
| Subsequent draws          |       |                                                                                     | 5,151      |   |   |   | — |   |   | 5,151 |   |
|                      |       |                                                                                     | 17,099     |   |   |   | (59,886 | ) |   | (42,787 | ) |
| Nonprime Mortgage Loans   |       |                                                                                     | (79,878    | ) |   |   | (122,177 | ) |   | (202,055 | ) |
| Total Production Sector   |       |                                                                                     | 142,023    |   |   |   | (218,476 | ) |   | (76,453 | ) |
| Reperforming loans        |       |                                                                                     | (7,290     | ) |   |   | (6,297 | ) |   | (13,587 | ) |
| Total Mortgage  Banking   |       |                                                                                     | $          | 134,733 |   |   |   | $ | (224,773 | ) |   | $ | (90,040 | ) |

 

Gain on sale of Prime Mortgage Loans increased in thequarter ended March 31, 2006 as compared to the quarter ended March 31,2005 due primarily to increased sales of such loans. These positive resultswere partially offset by lower margins resulting from increased pricingcompetition.

Gain on sale of Prime Home Equity Loans decreased inthe quarter ended March 31, 2006 as compared to the year-ago period dueprimarily to reduced margins on such loans.

Gain on sale of Nonprime Mortgage Loans decreased inthe quarter ended March 31, 2006 as compared to 2005 due primarily tolower margins resulting from increased pricing competition.

Reperforming loans arereinstated loans that had previously defaulted and were repurchased frommortgage securities we issued. The note rate on these loans is typically higherthan currently-offered mortgage interest rates and therefore, the margin onthese loans is typically higher than margins on Prime Mortgage Loans.

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

Netinterest income is summarized below:

| ** **                                                      | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                 | ** ** |
| Net interest  income (expense):                                 |       |                                    |       |   |   |
| Banking Segment loans and securities                            |       | $                                       | 437,908    |   | $ | 267,360 |   |
| Mortgage Banking Segment loans and securities                   |       | 113,326                                 |       | 176,331 |   |
| Loan Servicing Sector:                                          |       |                                    |       |   |   |
| Interest income on custodial balances                           |       | 160,027                                 |       | 30,529 |   |
| Interest expense                                                |       | (110,370                                | )          | (95,867 | ) |
| Capital Markets Segment securities inventory                    |       | 32,363                                  |       | 50,910 |   |
| Other                                                           |       | 61,181                                  |       | 61,730 |   |
| Net interest income                                             |       | 694,435                                 |       | 490,993 |   |
| Provision for loan losses related to loans held for  investment |       | (63,138                                 | )          | (19,622 | ) |
| Net interest  income after provision for loan losses            |       | $                                       | 631,297    |   | $ | 471,371 |   |

 

52

----

 

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 $78.6 billionduring the quarter ended March 31, 2006, an increase of $30.4 billion, or63% over the year-ago period. Net interest margin remained relativelyconstant at 2.23% and 2.22% during the quarters ended March 31, 2006 and2005, respectively.

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 March 31, 2006, reducingthe net interest margin.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate from 2.37% duringthe quarter ended March 31, 2005 to 4.73% during the quarter ended March 31,2006, and due to an increase of $1.9 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$70.0 million and $73.7 million in the quarters ended March 31, 2006 and2005, respectively.

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 0.51% in the quarter ended March 31, 2005 to 0.40% in thequarter ended March 31, 2006, partially offset by an increase of 6% in theaverage inventory of securities held. The decrease in the net interest marginearned on the securities portfolio is primarily due to a larger increase inshort-term financing rates versus the increase in rates in the longer-termsecurities held by the Capital Markets Segment. The decline in net interestincome was more than offset by an increase in gain on sale.

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.

The increase in the allowance for loan losses is duemainly to continuing growth and seasoning of the Bank’s loan portfolio. As theBank’s portfolio of loans held for investment continues to season, we expectour allowance for loan losses and the related provision for loan losses toincrease as a percentage of our portfolio of loans held for investment. As theBank’s portfolio continues to grow, the impact of seasoning on the allowance asa percentage of loans held for investment will be partially offset by newloans.

53

----

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

| ** **                                                                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **(in thousands)**       | ** ** |
| Nonaccrual loans(1):                                                                     |       |                     |       |                        |       |   |   |
| Mortgage loans:                                                                          |       |                     |       |                        |       |   |   |
| Nonprime                                                                                 |       | $                        | 347,822    |                        |       | $ | 325,257 |   |   |
| Prime                                                                                    |       | 227,441                  |       |                        | 347,476    |   |   |
| Prime home equity                                                                        |       | 119,780                  |       |                        | 110,040    |   |   |
| Subtotal                                                                                 |       | 695,043                  |       |                        | 782,773    |   |   |
| Warehouse lending  advances                                                              |       | —                   |       |                        | —     |   |   |
| Defaulted FHA-insured  and VA-guaranteed mortgage loans repurchased from securities |       | 428,711                  |       |                        | 465,599    |   |   |
| Total nonaccrual loans                                                                   |       | 1,123,754                |       |                        | 1,248,372  |   |   |
| Real estate acquired in  settlement of loans                                             |       | 152,745                  |       |                        | 110,499    |   |   |
| Total nonaccrual loans  and foreclosed assets                                            |       | $                        | 1,276,499  |                        |       | $ | 1,358,871 |   |   |
| Nonaccrual loans as a percentage of loans held for  investment:                          |       |                     |       |                        |       |   |   |
| Total                                                                                    |       | 1.5                      | %          |                        | 1.8        | % |   |
| Excluding loans  FHA-insured and VA-guaranteed loans                                     |       | 0.9                      | %          |                        | 1.1        | % |   |
| Allowance for loan  losses                                                               |       | $                        | 172,271    |                        |       | $ | 151,274 |   |   |
| Allowance for loan losses as a percentage of nonaccrual  loans:                          |       |                     |       |                        |       |   |   |
| Total                                                                                    |       | 15.3                     | %          |                        | 12.1       | % |   |
| Excluding loans  FHA-insured and VA-guaranteed loans                                     |       | 24.8                     | %          |                        | 19.3       | % |   |
| Allowance for loan losses as a percentage of loans  held for investment                  |       | 0.2                      | %          |                        | 0.2        | % |   |

