10-Q 1 a2187147z10-q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

Or

o

 

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

For the transition period from                             to                            

Commission file number: 1-8422

Countrywide Financial Corporation
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  26-2209742
(IRS Employer Identification No.)

4500 Park Granada, Calabasas, California
(Address of principal executive offices)

 

91302
(Zip Code)

(818) 225-3000
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):

  Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o    No ý

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

Class   Outstanding at August 8, 2008
Common Stock $0.01 par value   1,000

        The Registrant meets the conditions set forth in general instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.



COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q

June 30, 2008

TABLE OF CONTENTS

 
   
  Page

PART I. FINANCIAL INFORMATION

  1

Item 1.

 

Financial Statements:

   

 

Consolidated Balance Sheets—June 30, 2008 and December 31, 2007

  1

 

Consolidated Statements of Operations—Three and Six Months Ended June 30, 2008 and 2007

  2

 

Consolidated Statement of Changes in Shareholders' Equity—Six Months Ended June 30, 2008 and 2007

  3

 

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2008 and 2007

  4

 

Notes to Consolidated Financial Statements

  5

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  55

 

Overview

  55

 

Results of Operations Comparison—Quarters Ended June 30, 2008 and 2007

  60

 

Results of Operations Comparison—Six Months Ended June 30, 2008 and 2007

  68

 

Liquidity and Capital Resources

  75

 

Credit Risk Management

  78

 

Loan Servicing

  91

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

  92

 

Prospective Trends

  94

 

Regulatory Trends

  95

 

Accounting Developments

  96

 

Factors That May Affect Our Future Results

  98

Item 4.

 

Controls and Procedures

  99

PART II. OTHER INFORMATION

 
100

Item 1.

 

Legal Proceedings

  100

Item 6.

 

Exhibits

  100


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
  June 30,
2008
  December 31,
2007
 
 
  (Unaudited)
 
 
  (in thousands, except share data)
 

ASSETS

             

Cash

  $ 6,650,317   $ 8,810,399  

Mortgage loans held for sale (includes $8,638,178 carried at estimated fair value at June 30, 2008)

    11,816,362     11,681,274  

Trading securities owned, at estimated fair value

    1,193,001     14,504,563  

Trading securities pledged as collateral, at estimated fair value

        6,838,044  

Securities purchased under agreements to resell, securities borrowed and federal funds sold

    6,649,086     9,640,879  

Loans held for investment, net of allowance for loan losses of $5,035,651 and $2,399,491 at June 30, 2008 and December 31, 2007, respectively (includes $46,120 carried at estimated fair value at June 30, 2008)

    94,230,990     98,000,713  

Investments in other financial instruments, at estimated fair value

    18,847,997     25,817,659  

Mortgage servicing rights, at estimated fair value

    18,402,390     18,958,180  

Premises and equipment, net

    1,539,200     1,564,438  

Other assets

    12,747,151     12,550,775  
           
 

Total assets

  $ 172,076,494   $ 208,366,924  
           

LIABILITIES

             

Deposit liabilities

  $ 62,811,922   $ 60,200,599  

Securities sold under agreements to repurchase

    3,544,580     18,218,162  

Trading securities sold, not yet purchased, at estimated fair value

    31,415     3,686,978  

Notes payable (includes $1,212,252 carried at estimated fair value at June 30, 2008)

    82,335,591     97,227,413  

Accounts payable and accrued liabilities

    10,651,933     10,194,358  

Income taxes payable

    2,280,985     4,183,543  
           
 

Total liabilities

    161,656,426     193,711,053  
           

Commitments and contingencies

         

SHAREHOLDERS' EQUITY

             

Preferred stock, par value $0.05—authorized, 1,500,000 shares; issued and outstanding at June 30, 2008 and December 31, 2007, 20,000 shares of 7.25% Series B non-voting convertible cumulative shares with a total liquidation preference of $2,000,000

    1     1  

Common stock, par value $0.05—authorized, 1,000,000,000 shares; issued, 583,256,956 shares and 578,881,566 shares at June 30, 2008 and December 31, 2007, respectively; outstanding 583,256,956 shares and 578,434,243 shares at June 30, 2008 and December 31, 2007, respectively

    29,163     28,944  

Additional paid-in capital

    4,223,513     4,155,724  

Retained earnings

    7,208,574     10,644,511  

Accumulated other comprehensive loss

    (1,041,183 )   (173,309 )
           
 

Total shareholders' equity

    10,420,068     14,655,871  
           
 

Total liabilities and shareholders' equity

  $ 172,076,494   $ 208,366,924  
           

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

1


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2008   2007   2008   2007  
 
  (Unaudited)
 
 
  (in thousands, except per share data)
 

Revenues

                         
 

(Loss) gain on sale of loans and securities

  $ (126,942 ) $ 1,493,458   $ 162,369   $ 2,727,562  
 

Interest income

    2,462,546     3,499,644     5,269,105     6,851,626  
 

Interest expense

    (1,806,595 )   (2,771,648 )   (3,881,834 )   (5,392,693 )
                   
   

Net interest income

    655,951     727,996     1,387,271     1,458,933  
 

Provision for loan losses

    (2,330,925 )   (292,924 )   (3,832,277 )   (444,886 )
                   
   

Net interest (expense) income after provision for loan losses

    (1,674,974 )   435,072     (2,445,006 )   1,014,047  
                   
 

Loan servicing fees and other income from mortgage servicing rights and retained interests

    1,337,849     1,421,255     2,744,258     2,808,544  
 

Realization of expected cash flows from mortgage servicing rights

    (667,652 )   (857,125 )   (1,421,278 )   (1,657,007 )
 

Change in fair value of mortgage servicing rights

    1,896,008     1,177,330     435,295     1,231,513  
 

Recovery (impairment) of retained interests

    35,280     (268,117 )   (705,740 )   (697,718 )
 

Servicing Hedge losses

    (2,624,321 )   (1,373,089 )   (619,914 )   (1,486,827 )
                   
   

Net loan servicing fees and other income from mortgage servicing rights and retained interests

    (22,836 )   100,254     432,621     198,505  
                   
 

Net insurance premiums earned

    484,766     352,384     973,595     686,561  
 

Realized loss on available for sale investment securities

    (467,808 )   (4,889 )   (491,880 )   (3,886 )
 

Other

    184,956     172,118     424,337     331,384  
                   
   

Total revenues

    (1,622,838 )   2,548,397     (943,964 )   4,954,173  
                   

Expenses

                         
 

Compensation

    996,848     1,109,016     2,050,833     2,184,424  
 

Occupancy and other office

    249,169     269,017     491,948     533,230  
 

Insurance claims

    366,469     154,769     722,120     212,074  
 

Advertising and promotion

    65,638     79,540     138,898     149,557  
 

Other

    514,874     271,357     960,300     509,395  
                   
   

Total expenses

    2,192,998     1,883,699     4,364,099     3,588,680  
                   

(Loss) earnings before income taxes

    (3,815,836 )   664,698     (5,308,063 )   1,365,493  
 

(Benefit) provision for income taxes

    (1,485,737 )   179,630     (2,084,911 )   446,444  
                   
   

NET (LOSS) EARNINGS

  $ (2,330,099 ) $ 485,068   $ (3,223,152 ) $ 919,049  
                   

(Loss) earnings per share

                         
 

Basic

  $ (4.07 ) $ 0.83   $ (5.68 ) $ 1.57  
 

Diluted

  $ (4.07 ) $ 0.81   $ (5.68 ) $ 1.53  

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

2


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

 
   
  Common Stock    
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Convertible
Preferred
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
   
 
 
  Shares   Amount   Total  
 
  (Unaudited)
 
 
  (in thousands, except share data)
 

Balance at December 31, 2006

  $     585,182,298   $ 29,273   $ 2,154,438   $ 12,151,691   $ (17,556 ) $ 14,317,846  

Remeasurement of income taxes payable upon adoption of FIN 48

                    (12,719 )       (12,719 )
                               

Balance as adjusted, January 1, 2007

        585,182,298     29,273     2,154,438     12,138,972     (17,556 )   14,305,127  

Comprehensive income:

                                           
 

Net earnings for the period

                    919,049         919,049  
 

Other comprehensive income (loss), net of tax:

                                           
   

Net unrealized losses from available-for-sale securities

                        (130,123 )   (130,123 )
   

Net change in foreign currency translation adjustment

                        9,237     9,237  
   

Change in unfunded liability relating to defined benefit plans

                        2,214     2,214  
                                           
     

Total comprehensive income

                                        800,377  
                                           

Issuance of common stock pursuant to stock-based compensation

        9,887,079     502     226,734             227,236  

Excess tax benefit related to stock-based compensation plans

                68,348             68,348  

Issuance of common stock, net of treasury stock

        652,447     33     25,862             25,895  

Repurchase and cancellation of common stock

        (21,503,512 )   (1,075 )   (862,481 )           (863,556 )

Cash dividends paid—$0.30 per common share

                    (177,532 )       (177,532 )
                               

Balance at June 30, 2007

  $     574,218,312   $ 28,733   $ 1,612,901   $ 12,880,489   $ (136,228 ) $ 14,385,895  
                               

Balance at December 31, 2007

  $ 1     578,434,243   $ 28,944   $ 4,155,724   $ 10,644,511   $ (173,309 ) $ 14,655,871  

Cumulative effect of adoption of SFAS 159

                    34,249     (2,197 )   32,052  
                               

Balance as adjusted, January 1, 2008

    1     578,434,243     28,944     4,155,724     10,678,760     (175,506 )   14,687,923  

Comprehensive income:

                                           
 

Net loss for the period

                    (3,223,152 )       (3,223,152 )
 

Other comprehensive (loss), income net of tax:

                                           
   

Net unrealized losses from available-for-sale securities

                        (864,910 )   (864,910 )
   

Net change in foreign currency translation adjustment

                        (2,410 )   (2,410 )
   

Change in unfunded liability relating to defined benefit plans

                        1,643     1,643  
                                           
     

Total comprehensive loss

                                        (4,088,829 )
                                           

Issuance of common stock pursuant to stock-based compensation

        4,253,286     191     68,729             68,920  

Excess tax benefit related to stock-based compensation plans

                (4,361 )           (4,361 )

Issuance of common stock, net of treasury stock

        569,427     28     3,421             3,449  

Cash dividends paid—$0.30 per common share

                    (174,534 )       (174,534 )

Cash dividends paid—$3,625 per preferred share

                    (72,500 )       (72,500 )
                               

Balance at June 30, 2008

  $ 1     583,256,956   $ 29,163   $ 4,223,513   $ 7,208,574   $ (1,041,183 ) $ 10,420,068  
                               

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

3


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Six Months Ended
June 30,
 
 
  2008   2007  
 
  (Unaudited)
 
 
  (in thousands)
 

Cash flows from operating activities:

             
 

Net (loss) earnings

  $ (3,223,152 ) $ 919,049  
   

Adjustments to reconcile net (loss) earnings to net cash provided (used) by operating activities:

             
     

Gain on sale of loans and securities

    (162,369 )   (2,727,562 )
     

Accretion of discount on securities

    (172,748 )   (260,618 )
     

Interest capitalized on loans

    (307,333 )   (456,973 )
     

Amortization of deferred premiums, discounts, fees and costs, net

    (16,001 )   209,442  
     

Accretion of fair value adjustments and discount on notes payable

    (24,694 )   (29,348 )
     

Change in fair value of hedged notes payable and related interest-rate and foreign-currency swaps

    (58,207 )   (9,787 )
     

Amortization of deferred fees on time deposits

    13,521     11,113  
     

Provision for loan losses

    3,832,277     444,886  
     

Changes in MSR value due to realization of expected cash flows from mortgage servicing rights

    1,421,278     1,657,007  
     

Change in fair value of mortgage servicing rights

    (435,295 )   (1,231,513 )
     

Impairment of retained interests and accrual for funding obligation under rapid amortization

    729,283     759,529  
     

Servicing Hedge losses

    619,914     1,486,827  
     

Write-down of other than temporary impairment on available-for-sale securities

    497,963      
     

Stock-based compensation expense

    56,385     48,353  
     

Depreciation and other amortization

    147,849     151,188  
     

Provision for restructuring costs

    16,073      
     

(Benefit) provision for deferred income taxes

    (2,095,292 )   836,807  
     

Origination and purchase of loans held for sale

    (122,810,313 )   (242,781,618 )
     

Proceeds from sale and principal repayments of loans held for sale

    120,459,780     236,898,474  
     

Decrease (increase) in trading securities

    20,154,728     (1,207,318 )
     

