COUNTRYWIDE FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2004

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		13-2641992
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

4500 Park Granada, Calabasas, California (Address of principal executive offices)		91302 (Zip Code)

(Registrant’s telephone number, including area code)

(818) 225-3000

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

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 2, 2004

Common Stock $.05 par value		281,550,035

COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q

June 30, 2004

TABLE OF CONTENTS


			Page
			Number

PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements:
		Consolidated Balance Sheets June 30, 2004 and December 31, 2003		2
		Consolidated Statements of Earnings Three and Six Months Ended June 30, 2004 and 2003		3
		Consolidated Statement of Common Shareholders’ Equity Six Months Ended June 30, 2004		4
		Consolidated Statements of Cash Flows Six Months Ended June 30, 2004 and 2003		5
		Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2004 and 2003		6
		Notes to Consolidated Financial Statements		7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
		Overview		31
		Results of Operations Comparison — Quarters Ended June 30, 2004 and 2003		32
		Results of Operations Comparison — Six Months Ended June 30, 2004 and 2003		47
		Quantitative and Qualitative Disclosure About Market Risk		61
		Credit Risk		63
		Loan Servicing		65
		Liquidity and Capital Resources		66
		Off-Balance Sheet Arrangements and Contractual Obligations		67
		Prospective Trends		68
		Regulatory Trends		69
		Implementation of New Accounting Standards		69
		Factors That May Affect Future Results		69
	Item 3. Quantitative and Qualitative Disclosure About Market Risk			70
	Item 4. Controls and Procedures			70

PART II.	OTHER INFORMATION
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			71
	Item 4. Submission of Matters to a Vote of Security Holders			71
	Item 6. Exhibits and Reports on Form 8-K			72
Exhibit 10.97
Exhibit 10.98
Exhibit 10.99
Exhibit 10.100
Exhibit 10.101
Exhibit 10.102
Exhibit 10.103
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


		June 30,		December 31,
		2004		2003

		(Unaudited)

		(In thousands,
		except share data)

ASSETS
Cash		$	680,910	$	633,467
Mortgage loans and mortgage-backed securities held for sale			19,545,868		24,103,625
Trading securities owned, at market value			9,122,511		6,996,699
Trading securities pledged as collateral, at market value			1,608,312		4,118,012
Securities purchased under agreements to resell			14,639,396		10,348,102
Loans held for investment, net			33,895,452		26,368,055
Investments in other financial instruments			7,508,044		12,761,764
Mortgage servicing rights, net			8,334,826		6,863,625
Premises and equipment, net			881,042		755,276
Other assets			7,537,074		5,029,048

	Total assets	$	103,753,435	$	97,977,673


LIABILITIES
Notes payable		$	42,134,819	$	39,948,461
Securities sold under agreements to repurchase			25,620,471		32,013,412
Deposit liabilities			15,470,280		9,327,671
Accounts payable and accrued liabilities			8,365,332		6,248,624
Income taxes payable			2,717,736		2,354,789

	Total liabilities		94,308,638		89,892,957

Commitments and contingencies			—		—

SHAREHOLDERS’ EQUITY
Preferred stock — authorized, 1,500,000 shares of $0.05 par value; none issued and outstanding			—		—
Common stock — authorized, 500,000,000 shares of $0.05 par value; issued, 281,227,344 shares and 276,735,890 shares at June 30, 2004 and December 31, 2003, respectively; outstanding, 281,194,165 and 276,724,639 shares at June 30, 2004 and December 31, 2003, respectively			14,061		13,837
Additional paid-in capital			2,453,675		2,302,919
Accumulated other comprehensive income			66,377		164,526
Retained earnings			6,910,684		5,603,434

	Total shareholders’ equity		9,444,797		8,084,716

	Total liabilities and shareholders’ equity	$	103,753,435	$	97,977,673

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)



				Three Months Ended June 30,						Six Months Ended June 30,

				2004			2003			2004			2003


				(In thousands, except per share data)
Revenues:
	Gain on sale of loans and securities			$	1,277,331		$	1,710,927		$	2,635,998		$	3,063,497

	Interest income				1,074,326			805,167			2,124,076			1,447,289
	Interest expense				(575,778	)		(509,127	)		(1,093,333	)		(923,256	)

		Net interest income			498,548			296,040			1,030,743			524,033
	Provision for loan losses				(19,747	)		(7,222	)		(40,528	)		(14,825	)

		Net interest income after provision for loan losses			478,801			288,818			990,215			509,208


	Loan servicing fees and other income from retained interests				802,632			692,910			1,559,413			1,296,169
	Amortization of mortgage servicing rights				(569,977	)		(557,274	)		(983,659	)		(919,774	)
	Recovery (impairment) of retained interests				1,179,127			(1,551,847	)		183,482			(2,214,260	)
	Servicing hedge (losses) gains				(1,149,451	)		748,081			(476,655	)		754,442

		Net loan servicing fees and other income (loss) from retained interests			262,331			(668,130	)		282,581			(1,083,423	)


	Net insurance premiums earned				187,252			168,183			382,635			339,319
	Commissions and other income				127,389			128,517			248,170			242,735

			Total revenues		2,333,104			1,628,315			4,539,599			3,071,336

Expenses:
	Compensation expenses				770,090			652,718			1,450,754			1,232,629
	Occupancy and other office expenses				164,111			142,793			331,982			270,335
	Insurance claim expenses				83,752			85,851			168,427			173,949
	Other operating expenses				172,317			125,631			321,642			248,533

			Total expenses		1,190,270			1,006,993			2,272,805			1,925,446

Earnings before income taxes					1,142,834			621,322			2,266,794			1,145,890
Provision for income taxes					443,211			238,461			876,199			436,738

		NET EARNINGS		$	699,623		$	382,861		$	1,390,595		$	709,152

Earnings per share:
	Basic			$	2.50		$	1.44		$	4.99		$	2.72
	Diluted			$	2.24		$	1.37		$	4.46		$	2.59

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2004

(Unaudited)


								Accumulated
					Additional			Other
	Number of		Common		Paid-in-			Comprehensive			Retained
	Shares		Stock		Capital			Income			Earnings			Total


	(In thousands, except share data)
Balance at December 31, 2003		184,483,093	$	9,225	$	2,307,531		$	164,526		$	5,603,434		$	8,084,716
Cash dividends paid — $0.30 per common share		—		—		—			—			(83,345	)		(83,345	)
Stock options exercised		3,209,785		160		69,991			—			—			70,151
Tax benefit of stock options exercised		—		—		55,115			—			—			55,115
Contribution of common stock to 401(k) Plan		203,542		10		13,763			—			—			13,773
Issuance of common stock net of treasury stock		382,621		20		11,921			—			—			11,941
3-for-2 stock split		92,915,124		4,646		(4,646	)		—			—			—
Other comprehensive income, net of tax		—		—		—			(98,149	)		—			(98,149	)
Net earnings for the period		—		—		—			—			1,390,595			1,390,595

Balance at June 30, 2004		281,194,165	$	14,061	$	2,453,675		$	66,377		$	6,910,684		$	9,444,797

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



					Six Months Ended June 30,

					2004			2003


					(In thousands)
Cash flows from operating activities:
	Net earnings				$	1,390,595		$	709,152
		Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
			Gain on sale of available-for-sale securities			(176,457	)		(111,166	)
			Provision for loan losses			40,528			14,825
			Accretion of discount of available-for-sale securities			(170,240	)		(219,377	)
			Amortization and recovery/impairment of mortgage servicing rights			528,338			3,014,203
			Impairment of other retained interests			271,839			119,831
			Contribution of common stock to 401(k) Plan			13,773			11,039
			Depreciation and other amortization			71,033			52,244
			Provision for deferred income taxes			460,674			11,720
			Originations and purchases of loans held for sale			(154,898,000	)		(226,965,308	)
			Sales and principal repayments of loans held for sale			159,455,757			206,237,255