----

(1)          Thisamount excludes $414.3 million of government-insured loans eligible forrepurchase from Ginnie Mae securities issued by us. Our servicing agreementwith Ginnie Mae allows us to repurchase loans that are delinquent more than 90days instead of continuing to advance the delinquent interest to the securityholders. This amount is included in loans held for investment as Countrywidehas the option of repurchasing the loans from the securities and is required toinclude such loans on its balance sheets. However, we do not include theseloans in our nonaccrual balances because we have not exercised the option torepurchase the loans.

***Loan Servicing Feesand Other Income from MSRs and Retained Interests***

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

| ** **                                                                   | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **(in thousands)**                 | ** ** |
| Servicing fees,  net of guarantee fees(1)                                    |       | $                                       | 913,462    |   | $ | 720,317 |   |
| Income from  retained interests                                              |       | 133,973                                 |       | 116,975 |   |
| Late charges                                                                 |       | 67,341                                  |       | 56,868 |   |
| Prepayment  penalties                                                        |       | 53,786                                  |       | 32,903 |   |
| Global Operations  Segment subservicing fees                                 |       | 11,322                                  |       | 28,527 |   |
| Ancillary fees                                                               |       | 20,003                                  |       | 16,768 |   |
| Total loan  servicing fees and income from MSRs and retained interests  |       | $                                       | 1,199,887  |   | $ | 972,358 |   |

----

(1)   Includescontractually specified servicing fees

54

----

The increase in servicing fees, net of guarantee fees,was principally due to a 30% increase in the average servicing portfolio,partially offset by a decrease in the overall annualized net service fee earnedfrom 0.335% of the average portfolio balance during the quarter ended March 31,2005 to 0.326% during the quarter ended March 31, 2006.

The increase in incomefrom retained interests was due primarily to a 25% increase in the averageinvestment in these assets from the quarter ended March 31, 2005 to the quarterended March 31, 2006. 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 March 31, 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 $738.6 million during the quarter ended March 31, 2006.

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

We recorded an increase inthe fair value of the MSRs in the quarter ended March 31, 2006 of $978.3 millionprimarily as a result of the increase in mortgage rates during the quarter.

***Amortization of Mortgage Servicing Rights***

We recorded amortizationof MSRs of $472.2 million, or an annual rate of 22%, during the quarter ended March 31,2005. The amortization rate of the MSRs is dependent on the forecastedprepayment speeds at the beginning of the quarter.

***Recovery/ Impairment of Mortgage Servicing Rights***

During the quarter ended March 31,2005, we recorded recovery of previous impairment of MSRs of $452.4 million,primarily driven by the increase in mortgage interest rates during the period.

***Impairment of Retained Interests***

In the quarters ended March 31,2006 and 2005, we recognized impairment of retained interests of $120.7 millionand $137.1 million, respectively. This impairment was a result of a decline inthe value of such securities due to compression of the interest rate spread on theresiduals we hold because the interest on the collateral is fixed-rate while thepass-through rate is floating. In the quarter ended March 31, 2006 anincrease in market yield requirements for certain of our retained interestsalso contributed to the decline in value of such securities.

***Servicing Hedge Losses***

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 thequarters ended March 31, 2006 and 2005. As a result the Servicing Hedgeincurred a loss of $885.9 million, including $133 million of time value decayon 

55

----

the options included inthe Servicing Hedge during the quarter ended March 31, 2006 and a loss of$552.3 million, including $119 million of time value decay during the quarterended March 31, 2005.

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 $80.3 millionincrease in net insurance premiums earned.