Decrease in other assets

    847,619     420,705  
     

(Decrease) increase in trading securities sold, not yet purchased, at fair value

    (3,655,563 )   731,154  
     

(Decrease) increase in accounts payable and accrued liabilities

    (1,282,812 )   180,812  
     

Increase (decrease) in income taxes payable

    719,942     (473,482 )
           
       

Net cash provided (used) by operating activities

    15,272,833     (4,422,873 )
           

Cash flows from investing activities:

             
 

Decrease in securities purchased under agreements to resell, federal funds sold and securities borrowed

    2,991,793     884,808  
 

(Additions) repayments to loans held for investment, net

    (3,833,715 )   5,158,051  
 

Additions to investments in other financial instruments

    (3,998,340 )   (18,664,324 )
 

Proceeds from sale and repayment of investments in other financial instruments

    8,891,282     2,930,650  
 

Sale (purchases) of mortgage servicing rights, net

    1,300,151     (184,511 )
 

Purchases of premises and equipment, net

    (70,218 )   (135,173 )
           
   

Net cash provided (used) by investing activities

    5,280,953     (10,010,499 )
           

Cash flows from financing activities:

             
 

Net increase in deposit liabilities

    2,597,802     4,703,046  
 

Net (decrease) increase in securities sold under agreements to repurchase

    (14,673,582 )   4,073,347  
 

Net (decrease) increase in short-term borrowings

    (2,841,746 )   3,510,080  
 

Issuance of long-term debt

    500,000     24,026,503  
 

Repayment of long-term debt

    (8,060,931 )   (21,364,797 )
 

(Expense) benefit related to stock-based compensation

    (4,361 )   68,535  
 

Repurchase and cancellation of common stock

        (863,556 )
 

Issuance of common stock

    15,984     204,778  
 

Payment of dividends

    (247,034 )   (177,532 )
           
   

Net cash (used) provided by financing activities

    (22,713,868 )   14,180,404  
           

Net decrease in cash

    (2,160,082 )   (252,968 )

Cash at beginning of period

    8,810,399     1,407,000  
           
   

Cash at end of period

  $ 6,650,317   $ 1,154,032  
           

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 of Presentation

        Countrywide Financial Corporation ("Countrywide" or "CFC") is a holding company which, through its subsidiaries (collectively, the "Company"), is engaged in real estate finance-related businesses, including mortgage banking, banking and mortgage warehouse lending, dealing in securities and insurance underwriting. As discussed in Note 2—Subsequent Events—Merger and Subsequent Transactions with Bank of America Corporation, effective on July 1, 2008, the Company became a wholly-owned subsidiary of Bank of America Corporation ("Bank of America").

        These financial statements have been prepared assuming that Countrywide will continue to operate as a stand-alone entity and do not take into account any purchase accounting adjustments that may be recorded pursuant to Bank of America's acquisition of the Company, which was effective on July 1, 2008. These financial statements also do not reflect accounting changes that may be made to conform Countrywide's accounting policies to those of Bank of America.

        The accompanying consolidated financial statements have been prepared in compliance with U.S. generally accepted accounting principles for interim financial information and with the Securities and Exchange Commission's instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

        Preparation of financial statements in compliance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that materially affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial 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 fair presentation have been included. Operating results for the periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, including a description of the Company's significant accounting policies, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007 (the "2007 Annual Report").

        Certain amounts included in the prior period consolidated financial statements have been reclassified to conform to the current year presentation.


Note 2—Subsequent Events—Merger and Subsequent Transactions with Bank of America Corporation

        On January 11, 2008, Countrywide and Bank of America entered into an Agreement and Plan of Merger, pursuant to which Countrywide would merge (the "Merger") with and into Red Oak Merger Corporation, a wholly-owned merger subsidiary of Bank of America ("Merger Sub"), with Merger Sub continuing as the surviving company. The details of this agreement are contained in a Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2008, and the Amended Registration Statement on Form S-4 of Bank of America filed on May 28, 2008.

        The Merger was concluded on July 1, 2008. On July 1, 2008, Merger Sub was renamed Countrywide Financial Corporation. As the result of the Merger, Countrywide common stock was converted into 0.1822 of a share of Bank of America common stock plus an amount of cash in lieu of

5


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


any fractional share and all shares of the Company's 7.25% Series B Non-Voting Convertible Preferred Stock were cancelled.

        The Company notified the New York Stock Exchange of the conversion of its shares and related preferred stock purchase rights, requested that its common stock and preferred stock purchase rights be delisted and cease to trade at the close of business on June 30, 2008, and that the NYSE submit to the SEC Form 25s to report that the Company's shares of common stock and preferred stock purchase rights are no longer listed on the NYSE. The NYSE filed the Form 25s with the SEC on July 1, 2008.

        Following completion of the Merger, the Company sold assets to other subsidiaries of Bank of America and used proceeds from these sales to repay its unsecured revolving lines of credit and bank loans. The Company expects to record no material gain or loss on these transactions after giving effect to purchase price adjustments.

    The Company sold two entities that own all of the partnership interests in Countrywide Home Loans Servicing, LP ("Servicing LP") to NB Holdings Corporation ("NBHC") for approximately $19.7 billion, subject to certain adjustments. At June 30, 2008, Servicing LP's assets included approximately $15.3 billion of Mortgage Servicing Rights ("MSRs") and $4.4 billion of reimbursable servicing advances

    The Company sold a pool of residential mortgage loans held by Countrywide Home Loans ("CHL") to NBHC for approximately $9.5 billion, subject to certain adjustments. The pool of residential mortgage loans included first and second lien mortgages, home equity line of credit loans, and construction loans

    The Company novated to Bank of America, N.A. a portfolio of derivative instruments held by CHL in exchange for $1.5 billion

    The Company sold a pool of commercial mortgage loans held by Countrywide Commercial Real Estate to NBHC for approximately $238 million, subject to certain adjustments

    The Company sold a pool of securities to Blue Ridge Investments, LLC for approximately $147 million. The pool of securities included asset-backed securities and mortgage-backed securities (MBS) held by Countrywide Securities Corporation ("CSC")

    The Company terminated and repaid its unsecured revolving lines of credit and bank loans, including interest and fees, with approximately $11.5 billion.

        Details of these subsequent events and other transactions, are contained in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 8, 2008.


Note 3—Adoption of New Accounting Pronouncements

        In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, ("SFAS 157"). SFAS 157 provides a framework for measuring fair value when such measurements are used for accounting purposes. The framework focuses on an exit price in the principal (or, alternatively, the most advantageous) market accessible in an orderly transaction between willing market participants. SFAS 157 establishes a three-tiered fair value hierarchy based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market and Level 3 representing estimated values based on significant unobservable inputs). Under SFAS 157,

6


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


related disclosures are segregated for assets and liabilities measured at fair value based on the level used within the hierarchy to determine their fair values. The Company adopted SFAS 157 on its effective date of January 1, 2008 and there was no financial impact. However, as permitted under FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157," the Company elected to defer the application of SFAS 157 to certain nonfinancial assets and liabilities, which are not measured at fair value on a recurring basis, until January 1, 2009.

        In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, ("SFAS 159"). SFAS 159 permits fair value accounting to be irrevocably elected for most financial assets and liabilities on an individual contract basis at the time of acquisition or remeasurement event date. Upon adoption of SFAS 159, fair value accounting may also be elected for existing financial assets and liabilities. For those instruments for which fair value accounting is elected, changes in fair value will be recognized in earnings and fees and costs associated with origination or acquisition will be recognized as incurred rather than deferred. The Company adopted SFAS 159 on its effective date of January 1, 2008 and the financial impact upon adoption was an increase in beginning retained earnings of $34.2 million. See Note 5—Fair Value for further discussion.

        In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39, ("FSP FIN 39-1"). FSP FIN 39-1 amends certain paragraphs of FASB Interpretation Number 39, Offsetting of Amounts Related to Certain Contracts,—an interpretation of APB Opinion No. 10 and FASB Statement No. 105 ("FIN 39") to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. Upon adoption on the effective date of January 1, 2008, the Company changed its accounting policy to offset the right to reclaim or obligation to return cash collateral against fair value amounts recognized for derivative instruments under master netting arrangements. Adoption of FSP FIN 39-1 resulted in a reduction in total assets of $3.4 billion at December 31, 2007.

        In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109 ("SAB 109"). SAB 109 supersedes Staff Accounting Bulletin No. 105 ("SAB 105"), Application of Accounting Principles to Loan Commitments. It clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. However, it retains the guidance in SAB 105 that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The guidance is effective on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. This guidance generally has resulted in higher fair values being recorded upon initial recognition of derivative interest rate lock commitments. The initial and subsequent changes in value of interest rate lock commitments are a component of gain on sale of loans and securities. The effect of the adoption of SAB 109 was to increase gain on sale of loans and securities by $216.0 million. This amount represents the revenue recognized at the time the loan commitment was issued that is included in the value of the interest rate lock commitments or Mortgage Loan Inventory at June 30, 2008.

7


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 4—(Loss) Earnings Per Share

        Basic (loss) earnings per share is determined using net (loss) earnings (adjusted for dividends declared on preferred stock) divided by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing net (loss) earnings attributable to common shareholders by the weighted-average shares outstanding, assuming all potentially dilutive common shares were issued. The Company has potentially dilutive shares in the form of employee stock-based compensation instruments, convertible debentures and convertible preferred stock. As detailed in Note 18—Shareholders' Equity—Series B Convertible Preferred Stock, included in the consolidated financial statements of the 2007 Annual Report, the Company issued $2.0 billion of convertible preferred stock on August 22, 2007.

        The following table summarizes the basic and diluted (loss) earnings per share calculations for the periods indicated:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2008   2007   2008   2007  
 
  (in thousands, except per share data)
 

Net (loss) earnings:

                         
 

Net (loss) earnings

  $ (2,330,099 ) $ 485,068   $ (3,223,152 ) $ 919,049  
 

Dividends on convertible preferred stock

    (36,250 )       (72,500 )    
                   
 

Net (loss) earnings attributable to common shareholders

  $ (2,366,349 ) $ 485,068   $ (3,295,652 ) $ 919,049  
                   

Weighted-average shares outstanding:

                         
 

Basic weighted-average number of common shares outstanding

    581,958     583,669     580,649     585,901  
 

Effect of dilutive securities:

                         
   

Dilutive stock-based compensation instruments

        11,871         12,963  
                   
 

Diluted weighted-average number of common shares outstanding

    581,958     595,540     580,649     598,864  
                   

Net (loss) earnings per common share:

                         
 

Basic (loss) earnings per share

  $ (4.07 ) $ 0.83   $ (5.68 ) $ 1.57  
                   
 

Diluted (loss) earnings per share

  $ (4.07 ) $ 0.81   $ (5.68 ) $ 1.53  
                   

        Due to the loss attributable to common shareholders for the three and six months ended June 30, 2008, no potentially dilutive shares are included in loss per share calculation as including such shares in the calculation would be anti-dilutive. During the three and six months ended June 30, 2007, stock appreciation rights and options to purchase 172,011 shares and 26,390 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

8


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 5—Fair Value

        The Company's financial statements include assets and liabilities that are measured based on their estimated fair values. The application of fair value estimates may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its estimated fair value as discussed in the following paragraphs.

        As discussed in Note 3—Adoption of New Accounting Pronouncements, effective January 1, 2008, the Company adopted two pronouncements affecting the Company's fair value measurements and accounting: SFAS 157 and SFAS 159.

Transition Adjustment

        Management identified existing mortgage loans held for sale and commitments to purchase mortgage loans within the Capital Markets Segment to be accounted for at estimated fair value for consistency with its peers who generally use fair value accounting as well as to reduce the burden of compliance with the requirements for hedge accounting. Such loans represented 2% of mortgage loans held for sale at the time of adoption of SFAS 159.

        Management elected to account for certain outstanding asset-backed secured financings and the mortgage loans securing such financings at their estimated fair values to eliminate potential timing differences between recognition of changes in the estimated fair value of the loans securing these borrowings (which had been recorded at the lower of amortized cost or estimated fair value) and the estimated fair value of the borrowings (which had been recorded at amortized cost). This election was made for mortgage-backed secured financings collateralized by mortgage loans where the secondary market for the securities backed by the loans was disrupted. At the time of adoption, such borrowings represented 25% of mortgage-backed secured financings and the mortgage loans securing such borrowings represented 23% of mortgage loans held for sale.

        Management elected fair value accounting for those portions of its investments in municipal bonds included in its available-for-sale securities investment portfolio managed by nonaffiliated investment managers to improve the operational efficiency of using investment managers. Such investments represented 1% of the securities investment portfolio at the time of adoption.