			Decrease (increase) in mortgage loans and mortgage-backed securities held for sale			4,557,757			(20,728,053	)

			Decrease (increase) in trading securities			399,155			(2,061,281	)
			Decrease in investments in other financial instruments			241,754			1,832,040
			Increase in other assets			(2,526,527	)		(1,205,174	)
			Increase in accounts payable and accrued liabilities			2,078,576			4,914,077
			Increase in income taxes payable			19,083			292,512

				Net cash provided (used) by operating activities		7,199,881			(13,353,408	)

Cash flows from investing activities:
	Increase in securities purchased under agreements to resell					(4,291,294	)		(1,480,280	)
	Additions to loans held for investment					(7,567,925	)		(6,106,801	)
	Additions to available-for-sales securities					(3,496,972	)		(7,256,190	)
	Proceeds from sales and repayments of available-for-sale securities					8,465,591			3,808,600
	Additions to mortgage servicing rights					(2,055,577	)		(3,118,050	)
	Purchases of premises and equipment, net					(178,298	)		(117,698	)

				Net cash used by investing activities		(9,124,475	)		(14,270,419	)

Cash flows from financing activities:
	Net (decrease) increase in short-term borrowings					(1,577,020	)		12,675,309
	Net (decrease) increase in securities sold under agreement to repurchase					(6,392,941	)		6,143,881
	Issuance of long-term debt					5,220,883			3,765,193
	Repayment of long-term debt					(3,770,241	)		(3,290,035	)
	Increase in long-term FHLB advances					2,350,000			2,500,000
	Issuance of company obligated mandatorily redeemable capital pass-through securities					—			500,000
	Net increase in deposit liabilities					6,142,609			4,936,501
	Issuance of common stock					82,092			414,868
	Payment of dividends					(83,345	)		(33,319	)

				Net cash provided by financing activities		1,972,037			27,612,398

Net increase (decrease) in cash						47,443			(11,429	)
Cash at beginning of period						633,467			613,280

				Cash at end of period	$	680,910		$	601,851

Supplemental cash flow information:
	Cash used to pay interest				$	770,352		$	852,113
	Cash used to pay income taxes				$	405,509		$	131,744
Non-cash investing and financing activities:
	Unrealized (loss) gain on available-for-sale securities, net of tax				$	(98,149	)	$	90,988
	Contribution of common stock to 401(k) plan				$	13,773		$	11,039
	Securitization of interest-only strips				$	56,038		$	834,116

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



				Three Months Ended						Six Months Ended
				June 30,						June 30,

				2004			2003			2004			2003


				(In thousands)
Net earnings				$	699,623		$	382,861		$	1,390,595		$	709,152
Other comprehensive (loss) income, net of tax:
	Unrealized (losses) gains on available for sale securities:
		Unrealized holding (losses) gains arising during the period, before tax			(281,352	)		74,315			(270,261	)		149,669
			Income tax benefit (expense)		108,579			(28,134	)		104,071			(56,544	)

			Unrealized holding (losses) gains arising during the period, net of tax		(172,773	)		46,181			(166,190	)		93,125

		Less: reclassification adjustment for losses (gains) included in net earnings, before tax			147,160			(36,764	)		110,649			(3,434	)
			Income tax (benefit) expense		(57,449	)		13,863			(42,608	)		1,297

			Reclassification adjustment for losses (gains) included in net earnings, net of tax		89,711			(22,901	)		68,041			(2,137	)

Other comprehensive (loss) income, net of tax					(83,062	)		23,280			(98,149	)		90,988

Comprehensive income				$	616,561		$	406,141		$	1,292,446		$	800,140

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 1 —	Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the 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 generally accepted accounting principles for complete financial statements. 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 six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2003 for Countrywide Financial Corporation (the “Company”).

As more fully discussed in Note 10 — Notes Payable, the Company adopted an amendment to Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”) during the six months ended June 30, 2004. FIN 46R requires that Countrywide no longer include certain subsidiary trusts in its consolidated reporting group. The effects of this pronouncement on the Company’s financial statements are that the consolidated balance sheets:

• Exclude the trust preferred securities issued by the subsidiary trusts, formerly reflected in a separate mezzanine category on the consolidated balance sheets,

• Include the junior subordinated debentures issued by Countrywide Home Loans, Inc. (“CHL”) and the Company to the subsidiary trusts, currently reflected in Notes Payable, and

• Include CHL’s and the Company’s investments in the subsidiary trusts, currently reflected in Other Assets.

In April of 2004, the Company completed a 3-for-2 stock split effected as a stock dividend. All references in the accompanying consolidated financial statements to the number of common shares and earnings per share amounts have been adjusted accordingly.

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


Note 2 —	Earnings Per Share

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

As more fully discussed in Note 10, the Company has outstanding debentures convertible into common stock of the Company upon the stock reaching certain specified levels, or if the credit ratings of the debentures drop below investment grade. At June 30, 2004, the conditions providing the holders of the debentures the right to convert their securities to shares of common stock during the quarter ending September 30, 2004, had been met as a result of the Company’s stock price attaining a specified level. These conditions had also been met as of March 31, 2004. Therefore, the effect of conversion of the debentures was included in the Company’s calculation of diluted earnings per share for the three and six months ended June 30, 2004. For the three and six months ended June 30, 2003, the conditions providing the holders of the debentures the right to convert their securities had not been met and the effect of conversion of the securities was not included in the computation of diluted earnings per share for those periods.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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



		Three Months Ended June 30,


		2004						2003

		Net				Per-Share		Net				Per-Share
		Earnings		Shares		Amount		Earnings		Shares		Amount


		(In thousands, except per share data)
Net earnings and basic earnings per share		$	699,623		279,883	$	2.50	$	382,861		265,032	$	1.44
Effect of dilutive securities:
	Effect of convertible debentures		788		15,566				—		—
	Effect of dilutive stock options		—		17,448				—		14,742

Diluted earnings and earnings per share		$	700,411		312,897	$	2.24	$	382,861		279,774	$	1.37



		Six Months Ended June 30,


		2004						2003

		Net				Per-Share		Net				Per-Share
		Earnings		Shares		Amount		Earnings		Shares		Amount


		(In thousands, except per share data)
Net earnings and basic earnings per share		$	1,390,595		278,933	$	4.99	$	709,152		260,290	$	2.72
Effect of dilutive securities:
	Effect of convertible debentures		1,578		15,566				—		—
	Effect of dilutive stock options		—		17,617				—		13,138

Diluted earnings and earnings per share		$	1,392,173		312,116	$	4.46	$	709,152		273,428	$	2.59


	*Stock-Based Compensation*

The Company generally grants to employees both stock options and restricted stock. The Company’s stock option awards are generally for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company recognizes compensation expense related to its stock option plans only to the extent that the fair value of the shares at the grant date exceeds the exercise price. The Company recognizes compensation expense related to its restricted stock grants based on the fair value of the shares awarded on the date that the shares are awarded.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Had the estimated fair value of the options granted been included in compensation expense, the Company’s net earnings and earnings per share would have been as follows:



			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2004			2003			2004			2003


			(In thousands, except per share data)
Net Earnings:
	As reported		$	699,623		$	382,861		$	1,390,595		$	709,152
		Add: Stock-based compensation included in net earnings, net of taxes		491			—			965			—
		Deduct: Stock-based employee compensation, net of taxes		(11,773	)		(7,595	)		(16,961	)		(12,605	)