***Other Revenue***

Otherrevenue consisted of the following:

| ** **                                                     | ** ** | **Quarters Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**                 | ** ** |
| Appraisal fees,  net                                           |       | $                                       | 31,262     |   | $ | 21,565 |   |
| Credit report  fees, net                                       |       | 19,346                                  |       | 18,521 |   |
| Global Operations  Segment processing fees                     |       | 10,247                                  |       | 12,984 |   |
| Title services                                                 |       | 9,934                                   |       | 11,558 |   |
| Insurance agency  commissions                                  |       | 7,340                                   |       | 4,870 |   |
| Increase (decrease)  in cash surrender value of life insurance |       | 6,589                                   |       | (648 | ) |
| Other                                                          |       | 45,885                                  |       | 40,152 |   |
| Total other revenue                                            |       | $                                       | 130,603    |   | $ | 109,002 |   |

 

***Compensation Expenses***

Compensationexpenses increased $288.3 million, or 37%, during the quarter endedMarch 31, 2006 as compared to the year-ago period as summarized below:

| ** **                          | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(in thousands)**                 | ** ** |
| Base salaries                       |       | $                                       | 543,032    |   | $ | 449,367 |   |
| Incentive bonus  and commissions    |       | 456,299                                 |       | 379,580 |   |
| Payroll taxes and  benefits         |       | 233,656                                 |       | 149,538 |   |
| Deferral of loan  origination costs |       | (158,169                                | )          | (192,006 | ) |
| Total  compensation expenses        |       | $                                       | 1,074,818  |   | $ | 786,479 |   |

 

 

56

----

Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Mortgage Banking                              |       | 41,980                                  |       | 32,783 |   |
| Banking                                       |       | 2,220                                   |       | 1,552 |   |
| Capital Markets                               |       | 712                                     |       | 579 |   |
| Insurance                                     |       | 2,144                                   |       | 1,909 |   |
| Global Operations                             |       | 2,411                                   |       | 2,345 |   |
| Corporate Administration                      |       | 5,126                                   |       | 4,068 |   |
| Average  workforce, including temporary staff |       | 54,593                                  |       | 43,236 |   |

 

In the Loan Production Sector, compensation expensesincreased $135.4 million, or 23%, prior to the deferral of loan originationcosts, because of a 26% increase in average staff to accommodate growth in loanproduction and to expand our operations to support our long-term objective ofmarket share growth.

In the Loan Servicing Sector, compensation expenserose $25.4 million, or 32%, to accommodate a 17% 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 costs areamortized to interest income over the life of the loan.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                 | ** ** |
| Office and  equipment rentals              |       | $                                       | 53,142     |   | $ | 42,591 |   |
| Utilities                                  |       | 44,835                                  |       | 34,658 |   |
| Depreciation  expense                      |       | 47,771                                  |       | 33,524 |   |
| Postage and  courier service               |       | 25,217                                  |       | 23,537 |   |
| Office supplies                            |       | 18,746                                  |       | 16,021 |   |
| Dues and  subscriptions                    |       | 15,695                                  |       | 12,252 |   |
| Repairs and  maintenance                   |       | 13,152                                  |       | 11,738 |   |
| Other                                      |       | 26,773                                  |       | 14,335 |   |
| Total occupancy  and other office expenses |       | $                                       | 245,331    |   | $ | 188,656 |   |

 

Occupancy and other officeexpenses for the quarter ended March 31, 2006 increased by 30%, or $56.7million, primarily to accommodate a 26% increase in the average workforce.

***Insurance Claim Expenses***

Insurance claim expenseswere $124.0 million for the quarter ended March 31, 2006 as compared to$75.9 million for the year-ago period. The increase in insurance claim expenseswas due mainly to growth in our insurance book of business and an increase inour voluntary insurance which has a higher loss ratio than lender-placed linesof business.

57

----

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 9% from the quarter ended March 31, 2005, as a resultof a shift in the mortgage loan production market towards purchase activity,which generally requires more advertising and promotion than refinanceactivity, which is customarily driven by increased consumer demand formortgages resulting from low interest rates.

***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                 | ** ** |
| Legal,  consulting, accounting and auditing expenses |       | $                                       | 50,362     |   | $ | 27,461 |   |
| Insurance  commission expense                        |       | 45,382                                  |       | 31,570 |   |
| Travel and  entertainment                            |       | 36,357                                  |       | 23,758 |   |
| Taxes and  licenses                                  |       | 15,365                                  |       | 10,540 |   |
| Losses on  servicing-related advances                |       | 15,240                                  |       | 21,455 |   |
| Insurance                                            |       | 14,732                                  |       | 11,649 |   |
| Software  amortization and impairment                |       | 14,418                                  |       | 13,108 |   |
| Other                                                |       | 45,976                                  |       | 39,675 |   |
| Deferral of loan  origination costs                  |       | (25,668                                 | )          | (29,577 | ) |
| Total other  operating expenses                      |       | $                                       | 212,164    |   | $ | 149,639 |   |

 

***Quantitative and QualitativeDisclosures 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.

***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-

58

----

pricing model is used. Theprimary assumption used in this model is implied market volatility of interestrates. Retained interests are valued using a zero volatility discounted cashflow model. The primary assumptions used in these models are prepayment rates,discount rates and credit losses.