9


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        As a result of these elections, the Company recorded a $34.2 million cumulative effect adjustment to opening retained earnings as summarized below:

 
   
  Transition Adjustments to    
 
 
  Carrying Value
Before Adoption
  Retained
Earnings
Gain/(Loss)
  Other
Comprehensive
Income
  Carrying Value
After Adoption
 
 
  (in thousands)
 

Assets:

                         
 

Mortgage loans held for sale(1)

  $ 2,897,216   $ 237         $ 2,897,453  
 

Investment in other financial instruments:

                         
   

Investment securities

    244,902     2,197   $ (2,197 )   244,902  
   

Interest rate lock commitments(2)

        432           432  
                       
   

Total assets

  $ 3,142,118               $ 3,142,787  
                       

Liabilities:

                         
 

Notes payable:

                         
   

Asset-backed secured financings

  $ 2,353,250     51,060         $ 2,302,190  
 

Accounts payable and accrued liabilities:

                         
   

Interest rate lock commitments(2)

    51     51            
                     
   

Total liabilities

  $ 2,353,301               $ 2,302,190  
                       

Pre-tax cumulative-effect of adoption of the fair value option

          53,977              

Effect on income taxes payable

          (19,728 )            
                         

Cumulative effect of adoption of the fair value option

        $ 34,249              
                         

(1)
A lower of cost or market valuation allowance of $96.5 million was recorded as part of the basis of the loans accounted for at estimated fair value.

(2)
Interest rate lock commitments include commitments to originate or purchase mortgage loans that qualify as derivative financial instruments under SFAS 133 and commitments to purchase loans accounted for at estimated fair value under the fair value option.

Prospective Fair Value Accounting Elections

        Management identified certain new mortgage loans originated or purchased for sale in the Company's mortgage banking operations to be accounted for at estimated fair value so the changes in the fair value of such loans will be reflected in earnings as they occur to match the accounting to related hedging instruments, as well as to reduce the burden of compliance with the requirements for hedge accounting. The mortgage loans identified were those that have an existing active market (primarily agency-eligible mortgage loans). Such loans represented 85% and 86% of mortgage loans

10


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


originated or purchased and held for sale during the three and six months ended June 30, 2008, respectively.

Fair Value Measurements

        Gains (losses) from changes in estimated fair values included in earnings for financial statement items carried at estimated fair value pursuant to the fair value option are summarized below:

 
  Three Months
Ended
  Six Months
Ended
 
 
  June 30, 2008  
 
  (in thousands)
 

Assets:

             
 

Mortgage loans at fair value (1)

  $ (253,717 ) $ (623,275 )
 

Investments in other financial instruments:

             
   

Investment securities

    (5,741 )   (2,493 )
   

Interest rate lock commitments

    1,692     208  

Liabilities:

             
 

Notes Payable:

             
   

Asset-backed secured financings

    37,304     388,464  

(1)
$90.5 million and $187.0 million of the loss recognized on mortgage loans was related to changes in the credit risk of the loans for the three and six months ended June 30, 2008, respectively.

        Following is the fair value and related principal amount due upon maturity of assets and liabilities accounted for under the fair value option as of June 30, 2008:

 
  Fair Value   Principal Amount
Due Upon
Maturity
  Difference  
 
  (in thousands)
 

Assets:

                   
 

Mortgage loans:

                   
   

Current through 89 days delinquent

  $ 8,549,967   $ 9,079,690   $ (529,723 )
   

90 or more days delinquent

    134,331     260,822     (126,491 )
 

Investments in financial instruments:

                   
   

Investment securities

    358,390     340,485     17,905  

Liabilities:

                   
 

Notes Payable:

                   
   

Asset-backed secured financings

    1,212,252     1,672,721     (460,469 )

11


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Following is a summary of financial statement items that are measured at estimated fair value on a recurring basis—including assets measured under the fair value option as of June 30, 2008:

 
  Level 1   Level 2   Level 3   Netting Adjustments (1)   Total  
 
  (in thousands)
 

Assets:

                               
 

Mortgage loans

  $   $ 7,259,090   $ 1,425,208   $   $ 8,684,298  
 

Trading securities

    3     2,088,091     1,124,351     (2,019,444 )   1,193,001  
 

Investments in other financial instruments:

                               
   

Investment securities

    234,334     2,343,562     13,424,032         16,001,928  
   

Retained interests

            1,510,579         1,510,579  
   

Interest rate lock commitments(2)

            150,817         150,817  
   

Other derivative instruments

    15,300     4,184,110         (3,014,737 )   1,184,673  
                       
   

Total investments in other financial instruments

    249,634     6,527,672     15,085,428     (3,014,737 )   18,847,997  
                       
 

Mortgage servicing rights

            18,402,390         18,402,390  

Liabilities:

                               
 

Trading securities sold, not yet purchased

    3     1,960,835         (1,929,423 )   31,415  
 

Notes Payable:

                               
   

Asset-backed secured financings

            1,212,252         1,212,252  
 

Accounts payable and accrued liabilities:

                               
   

Interest rate lock commitments(2)

            43,868         43,868  
   

Other derivative instruments

        1,459,423         (1,306,119 )   153,304  

(1)
Amounts represent the netting of the impact of qualifying master netting agreements that allow the Company to settle positive and negative positions in accordance with FIN 39, and cash collateral held or placed with the same counterparties.

(2)
Interest rate lock commitments include commitments to originate or purchase mortgage loans that qualify as derivative financial instruments under SFAS 133 and commitments to purchase loans accounted for at estimated fair value under the fair value option (SFAS 159).

12


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Following is a summary of changes in balance sheet line items measured using Level 3 inputs:

 
  Three Months Ended June 30, 2008  
 
   
   
  Investments in Other
Financial Instruments
   
   
 
 
  Mortgage
Loans
  Trading
Securities
  Investment
Securities
  Retained
Interests
  Interest
Rate Lock
Commitments,
Net
  Mortgage
Servicing
Rights
  Total  
 
  (in thousands)
 

Assets:

                                           

Balance, March 31, 2008

  $ 2,411,044   $ 1,346,992   $ 14,658,098   $ 1,853,177   $ 216,105   $ 17,154,574   $ 37,639,990  
 

Total (losses) gains:

                                           
   

Included in earnings

    (116,542 )   (85,440 )   (457,703 )   (138,714 )   434,179     1,228,356     864,136  
   

Included in other comprehensive income

            (441,482 )   (32,288 )           (473,770 )
 

Purchases, issuances and settlements

    (814,467 )   (137,201 )   (334,881 )   (171,596 )       19,460     (1,438,685 )
 

Transfers to mortgage loans:

                                           
     

Level 2

                    (598,162 )       (598,162 )
     

Level 3

    (54,827 )               54,827          
                               

Balance, June 30, 2008

  $ 1,425,208   $ 1,124,351   $ 13,424,032   $ 1,510,579   $ 106,949   $ 18,402,390   $ 35,993,509  
                               

Changes in unrealized (losses) gains relating to assets still held at June 30, 2008

  $ (127,171 ) $ 41,432   $ (457,791 ) $ (152,158 ) $ 109,156   $ 1,896,007   $ 1,309,475  
                               

 

 
  Notes Payable:
Asset-backed
Secured
Financings
 
 
  (in thousands)
 

Liabilities:

       

Balance, March 31, 2008

  $ 1,692,472  
 

Total gains:

       
   

Included in earnings

    (37,304 )
 

Purchases, issuances and settlements

    (442,916 )
       

Balance, June 30, 2008

  $ 1,212,252  
       

Change in unrealized gains relating to liabilities still held at June 30, 2008

  $ 72,852  
       

13


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 
  Six Months Ended June 30, 2008  
 
   
   
  Investments in Other
Financial Instruments
   
   
 
 
  Mortgage
Loans
  Trading
Securities
  Investment
Securities
  Retained
Interests
  Interest
Rate Lock
Commitments,
Net
  Mortgage
Servicing
Rights
  Total  
 
  (in thousands)
 

Assets:

                                           

Balance, December 31, 2007

  $ 3,480,673   $ 1,924,558   $ 16,330,950   $ 3,358,756   $ 107,718   $ 18,958,180   $ 44,160,835  
 

Impact of SFAS 157 and SFAS 159 adoption

    237                 483         720  
                               

Balance, January 1, 2008

    3,480,910     1,924,558     16,330,950     3,358,756     108,201     18,958,180     44,161,555  
 

Total (losses) gains:

                                           
   

Included in earnings

    (574,725 )   (290,385 )   (491,735 )   (675,047 )   1,356,915     (985,983 )   (1,660,960 )
   

Included in other comprehensive income

            (1,369,547 )   (32,633 )           (1,402,180 )
 

Purchases, issuances and settlements

    (1,342,016 )   (509,822 )   (1,045,636 )   (1,140,497 )       430,193     (3,607,778 )
 

Transfers to mortgage loans:

                                           
     

Level 2

                    (1,497,128 )       (1,497,128 )
     

Level 3

    (138,961 )               138,961          
                               

Balance, June 30, 2008

  $ 1,425,208   $ 1,124,351   $ 13,424,032   $ 1,510,579   $ 106,949   $ 18,402,390   $ 35,993,509  
                               

Changes in unrealized (losses) gains relating to assets still held at June 30, 2008

  $ (509,978 ) $ (2,992 ) $ (491,789 ) $ (707,853 ) $ 1,252   $ 435,295   $ (1,276,065 )
                               

 

 
  Notes Payable:
Asset-backed
Secured
Financings
 
 
  (in thousands)
 

Liabilities:

       

Balance, December 31, 2007

  $ 2,353,250  
 

Impact of SFAS 157 and SFAS 159 adoption

    (51,060 )
       

Balance, January 1, 2008

    2,302,190  
 

Total gains:

       
   

Included in earnings

    (388,464 )
 

Purchases, issuances and settlements

    (701,474 )
       

Balance, June 30, 2008

  $ 1,212,252  
       

Change in unrealized gains relating to liabilities still held at June 30, 2008

  $ 423,968  
       

        Gains and losses from changes in the estimated fair value of mortgage loans held for sale, interest rate lock commitments ("IRLCs"), trading securities and asset-backed secured financings are included in gain on sale of loans and securities. Gains and losses from changes in the estimated fair value of investment securities are included in other income and in realized loss on available for sale securities. Gains and losses from changes in the estimated fair value of retained interests are included in impairment of retained interests. Gains and losses from changes in the estimated fair value of mortgage

14


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


servicing rights are included in realization of expected cash flows from mortgage servicing rights and change in fair value of mortgage servicing rights.

    Valuation Techniques

        For a complete discussion of valuation techniques used to value financial instruments, refer to Note 19—Fair Value of Financial Instruments to the consolidated financial statements included in the Company's 2007 Annual Report. The following describes the methods used by the Company in estimating the fair values of Level 3 financial statement items:

    Mortgage Loans

        The Company estimates the fair value of Level 3 loans based on relevant factors, including dealer price quotations, whole loan bid sheets, prices available for similar securities and valuation models intended to approximate the amounts that would be received from a third party. These techniques and related assumptions are used to approximate the whole loan price that would be received from an unaffiliated buyer.

        The Company regularly compares the values developed from our valuation models to executed trades to assure that the valuations are reflective of actual sale prices. However, due to the illiquidity of the mortgage marketplace prevalent at June 30, 2008, which resulted in a lack of executed trades that could be used to assure that the valuations are reflective of fair value, it was necessary to look for alternative sources of value, including the whole loan purchase market for similar loans, and to apply more judgment to the valuations of non-conforming prime, prime home equity and subprime (formerly known as nonprime) loans, which represented approximately 18% of mortgage loans originated or purchased for resale excluding loans secured by commercial real estate at June 30, 2008.

    Trading Securities

        Level 3 trading securities primarily represent collateralized mortgage obligations for which fair value is estimated using valuation models and observable and unobservable assumptions intended to approximate the amounts that would be received from an unaffiliated buyer.

    Investments in Other Financial Instruments:

            Investment Securities

            Mortgage-Backed Securities

            Fair value for Level 3 non-agency mortgage-backed securities, which consist primarily of collateralized mortgage obligations, is estimated using valuation models and observable and unobservable assumptions intended to approximate the amounts that would be received from an unaffiliated buyer.

            Retained Interests

            Fair value of retained interests, with the exception of interest-only securities and mortgage-backed securities, is estimated through the use of proprietary, "static" (single rate path) discounted cash flow models. The Company has incorporated mortgage prepayment and credit loss

15


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

    assumptions in its valuation models that it believes other major market participants would consider in deriving the fair value of such retained interests.

            Principal-Only Securities

            Fair value is estimated through the use of a proprietary, multiple rate path discounted cash flow model. The Company has incorporated mortgage prepayment assumptions in its valuation that it believes other major market participants would consider in deriving the fair value of principal-only securities.