	Pro forma		$	688,341		$	375,266		$	1,374,599		$	696,547

Basic Earnings Per Share:
	As reported		$	2.50		$	1.44		$	4.99		$	2.72
	Pro forma		$	2.46		$	1.42		$	4.93		$	2.68
Diluted Earnings Per Share:
	As reported		$	2.24		$	1.37		$	4.46		$	2.59
	Pro forma		$	2.20		$	1.34		$	4.40		$	2.55

The fair value of each stock option grant is estimated on the date of grant using a Black-Scholes option-pricing model that has been modified to consider cash dividends to be paid. To determine periodic compensation expense for purposes of this pro forma disclosure, the fair value of each stock option grant is amortized over the vesting period. The weighted-average assumptions used to value the stock option grants and the resulting average estimated values are as follows:



		Three Months						Six Months
		Ended June 30,						Ended June 30,

		2004			2003			2004			2003

Weighted Average Assumptions:
	Dividend yield		0.85	%		0.84	%		0.85	%		0.73	%
	Expected volatility		36.04	%		33.00	%		36.02	%		33.00	%
	Risk-free interest rate		2.90	%		2.35	%		2.90	%		2.34	%
	Expected life (in years)		5.00			4.16			5.00			4.16
Weighted Average Exercise Price		$	63.74		$	31.91		$	63.69		$	31.33
Per-share Fair Value of Options		$	21.31		$	16.30		$	21.32		$	16.07

During the three and six months ended June 30, 2004, options to purchase 5,909,998 and 5,919,248 shares, respectively, of stock were not included in the computation of earnings per share because they were anti-dilutive. During both the three and six months ended June 30, 2003, options totaling 2,034,272 were anti-dilutive.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


Note 3 —	Mortgage Servicing Rights

The activity in Mortgage Servicing Rights (“MSRs”) for the periods indicated are as follows:



			Six Months Ended June 30,

			2004			2003


			(In thousands)
Mortgage Servicing Rights
	Balance at beginning of period		$	8,065,174		$	7,420,946
		Additions		2,055,577			3,118,050
		Securitization of MSRs		(56,038	)		(834,116	)
		Amortization		(983,659	)		(919,774	)
		Application of valuation allowance to write down permanently impaired MSRs		(360,774	)		(1,801,277	)

	Balance before valuation allowance at end of period			8,720,280			6,983,829

Valuation Allowance for Impairment of Mortgage Servicing Rights
	Balance at beginning of period			(1,201,549	)		(2,036,013	)
		Additions		455,321			(2,094,429	)
		Application of valuation allowance to write down permanently impaired MSRs		360,774			1,801,277

	Balance at end of period			(385,454	)		(2,329,165	)

Mortgage Servicing Rights, net			$	8,334,826		$	4,654,664

The estimated fair values of mortgage servicing rights were $9.2 billion and $6.9 billion as of June 30, 2004 and December 31, 2003, respectively.

The long-term estimated weighted average prepayment speeds (annual rates) for the MSRs were approximately 21% and 17% at December 31, 2003 and June 30, 2004, respectively, while the weighted average note rate in the servicing portfolio declined over that period from 6.1% to 5.9%. The MSR option adjusted spread (“OAS”) at June 30, 2004, ranged from 3.3% for conventional conforming MSRs to 7.3% for subprime MSRs. In comparison, the MSR OAS at December 31, 2003 ranged from 3.5% for conventional conforming MSRs to 7.5% for subprime MSRs.

The following table summarizes the Company’s estimate of amortization of the existing MSRs for the five-year period ending June 30, 2009. This projection was developed using the assumptions made by management in its June 30, 2004 valuation of MSRs. The assumptions underlying the following estimate will be affected as market conditions and portfolio composition and behavior change, causing both actual and

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

projected amortization levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management.


	Estimated MSR
Year Ended June 30,	Amortization

	(In thousands)
2005	$	1,494,330
2006		1,274,679
2007		1,050,348
2008		863,847
2009		712,442

Five-year total	$	5,395,646


Note 4 —	Trading Securities

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


		June 30,		December 31,
		2004		2003


		(In thousands)
Mortgage pass-through securities:
	Fixed-rate	$	5,733,119	$	8,523,439
	Adjustable-rate		735,378		476,514

			6,468,497		8,999,953
Collateralized mortgage obligations			2,250,577		1,362,446
U.S. Treasury securities			1,163,901		192,174
Obligation of U.S. Government-sponsored enterprises			311,630		243,790
Asset-backed securities			301,787		99,774
Interest-only securities			211,152		190,331
Negotiable certificates of deposits			23,279		26,243

		$	10,730,823	$	11,114,711

As of June 30, 2004, $9.8 billion of the Company’s trading securities had been pledged as collateral for financing purposes, of which the counterparty has the contractual right to sell or re-pledge $1.6 billion. The Company had recorded $15.9 million and $26.3 million in gains that related to trading securities still held at June 30, 2004, and December 31, 2003, respectively.


Note 5 —	Securities Purchased Under Agreements to Resell

As of June 30, 2004, the Company had accepted collateral with a fair value of $18.4 billion that it had the contractual ability to sell or re-pledge. As of June 30, 2004, the Company had re-pledged $17.7 billion of such collateral for financing purposes, of which $4.4 billion related to amounts offset against securities purchased under agreements to resell under master netting arrangements.

As of December 31, 2003, the Company had accepted collateral with a fair value of $11.8 billion that it had the contractual ability to sell or re-pledge. As of December 31, 2003, the Company had re-pledged

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

$10.8 billion of such collateral for financing purposes, of which $1.2 billion related to amounts offset against securities purchased under agreements to resell under master netting arrangements.


Note 6 —	Loans Held for Investment and Allowance for Loan Losses

Loans held for investment as of the dates indicated include the following:


			June 30,			December 31,
			2004			2003


			(In thousands)
Mortgage loans:
	Prime Home Equity		$	14,818,056		$	12,804,356
	Prime			14,015,330			8,770,932
	Subprime			137,679			175,331

		Total mortgage loans		28,971,065			21,750,619
Warehouse lending advances secured by mortgage loans				3,253,360			1,886,169
Defaulted FHA-insured and VA-guaranteed mortgage loans repurchased from securities				1,462,128			2,560,454

				33,686,553			26,197,242
Deferred loan origination costs				314,738			249,262
Allowance for loan losses				(105,839	)		(78,449	)

		Loans held for investment, net	$	33,895,452		$	26,368,055

At June 30, 2004, mortgage loans held for investment totaling $18.3 billion and $2.8 billion were pledged to secure Federal Home Loan Bank advances and securities sold under agreements to repurchase, respectively.

At June 30, 2004, the Company had accepted collateral securing warehouse lending advances that it had the contractual ability to sell or re-pledge with a fair value of $3.4 billion. As of June 30, 2004, no such collateral had been re-pledged.