Thefollowing table summarizes the estimated change in fair value of ourinterest-rate-sensitive assets, liabilities and commitments as of March 31,2006, 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                                              |       | $                                       | (2,624     | ) | $ | (1,155 | ) | $ | 828 |   | $ | 1,373 |   |
| Impact of Servicing  Hedge:                                               |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                            |       | 244                                     |       | 122 |   | (122 | ) | (243 | ) |
| Swap-based                                                                |       | 2,187                                   |       | 832 |   | (472 | ) | (751 | ) |
| Treasury-based                                                            |       | 282                                     |       | 61 |   | (4 | ) | (4 | ) |
| MSRs and retained  interests, net                                         |       | 89                                      |       | (140 | ) | 230 |   | 375 |   |
| Interest rate lock  commitments                                           |       | 296                                     |       | 200 |   | (307 | ) | (674 | ) |
| Mortgage Loan Inventory                                                   |       | 1,020                                   |       | 595 |   | (731 | ) | (1,556 | ) |
| Impact of associated  derivative instruments:                             |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                            |       | (1,381                                  | )          | (820 | ) | 1,049 |   | 2,230 |   |
| Treasury-based                                                            |       | 89                                      |       | 26 |   | 15 |   | 37 |   |
| Eurodollar-based                                                          |       | (92                                     | )          | (48 | ) | 59 |   | 124 |   |
| Interest rate lock  commitments and Mortgage Loan Inventory, net          |       | (68                                     | )          | (47 | ) | 85 |   | 161 |   |
| Countrywide Bank:                                                         |       |                                    |       |   |   |   |   |   |   |
| Securities portfolio                                                      |       | 178                                     |       | 103 |   | (124 | ) | (263 | ) |
| Mortgage loans                                                            |       | 616                                     |       | 329 |   | (359 | ) | (747 | ) |
| Deposit liabilities                                                       |       | (283                                    | )          | (146 | ) | 151 |   | 303 |   |
| Federal Home Loan Bank  advances                                          |       | (200                                    | )          | (97 | ) | 90 |   | 173 |   |
| Countrywide Bank, net                                                     |       | 311                                     |       | 189 |   | (242 | ) | (534 | ) |
| Notes payable and  capital securities                                     |       | (677                                    | )          | (340 | ) | 325 |   | 638 |   |
| Impact of associated  derivative instruments:                             |       |                                    |       |   |   |   |   |   |   |
| Swap-based                                                                |       | 100                                     |       | 51 |   | (51 | ) | (101 | ) |
| Notes payable and  capital securities, net                                |       | (577                                    | )          | (289 | ) | 274 |   | 537 |   |
| Insurance company  investment portfolios                                  |       | 57                                      |       | 29 |   | (29 | ) | (59 | ) |
| Net change in fair value  related to MSRs and other financial instruments |       | $                                       | (188       | ) | $ | (258 | ) | $ | 318 |   | $ | 480 |   |
| Net change in fair value related to broker-dealer  trading securities     |       | $                                       | (20        | ) | $ | (6 | ) | $ | (4 | ) | $ | (15 | ) |
|                                                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 | ) |
|                                                                                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

59

----

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 occasionally issue medium-term notes denominatedin a foreign currency. We manage the foreign currency risk associated withthese medium-term notes through cross-currency swap transactions. The terms ofthe cross-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**

***Saleof Loans—Representations and Warranties***

***Nearly all***of the mortgage loans that we originate in ourMortgage Banking Segment are sold into the secondary mortgage market in theform of securities, and to a lesser extent in the form of loans. In thecase of both securitizations and loan sales, we assume potential liability under the representations and warrantieswe make to purchasers and insurers of the loans. In the event of a breach ofsuch representations and warranties, we may be required to either repurchasethe mortgage loans with the identified defects or indemnify the investor orinsurer. In either case, webear the risk of any subsequent credit loss on the mortgage loans. Theliability associated with this risk totaled $271.9 million at March 31, 2006 and $169.8 million atDecember 31, 2005. The increase in this representation and warrantyreserve is due mainlyto securitizations in the current quarter together with an increase in loansales, which had more extensive representations and warranties than securitizations. The expenseassociated with the reserve for representations and warranties is recorded as acomponent of gain on sale of loans in the consolidated income statement.

***Securitization Credit Recourse***

When we securitize our mortgage loans, we may retainlimited credit risk. As described in our 2005 Annual Report, the degree towhich credit risk on the underlying loans is transferred through thesecuritization process depends on the structure of the securitization. OurPrime Mortgage Loans generally are securitized on a non-recourse basis, whilePrime Home Equity Loans and Nonprime Mortgage Loans generally are securitizedwith limited recourse for credit losses.

60

----

Ourexposure to credit losses related to our limited recourse securitizationactivities is limited to the carrying value of our subordinated interests andto the contractual limit of reimbursable losses under our corporate guaranteesless the recorded liability for such guarantees. These amounts atMarch 31, 2006 are as follows:

| ** **                                                   | ** ** | **March 31,  2006** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**  | ** ** |
| Subordinated  Interests:                                     |       |                     |       |   |   |
| Prime home equity residual securities                        |       |                     | $          | 790,965 |   |   |
| Prime home equity line of credit transferor’s  interest |       |                     | 420,297    |   |   |
| Nonprime residual securities                                 |       |                     | 416,494    |   |   |
| Prime residual securities                                    |       |                     | 54,387     |   |   |
| Subordinated mortgage-backed pass-through securities         |       |                     | 1,941      |   |   |
|                                                         |       |                     | $          | 1,684,084 |   |   |
| Corporate guarantees in  excess of recorded liability        |       |                     | $          | 386,222 |   |   |

 

Thecarrying value of the residual securities is net of expected future creditlosses.