            Interest-Only Securities

            Fair value is estimated through the use of a proprietary, multiple rate path discounted cash flow model. The Company has incorporated mortgage prepayment assumptions in its valuation model that it believes other major market participants would consider in deriving the fair value of interest-only securities.

            Interest Rate Lock Commitments

            Effective January 1, 2008, the Company adopted SAB 109, which is effective on a prospective basis for IRLCs issued or modified after December 31, 2007. For IRLCs issued or modified after December 31, 2007, the Company estimates the fair value of an IRLC based on the estimated fair value of the underlying mortgage loan less the commitment price adjusted for the probability that the mortgage loan will fund within the terms of the IRLC. The Company generally estimates the fair value of the underlying loan based on quoted market prices for securities backed by similar types of loans together with estimated servicing value adjusted for the estimated costs and profit margin associated with securitization to approximate the whole loan price that would be received from an unaffiliated buyer. The estimated probability of mortgage loan funding is based on the Company's historical experience and is adjusted to reflect the risk of variability in such probability using an option pricing model. If quoted market prices for relevant securities are not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar securities, and valuation models intended to approximate the amounts that would be received from a third party.

            For IRLCs issued before January 1, 2008, the Company estimates the fair value of an IRLC based on the change in estimated fair value of the underlying mortgage loan and the probability that the mortgage loan will fund within the terms of the IRLC. The change in fair value of the underlying mortgage loan is measured from the date the IRLC is issued. At the time of issuance the estimated fair value of an IRLC is zero. Subsequent to issuance, the value of an IRLC can be either positive or negative, depending on the change in value of the underlying mortgage loan. The Company generally estimates the fair value of the underlying loan based on quoted market prices for securities backed by similar types of loans. If quoted market prices are not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar instruments, and valuation models intended to approximate the amounts that would be received from a third party.

16


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

    Mortgage Servicing Rights

        The Company estimates the fair value of its MSRs using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value at each balance sheet date. The cash flow assumptions (which consider only contractual cash flows) and prepayment assumptions used in Countrywide's discounted cash flow model are based on market factors and encompass the historical performance of our MSRs. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds and discount rates (projected London Inter Bank Offering Rate ("LIBOR") plus option-adjusted spread). These variables can, and generally do, change from quarter to quarter as market conditions and projected interest rates change. The current market data utilized in the MSR valuation process and in the assessment of the reasonableness of the MSR valuation are obtained from peer group MSR valuation surveys, MSR market trades, MSR broker valuations and prices of interest-only securities.

        The cash flow model and underlying prepayment and interest rate models used to value the MSRs are subjected to validation in accordance with the Company's model validation policies. This process includes review of the theoretical soundness of the models and the related development process, back testing of actual results to model predictions, benchmarking to commercially available models and ongoing performance monitoring.

    Asset-Backed Secured Financings

        The Company estimates the fair value of Level 3 asset-backed secured financings based on relevant factors expected to reflect the amounts that would be received by an unaffiliated seller of the financings from an unaffiliated buyer, including dealer price quotations, prices available for similar instruments, and valuation models.

17


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Following is a summary of items that are measured at estimated fair value on a nonrecurring basis:

 
   
   
   
   
  Gain (Loss)  
 
  Level 1   Level 2   Level 3   Total   Three Months
Ended
June 30, 2008
  Six Months
Ended
June 30, 2008
 
 
  (in thousands)
 

At June 30, 2008:

                                     
 

Mortgage loans held for sale

  $   $ 2,502,233   $ 675,951   $ 3,178,184   $ (16,751 ) $ (136,379 )

Three months ended June 30, 2008:

                                     
 

Mortgage loans held for investment transferred from mortgage loans held for sale

  $   $ 213,438   $ 338,429   $ 551,867   $ (53,891 ) $  

Six months ended June 30, 2008:

                                     
 

Mortgage loans held for sale transferred from mortgage loans held for investment(1)

  $   $ 363,354   $ 2,042,953   $ 2,406,307   $   $ (19,477 )
 

Mortgage loans held for investment transferred from mortgage loans held for sale

  $   $ 1,272,241   $ 353,301   $ 1,625,542   $   $ (58,859 )

(1)
The mortgage loans transferred from mortgage loans held for investment to mortgage loans held for sale during the quarter ended March 31, 2008, consist of loans that had been carried as part of the mortgage loan investment portfolio for an average of 4.0 years. No such transfers were made during the quarter ended June 30, 2008.


Note 6—Derivative Financial Instruments

Derivative Financial Instruments

        A significant market risk facing the Company is interest rate risk, which includes the risk that changes in market interest rates will result in unfavorable changes in the value of our assets or liabilities ("price risk") and the risk that net interest income from our mortgage loan and investment portfolios will change in response to changes in interest rates. This risk includes both changes in "risk-free" rates (usually the U.S. Treasury rate for an asset of the same duration) and changes in the premiums to risk-free rates of return required by investors, which may be the result of liquidity and/or investor perceptions of risk ("Market Spread"). The overall objective of the Company's interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

18


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        The Company manages interest rate risk with derivative financial instruments and by the structure of its activities as follows:

    The Company uses various financial instruments, including derivatives, to manage the interest rate risk related specifically to the values of its IRLCs, mortgage loans held by the Company pending sale ("Mortgage Loan Inventory"), MSRs, retained interests, trading securities, and a portion of its debt.

    Structurally, the Company manages interest rate risk in its mortgage banking activities through the natural counterbalance of its loan production and servicing businesses while using portfolios of financial instruments, including derivatives, to separately moderate interest rate driven changes in value of these businesses' assets. However, the market disruption that began in the latter part of 2007 has impacted the availability and the cost of derivative financial instruments used to manage Market Spread-driven changes in the value of our mortgage banking assets. Although separate portfolios of financial instruments were maintained to manage the interest rate risk inherent in the mortgage banking assets, the Company managed its aggregate changes in value of those assets arising from Market Spread risk during the six months ended June 30, 2008 by relying more on the opposing Market Spread risk inherent in the loan production and loan servicing assets. Specifically, as Market Spreads widen the value of our IRLCs and Mortgage Loan Inventory generally decrease while the value of MSRs increase. Accordingly, Market Spread related changes in the value of sector assets and the related hedge instruments (collectively the "Position") were allocated between loan production activities and loan servicing activities in the six months ended June 30, 2008.

    The Company manages interest rate risk relating to its portfolios of investment securities of loans held for investment largely by funding interest-earning assets with liabilities of similar duration or a combination of derivative instruments and certain liabilities that create repricing characteristics that closely reflect the repricing behaviors of those assets.

Risk Management Activities Related to Mortgage Loan Inventory and Interest Rate Lock Commitments

        The Company actively manages the risk profiles of its IRLCs and Mortgage Loan Inventory on a daily basis. To manage the price risk associated with the IRLCs, the Company generally uses a combination of net forward sales of MBS and put and call options on MBS, Treasury futures and Eurodollar futures. The Company generally enters into forward sales of MBS in an amount equal to the portion of the IRLCs expected to close, assuming no change in mortgage interest rates. The Company acquires put and call options to protect against the variability of loan closings caused by changes in mortgage rates. The Company may enter into credit default swaps as part of its management of Market Spread risk.

        The Company manages the price risk related to the Mortgage Loan Inventory primarily by entering into forward sales of MBS and Eurodollar futures. The value of these forward MBS sales and Eurodollar futures moves in opposite direction to the value of the Mortgage Loan Inventory. The Company may enter into credit default swaps or similar instruments as part of its management of Market Spread-driven changes associated with its Mortgage Loan Inventory.

        The Company manages the price risk related to its commercial mortgage loans using interest rate swaps, total rate of return and credit default swaps.

19


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        During the six months ended June 30, 2008, the interest rate risk management activities associated with 14% of the fixed-rate mortgage loan inventory and 11% of the adjustable-rate mortgage loan inventory were accounted for as fair value hedges. These percentages decreased from prior periods because the Company began accounting for a substantial portion of its inventory at estimated fair value. For the six months ended June 30, 2008 and 2007, the Company recognized pre-tax losses of $18.7 million and $6.4 million, respectively, representing the ineffective portion of the hedges of its Mortgage Loan Inventory that qualified as fair value hedges.

Risk Management Activities Related to Mortgage Servicing Rights and Retained Interests

        To moderate the impact on earnings caused by a rate-driven decline in fair value of its MSRs and retained interests from securitization, the Company maintains a portfolio of financial instruments, including derivatives and securities, which generally increase in value when interest rates decline. During early 2007, the Company used credit-related derivative financial instruments to moderate the negative impact on earnings caused by a Market Spread-driven decline in fair value. This portfolio of financial instruments is collectively referred to as the "Servicing Hedge."

        The following table summarizes the activity for derivative contracts included in the Servicing Hedge expressed by notional amounts:

 
  Balance,
December 31,
2007
  Additions   Dispositions/
Expirations
  Balance,
June 30,
2008
 
 
  (in millions)
 

Interest rate swaptions

  $ 102,410   $ 93,200   $ (98,690 ) $ 96,920  

Interest rate swaps

    47,675     100,251     (71,090 )   76,836  

Treasury futures

    45,000     21,678     (21,678 )   45,000  

Call options on interest rates futures

    15,500     96,550     (112,050 )    

Mortgage forward rate agreements

    13,000     51,100     (15,000 )   49,100  

MBS forward contracts

    9,500     90,830     (94,550 )   5,780  

Risk Management Activities Related to Issuance of Long-Term Debt

        The Company has entered into interest rate swap contracts in which the rate received is fixed and the rate paid is adjustable and is indexed to LIBOR. These interest rate swaps enable the Company to convert a portion of its fixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of $2.3 billion as of June 30, 2008) and a portion of its foreign currency-denominated fixed and floating-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of $4.0 billion as of June 30, 2008). These transactions are generally designated as fair value hedges. For the six months ended June 30, 2008 and 2007, the Company recognized pre-tax gains of $58.2 million and $9.8 million, respectively, representing the ineffective portion of its fair value hedges of debt.

Risk Management Activities Related to Deposit Liabilities

        The Company has entered into interest rate swap contracts that have the effect of converting a portion of its fixed-rate deposit liabilities to LIBOR-based variable-rate deposit liabilities. These transactions are designated as fair value hedges. For the six months ended June 30, 2008 and 2007, the Company recognized a pre-tax loss of $10.0 million and pre-tax gains of $0.3 million, respectively, representing the hedge ineffectiveness related to these contracts.

20


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Risk Management Activities Related to the Broker-Dealer Securities Trading Portfolio

        The Company is exposed to price changes in its trading portfolio of fixed-income securities, primarily MBS, held in connection with its broker-dealer activities. To manage the price risk that results from interest rate changes during the period it holds the securities, the Company utilizes derivative instruments including forward sales/purchases of To-Be-Announced ("TBA") MBS, interest rate futures contracts, interest rate swaps, total rate of return swaps, put/call options on interest rate futures contracts, interest rate caps, receiver swaptions, credit default swaps and forward rate agreements.


Note 7—Mortgage Loans Held for Sale

        Mortgage loans held for sale include the following:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Mortgage loans carried at estimated fair value:

             
 

Prime

  $ 7,225,291   $  
 

Subprime

    1,328,074      
 

Commercial real estate

    84,813      
           

    8,638,178      
           

Mortgage loans carried at lower of amortized cost or estimated fair value:

             
 

Prime

    2,880,816     7,815,880  
 

Subprime

    2,432     3,038,980  
 

Prime home equity

    25,964     82,131  
 

Commercial real estate

    270,938     1,055,343  
 

Deferred premiums, discounts, fees and costs, net

    44,104     (167,945 )
 

Lower of cost or market valuation allowance

    (46,070 )   (143,115 )
           

    3,178,184     11,681,274  
           

  $ 11,816,362   $ 11,681,274  
           

        The Company generally estimates the fair value of loans held for sale based on quoted market prices for securities backed by similar types of loans. If quoted market prices are not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar instruments, and valuation models intended to approximate the amounts that would be received from a third party. We regularly compare the values developed from our valuation models to executed trades to assure that the valuations are reflective of actual sale prices. However, due to the illiquidity of the mortgage marketplace at June 30, 2008, which resulted in a lack of executed trades that could be used to assure that the valuations are reflective of fair value, it was necessary to look for alternative sources of value, including the whole loan purchase market for similar loans, and to apply more judgment to the valuations of non-conforming prime, prime home equity and subprime loans, which represented approximately 18% of mortgage loans held for sale excluding loans secured by commercial real estate at June 30, 2008.