Changes in the allowance for loan losses were as follows for the periods indicated:



	Six Months Ended
	June 30,

	2004			2003


	(In thousands)
Balance, beginning of period	$	78,449		$	42,049
Provision for loan losses		40,528			14,825
Net charge-offs		(13,138	)		(8,694	)

Balance, end of period	$	105,839		$	48,180

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


Note 7 —	Investments in Other Financial Instruments

Investments in other financial instruments as of the dates indicated include the following:


			June 30,		December 31,
			2004		2003


			(In thousands)
Home equity AAA asset-backed senior securities			$	1,515,604	$	4,622,810
Insurance and Banking Segments investment portfolios:
	Mortgage-backed securities			3,369,603		4,440,676
	U.S. Treasury securities and obligations of U.S. Government-sponsored enterprises			252,872		283,453
	Other			94,263		88

		Total Insurance and Banking Segments investment portfolios		3,716,738		4,724,217

Other interests retained in securitization:
	Subprime residual securities			700,065		370,912
	Prime home equity residual securities			305,993		320,663
	Nonconforming interest-only and principal-only securities			190,142		130,300
	Prime home equity line of credit transferor’s interest			185,869		236,109
	Subprime AAA interest-only securities			166,397		310,020
	Prepayment bonds			87,645		50,595
	Prime home equity interest-only securities			18,486		33,309
	Subordinated mortgage-backed pass-through securities			2,637		5,997

		Total other interests retained in securitization		1,657,234		1,457,905

Servicing hedge instruments — U.S. Treasury securities				—		1,148,922

		Total available-for-sale securities		6,889,576		11,953,854

Servicing hedge derivative instruments				442,316		642,019
Debt hedge instruments — Interest rate and foreign currency swaps				176,152		165,891

		Investments in other financial instruments	$	7,508,044	$	12,761,764

At June 30, 2004, the Company had pledged $1.5 billion of home equity-backed securities to secure securities sold under agreements to repurchase.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Amortized cost and fair value of available-for-sale securities as of the dates indicated are as follows:



	June 30, 2004

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value


	(In thousands)
Home equity AAA asset-backed senior securities	$	1,452,734	$	62,870	$	—		$	1,515,604
Other interests retained in securitization		1,606,844		90,996		(40,606	)		1,657,234
Mortgage-backed securities		3,427,585		14,097		(72,079	)		3,369,603
U.S. Treasury securities and obligations of U.S. Government-sponsored enterprises		251,241		20,911		(19,280	)		252,872
Other		93,798		624		(159	)		94,263

	$	6,832,202	$	189,498	$	(132,124	)	$	6,889,576



	December 31, 2003

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value


	(In thousands)
Home equity AAA asset-backed senior securities	$	4,445,574	$	177,236	$	—		$	4,622,810
Other interests retained in securitization		1,356,420		102,798		(1,313	)		1,457,905
Mortgage-backed securities		4,476,600		38,869		(74,793	)		4,440,676
U.S. Treasury securities and obligations of U.S. Government-sponsored enterprises		1,433,436		41,542		(42,603	)		1,432,375
Other		86		2		—			88

	$	11,712,116	$	360,447	$	(118,709	)	$	11,953,854

At June 30, 2004 and December 31, 2003, the Company’s available-for-sale securities in an unrealized loss position are as follows:



	June 30, 2004


	Less Than 12 Months					12 Months or More					Total

			Unrealized					Unrealized					Unrealized
	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss


	(In thousands)
Other interests retained in securitization	$	114,676	$	(40,606	)	$	—	$	—		$	114,676	$	(40,606	)
Mortgage-backed securities		2,113,063		(41,842	)		581,640		(30,237	)		2,694,703		(72,079	)
U.S. Treasury securities and obligations of U.S. Government-sponsored enterprises		163,954		(1,255	)		31,700		(18,025	)		195,654		(19,280	)
Other		27,010		(159	)		—		—			27,010		(159	)

Total temporarily impaired securities	$	2,418,703	$	(83,862	)	$	613,340	$	(48,262	)	$	3,032,043	$	(132,124	)

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



	December 31, 2003


	Less Than 12 Months					12 Months or More					Total

			Unrealized					Unrealized					Unrealized
	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss


	(In thousands)
Other interests retained in securitization	$	10,698	$	(1,313	)	$	—	$	—		$	10,698	$	(1,313	)
Mortgage-backed securities		2,640,623		(74,739	)		7,666		(54	)		2,648,289		(74,793	)
U.S. Treasury securities and obligations of U.S. Government-sponsored enterprises		1,237,804		(42,603	)		—		—			1,237,804		(42,603	)

Total temporarily impaired securities	$	3,889,125	$	(118,655	)	$	7,666	$	(54	)	$	3,896,791	$	(118,709	)

The temporary impairment is a result of the change in market interest rates and is not indicative of the underlying issuers’ ability to repay. Accordingly, we have not recognized other-than-temporary impairment related to these securities as of June 30, 2004.

Gross gains and losses realized on the sales of available-for-sale securities are as follows for the periods indicated:



			Six Months Ended
			June 30,

			2004			2003


			(In thousands)
Home equity AAA asset-backed senior securities:
	Gross realized gains		$	137,215		$	—
	Gross realized losses			—			—

		Net		137,215			—

Other interests retained in securitization:
	Gross realized gains			—			21,081
	Gross realized losses			—			(8,521	)

		Net		—			12,560

Principal-only securities:
	Gross realized gains			—			91,981
	Gross realized losses			—			—

		Net		—			91,981

Mortgage-backed securities:
	Gross realized gains			7,057			5,502
	Gross realized losses			(946	)		—

		Net		6,111			5,502

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



			Six Months Ended
			June 30,

			2004			2003


			(In thousands)
U.S. Treasury securities and obligations of U.S. Government-sponsored enterprises:
	Gross realized gains			33,359			1,123
	Gross realized losses			(224	)		—

		Net		33,135			1,123

Other:
	Gross realized gains			11			—
	Gross realized losses			(15	)		—

		Net		(4	)		—

Total gains and losses on available-for-sale securities:
	Gross realized gains			177,642			119,687
	Gross realized losses			(1,185	)		(8,521	)

		Net	$	176,457		$	111,166


Note 8 —	Other Assets

Other assets as of the dates indicated include the following:


	June 30,		December 31,
	2004		2003


	(In thousands)
Securities broker-dealer receivables	$	1,611,411	$	742,139
Securities borrowed		1,394,984		—
Reimbursable servicing advances		804,766		1,031,835
Receivables from custodial accounts		719,860		595,671
Investments in Federal Reserve Bank and Federal Home Loan Bank stock		523,769		394,110
Capitalized software, net		261,220		235,713
Federal funds sold		260,000		100,000
Interest receivable		254,584		242,669
Unsettled securities trades, net		254,483		173,382
Prepaid expenses		202,165		204,570
Derivative margin accounts		173,163		285,583
Restricted cash		167,577		281,477
Cash surrender value of assets held in trust for deferred compensation plan		115,753		115,491
Receivables from sale of securities		107,924		105,325
Other assets		685,415		521,083

	$	7,537,074	$	5,029,048

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

At June 30, 2004, the Company had pledged $3.9 billion of other assets to secure securities sold under repurchase agreements, of which the counterparty has the right to sell or re-pledge $1.2 billion. As of June 30, 2004, $1.5 billion of the pledged other assets related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.


Note 9 —	Securities Sold Under Agreements to Repurchase

The Company routinely enters into short-term financing arrangements to sell securities under agreements to repurchase. 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, 2004, repurchase agreements were secured by $14.7 billion of securities purchased under agreements to resell; $9.4 billion of trading securities; $1.5 billion of investments in other financial instruments; $2.8 billion of loans held for investment; $3.9 billion of other assets and $0.9 billion of mortgage loans held for sale. As of June 30, 2004, $4.4 billion of the pledged securities purchased under agreements to resell and $1.5 billion of the pledged other assets related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.