Thetotal credit losses incurred for the quarters ended March 31, 2006 and2005 related to all of our mortgage loan sales activities are summarized asfollows:

| ** **                                                         | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**                 | ** ** |
| Nonprime  securitizations with retained residual interest          |       | $                                       | 24,005     |   | $ | 19,792 |   |
| Repurchased or  indemnified loans                                  |       | 12,616                                  |       | 8,305 |   |
| Prime home equity  securitizations with retained residual interest |       | 11,915                                  |       | 4,497 |   |
| Prime home equity  securitizations with corporate guarantee        |       | 2,542                                   |       | 436 |   |
| Nonprime  securitizations with corporate guarantee                 |       | 2,429                                   |       | 4,518 |   |
| VA losses in  excess of VA guarantee                               |       | 488                                     |       | 526 |   |
|                                                               |       | $                                       | 53,995     |   | $ | 38,074 |   |

 

***Portfolio LendingActivities***

As discussed in thepreceding section, “Detailed Line Item Discussion of Consolidated Revenue andExpense Items—*Net Interest Income and Provision for LoanLosses*,” we have a portfolio of mortgage loans held for investment,consisting primarily of Prime Mortgage and Prime Home Equity Loans, with unpaidprincipal balances that amounted to $68.8 billion at March 31, 2006. Thisportfolio is held primarily in our Bank. Of the amount held in the Bank, $3.8billion of Prime Home Equity Loans with combined loan-to-value ratios equal toor above 90% are covered by pool insurance policies that provides partialprotection against credit losses. Otherwise, after taking into considerationprimary mortgage insurance (which is generally required for conventional loanswith loan-to-value ratios greater than 80%), we generally retain full creditexposure on these loans.

We also provide short-termsecured mortgage-loan warehouse advances to various lending institutions, whichtotaled $3.1 billion at March 31, 2006. We incurred no credit lossesrelated to this activity during the quarter ended March 31, 2006.

***MortgageReinsurance***

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. 

61

----

As of March 31,2006, approximately $81.4 billion of mortgage loans in our servicing portfolioare covered by such mortgage reinsurance contracts. The reinsurance contractsplace limits on our maximum exposure to losses. At March 31, 2006, themaximum aggregate losses under the reinsurance contracts was limited to $724.4million. We are required to pledge securities to cover this potentialliability. For the three months ended March 31, 2006, we did notexperience any losses under our reinsurance contracts.

***Mortgage Loans Heldfor Sale***

At March 31, 2006,mortgage loans held for sale amounted to $32.1 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 CreditRisk***

We have exposure to creditloss in the event of contractual non-performance by our trading counterpartiesand counterparties to our various over-the-counter derivative financialinstruments. We manage this credit risk by selecting only counterparties webelieve to be financially strong, spreading the credit risk among many suchcounterparties and by placing contractual limits on the amount of unsecuredcredit extended to any single counterparty.

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at March 31, 2006, before and after collateralheld by us, was as follows:

| ** **                                        | ** ** | **March 31,  2006** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|
| ** **                                        | ** ** | **(in millions)**   | ** ** |
| Aggregate credit  exposure before collateral held |       |                     | $          | 701 |   |   |
| Less: collateral  held                            |       |                     | (362       | ) |   |
| Net aggregate unsecured  credit exposure          |       |                     | $          | 339 |   |   |

For the quarter ended March 31,2006, we incurred no credit losses due to non-performance of any of ourcounterparties.

**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.

| ** **                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in millions)**                  | ** ** |
| Beginning owned  servicing portfolio |       | $                                       | 1,081,189  |   | $ | 821,475 |   |
| Add: Loan  production                |       | 103,418                                 |       | 91,460 |   |
| Purchased MSRs (bulk acquisitions)   |       | 101                                     |       | 17,931 |   |
| Less: Runoff(1)                      |       | (58,229                                 | )          | (58,639 | ) |
| Ending owned  servicing portfolio    |       | 1,126,479                               |       | 872,227 |   |
| Subservicing  portfolio              |       | 26,172                                  |       | 21,178 |   |
| Total servicing portfolio            |       | $                                       | 1,152,651  |   | $ | 893,405 |   |
| MSR portfolio                        |       | $                                       | 1,024,220  |   | $ | 798,518 |   |
| Mortgage loans  owned                |       | 102,259                                 |       | 73,709 |   |
| Subservicing  portfolio              |       | 26,172                                  |       | 21,178 |   |
| Total servicing  portfolio           |       | $                                       | 1,152,651  |   | $ | 893,405 |   |

 