21


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        At June 30, 2008, the Company had pledged mortgage loans held for sale with unpaid principal balances totaling $1.3 billion and $0.3 billion to secure collateral for asset-backed secured financings and secure Federal Home Loan Bank ("FHLB") advances, respectively.

        At December 31, 2007, the Company had pledged mortgage loans held for sale with unpaid principal balances totaling $0.3 billion, $0.01 billion, $4.4 billion and $0.8 billion to secure a secured revolving line of credit, securities sold under agreements to repurchase, collateral for asset-backed secured financings and to secure FHLB advances, respectively.


Note 8—Trading Securities and Trading Securities Sold, Not Yet Purchased

        Trading securities, which consist of trading securities owned and trading securities pledged as collateral, include the following:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

U.S. Treasury securities

  $   $ 3,974,806  

Agency mortgage pass-through securities

    2     13,767,268  

Obligations of U.S. Government-sponsored enterprises

        781,470  

Collateralized mortgage obligations

    255,859     1,988,054  

Asset-backed securities

    55,072     121,582  

Interest-only securities

    808,191     404,364  

Residual securities

    5,310     857  

Mark-to-market on TBA securities

    37,226     67,213  

Derivative financial instruments

    31,339     231,587  

Other

    2     5,406  
           

  $ 1,193,001   $ 21,342,607  
           

22


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Trading securities by credit rating were as follows:

 
  June 30, 2008  
 
   
  Credit Rating  
 
  Total(1)   AAA   AA   A   <A   Not Rated(2)  
 
  (in thousands)
 

U.S. Treasury securities

  $   $   $   $   $   $  

Agency mortgage pass-through securities

    2     2                  

Collateralized mortgage obligations

    255,859     227,718     6,266     1,119     19,362     1,394  

Asset-backed securities

    55,072     9,525     32,052     1,025     12,470      

Interest-only securities

    808,191     490,445                 317,746  

Residual securities

    5,310     23         612     1,129     3,546  

Other

    2                     2  
                           

  $ 1,124,436   $ 727,713   $ 38,318   $ 2,756   $ 32,961   $ 322,688  
                           

(1)
Derivative financial instruments, including mark-to-market on TBA securities, are not included in this table as derivative financial instruments are contracts between Countrywide and a counterparty. Such contracts are not rated by the rating agencies. Countrywide manages its derivatives counterparty risk by entering into derivatives only with creditworthy counterparties and limiting its exposure to individual counterparties.

(2)
These securities are generally not rated due to their illiquidity and the absence of significant trading activity.

        As of June 30, 2008, $133.2 million of the Company's trading securities had been pledged as collateral for financing purposes. None of the financing agreements provided the counterparties with the contractual right to sell or re-pledge the trading securities.

        As of December 31, 2007, $15.4 billion of the Company's trading securities had been pledged as collateral for financing purposes, of which the counterparty had the contractual right to sell or re-pledge $6.8 billion.

        Trading securities sold, not yet purchased, include the following:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

U.S. Treasury securities

  $   $ 2,744,206  

Obligations of U.S. Government-sponsored enterprises

        401,298  

Mark-to-market on TBA securities

    17,359     196,733  

Derivative financial instruments

    14,053     343,782  

Other

    3     959  
           

  $ 31,415   $ 3,686,978  
           

23


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 9—Securities Purchased Under Agreements to Resell, Securities Borrowed and Federal Funds Sold

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

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Securities purchased under agreements to resell

  $ 2,874,086   $ 5,384,569  

Securities borrowed

        928,857  

Federal funds sold

    3,775,000     3,327,453  
           

  $ 6,649,086   $ 9,640,879  
           

        As of June 30, 2008, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $5.8 billion that it had the contractual ability to sell or re-pledge, including $3.2 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of June 30, 2008, the Company had re-pledged $4.9 billion of such collateral for financing purposes.

        Through June 30, 2008, the Company had an informal agreement with one of its primary securities custodial banks to have on deposit adequate cash to ensure orderly clearance and settlement of securities and financing transactions on the date of settlement. At June 30, 2008, Countrywide had $0.5 billion on deposit with the custodial bank available to clear future transactions.

        As of December 31, 2007, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $17.6 billion, that it had the contractual ability to sell or re-pledge, including $9.0 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of December 31, 2007, the Company had re-pledged $14.3 billion of such collateral for financing purposes.

24


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 10—Loans Held for Investment, Net

        Loans held for investment include the following:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Mortgage loans:

             
 

Prime

             
   

Pay option and payment advantage

  $ 26,409,335   $ 28,509,138  
   

Other

    30,071,783     25,517,950  
           

    56,481,118     54,027,088  
 

Prime home equity

    32,864,577     34,539,144  
 

Subprime

    2,454,542     2,725,407  
 

Commercial real estate

    181,390     265,845  
           
   

Total mortgage loans

    91,981,627     91,557,484  
           

Defaulted FHA-insured and VA-guaranteed loans repurchased from securities

    3,411,386     2,691,563  

Warehouse lending advances secured by mortgage loans

    904,647     887,134  
           

    96,297,660     95,136,181  

Premiums, discounts and deferred loan origination fees and costs, net

    (469,411 )   (363,560 )

Allowance for loan losses

    (5,035,651 )   (2,399,491 )
           

    90,792,598     92,373,130  

Mortgage Loans Held in SPEs

    3,438,392     5,627,583  
           
   

Loans held for investment, net

  $ 94,230,990   $ 98,000,713  
           

        Loans are transferred from mortgage loans held for sale to mortgage loans held for investment when the Company makes the decision to hold such loans for the foreseeable future, which has been defined as the next twelve months, and has made an assessment that the Company has the ability to hold them for that time. During the six months ended June 30, 2008, the Company transferred prime, prime home equity and subprime mortgage loans with an unpaid principal balance of $1.5 billion, $0.1 billion and $0.1 billion, respectively, from mortgage loans held for sale to mortgage loans held for investment, as management made the decision in the first six months of 2008 to hold those loans for the foreseeable future. In connection with these transfers, impairment in the amount of $73.4 million was recorded as a component of gain on sale of loans and securities.

        Mortgage loans with unpaid principal balances totaling $58.8 billion and $62.6 billion were pledged to secure FHLB advances and to enable additional borrowings from the FHLB at June 30, 2008 and December 31, 2007, respectively.

        Mortgage loans held for investment with unpaid principal balances totaling $7.4 billion and $6.0 billion were pledged to secure an unused borrowing facility with the Federal Reserve Bank ("FRB") at June 30, 2008 and December 31, 2007, respectively.

        Mortgage loans held for investment with unpaid principal balances totaling $0.5 billion were pledged to secure securities sold under agreements to repurchase at June 30, 2008.

25


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Defaulted FHA-insured and VA-guaranteed loans repurchased from securities totaling $1.3 billion were pledged to secure securities sold under agreements to repurchase at December 31, 2007. No amounts were pledged at June 30, 2008.

        Mortgage loans with unpaid principal balances totaling $1.9 billion were pledged to secure a revolving line of credit at December 31, 2007. No amounts were pledged at June 30, 2008.

        Mortgage loans held in special purpose entities ("SPEs") with carrying values totaling $3.4 billion and $5.6 billion were pledged to secure asset-backed secured financings at June 30, 2008 and December 31, 2007, respectively. These amounts included $0.2 billion and $0.3 billion of real estate acquired in settlement of loans as of June 30, 2008 and December 31, 2007, respectively. These assets were re-recognized on the Company's consolidated balance sheets at their estimated fair value after management concluded that certain securities collateralized by these loans it had reacquired as part of its market-making activities would be held for an other-than-temporary period. The carrying value of the mortgage loans held in SPEs includes fair value discounts of $862.1 million and $960.7 million at June 30, 2008 and December 31, 2007, respectively.

        As of both June 30, 2008 and December 31, 2007, the Company had accepted mortgage loan collateral securing warehouse lending advances of $1.0 billion, that it had the contractual ability to re-pledge.

        The Company modified loans for borrowers who would not be able to obtain refinancing from other lenders under the modified terms. Other loans were modified to retain borrowers with good payment history but the modifications were considered to represent credit concessions. These transactions were classified as troubled debt restructurings. The majority of these transactions involved modifications of current loans from payment option adjustable-rate mortgage ("ARM") loans to payment advantage ARM loans with interest rates that are fixed for five years. Because these modifications were made at terms not comparable to market terms that would be offered if the modified loans were fully underwritten, the Company categorized these transactions as troubled debt restructurings.

        Troubled debt restructurings at June 30, 2008 and December 31, 2007 totaled $1.2 billion and $282.6 million, respectively, the majority of which were the conversions of current payment-option ARM loans to payment-advantage ARM loans. Of the troubled debt restructurings, $1.1 billion and $6.3 million were on accrual status as of June 30, 2008 and December 31, 2007, respectively. An impairment allowance of $117.2 million and $11.0 million relating to these loans is included in the allowance for loan losses as of June 30, 2008 and December 31, 2007, respectively. Management considered $28.8 million and $37.3 million of warehouse lending loans to be impaired as of June 30, 2008 and December 31, 2007, respectively. The average investment in impaired loans, consisting of troubled debt restructurings and nonperforming warehouse lines of credit, during the six months ended June 30, 2008 was $784.9 million and none during the six months ended June 30, 2007.

26


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Changes in the allowance for loan losses, the composition of the provision for loan losses and the allowance for loan losses were as follows:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2008   2007   2008   2007  
 
  (in thousands)
 

Balance, beginning of period

  $ 3,351,304   $ 464,131   $ 2,399,491   $ 326,817  

Provision for loan losses before estimated pool mortgage insurance recoveries

    2,614,321     368,811     4,172,399     544,774  

Charge-offs

    (942,020 )   (157,447 )   (1,571,623 )   (198,516 )

Recoveries

    12,046     3,060     35,384     5,480  
                   

Balance, end of period

  $ 5,035,651   $ 678,555   $ 5,035,651   $ 678,555  
                   

 

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2008   2007   2008   2007  
 
  (in thousands)
 

Provision for loan losses before estimated pool mortgage insurance recoveries

  $ 2,614,321   $ 368,811   $ 4,172,399   $ 544,774  

Change in estimate of amounts recoverable from pool mortgage insurance

    (283,396 )   (75,887 )   (340,122 )   (99,888 )
                   

Provision for loan losses

  $ 2,330,925   $ 292,924   $ 3,832,277   $ 444,886  
                   

 

 
  June 30,  
 
  2008   2007  
 
  (in thousands)
 

Allowance for loan losses

  $ 5,035,651   $ 678,555  

Estimated amount recoverable from pool mortgage insurance

    (895,925 )   (165,651 )
           

Allowance for loan losses, net of estimated pool mortgage insurance

  $ 4,139,726   $ 512,904  
           

        The Company has recorded a liability for losses on unfunded loan commitments in accounts payable and accrued liabilities totaling $63.7 million and $38.4 million at June 30, 2008 and December 31, 2007, respectively. The provision for these losses is recorded in other expenses. The following is a summary of changes in the liability:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2008   2007   2008   2007  
 
  (in thousands)
 

Balance, beginning of period

  $ 65,835   $ 13,759   $ 38,384   $ 8,104  

Provision for losses on unfunded loan commitments

    (2,181 )   4,463     25,270     10,118  
                   

Balance, end of period

  $ 63,654   $ 18,222   $ 63,654   $ 18,222  
                   

27


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 11—Investments in Other Financial Instruments, at Estimated Fair Value

        Investments in other financial instruments include the following:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Securities accounted for as available-for-sale:

             
 

Prime non-agency mortgage-backed securities

  $ 13,421,562   $ 16,328,280  
 

Prime agency mortgage-backed securities

    1,645,915     2,944,210  
 

Subprime mortgage-backed securities

    786     35  
 

Obligations of U.S. Government-sponsored enterprises

    145,901     255,205  
 

Municipal bonds

    167,707     419,540  
 

U.S. Treasury securities

    88,433     92,900  
 

Corporate bonds

    97,596     74,643  
           
   

Investment securities

    15,567,900     20,114,813  
           
 

Interests retained in securitization—non credit-sensitive:

             
   

Mortgage-backed pass-through securities

    34,616     37,567  
   

Prime interest-only and principal-only securities

    227,924     256,832  
   

Prepayment penalty bonds

    6,615     9,516  
           
     

Total interests retained in securitization—non credit-sensitive

    269,155     303,915  
           
 

Interests retained in securitization—credit-sensitive(1):

             
   

Mortgage-backed pass-through securities

    176     281  
   

Prime residual securities

    9,254     8,026  
   

Prime home equity retained interests

    77,175     94,112  
   

Subprime retained interests

    27,382     29,770  
           
     

Total interests retained in securitization—credit-sensitive(1)

    113,987     132,189  
           
       

Total securities accounted for as available-for-sale

    15,951,042     20,550,917  
           

Financial instruments with changes in unrealized gains and losses recognized in earnings in the period of change:

             
 

Securities accounted for as trading:

             
   

Interests retained in securitization—non credit-sensitive:

             
     

Mortgage-backed pass-through securities

    175,879     559,880  
     

Prime interest-only and principal-only securities

    730,759     745,160  
     

Prepayment penalty bonds

    45,979     70,401  
     

Interest rate swaps

        50  
           
       

Total interests retained in securitization—non credit-sensitive

    952,617     1,375,491  
           
   

Interests retained in securitization—credit-sensitive(1):

             
     

Mortgage-backed pass-through securities

    22,907     34,424  
     

Prime residual securities

    20,479     12,531  
     

Prime home equity retained interests

    76,916     328,569  
     

Subprime retained interests

    54,518     263,278  
           
       

Total interests retained in securitization—credit-sensitive(1)

    174,820     638,802  
           
   

Servicing Hedge principal-only securities

        908,358  
   

Municipal bonds

    358,390      
   

Corporate bonds

    75,638     72,685  
           
       

Total securities accounted for as trading

    1,561,465     2,995,336  
           
 

Hedging and pipeline derivatives

    1,335,490     2,271,406  
           

Total financial instruments with changes in unrealized gains and losses recognized in earnings in the period of change

    2,896,955     5,266,742  
           
     

Total investments in other financial instruments

  $ 18,847,997   $ 25,817,659  
           

(1)
Credit-sensitive securities retained in securitization includes securities that are expected to absorb credit losses from interests that are senior in the securitization structure.