Note 10 —	Notes Payable

Notes payable as of the dates indicated consist of the following:


		June 30,		December 31,
		2004		2003


		(In thousands)
Medium-term notes, various series:
	Fixed-rate	$	12,246,668	$	12,724,998
	Floating-rate		9,893,966		3,848,023

			22,140,634		16,573,021
Federal Home Loan Bank advances			9,375,000		6,875,000
Asset-backed commercial paper			7,724,117		9,699,053
Unsecured commercial paper			1,288,369		4,819,382
Junior subordinated debentures			1,027,947		1,027,880
Convertible debentures			515,999		515,198
Unsecured notes payable			34,260		409,668
Secured notes payable			28,493		29,259

		$	42,134,819	$	39,948,461

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	*Medium-Term Notes*

During the six months ended June 30, 2004, CHL, the Company’s principal mortgage banking subsidiary, issued medium-term notes under shelf registration statements or pursuant to its Euro medium-term note program as follows:



	Outstanding Balance
							Interest Rate				Maturity Date
	Floating
	Rate		Fixed Rate		Total		From		To		From	To


	(Dollar amounts in thousands)
Series L	$	4,066,000	$	1,850,000	$	5,916,000		1.2%		4.0%	Jan 18, 2005	Mar 22, 2011
Series M		1,505,000		12,500		1,517,500		1.3%		6.2%	May 20, 2005	Jun 25, 2029
Euro Notes		1,942,486		—		1,942,486		1.2%		1.9%	Mar 1, 2005	Dec 15, 2008

	$	7,513,486	$	1,862,500	$	9,375,986

Of the $7.5 billion of floating-rate medium-term notes issued by the Company during the six months ended June 30, 2004, $1.7 billion were effectively converted to fixed-rate debt using interest rate swap contracts. Of the $1.9 billion of fixed-rate medium-term notes issued by the Company during the six months ended June 30, 2004, none was converted to floating-rate debt.

During the six months ended June 30, 2004, CHL redeemed $3.8 billion of maturing medium-term notes.

As of June 30, 2004, $3.2 billion of foreign currency-denominated medium-term notes were outstanding. Such notes are denominated in Japanese Yen, Deutsche Marks, French Francs, Portuguese Escudos, Pound Sterling and Euros. These notes have been effectively converted to U.S. dollars through currency swaps.


	*Asset-Backed Commercial Paper*

In April 2003, the Company formed a wholly-owned special purpose entity for the purpose of issuing commercial paper in the form of short-term Secured Liquidity Notes (“SLNs”) to finance certain of its Mortgage Loan Inventory. The special purpose entity issues short-term notes with maturities of up to 180 days, extendable to 300 days. The SLNs bear interest at prevailing money market rates approximating LIBOR. The SLN program’s capacity, based on aggregate commitments from underlying credit enhancers, was $18.2 billion at June 30, 2004. The Company has pledged $8.1 billion in Mortgage Loan Inventory to secure the asset-backed commercial paper issued at June 30, 2004. For the six months ended June 30, 2004, the average borrowings under this facility totaled $13.0 billion, and the weighted average interest rate of the commercial paper was 1.1%. At June 30, 2004, the average interest rate of the commercial paper outstanding was 1.2%.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	*Federal Home Loan Bank Advances*

During the six months ended June 30, 2004, the Company obtained $2.5 billion of advances from the Federal Home Loan Bank (“FHLB”). Of this total, $0.7 billion bear variable interest rates and $1.8 billion bear fixed interest rates. The average interest rate and maturity schedule of these new advances follows:


Year Ended June 30,	Amount		Rate

	(In thousands)
2005	$	150,000		1.33	%
2006		500,000		1.92	%
2007		1,250,000		1.86	%
2008		400,000		3.07	%
2009		200,000		3.40	%

	$	2,500,000		2.16	%


	*Junior Subordinated Debentures*

As more fully discussed in Note 2 — Summary of Significant Accounting Policies “Implementation of New Accounting Standards”, included in the Company’s financial statements in Countrywide’s Annual Report on Form 10-K for the period ended December 31, 2003 (the “2003 Annual Report”), the FASB issued FIN 46R in December 2003. The effect of FIN 46R on the Company is to require that Countrywide no longer include certain subsidiary trusts in its consolidated reporting group. Specifically, the Company now excludes the subsidiary trusts that have issued trust-preferred securities backed by junior subordinated debentures issued by CHL and the Company from the Company’s consolidated financial statements. Terms of the trust-preferred securities are detailed in Note 18 of the 2003 Annual Report.

As a result of the Company’s adoption of FIN 46R, the company-obligated capital securities of subsidiary trusts are no longer reflected on Countrywide’s consolidated balance sheets, but have been replaced on the Company’s balance sheet by the junior subordinated debentures issued to the subsidiary trusts by CHL and the Company.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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



			June 30, 2004

			Countrywide		Countrywide
			Capital I		Capital III


			(In thousands)
Balance Sheet:
	Junior subordinated debentures receivable		$	307,279	$	205,204
	Other assets			1,031		692

		Total assets	$	308,310	$	205,896

	Notes payable		$	9,219	$	6,170
	Other liabilities			1,031		692
	Company-obligated mandatorily redeemable capital trust pass-through securities			298,060		199,034
	Equity			—		—

		Total liabilities and equity	$	308,310	$	205,896



			Six Months Ended
			June 30, 2004

			Countrywide			Countrywide
			Capital I			Capital III


			(In thousands)
Statement of Earnings:
	Revenues		$	12,416		$	8,321
	Expenses			(12,416	)		(8,321	)
	Provision for income taxes			—			—

		Net earnings	$	—		$	—



			December 31, 2003

			Countrywide		Countrywide
			Capital I		Capital III


			(In thousands)
Balance Sheet:
	Junior subordinated debentures receivable		$	307,234	$	205,182
	Other assets			3,076		1,710

		Total assets	$	310,310	$	206,892

	Notes payable		$	9,279	$	6,200
	Other liabilities			3,076		1,710
	Company-obligated mandatorily redeemable capital trust pass-through securities			297,955		198,982
	Equity			—		—

		Total liabilities and equity	$	310,310	$	206,892

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



			Six Months Ended
			June 30, 2003

			Countrywide			Countrywide
			Capital I			Capital III


			(In thousands)
Statement of Earnings:
	Revenues		$	12,416		$	8,321
	Expenses			(12,416	)		(8,321	)
	Provision for income taxes			—			—

		Net earnings	$	—		$	—


	*Convertible Debentures*

The Company has issued zero-coupon Liquid Yield Option Notes (“LYONs”) with an aggregate face value of $675 million, or $1,000 per note, due upon maturity on February 8, 2031. The LYONs were issued at a discount to yield 1.0% to maturity, or 8.25% to the first call date. The LYONs are senior indebtedness of the Company.

Holders of LYONs may require the Company to repurchase all or a portion of their LYONs at the original issue price plus accrued original issue discount. The Company may pay the purchase price in cash, common stock or a combination thereof.

Beginning on February 8, 2006, and on any date thereafter, the Company may redeem the LYONs at the original issue price plus accrued original issue discount.

In the calendar quarter subsequent to June 30, 2004, holders may surrender LYONs for conversion into shares of the Company’s common stock. Holders of LYONs may also surrender shares in any subsequent calendar quarter if the conversion contingency requirements of the LYONs continue to be met. Such requirements are met if, as of the last day of the preceding calendar quarter, the closing sale price of the Company’s common stock, for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter, is more than a specified percentage of the accrued conversion price per share of common stock on the last day of trading of such preceding calendar quarter (the “Contingent Conversion Stock Price”), with such Contingent Conversion Stock Price to be adjusted for the effect of any stock split declared by the Company. At June 30, 2004, the accrued conversion price per share of common stock was $33.15. The specified percentage of such accrued conversion price applicable for such period was 132.48%. Therefore, the Contingent Conversion Stock Price of the LYONs was $43.92. If the conversion contingency requirements of the LYONs have been met, holders may surrender LYONs for conversion into 23.14 shares of the Company’s common stock per LYON.