62

----

 

| ** **                                               | ** ** | **March 31,**     | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(in millions)** | ** ** |
| Composition of owned  servicing portfolio at period end: |       |                   |       |   |   |
| Conventional mortgage                                    |       | $                      | 910,349    |   | $ | 677,251 |   |
| Nonprime Mortgage                                        |       | 114,378                |       | 93,607 |   |
| Prime Home Equity                                        |       | 51,486                 |       | 49,014 |   |
| FHA-insured mortgage                                     |       | 37,112                 |       | 39,228 |   |
| VA-guaranteed mortgage                                   |       | 13,154                 |       | 13,127 |   |
| Total owned portfolio                                    |       | $                      | 1,126,479  |   | $ | 872,227 |   |
| Delinquent mortgage  loans(2):                           |       |                   |       |   |   |
| 30 days                                                  |       | 2.02                   | %          | 2.03 | % |
| 60 days                                                  |       | 0.64                   | %          | 0.57 | % |
| 90 days or more                                          |       | 1.02                   | %          | 0.71 | % |
| Total delinquent mortgage loans                          |       | 3.68                   | %          | 3.31 | % |
| Loans pending  foreclosure(2)                            |       | 0.47                   | %          | 0.43 | % |
| Delinquent mortgage  loans(2):                           |       |                   |       |   |   |
| Conventional                                             |       | 2.06                   | %          | 1.99 | % |
| Nonprime Mortgage                                        |       | 12.51                  | %          | 9.59 | % |
| Prime Home Equity                                        |       | 1.43                   | %          | 0.97 | % |
| Government                                               |       | 11.61                  | %          | 10.50 | % |
| Total delinquent mortgage loans                          |       | 3.68                   | %          | 3.31 | % |
| Loans pending  foreclosure(2):                           |       |                   |       |   |   |
| Conventional                                             |       | 0.21                   | %          | 0.22 | % |
| Nonprime Mortgage                                        |       | 2.35                   | %          | 1.84 | % |
| Prime Home Equity                                        |       | 0.06                   | %          | 0.05 | % |
| Government                                               |       | 1.08                   | %          | 1.14 | % |
| Total loans  pending foreclosure                         |       | 0.47                   | %          | 0.43 | % |

----

(1)          Runoff refers toprincipal repayments on loans.

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

We attribute the overallincrease in delinquencies in our servicing portfolio primarily to increases inthe loans in hurricane-affected areas, which contributed 27 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 $89.8 billion in available sources of short-term liquidity, whichrepresents an increase of $0.1 billion from December 31, 2005. We believewe have adequate financing capacity to meet our currently foreseeable needs.

As part of our strategiccapital management and as a cost effective means for financing growth, theCompany issued $500 million in callable floating-rate subordinated notes duringthe third quarter of 2005. These subordinated notes are eligible for Tier 2regulatory capital treatment and represent an efficient and non-dilutive meansfor supporting the Company’s capital management efforts. Other capital raising 

63

----

alternativesunder consideration to address future needs include various non-dilutivesecurities that receive a high degree of equity treatment by regulators, creditrating agencies or both.

At March 31,2006 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:

| ** **              | ** ** | **March 31, 2006**                     | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **              | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **              | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage Capital |       |                                             | 5.0        | % |   |   | 6.8 | % |   | $ | 13,187,557 |   |   | 7.2 | % |   | $ | 5,597,873 |   |
| Risk-Based Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                  |       |                                             | 6.0        | % |   |   | 11.6 | % |   | $ | 13,187,557 |   |   | 12.0 | % |   | $ | 5,597,873 |   |
| Total                   |       |                                             | 10.0       | % |   |   | 12.7 | % |   | $ | 14,477,045 |   |   | 12.3 | % |   | $ | 5,732,138 |   |

----

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

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

----

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

**Cash Flows**

Cash flows provided by operatingactivities was $3.3 billion for the three months ended March 31, 2006,compared to $0.2 billion for the three months ended March 31, 2005. The increasein net cash flow provided by operations for the three months ended March 31,2006 compared to the three months ended March 31, 2005 was primarily dueto a $7.6 billion net increase in cash provided related to mortgage loans. Inthe quarter ended March 31, 2006 proceeds from the sales of mortgage loansexceeded funds used to originate and purchase mortgage loans by$4.5 billion. In the quarter ended March 31, 2005 funds used tooriginate and purchase mortgage loans exceeded proceeds from the sales ofmortgage loans by $3.1 billion. This increase in cash provided byoperations was partially offset by a $3.4 billion increase in cash used tosettle trading securities.

Net cash used by investingactivities was $2.5 billion for the three months ended March 31, 2006,compared to $18.1 billion for the three months ended March 31, 2005. Thedecrease in net cash used in investing activities was attributable to a $3.8billion decrease in cash used to fund loans held for investment, combined witha $1.9 billion decrease in cash used to fund investments in other financialinstruments and a $9.7 billion decrease in securities purchased underagreements to resell, securities borrowed and federal funds sold.

Net cash provided byfinancing activities for the three months ended March 31, 2006 totaled$0.8 billion, compared to $17.9 billion for the three months ended March 31,2005. The decrease in cash provided by financing activities was comprised of a$15.1 billion net decrease in short-term borrowings, including securities soldunder agreements to repurchase and a $2.3 billion decrease in long-term debt.

64

----

**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 a securitization,we customarily provide representations and warranties with respect to themortgage loans transferred. In addition, we generally retain the right toservice 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 quarter ended March 31,2006, we securitized $8.5 billion in Nonprime Mortgage and Prime Home EquityLoans with limited recourse for credit losses. Our exposure to credit lossesrelated to our limited recourse securitization activities is limited to thecarrying value of our subordinated interests and to the contractual limit ofreimbursable losses under our corporate guarantees less the recorded liabilityfor such guarantees. For a further discussion of our exposure to credit risk,see the section in this Report entitled “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Credit Risk Management.”