28


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Investments in other financial instruments by credit rating were as follows:

 
  June 30, 2008  
 
   
  Credit Rating  
 
  Total(1)   AAA   AA   A   <A   Not Rated(2)  
 
  (in thousands)
 

Securities accounted for as available-for-sale:

                                     
 

Prime non-agency mortgage-backed securities

  $ 13,421,562   $ 13,325,612   $ 63,024   $ 21,798   $ 11,128   $  
 

Prime agency mortgage-backed securities

    1,645,915     1,645,915                  
 

Sub prime mortgage-backed securities

    786     786                  
 

Obligations of U.S. Government-sponsored enterprises

    145,901     145,901                  
 

Municipal bonds

    167,707     55,775     95,059     16,873          
 

U.S. Treasury securities

    88,433     88,433                  
 

Corporate bonds

    97,596     97,546         50          
                           
   

Investment securities

    15,567,900     15,359,968     158,083     38,721     11,128      
                           
 

Interests retained in securitization—non credit-sensitive:

                                     
   

Mortgage-backed pass-through securities

    34,616     22,511     12,105              
   

Prime interest-only and principal-only securities

    227,924     201,821                 26,103  
   

Prepayment penalty bonds

    6,615     535                 6,080  
                           
     

Total interests retained in securitization—non credit-sensitive

    269,155     224,867     12,105             32,183  
                           
 

Interests retained in securitization—credit-sensitive:

                                     
   

Mortgage-backed pass-through securities

    176                 176      
   

Prime residual securities

    9,254                     9,254  
   

Prime home equity retained interests

    77,175                     77,175  
   

Subprime retained interests

    27,382     4,548                 22,834  
                           
     

Total interests retained in securitization—credit-sensitive

    113,987     4,548             176     109,263  
                           
 

Total securities accounted for as available-for-sale

  $ 15,951,042   $ 15,589,383   $ 170,188   $ 38,721   $ 11,304   $ 141,446  
                           

Financial instruments with changes in unrealized gains and losses recognized in earnings in the period of change:

                                     
 

Securities accounted for as trading:

                                     
   

Interests retained in securitization—non credit-sensitive:

                                     
     

Mortgage-backed pass-through securities

  $ 175,879   $ 116,153   $ 29,463   $ 23,373   $ 6,890   $  
     

Prime interest-only and principal-only securities

    730,759     730,759                  
     

Prepayment penalty bonds

    45,979                     45,979  
                           
       

Total interests retained in securitization—non credit-sensitive

    952,617     846,912     29,463     23,373     6,890     45,979  
                           
   

Interests retained in securitization—credit-sensitive:

                                     
     

Mortgage-backed pass-through securities

    22,907                 21,387     1,520  
     

Prime residual securities

    20,479                     20,479  
     

Prime home equity retained interests

    76,916                     76,916  
     

Subprime retained interests

    54,518                     54,518  
                           
       

Total interests retained in securitization—credit-sensitive

    174,820                 21,387     153,433  
                           
   

Municipal bonds

    358,390     111,285     174,002     61,817     11,286      
   

Corporate bonds

    75,638     3,956     13,367     42,093     16,222      
                           
 

Total securities accounted for as trading

    1,561,465     962,153     216,832     127,283     55,785     199,412  
                           
     

Total investments in other financial instruments

  $ 17,512,507   $ 16,551,536   $ 387,020   $ 166,004   $ 67,089   $ 340,858  
                           

(1)
Hedging and mortgage pipeline derivative financial instruments are not included in this table as derivatives are contracts between Countrywide and a counterparty and are not rated by the rating agencies. Countrywide manages its derivatives counterparty risk by entering into derivatives only with creditworthy counterparties and limiting its exposure to individual counterparties.

(2)
These securities are generally not rated due to their illiquidity and the absence of significant trading activity.

29


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        At June 30, 2008, the Company had pledged $0.8 billion of investments in other financial instruments to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge. At June 30, 2008, the Company had pledged $0.05 billion of MBS to secure its derivative instrument liabilities and $0.03 billion of MBS to secure a borrowing facility with the FRB.

        At December 31, 2007, the Company had pledged $0.08 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge. At December 31, 2007, the Company had also pledged $0.01 billion of MBS to secure margin calls on derivative instruments and $1.6 billion of MBS to secure a borrowing facility with the FRB.

        At June 30, 2008 and December 31, 2007, the Company had pledged $12.4 billion and $13.4 billion of MBS to enable future borrowings with the FHLB.

        Amortized cost and fair value of available-for-sale securities were as follows:

 
  June 30, 2008  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  
 
  (in thousands)
 

Prime non-agency mortgage-backed securities

  $ 15,196,885   $ 3,926   $ (1,779,249 ) $ 13,421,562  

Prime agency mortgage-backed securities

    1,650,082     10,290     (14,457 )   1,645,915  

Subprime mortgage-backed securities

    802         (16 )   786  

Obligations of U.S. Government-sponsored enterprises

    141,468     4,433         145,901  

Municipal bonds

    167,214     851     (358 )   167,707  

U.S. Treasury securities

    84,682     3,779     (28 )   88,433  

Interests retained in securitization

    372,322     65,242     (54,422 )   383,142  

Corporate bonds

    97,288     1,464     (1,156 )   97,596  
                   

  $ 17,710,743   $ 89,985   $ (1,849,686 ) $ 15,951,042  
                   

 

 
  December 31, 2007  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  
 
  (in thousands)
 

Prime non-agency mortgage-backed securities

  $ 16,734,057   $ 10,147   $ (415,924 ) $ 16,328,280  

Prime agency mortgage-backed securities

    2,942,460     18,628     (16,878 )   2,944,210  

Subprime mortgage-backed securities

    35             35  

Obligations of U.S. Government-sponsored enterprises

    249,826     5,379         255,205  

Municipal bonds

    415,420     4,678     (558 )   419,540  

U.S. Treasury securities

    89,142     3,760     (2 )   92,900  

Interests retained in securitization

    392,966     63,690     (20,552 )   436,104  

Corporate bonds

    72,519     2,127     (3 )   74,643  
                   

  $ 20,896,425   $ 108,409   $ (453,917 ) $ 20,550,917  
                   

30


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        The Company's available-for-sale securities in an unrealized loss position were as follows:

 
  June 30, 2008  
 
  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)
 

Prime non-agency mortgage-backed securities

  $ 7,031,496   $ (917,859 ) $ 5,195,697   $ (861,390 ) $ 12,227,193   $ (1,779,249 )

Prime agency mortgage-backed securities

    447,927     (5,987 )   491,375     (8,470 )   939,302     (14,457 )

Subprime mortgage-backed securities

    633     (4 )   153     (12 )   786     (16 )

Municipal bonds

            53,366     (358 )   53,366     (358 )

U.S. Treasury securities

    3,483     (28 )           3,483     (28 )

Interests retained in securitization

    46,095     (15,876 )   111,306     (38,546 )   157,401     (54,422 )

Corporate Bonds

    34,426     (1,156 )   50         34,476     (1,156 )
                           

  $ 7,564,060   $ (940,910 ) $ 5,851,947   $ (908,776 ) $ 13,416,007   $ (1,849,686 )
                           

 

 
  December 31, 2007  
 
  Less Than 12 Months   12 Months or More   Total  
 
  Fair Value   Gross
Unrealized
Loss
  Fair Value   Grosse
Unrealized
Loss
  Fair Value   Gross
Unrealized
Loss
 
 
  (in thousands)
 

Prime non-agency mortgage-backed securities

  $ 10,000,860   $ (262,031 ) $ 3,210,776   $ (153,893 ) $ 13,211,636   $ (415,924 )

Prime agency mortgage-backed securities

    196,561     (842 )   833,354     (16,036 )   1,029,915     (16,878 )

Municipal bonds

    11,144     (63 )   99,658     (495 )   110,802     (558 )

U.S. Treasury securities

            7,498     (2 )   7,498     (2 )

Interests retained in securitization

    14,720     (887 )   114,343     (19,665 )   129,063     (20,552 )

Corporate Bonds

    305     (3 )   50         355     (3 )
                           

  $ 10,223,590   $ (263,826 ) $ 4,265,679   $ (190,091 ) $ 14,489,269   $ (453,917 )
                           

        The Company's Asset/Liability Committee ("ALCO") assesses securities classified as available-for-sale for other-than-temporary impairment on a quarterly basis. This assessment evaluates whether the Company intends to and is able to recover the amortized cost of the securities when taking into account the Company's present investment objectives and liquidity requirements and whether the creditworthiness of the issuer calls the realization of contractual cash flows into question.

        During the six months ended June 30, 2008, ALCO determined that it was no longer reasonably assured that the decline in value would be recovered during the holding period of certain prime non-agency mortgage-backed securities. Such securities had a carrying value of $1.5 billion when this determination was made. As a result of this determination, unrealized losses recorded in accumulated other comprehensive income totaling $0.5 billion were transferred to earnings during the six months ended June 30, 2008. No such losses were recorded during the six months ended June 30, 2007.

31


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Gross gains and losses realized on the sales of available-for-sale securities (excluding recognition of other than temporary impairment) were as follows:

 
  Six Months Ended
June 30,
 
 
  2008   2007  
 
  (in thousands)
 

Prime agency mortgage-backed securities:

             
 

Gross realized gains

  $ 11,493   $ 11  
 

Gross realized losses

    (2,115 )    
           
   

Net

    9,378     11  
           

Prime non-agency mortgage-backed securities:

             
 

Gross realized gains

    90      
 

Gross realized losses

    (3,394 )    
           
   

Net

    (3,304 )    
           

Municipal bonds:

             
 

Gross realized gains

        75  
 

Gross realized losses

        (857 )
           
   

Net

        (782 )
           

Obligations of U.S. Government-sponsored enterprises:

             
 

Gross realized gains

    1,608      
 

Gross realized losses

         
           
   

Net

    1,608      
           

Interests retained in securitization:

             
 

Gross realized gains

        1,615  
 

Gross realized losses

    (1,599 )   (12 )
           
   

Net

    (1,599 )   1,603  
           

Total gains and losses on available-for-sale securities:

             
 

Gross realized gains

    13,191     1,701  
 

Gross realized losses

    (7,108 )   (869 )
           
   

Net

  $ 6,083   $ 832  
           

32


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 12—Mortgage Servicing Rights, at Estimated Fair Value

        The activity in MSRs was as follows:

 
  Six Months Ended
June 30,
 
 
  2008   2007  
 
  (in thousands)
 

Balance at beginning of period

  $ 18,958,180   $ 16,172,064  
 

Additions:

             
   

Servicing resulting from transfers of financial assets

    1,730,344     4,156,287  
   

Purchases

    7,420     184,511  
           
     

Total additions

    1,737,764     4,340,798  
 

Less sales

    (1,307,571 )    
 

Change in fair value:

             
   

Due to changes in valuation inputs or assumptions used in valuation model(1)

    435,295     1,231,513  
   

Other changes in fair value(2)

    (1,421,278 )   (1,657,007 )
           

Balance at end of period

  $ 18,402,390   $ 20,087,368  
           

(1)
Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

(2)
Represents changes due to realization of expected cash flows.