On July 12, 2004, the Company filed a registration statement with the SEC relating to a potential offer by the Company to exchange the LYONs for a new convertible security. This registration statement has not been declared effective, and the Company has not determined whether it will make the exchange offer described therein.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


Note 11 —	Deposits

The following table shows comparative deposits as of the dates indicated:


	June 30,		December 31,
	2004		2003


	(In thousands)
Company-controlled escrow deposit accounts	$	8,418,434	$	5,900,682
Time deposits		6,209,793		3,252,665
Interest-bearing checking accounts		759,991		73,217
Non interest-bearing checking accounts		79,850		99,545
Savings accounts		2,212		1,562

	$	15,470,280	$	9,327,671


Note 12 —	Derivative Instruments and Risk Management Activities

The primary market risk facing the Company is interest rate risk. The most predominate type of interest rate risk at Countrywide is price risk, which is the risk that the value of our assets or liabilities will change due to changes in interest rates. To a lesser extent, interest rate risk also includes the risk that the net interest income from our mortgage loan and investment portfolios will change in response to changes in interest rates. From an enterprise perspective, the Company manages this risk through the natural counterbalance of its loan production and servicing businesses along with various financial instruments, including derivatives, which are used to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory and MBS held for sale, MSRs, trading securities and other retained interests, as well as a portion of its debt. 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.

The Company uses a variety of derivative financial instruments to manage interest rate risk. These instruments include MBS mandatory forward sale and purchase commitments, options to sell or buy MBS, Treasury and Eurodollar rate futures and options thereon, interest rate floors, interest rate caps, capped swaps, swaptions, and interest rate swaps. These instruments involve, to varying degrees, elements of interest rate and credit risk. The Company manages foreign currency exchange rate risk, which arises from the issuance of foreign currency-denominated debt, with foreign currency swaps.


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

The Company has interest rate risk relative to its mortgage loan inventory and its Interest Rate Lock Commitments (“IRLCs”).

The Company is exposed to price risk from the time an IRLC is made to a mortgage applicant (or financial intermediary) to the time the related mortgage loan is sold. During this period, the Company is exposed to losses if mortgage rates rise, because the value of the IRLC or mortgage loan declines. To manage this price risk, the Company utilizes derivatives, primarily forward sales of MBS and options to buy and sell MBS, as well as options on Treasury futures contracts. Certain of these instruments qualify as “fair value” hedges of mortgage loans under SFAS 133.

In general, the risk management activities connected with 75% or more of the fixed-rate mortgage inventory is accounted for as a “fair value” hedge. The Company recognized pre-tax losses of $84.6 million and pre-tax gains of $1.8 million, representing the ineffective portion of such fair value hedges of its mortgage inventory, for the six months ended June 30, 2004 and 2003, respectively. These amounts, along with the

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

change in the fair value of the derivative instruments that were not designated as hedge instruments, are included in gain on sale of loans and securities in the statement of earnings.

IRLCs are derivative instruments and are recorded at fair value with changes in fair value recognized in current period earnings (as a component of gain on sale of loans and securities). Because IRLCs are derivatives under SFAS 133, the risk management activities related to the IRLCs do not qualify for hedge accounting under SFAS 133. The “freestanding” derivative instruments that are used to manage the interest rate risk associated with the IRLCs are marked to fair value and recorded as a component of gain on sale of loans in the consolidated statements of earnings.


	*Risk Management Activities Related to Mortgage Servicing Rights (MSRs) and Other Retained Interests*

MSRs and other retained interests, specifically interest-only securities and residual securities, are generally subject to a loss in value, or impairment, when mortgage interest rates decline. To moderate the effect of impairment on earnings, the Company maintains a portfolio of financial instruments, including derivatives, which increase in aggregate value when interest rates decline. This portfolio of financial instruments is collectively referred to as the “Servicing Hedge.” During the six months ended June 30, 2004 and 2003, none of the derivative instruments included in the Servicing Hedge were designated as hedges under SFAS 133. The change in fair value of these derivative instruments was recorded in current period earnings as a component of Servicing Hedge gains and losses.

The financial instruments that comprise the Servicing Hedge include options on interest rate futures, interest rate swaps, interest rate caps, interest rate swaptions, interest rate futures and Treasury securities. With respect to the options on interest rate futures and interest rate caps, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. With respect to the interest rate swap contracts outstanding as of June 30, 2004, the Company estimates that its maximum exposure to loss over the various contractual terms is $229 million. Although this estimate could be exceeded, the Company derives its estimates of loss exposure based upon observed volatilities in the interest rate options market. Using the currently observed volatilities, management estimates, to a 95% confidence level, the maximum potential rate changes over a one-year time horizon. Management then estimates the Company’s exposure to loss based on the estimated maximum adverse rate change as of the measurement date.

The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge.


	Balance,							Balance,
	December 31,				Dispositions/			June 30,
	2003		Additions		Expirations			2004


	(In millions)
Long Call Options on Interest Rate Futures	$	70,750	$	44,250	$	(96,500	)	$	18,500
Long Put Options on Interest Rate Futures	$	92,675	$	12,000	$	(98,675	)	$	6,000
Interest Rate Swaps	$	10,600	$	1,500	$	(9,600	)	$	2,500
Interest Rate Caps	$	800	$	4,173	$	—		$	4,973
Interest Rate Swaptions	$	23,000	$	33,000	$	(24,500	)	$	31,500
Interest Rate Futures	$	2,200	$	9,500	$	(11,700	)	$	—


	*Risk Management Activities Related to Issuance of Long-Term Debt*

The Company enters into interest rate swap contracts which enable it to convert a portion of its fixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt and to enable the Company to convert a portion

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

of its foreign currency-denominated fixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt. These transactions are designated as “fair value” hedges under SFAS 133. For the six months ended June 30, 2004, the Company recognized a pre-tax gain of $0.4 million, representing the ineffective portion of such fair value hedges of debt. For the six months ended June 30, 2003, the Company recognized a pre-tax loss of $0.1 million, representing the ineffective portion of such fair value hedges of debt. These amounts are included in interest charges in the consolidated statements of earnings.

In addition, the Company enters into interest rate swap contracts which enable it to convert a portion of its floating-rate, long-term debt to fixed-rate, long-term debt and to convert a portion of its foreign currency-denominated fixed-rate, long-term debt to U.S. dollar fixed-rate debt. These transactions are designed as “cash flow” hedges. For the six months ended June 30, 2004 and 2003, the Company recognized a pre-tax gain of $0.01 million and $0.1 million, respectively, representing the ineffective portion of such cash flow hedges. As of June 30, 2004, deferred net gains or losses on derivative instruments included in other comprehensive income that are expected to be reclassified to earnings during the next 12 months are not material.


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

In connection with its broker-dealer activities, the Company maintains a trading portfolio of fixed income securities, primarily MBS. The Company is exposed to price changes in its trading portfolio arising from interest rate changes during the period it holds the securities. To manage this risk, the Company utilizes derivative financial instruments. These instruments include MBS mandatory forward sale and purchase commitments as well as short sales of cash market U.S. Treasury securities, futures contracts, interest rate swap contracts, and swaptions. All such derivatives are accounted for as “free-standing” and as such are carried at fair value with changes in fair value recorded in current period earnings as a component of gain on sale of loans and securities.