We do not believe that anyof our off-balance sheet arrangements have or are reasonably likely to have acurrent or future material effect on our financial condition, results ofoperations, liquidity, capital expenditures or capital resources.

***Contractual Obligations***

Thefollowing table summarizes our significant contractual obligations atMarch 31, 2006, with the exception of short-term borrowing arrangementsand pension and post-retirement benefit plans.

| ** **           | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|----------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| ** **           | ** ** | **(in thousands)**         | ** ** |
| **Obligations:**     |       |                            |       |               |       |               |       |                             |       |      |       |
| Notes payable        |       | $                               | 18,087,669 |               | $          | 27,544,857         |       | $                                | 11,446,886 |      | $          | 1,991,529 |   | $ | 59,070,941 |   |
| Time deposits        |       | $                               | 17,681,879 |               | $          | 4,144,440          |       | $                                | 1,564,443  |      | $          | 1,455,840 |   | $ | 24,846,602 |   |
| Operating leases     |       | $                               | 169,233    |               | $          | 249,931            |       | $                                | 111,418    |      | $          | 31,900 |   | $ | 562,482 |   |
| Purchase obligations |       | $                               | 151,124    |               | $          | 12,931             |       | $                                | 5,242      |      | $          | 668 |   | $ | 169,965 |   |

 

As of March 31, 2006, the Company had undisbursedhome equity lines of credit and construction loan commitments of $7.5 billionand $1.4 billion, respectively. As of March 31, 2006, outstandingcommitments to fund mortgage loans totaled $42.3 billion, outstandingcommitments to sell mortgage loans totaled $31.2 billion and outstandingcommitments to buy mortgage loans totaled $18.5 billion.

65

----

In connection with theCompany’s underwriting activities, the Company had commitments to purchase andsell new issues of securities aggregating $130.2 million and $62.4 million atMarch 31, 2006, respectively.

**Prospective Trends**

***United StatesMortgage Market***

Over the last decade,total mortgage indebtedness in the United States has grown at an average annualrate of 9%. We believe that continued population growth, ongoing developmentsin the mortgage market and the prospect of relatively low interest rates supportgrowth in the market for the foreseeable future. Some of the ongoingdevelopments in the mortgage market that should fuel its growth includegovernment-sponsored programs targeted to increase homeownership in low-incomeand minority communities, the growth in nonprime lending, the growth of primehome equity lending as a major form of consumer finance and the increasingefficiency of the secondary mortgage market that lowers the overall cost ofhomeownership.

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

Today, large andsophisticated financial institutions dominate the residential mortgage industry.According to the trade publication *InsideMortgage Finance*, the top 30 originators produced 91% of all loansoriginated during the quarter ended March 31, 2006, as compared to 90% forduring the quarter ended December 31, 2005. 

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

| **Institution**             | ** ** | ** **             | ** ** | **Three Months Ended  March 31, 2006** | ** ** | **Three Months Ended  December 31, 2005** | ** ** |
|-----------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                  | ** ** | **(in billions)** | ** ** |
| *Countrywide*               |       |                   | $          | 103                                                        |       |                                                          |       | $ | 133 |   |   |
| Wells Fargo Home  Mortgage  |       |                   | 91         |                                                       |       |                                                          | 117        |   |   |
| Washington Mutual           |       |                   | 52         |                                                       |       |                                                          | 60         |   |   |
| Chase Home Finance          |       |                   | 41         |                                                       |       |                                                          | 45         |   |   |
| CitiMortgage(1)             |       |                   | 36         |                                                       |       |                                                          | —     |   |   |
| Bank of America Mortgage(1) |       |                   | —     |                                                       |       |                                                          | 40         |   |   |
| Total for Top Five          |       |                   | $          | 323                                                        |       |                                                          |       | $ | 395 |   |   |

----

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

66

----

We believe the consolidation trend will continue, asthe aforementioned market forces will continue to drive out weak competitors.We believe Countrywide will benefit from this trend through increased marketshare and 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***

***Housing values affect us in several positive ways: risinghousing values point to healthy demand for purchase-money mortgage financing; increasedaverage loan balances; and a reduction in the risk of loss on sale offoreclosed real estate in the event a loan defaults. However, as housing valuesappreciate, prepayments of existing mortgages tend to increase as mortgagorslook to monetize the additional equity in their homes. Over the last severalyears, the housing price index has significantly outpaced the consumer priceindex and growth in personal income. Consequently, we expect housing values toincrease at a slower rate in the coming years than in the past several years.Although there may be some markets that experience housing price depreciation,we believe that price depreciation will not occur nationwide. Over the longterm, we expect that housing appreciation will be positively correlated withboth consumer price inflation and growth in personal income.***

***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.

***Implementation ofNew Accounting Standards***

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.

67

----

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

·  different measurements of awards that containperformance or market conditions

·  distinguishment of awards between equity andliabilities based on guidance in Statement of Financial Accounting StandardsNo. 150 “Accounting for Certain Financial Instruments with Characteristicsof both Liability and Equity”.

SFAS 123R also provides for the use of alternativemodels to determine compensation cost related to stock option grants. The modelthe Company will use to value its employee stock based compensation is avariant of the Black-Scholes-Merton option pricing model. Adoption of SFAS 123Ris expected to have an effect of approximately $40 million net of tax relatedto the expensing of prior periods’ unamortized grants in 2006. The Companyadopted SFAS 123R on January 1, 2006.