        As detailed in Note 2—Subsequent Events—Merger and Subsequent Transactions with Bank of America Corporation, on July 2, 2008, the Company sold two entities that hold the partnership interests in the Company's primary loan servicing subsidiary, Servicing LP, to NBHC. Servicing LP's assets included $15.3 billion of the Company's MSRs at June 30, 2008.

33


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 13—Other Assets

        Other assets include the following:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Reimbursable servicing advances, net

  $ 5,216,792   $ 3,981,703  

Investments in FRB and FHLB stock

    1,993,036     2,172,987  

Real estate acquired in settlement of loans

    952,329     807,843  

Estimated amounts recoverable from pool mortgage insurance

    895,925     555,803  

Interest receivable

    633,097     932,477  

Receivables from custodial accounts

    382,813     387,509  

Capitalized software, net

    379,172     385,276  

Prepaid expenses

    326,595     374,943  

Cash surrender value of assets held in trust for deferred compensation plans

    292,039     307,902  

Cash surrender value of Company-owned life insurance

    221,500     229,835  

Margin accounts

    219,369     669,391  

Mortgage guaranty insurance tax and loss bonds

    188,667     165,066  

Securities broker-dealer receivables

    87,489     203,206  

Restricted cash

    75,565     86,078  

Receivables from sale of securities

    12,720     98,021  

Other

    870,043     1,192,735  
           

  $ 12,747,151   $ 12,550,775  
           

        The Company had pledged $0.01 billion of receivables from sale of securities to secure securities sold under agreements to repurchase at June 30, 2008 and December 31, 2007.

34


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 14—Deposit Liabilities

        Deposit liabilities include the following:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Non-interest-bearing checking accounts

  $ 729,152   $ 457,487  

Retail savings and money market accounts:

             
 

Retail

    9,724,721     8,268,969  
 

Brokered

    1,715,642     3,159,124  

Commercial money market accounts

    219,015     892,085  

Time deposits:

             
 

Retail

    31,095,961     25,119,310  
 

Brokered

    7,575,540     9,107,958  
 

Commercial

             
   

Premier business banking

    502,437     545,118  
   

Other

    41,486     42,711  
           

    543,923     587,829  
           

    39,215,424     34,815,097  

Company-administered custodial deposit accounts(1)

    11,192,367     12,591,401  
           

    62,796,321     60,184,163  

Basis adjustment through application of hedge accounting

    15,601     16,436  
           

  $ 62,811,922   $ 60,200,599  
           

(1)
These accounts represent the portion of the investor custodial accounts administered by Countrywide that have been placed on deposit with Countrywide Bank, FSB ("Countrywide Bank" or the "Bank").

35


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Substantially all of the time deposits outstanding were interest-bearing. The contractual maturities of those deposits as of June 30, 2008, are shown in the following table:

 
  Time Deposit Maturities   Weighted Average Rate  
 
  (dollar amounts in thousands)
 

Quarter ending:

             
 

September 30, 2008

  $ 14,650,810     4.88 %
 

December 31, 2008

    9,523,683     4.71 %
 

March 31, 2009

    2,793,532     4.17 %
 

June 30, 2009

    7,400,499     3.98 %
             

Total twelve months ending June 30, 2009

    34,368,524     4.58 %

Twelve months ending June 30,

             
 

2010

    1,833,014     4.32 %
 

2011

    872,346     4.53 %
 

2012

    193,727     4.79 %
 

2013

    190,460     4.93 %
 

Thereafter

    1,757,353     5.77 %
             

    39,215,424     4.62 %

Basis adjustment through application of hedge accounting

    15,601        
             

  $ 39,231,025        
             


Note 15—Securities Sold Under Agreements to Repurchase

        The Company routinely enters into short-term financing arrangements to sell securities under agreements to repurchase ("repurchase agreements"). The repurchase agreements are collateralized by mortgage loans and securities. All securities underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to repurchase the same or substantially identical securities.

        At June 30, 2008, repurchase agreements were secured by $0.1 billion of trading securities, $4.9 billion of securities purchased under agreements to resell and securities borrowed, $0.5 billion of loans held for investment, $0.8 billion in investments in other financial instruments and $0.01 billion of other assets. At June 30, 2008, $3.2 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.

        At December 31, 2007, repurchase agreements were secured by $0.01 billion of mortgage loans held for sale, $15.4 billion of trading securities, $14.3 billion of securities purchased under agreements to resell and securities borrowed, $1.3 billion in loans held for investment, $0.1 billion in investments in other financial instruments and $0.01 billion of other assets. At December 31, 2007, $9.0 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.

36


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 16—Notes Payable

        The following table summarizes notes payable:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Secured revolving lines of credit

  $   $ 1,547,648  

Unsecured revolving lines of credit

    8,120,000     10,820,000  

Unsecured bank loans

    3,360,000     660,000  

Borrowings from the Federal Reserve Bank

        750,000  

Federal Home Loan Bank advances

    43,675,000     47,675,000  

Medium-term notes:

             
 

Floating-rate

    8,196,680     10,779,722  
 

Fixed-rate

    7,022,293     8,221,445  
           

    15,218,973     19,001,167  

Asset-backed secured financings

   
3,438,391
   
9,453,478
 

Asset-backed secured financings at estimated fair value

    1,212,252      

Convertible debentures

    4,000,000     4,000,000  

Subordinated debt

    1,082,726     1,067,010  

Junior subordinated debentures

    2,193,703     2,219,511  

Other

    34,546     33,599  
           

  $ 82,335,591   $ 97,227,413  
           

Secured Revolving Lines of Credit

        The Company formed a special purpose entity (Park Monaco) to finance inventory with funding provided by a group of bank-sponsored conduits that were financed through the issuance of asset-backed commercial paper. The entity incurred interest based on prevailing money market rates approximating the cost of asset-backed commercial paper. On May 2, 2008, the Company repaid the outstanding balance, and on May 9, 2008, the Company terminated the facility.

        For the six months ended June 30, 2008, the average borrowings under this facility totaled $0.5 billion and the weighted-average interest rate was 4.43%. For the six months ended June 30, 2007, the average borrowings under this facility totaled $0.7 billion and the weighted-average interest rate was 5.34%. At June 30, 2007, the weighted-average interest rate was 5.35%.

        During 2007, the Company had a $4.0 billion master trust facility to finance Countrywide Warehouse Lending ("CWL") receivables backed by mortgage loans through the sale of such receivables to a multi-asset conduit finance company financed by issuing extendable maturity asset-backed commercial paper. At June 30, 2007, the Company had pledged $1.1 billion in loans held for investment to secure this facility. For the six months ended June 30, 2007, the average borrowings under this facility totaled $1.1 billion and the weighted-average interest rate was 5.38%. At June 30, 2007, the weighted-average interest rate was 5.39%. This facility was terminated during 2007.

Unsecured Revolving Lines of Credit and Unsecured Bank Loans

        As of June 30, 2008, the Company had unsecured credit agreements (revolving credit facilities) with a group of commercial banks permitting the Company to borrow an aggregate maximum total

37


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


amount of $11.5 billion. In August 2007, the Company borrowed $11.5 billion from these revolving credit facilities, of which $3.4 billion was converted to unsecured term bank loans with maturities through May 2009.

        For the six months ended June 30, 2008, the average outstanding borrowings under the remaining revolving credit facilities totaled $10.0 billion and the weighted-average interest rate was 3.26%. At June 30, 2008, the weighted-average interest rate was 3.22%. No amount was outstanding under this facility at June 30, 2007. For the six months ended June 30, 2008, the average outstanding borrowings under the unsecured bank loan totaled $1.5 billion and the average interest rate was 3.63%. At June 30, 2008, the weighted average interest rate was 3.42%. On July 1, 2008, all amounts owing under these facilities were repaid and the facilities were terminated.

Backup Credit Facilities

        As of June 30, 2008, the Company had pledged $7.4 billion and $0.03 billion of mortgage loans held for investment and MBS, respectively, to secure an unused borrowing facility with the FRB.

Federal Home Loan Bank Advances

        During the six months ended June 30, 2008, the Company obtained $0.5 billion of fixed-rate advances from the FHLB, and repaid $4.5 billion of advances of which, $2.4 billion was fixed-rate. At June 30, 2008, the Company had pledged $58.8 billion and $12.4 billion respectively, of mortgage loans and investments in other financial instruments to secure its outstanding FHLB advances and enable future advances.

        At December 31, 2007, the Company had pledged $62.6 billion and $13.4 billion, respectively, of mortgage loans and investments in other financial instruments to secure its outstanding FHLB advances and enable future advances.

Medium-Term Notes

        During the six months ended June 30, 2008, the Company did not issue any medium-term notes and redeemed $4.1 billion of maturing medium-term notes.

        As of June 30, 2008, $4.0 billion of foreign currency-denominated medium-term notes were outstanding. Such notes are denominated in Swiss Francs, Pounds Sterling, Canadian Dollars, Australian Dollars and Euros. These notes have been effectively converted to U.S. dollar-denominated debt through currency swaps.

Asset-Backed Secured Financings

        The Company records certain mortgage loan securitization transactions as secured borrowings when they do not meet the accounting requirements for sale recognition. The securitization transactions accounted for as secured borrowings totaled $1.2 billion and $3.8 billion at June 30, 2008 and December 31, 2007, respectively. At June 30, 2008 and December 31, 2007, the Company had pledged mortgage loans held for sale with unpaid principal balances totaling $2.1 billion and $4.4 billion, respectively, to secure these borrowings.

        In its market-making and trading activities, CSC would reacquire securities with embedded derivatives created in Countrywide loan sales activities. After reacquiring certain of those securities during 2007, the market for non-agency MBS was disrupted. Management subsequently concluded that certain securities it reacquired beginning in 2007 were no longer readily salable. When the Company

38


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


holds beneficial interests in its securitizations that include embedded derivatives for other-than market making purposes, the applicable accounting standards require that the transactions be re-characterized as financing transactions. As a result, liabilities of $3.4 billion and $5.6 billion and related Mortgage Loans Held in SPEs in loans held for investment were included on the Company's balance sheet at June 30, 2008 and December 31, 2007, respectively.

Junior Subordinated Debentures

        As more fully discussed in Note 15—Notes Payable included in the consolidated financial statements of the 2007 Annual Report, the Company has issued junior subordinated debentures to non-consolidated subsidiary trusts. The trusts finance their holdings of the junior subordinated debentures by issuing Company-guaranteed capital securities.

        The Company guarantees the indebtedness of CHL to one of its subsidiary trusts, Countrywide Capital III, which is excluded from the Company's consolidated financial statements. Following is summarized information for that trust:

 
  June 30,
2008
  December 31,
2007
 
 
  (in thousands)
 

Balance Sheets:

             
 

Junior subordinated debentures receivable

  $ 205,377   $ 205,356  
 

Other assets

    692     692  
           
   

Total assets

  $ 206,069   $ 206,048  
           
 

Notes payable

 
$

6,175
 
$

6,175
 
 

Other liabilities

    692     692  
 

Company-obligated guaranteed redeemable capital trust pass-through securities

    199,202     199,181  
 

Shareholder's equity

         
           
   

Total liabilities and shareholder's equity

  $ 206,069   $ 206,048  
           

 

 
  Six Months Ended
June 30,
 
 
  2008   2007  
 
  (in thousands)
 

Statements of Operations:

             
 

Revenues

  $ 8,321   $ 8,321  
 

Expenses

    (8,321 )   (8,321 )
 

Provision for income taxes

         
           
   

Net earnings

  $   $  
           

39


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Maturities of Notes Payable

        Maturities of notes payable were as follows:

 
  Principal, Premiums and Discounts    
   
 
 
  Unsecured
Revolving
Lines of
Credit and
Bank Loan(1)
  All Other
Notes Payable
  Basis
Adjustment
  Total  
 
  (in thousands)
 

Quarter ending:

                         
 

September 30, 2008

  $   $ 1,198,970   $ 62,889   $ 1,261,859  
 

December 31, 2008

    660,000     2,971,786     447,696     4,079,482  
 

March 31, 2009

        1,807,234     43,002     1,850,236  
 

June 30, 2009

    2,700,000     1,823,426     40,582     4,564,008  
                   

Total twelve months ending June 30, 2009

    3,360,000     7,801,416     594,169     11,755,585  

Twelve months ending June 30,

                         
 

2010

        13,191,063     4,776     13,195,839  
 

2011

    6,580,000     18,478,647     348,947     25,407,594  
 

2012

    1,540,000     8,750,312     144,571     10,434,883  
 

2013

        4,950,117     762     4,950,879  
 

Thereafter

        16,527,421     63,390     16,590,811  
                   
   

Total

  $ 11,480,000   $ 69,698,976   $ 1,156,615   $ 82,335,591  
                   

(1)
On July 1, 2008, the Company terminated these credit facilities and repaid all the outstanding borrowings plus accrued interest and fees.