Note 13 —	Segments and Related Information

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

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

The Loan Production Sector of the Mortgage Banking Segment originates Prime and Subprime Mortgage Loans through a variety of channels on a national scale. Through the Company’s retail branch network, which consists of the Consumer Markets Division and Full Spectrum Lending, Inc., the Company sources mortgage loans directly from consumers, as well as through real estate agents and home builders. The Wholesale Lending Division sources mortgage loans primarily from mortgage brokers. The Correspondent Lending Division acquires mortgage loans from other financial institutions. The Loan Servicing Sector of the Mortgage Banking Segment includes investments in MSRs and other retained interests, as well as the Company’s loan servicing operations and subservicing for other domestic financial institutions. The Loan Closing Services Sector of the Mortgage Banking Segment 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 Capital Markets Segment primarily includes the operations of Countrywide Securities Corporation, a registered broker-dealer specializing in the mortgage securities market. In addition, it includes the operations of Countrywide Asset Management Corporation, Countrywide Servicing Exchange and CCM International Ltd.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The Banking Segment’s operations are primarily comprised of Treasury Bank, National Association (“Treasury Bank” or the “Bank”), and Countrywide Warehouse Lending. Treasury Bank invests primarily in mortgage loans sourced from the Loan Production Sector. Countrywide Warehouse Lending provides temporary financing secured by mortgage loans to third-party mortgage bankers.

The Insurance Segment activities include Balboa Life and Casualty Group, a national provider of property, life, and liability insurance; Balboa Reinsurance Company, a primary mortgage reinsurance company; and Countrywide Insurance Services, Inc., a national insurance agency offering a specialized menu of insurance products directly to consumers.

The Global Operations Segment includes Global Home Loans Limited, a provider of loan origination processing and servicing in the United Kingdom; UKValuation Limited, a provider of property valuation services in the UK; and Countrywide International Technology Holdings Limited, a licensor of loan origination processing, servicing, and residential real estate value assessment technology.

In general, intercompany transactions are recorded on an arm’s-length basis. However, the rate at which the Bank reimburses CHL for origination costs incurred on mortgage loans funded by the Bank is determined on an incremental cost basis, which is less than the rate that the Bank would pay to third parties.

Included in the tables below labeled “Other” are the holding company activities and certain reclassifications to conform management reporting to the consolidated financial statements:



			Three Months Ended June 30, 2004


			Mortgage Banking										Diversified Businesses

			Loan			Loan		Closing					Capital							Global							Grand
			Production			Servicing		Services		Total			Markets		Banking			Insurance		Operations		Other			Total		Total


			(In thousands)
Revenues
	External		$	1,588,735		$	141,099	$	55,086	$	1,784,920		$	120,875	$	175,653		$	213,575	$	53,603	$	(15,522	)	$	548,184	$	2,333,104
	Intersegment			(36,417	)		28,268		—		(8,149	)		40,810		(6,962	)		—		—		(25,699	)		8,149		—

		Total Revenues	$	1,552,318		$	169,367	$	55,086	$	1,776,771		$	161,685	$	168,691		$	213,575	$	53,603	$	(41,221	)	$	556,333	$	2,333,104

Segment Earnings (pre-tax)			$	828,183		$	25,193	$	23,069	$	876,445		$	89,631	$	119,083		$	48,537	$	9,683	$	(545	)	$	266,389	$	1,142,834

Segment Assets			$	26,568,040		$	13,684,450	$	64,043	$	40,316,533		$	30,912,514	$	30,376,071		$	1,665,481	$	228,672	$	254,164		$	63,436,902	$	103,753,435



			Three Months Ended June 30, 2003


			Mortgage Banking											Diversified Businesses

			Loan			Loan			Closing					Capital						Global								Grand
			Production			Servicing			Services		Total			Markets		Banking		Insurance		Operations			Other			Total		Total


			(In thousands)
Revenues
	External		$	1,851,606		$	(735,021	)	$	62,376	$	1,178,961		$	134,348	$	92,269	$	194,831	$	48,028		$	(20,122	)	$	449,354	$	1,628,315
	Intersegment			(42,003	)		17,398			—		(24,605	)		34,223		1,723		—		—			(11,341	)		24,605		—

		Total Revenues	$	1,809,603		$	(717,623	)	$	62,376	$	1,154,356		$	168,571	$	93,992	$	194,831	$	48,028		$	(31,463	)	$	473,959	$	1,628,315

Segment Earnings (pre-tax)			$	1,209,793		$	(836,247	)	$	28,872	$	402,418		$	115,051	$	67,278	$	37,015	$	(225	)	$	(215	)	$	218,904	$	621,322

Segment Assets			$	39,381,016		$	10,124,206		$	75,357	$	49,580,579		$	24,554,379	$	15,924,568	$	1,481,144	$	166,662		$	78,234		$	42,204,987	$	91,785,566

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



			Six Months Ended June 30, 2004


			Mortgage Banking											Diversified Businesses

			Loan			Loan			Closing					Capital							Global							Grand
			Production			Servicing			Services		Total			Markets		Banking			Insurance		Operations		Other			Total		Total


			(In thousands)
Revenues
	External		$	3,196,930		$	101,269		$	104,466	$	3,402,665		$	300,267	$	318,949		$	436,040	$	111,415	$	(29,737	)	$	1,136,934	$	4,539,599
	Intersegment			(82,469	)		50,789			—		(31,680	)		84,814		(9,328	)		—		—		(43,806	)		31,680		—

		Total Revenues	$	3,114,461		$	152,058		$	104,466	$	3,370,985		$	385,081	$	309,621		$	436,040	$	111,415	$	(73,543	)	$	1,168,614	$	4,539,599

Segment Earnings (pre-tax)			$	1,770,070		$	(133,026	)	$	41,601	$	1,678,645		$	242,782	$	224,691		$	100,532	$	21,414	$	(1,270	)	$	588,149	$	2,266,794

Segment Assets			$	26,568,040		$	13,684,450		$	64,043	$	40,316,533		$	30,912,514	$	30,376,071		$	1,665,481	$	228,672	$	254,164		$	63,436,902	$	103,753,435



			Six Months Ended June 30, 2003


			Mortgage Banking											Diversified Businesses

			Loan			Loan			Closing					Capital						Global							Grand
			Production			Servicing			Services		Total			Markets		Banking		Insurance		Operations		Other			Total		Total


			(In thousands)
Revenues
	External		$	3,264,915		$	(1,172,720	)	$	114,026	$	2,206,221		$	265,946	$	154,693	$	388,629	$	94,073	$	(38,226	)	$	865,115	$	3,071,336
	Intersegment			(80,611	)		28,425			—		(52,186	)		65,254		6,266		—		—		(19,334	)		52,186		—

		Total Revenues	$	3,184,304		$	(1,144,295	)	$	114,026	$	2,154,035		$	331,200	$	160,959	$	388,629	$	94,073	$	(57,560	)	$	917,301	$	3,071,336

Segment Earnings (pre-tax)			$	2,092,093		$	(1,390,279	)	$	54,855	$	756,669		$	211,163	$	110,611	$	61,773	$	5,571	$	103		$	389,221	$	1,145,890

Segment Assets			$	39,381,016		$	10,124,206		$	75,357	$	49,580,579		$	24,554,379	$	15,924,568	$	1,481,144	$	166,662	$	78,234		$	42,204,987	$	91,785,566


Note 14 —	Regulatory and Agency Capital Requirements

In connection with the acquisition of Treasury Bank, the Company became a bank holding company. As a result, the Company is subject to regulatory capital requirements imposed by the Board of Governors of the Federal Reserve System. The Company is also subject to U.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac and Ginnie Mae net worth requirements.