In March 2006, theFASB issued Statement of Financial Accounting Standards No. 156, “Accountingfor Servicing of Financial Assets” (“SFAS 156”), which amends SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities.” (“SFAS 140”) SFAS 156 changes SFAS 140 by requiring thatMortgage Servicing Rights (“MSRs”) be initially recognized at their fair valueand by providing the option to either: (1) carry MSRs at fair value withchanges in fair value recognized in earnings; or (2) continue recognizingperiodic amortization expense and assess the MSRs for impairment as wasoriginally required by SFAS 140. This option may be applied by class ofservicing asset or liability. The subsequent measurement of MSRs at fair valueeliminates the need for entities that manage risks inherent in MSRs withderivatives to qualify for hedge accounting treatment under SFAS 133. SFAS 156is 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. This statementalso requires servicing rights to be measured initially at fair value andconsidered part of the proceeds received in exchange for the sale of assets. Wehave chosen to early adopt this standard in the current quarter and electedfair value accounting for our existing types of residential mortgage servicingrights. The carrying amount of mortgage servicing rights (“MSRs”) at December 31,2005 was adjusted on January 1, 2006 to reflect the change in measurementto fair value and is included as a cumulative-effect adjustment to retainedearnings as of January 1, 2006 in the amount of $67.1 million.

**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.

68

----

Forward-looking statementsgive management’s expectation about the future and are not guarantees. Wordslike “believe,” “expect,” “anticipate,” “promise,” “plan” and other expressionsor words of similar meanings, as well as future or conditional verbs such as “will,”“would,” “should,” “could,” or “may” are generally intended to identifyforward-looking statements. There are a number of factors, many of which arebeyond our control, that could cause actual results to differ significantlyfrom management’s expectations. Some of these factors are discussed below.

Readers are cautioned notto place undue reliance on forward-looking statements. Forward-lookingstatements speak only as of the date they are made. We do not undertake toupdate them to reflect changes that occur after the date they are made.

Factorsthat could cause actual results to differ materially from historical results orthose anticipated 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

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

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

·       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 we filewith 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 

69

----

document.Each of these factors could by itself, or together with one or more otherfactors, adversely affect our business, results of operations and/or financialcondition.

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

In response to this Item,the information set forth on pages 58 to 60 of this Form 10-Q isincorporated 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 theirevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective inensuring that material information relating to the Company, including ourconsolidated subsidiaries, is made known to the Chief Executive Officer andChief Financial Officer by others within those entities during the period inwhich this quarterly report on Form 10-Q was being prepared.

**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 March 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

70

----

**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 three months ended March 31, 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 |   |   |
| Total                   |       |       | 86,263     |                                                |       |                                         | $          | 35.42                                                                                                                             |       |                                                                                                                                 |       | n/a |   |   |   | n/a |   |   |

----

(1)          TheCompany has no publicly announced plans or programs to repurchase its stock.The shares indicated in this table represent only the withholding of a portionof restricted shares to cover taxes on vested restricted shares.

**Item 6.   *Exhibits***

(a)   *Exhibits*

See Index of Exhibits on page 73.

71

----

**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: May 9, 2006 | By:                                | /s/  STANFORD L. KURLAND |
|                    |                               | Stanford L.  Kurland |
| * *                | * *                           | *President  and Chief Operating Officer* |
| Dated: May 9, 2006 | By:                                | /s/  ERIC P. SIERACKI |
|                    |                               | Eric P. Sieracki |
|                    |                               | *Executive  Managing Director and  Chief Financial Officer* |

 

72

----

**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QMarch 31, 2006**

**INDEXOF EXHIBITS**

| ExhibitNo. | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.58       |       | Indenture, dated February 1, 2005, among the  Company, CHL and The Bank of New York, as Trustee.                                                                                                                                                                                            |
| 4.59*      |       | Form of Medium-Term  Notes, Series B (fixed-rate) of CFC (incorporated by reference to Exhibit  4.11 to the registration statement on Form S-3 of the Company and CHL (File  Nos. 333-131707, 333-131707-01, 333-131707-02 and 333-131707-03), filed with  the SEC on February 9, 2006).    |
| 4.60*      |       | Form of Medium-Term  Notes, Series B (floating-rate) of CFC (incorporated by reference to Exhibit  4.12 to the registration statement on Form S-3 of the Company and CHL (File  Nos. 333-131707, 333-131707-01, 333-131707-02 and 333-131707-03), filed with  the SEC on February 9, 2006). |
| +10.127*   |       | Amended and Restated  Annual Incentive Plan, dated as of June 16, 2005 (incorporated by reference  to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the  SEC on June 21, 2005).                                                                                 |
| +10.128*   |       | Supplemental Savings and  Investment Deferred Compensation Plan, dated as of  December 30, 2005, effective as of February 1, 2006 (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed  with the SEC on January 6, 2006).                    |
| +10.129    |       | Executive Contribution  Account Plan.                                                                                                                                                                                                                                                       |
| 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.                                                                                                                                                                                                               |

----

*       Incorporatedby reference

+     Constitutesa management contract or compensatory plan or arrangement

73

----