Note 17—Regulatory and Agency Capital Requirements

        Countrywide Bank is regulated by the Office of Thrift Supervision ("OTS") and is therefore subject to OTS capital requirements. At June 30, 2008, the Bank's regulatory capital ratios and amounts and minimum required capital ratios for the Bank to maintain a "well capitalized" status are as follows based both on its actual balances and proforma balances giving effect to the $5.5 billion capital contribution made by the Company on July 2, 2008:

 
   
  Actual   Proforma(2)  
 
  Minimum
Required(1)
 
 
  Ratio   Amount   Ratio   Amount  
 
  (dollar amounts in thousands)
 

Tier 1 Capital

    5.0 %   6.9 % $ 8,071,716     11.1 % $ 13,601,716  

Risk-Based Capital:

                               
 

Tier 1

    6.0 %   11.1 % $ 8,071,716     18.7 % $ 13,601,716  
 

Total

    10.0 %   12.4 % $ 9,016,959     20.0 % $ 14,545,788  

(1)
Minimum required to qualify as "well capitalized."

(2)
The proforma capital ratios reflect the cash contributed to the Bank. These ratios will decrease as we reinvest the proceeds of the capital contribution into interest earning assets with higher risk weightings.

40


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        The Bank is required by OTS regulations to maintain tangible capital of at least 1.5% of assets. However, the Bank is also required to maintain a tangible equity ratio of at least 2% to avoid being classified as "critically undercapitalized." Critically undercapitalized institutions are subject to the prompt corrective action provisions of the Financial Institution Reform Recovery and Enforcement Act of 1989. The Bank's tangible capital ratio was 6.9% and 8.0% at June 30, 2008 and December 31, 2007, respectively.

        The OTS has prescribed that the Company and its affiliates are not authorized to receive, and the Bank is not authorized to pay the Company or its affiliates, capital distributions without receipt of prior written OTS non-objection.

        The Company is also subject to U.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac and Government National Mortgage Association ("Ginnie Mae") net worth requirements. Management believes the Company is in compliance with those requirements.


Note 18—Supplemental Cash Flow Information

        The following table presents supplemental cash flow information:

 
  Six Months Ended
June 30,
 
 
  2008   2007  
 
  (in thousands)
 

Cash used to pay interest

  $ 3,939,669   $ 5,356,090  

Cash (refunded) used to pay income taxes

    (704,031 )   13,796  

Non-cash investing activities:

             
 

Transfer of loans from mortgage loans held for sale at lower of cost or estimated fair value to loans held for investment

    (1,625,542 )   (1,636,114 )
 

Transfer of loans held for investment to mortgage loans held for sale

    2,406,307      
 

Transfer of real estate acquired in settlement of loans from loans receivable to other assets

    865,234     407,302  
 

Servicing resulting from transfers of financial assets

    1,730,344     4,156,287  
 

Retention of other financial instruments classified as available-for-sale in securitization transactions

    15,852     1,829  
 

Unrealized loss on available-for-sale securities, foreign currency translation adjustments, cash flow hedges and change in unfunded liability relating to defined benefit plans, net of tax

    (865,677 )   (118,672 )
 

Remeasurement of financial assets and liabilities upon adoption of SFAS 159

    34,249      
 

Remeasurement of income taxes payable upon adoption of FIN 48

        (12,719 )
 

Decrease in Mortgage Loans Held in SPEs

    2,189,191      

Non-cash financing activities:

             
 

Decrease in asset-backed secured financings

    (4,728,777 )    

41


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 19—Net Interest Income

        The following table summarizes net interest income:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2008   2007   2008   2007  
 
  (in thousands)
 

Interest income:

                         
 

Loans

  $ 1,766,287   $ 2,150,060   $ 3,728,520   $ 4,270,105  
 

Trading securities

    142,203     341,932     356,067     660,884  
 

Securities purchased under agreements to resell, securities borrowed and federal funds sold

    172,497     613,410     394,117     1,274,689  
 

Investments in other financial instruments

    268,451     233,261     538,945     360,752  
 

Other

    113,108     160,981     251,456     285,196  
                   
   

Total interest income

    2,462,546     3,499,644     5,269,105     6,851,626  
                   

Interest expense:

                         
 

Deposit liabilities

    560,831     544,030     1,149,759     1,043,869  
 

Securities sold under agreements to repurchase

    208,975     911,104     519,774     1,801,771  
 

Trading securities sold, not yet purchased

    19,463     60,375     52,253     122,504  
 

Notes payable

    933,575     1,116,212     1,977,786     2,173,445  
 

Other

    83,751     139,927     182,262     251,104  
                   
   

Total interest expense

    1,806,595     2,771,648     3,881,834     5,392,693  
                   

Total net interest income

  $ 655,951   $ 727,996   $ 1,387,271   $ 1,458,933  
                   


Note 20—Restructuring Charges

        During the third quarter of 2007, the Company initiated a program to reduce costs and improve operating efficiencies in response to lower mortgage market origination volumes and other market conditions. As part of this plan, the Company expected to incur lease and other contract termination costs. Management recorded restructuring charges totaling $144.6 million in 2007 and recorded an additional $16.1 million in the first six months of 2008. Specific actions taken in 2007 included reducing the workforce by approximately 11,000 and the closure of 259 branches. These reductions occurred in most geographic locations and levels of the organization. The restructuring charges were recorded in the "Other" segment. During the first six months of 2008, the specific actions included reducing the workforce by approximately 1,500.

42


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        The following table summarizes the restructuring liability balance, recorded in accounts payable and accrued liabilities at June 30, 2008, and related activity during the six months ended June 30, 2008:

 
   
   
   
  Utilized    
 
 
  Balance
December 31,
2007
   
   
  Balance
June 30,
2008
 
 
  Additions   Reversals   Cash   Non-Cash  
 
  (in thousands)
 

Severance and benefits

  $ 2,959   $ 3,264   $   $ (6,223 ) $   $  

Lease termination costs

    45,399     10,581         (24,634 )   (5,884 )   25,462  

Other costs

        2,228             (2,228 )    
                           

  $ 48,358   $ 16,073   $   $ (30,857 ) $ (8,112 ) $ 25,462  
                           


Note 21—Pension Plans

        The Company provides retirement benefits to its employees using a variety of plans. For employees hired prior to January 1, 2006, the Company has a defined benefit pension plan (the "Pension Plan"). For employees hired after December 31, 2005, the Company makes supplemental contributions to employee 401(k) Plan accounts.

        Net periodic benefit cost for the Pension Plan during the three and six months ended June 30, 2008 and 2007, includes the following components:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2008   2007   2008   2007  
 
  (in thousands)
 

Service cost

  $ 17,404   $ 19,400   $ 34,808   $ 41,479  

Interest cost

    7,158     6,355     14,316     12,337  

Expected return on plan assets

    (5,950 )   (5,483 )   (11,900 )   (10,974 )

Amortization of prior service cost

    87     87     174     174  

Recognized net actuarial loss

        217         217  
                   
 

Net periodic benefit cost

  $ 18,699   $ 20,576   $ 37,398   $ 43,233  
                   


Note 22—Segments and Related Information

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

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

        The Loan Production Sector originates prime and subprime loans for sale or securitization through a variety of channels on a national scale. Historically, mortgage banking loan production has occurred in CHL. Over the past several years, the Company has been transitioning this production to its bank subsidiary, Countrywide Bank. Effective January 1, 2008, the Company's production channels have moved into the Bank, completing the migration of substantially all of Countrywide's loan production activities from CHL to the Bank. During the six months ended June 30, 2008, over 97% of Countrywide's mortgage loan production occurred in Countrywide Bank. The mortgage loan production, the related balance sheet and the income relating to the holding and sale of these loans is

43


COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


included in the Mortgage Banking Segment regardless of whether the activity occurred in CHL or the Bank.

        The Loan Production Sector is comprised of three lending channels:

    Retail Channel sources mortgage loans primarily from consumers through the Company's retail branch network and call centers, as well as through real estate agents and homebuilders

    Wholesale Lending Channel sources mortgage loans primarily from mortgage brokers

    Correspondent Lending Channel purchases mortgage loans from other mortgage lenders, including financial institutions, commercial banks, savings and loan associations, home builders and credit unions.

        The Loan Servicing Sector includes investments in MSRs, retained interests including senior and mezzanine mortgage-backed securities which remain unsold from prior securitizations, the Mortgage Banking investment loan portfolio as well as the Company's loan servicing operations and subservicing for other domestic financial institutions. Subsequent to sale, adjustments to the liability for representations and warranties are included in this sector. The Loan Closing Services Sector is comprised of the LandSafe companies, which provide credit reports, appraisals, title reports and flood determinations to the Company's Loan Production Sector, as well as to third parties.

        The Banking Segment includes Banking Operations—primarily the investment and fee-based activities of Countrywide Bank—together with the activities of Countrywide Warehouse Lending and certain loans held for investment and owned by Countrywide Home Loans. Banking Operations invests in mortgage loans sourced from the Loan Production Sector and mortgage loans and MBS purchased from non-affiliated entities. Countrywide Warehouse Lending provides third-party mortgage lenders with temporary financing secured by mortgage loans.

        The Capital Markets Segment includes the operations of CSC, a registered broker-dealer specializing in the mortgage securities market. It also includes the operations of Countrywide Asset Management Corporation, Countrywide Commercial Real Estate Finance Inc., Countrywide Servicing Exchange, Countrywide Alternative Investments Inc., CSC Futures Inc., Countrywide Capital Markets Asia (H.K.) Limited, CAA Management Inc., Countrywide Sunfish Management LLC and Countrywide Derivative Products, Inc.

        The Insurance Segment includes Balboa Insurance Group, a national provider of property, casualty, life, disability and credit insurance; Balboa Reinsurance Company, a primary mortgage reinsurance company; and Countrywide Insurance Services, a national insurance agency offering a specialized menu of insurance products directly to consumers.

        The Global Operations Segment includes Countrywide International Technology Holdings Limited, a licensor of loan origination processing, servicing and residential real estate value assessment technology; CFC India Private Limited, a provider of call center, data processing and information technology related services; and CFC International (Processing Services), Limited, located in Costa Rica, a provider of call center and data processing services.

        Segment selection was based upon internal organizational structures, and the process by which these operations are managed and evaluated, including how resources are allocated to the operations. Certain amounts reflected in the prior period have been adjusted to conform to the current period presentation.

        Intersegment transactions are generally recorded on an arms-length basis. However, prior to October 2007, the fulfillment fees paid by Banking Operations to the Production Sector for origination costs incurred on mortgage loans funded by Banking Operations were generally determined on an incremental cost basis, which may be less than the fees that Banking Operations would pay to a third party.

44


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

        Financial highlights by operating segments are as follows:

 
  Three Months Ended June 30, 2008  
 
  Mortgage Banking    
   
   
   
   
   
 
 
  Loan
Production
  Loan
Servicing
  Closing
Services
  Total   Banking   Capital
Markets
  Insurance   Global
Operations
  Other   Total
Consolidated
 
 
  (in thousands)
 

Revenues:

                                                             
 

External

  $ 765,710   $ (1,115,865 ) $ 98,888   $ (251,267 ) $ (1,827,393 ) $ (87,699 ) $ 534,364   $ 12,041   $ (2,884 ) $ (1,622,838 )
 

Intersegment

    (3,078 )   84,692     (480 )   81,134     (57,108 )   (295 )   (1,812 )   30,099     (52,018 )    
                                           

Total Revenues

  $ 762,632   $ (1,031,173 ) $ 98,408   $ (170,133 ) $ (1,884,501 ) $ (87,994 ) $ 532,552   $ 42,140   $ (54,902 ) $ (1,622,838 )
                                           

Pre-tax Earnings (Loss)

  $ (135,175 ) $ (1,406,754 ) $ 33,115   $ (1,508,814 ) $ (2,145,667 ) $ (170,034 ) $ 12,042   $ 11,723   $ (15,086 ) $ (3,815,836 )
                                           

Total Assets at Period End

  $ 14,203,239   $ 39,731,833   $ 412,477   $ 54,347,549   $ 107,451,467   $ 5,878,284   $ 4,298,360   $ 259,240   $ (158,406 ) $ 172,076,494