Regulatory capital is assessed for adequacy by three measures: Tier 1 Leverage Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital. Tier 1 Leverage Capital includes common shareholders’ equity, preferred stock and capital securities that meet certain guidelines detailed in the capital regulations, less goodwill, the portion of MSRs not includable in regulatory capital (generally, the carrying value of MSRs in excess of Tier 1 Capital, net of associated deferred taxes) and other adjustments. Tier 1 Leverage Capital is measured with respect to average assets during the quarter. The Company is required to have a Tier 1 Leverage Capital ratio of 4.0% to be considered adequately capitalized and 5.0% to be considered well capitalized.

The Tier 1 Risk-Based Capital ratio is calculated as a percent of risk-weighted assets at the end of the quarter. The Company is required to have a Tier 1 Risk-Based Capital ratio of 4.0% to be considered adequately capitalized and 6.0% to be considered well capitalized.

Total Risk-Based Capital includes preferred stock and capital securities excluded from Tier 1 Capital, mandatory convertible debt, and subordinated debt that meets certain regulatory criteria. The Total Risk-Based Capital ratio is calculated as a percent of risk-weighted assets at the end of the quarter. The Company is required to have a Total Risk-Based Capital ratio of 8.0% to be considered adequately capitalized and 10.0% to be considered well capitalized.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table presents the actual capital ratios and amounts, and minimum required capital ratios for the Company to maintain a “well-capitalized” status by the Board of Governors of the Federal Reserve System as of the dates indicated:



				June 30, 2004				December 31, 2003
		Minimum
		Required(1)		Ratio		Amount		Ratio		Amount


		(Dollar amounts in thousands)
Tier 1 Leverage Capital			5.0%		8.2%	$	9,457,318		8.3%	$	8,082,963
Risk-Based Capital
	Tier 1		6.0%		11.9%	$	9,457,318		12.8%	$	8,082,963
	Total		10.0%		12.6%	$	10,029,785		13.7%	$	8,609,996

(1) Minimum required to qualify as “well-capitalized.”


Note 15 —	Legal Proceedings

The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the company and its subsidiaries.


Note 16 —	Subsequent Events

On June 22, 2004, the Company announced that its Board of Directors had declared a 2-for-1 stock split in the form of a stock dividend, subject to shareholder approval of a proposed amendment of the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of its common stock from 500,000,000 to 1,000,000,000. If the proposed amendment is approved by the Company’s shareholders at a special meeting to be held on August 17, 2004, the 2-for-1 stock split, effected as a stock dividend, would be payable on August 30, 2004 to stockholders of record on August 25, 2004.

On July 12, 2004 the Company filed a registration statement with the SEC relating to a potential offer by the Company to exchange the LYONs for a new convertible security. This registration statement has not been declared effective, and the Company has not determined whether it will make the exchange offer described therein.

On July 22, 2004, the Company’s Board of Directors declared a dividend of $0.20 per common share, payable August 31, 2004 to shareholders of record on August 13, 2004.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


Note 17 —	Summarized Financial Information

Summarized financial information for Countrywide Financial Corporation and subsidiaries is as follows:



			June 30, 2004

			Countrywide		Countrywide
			Financial		Home		Other
			Corporation		Loans, Inc.		Subsidiaries		Eliminations			Consolidated


			(In thousands)
Balance Sheet:
	Mortgage loans and mortgage-backed securities held for sale		$	—	$	19,492,911	$	52,957	$	—		$	19,545,868
	Trading securities			—		211,152		10,519,671		—			10,730,823
	Securities purchased under agreements to resell			—		290,000		17,575,842		(3,226,446	)		14,639,396
	Loans held for investment, net			—		11,059,834		22,836,013		(395	)		33,895,452
	Investments in other financial instruments			—		1,173,036		6,335,008		—			7,508,044
	Mortgage servicing rights, net			—		8,334,826		—		—			8,334,826
	Other assets			10,850,777		4,500,251		15,040,529		(21,292,531	)		9,099,026

		Total assets	$	10,850,777	$	45,062,010	$	72,360,020	$	(24,519,372	)	$	103,753,435

	Notes payable		$	1,267,376	$	35,914,426	$	17,180,575	$	(12,227,558	)	$	42,134,819
	Securities sold under agreements to repurchase			—		60,502		28,785,941		(3,225,972	)		25,620,471
	Deposit liabilities			—		—		15,470,280		—			15,470,280
	Other liabilities			138,604		5,204,154		5,940,871		(200,561	)		11,083,068
	Equity			9,444,797		3,882,928		4,982,353		(8,865,281	)		9,444,797

		Total liabilities and equity	$	10,850,777	$	45,062,010	$	72,360,020	$	(24,519,372	)	$	103,753,435



			Six Months Ended June 30, 2004

			Countrywide			Countrywide
			Financial			Home		Other
			Corporation			Loans, Inc.		Subsidiaries		Eliminations			Consolidated


			(In thousands)
Statement of Earnings:
	Revenues		$	6,024		$	2,673,368	$	2,003,597	$	(143,390	)	$	4,539,599
	Expenses			6,521			1,356,518		1,052,762		(142,996	)		2,272,805
	Provision for income taxes			(193	)		514,796		361,748		(152	)		876,199
	Equity in net earnings of subsidiaries			1,390,899			—		—		(1,390,899	)		—

		Net earnings	$	1,390,595		$	802,054	$	589,087	$	(1,391,141	)	$	1,390,595

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



			December 31, 2003

			Countrywide		Countrywide
			Financial		Home		Other
			Corporation		Loans, Inc.		Subsidiaries		Eliminations			Consolidated


			(In thousands)
Balance Sheet:
	Mortgage loans and mortgage-backed securities held for sale		$	—	$	24,068,487	$	35,138	$	—		$	24,103,625
	Trading securities			—		190,331		10,924,380		—			11,114,711
	Securities purchased under agreements to resell			—		110,000		21,553,496		(11,315,394	)		10,348,102
	Loans held for investment, net			—		11,681,056		14,687,531		(532	)		26,368,055
	Investment in other financial instruments			34,141		2,410,130		10,283,046		34,447			12,761,764
	Mortgage servicing rights, net			—		6,863,625		—		—			6,863,625
	Other assets			9,410,093		6,646,851		17,819,719		(27,458,872	)		6,417,791

		Total assets	$	9,444,234	$	51,970,480	$	75,303,310	$	(38,740,351	)	$	97,977,673

	Notes payable		$	1,266,575	$	42,042,516	$	16,679,720	$	(20,040,350	)	$	39,948,461
	Securities sold under agreements to repurchase			—		1,953,163		41,138,338		(11,078,089	)		32,013,412
	Deposit liabilities			—		—		9,327,671		—			9,327,671
	Other liabilities			92,943		4,677,617		4,203,633		(370,780	)		8,603,413
	Equity			8,084,716		3,297,184		3,953,948		(7,251,132	)		8,084,716

		Total liabilities and equity	$	9,444,234	$	51,970,480	$	75,303,310	$	(38,740,351	)	$	97,977,673



			Six Months Ended June 30, 2003

			Countrywide		Countrywide
			Financial		Home		Other
			Corporation		Loans, Inc.		Subsidiaries		Eliminations			Consolidated


			(In thousands)
Statement of Earnings:
	Revenues		$	6,929	$	1,585,999	$	1,575,554	$	(97,146	)	$	3,071,336
	Expenses			4,322		1,198,308		819,528		(96,712	)		1,925,446
	Provision for income taxes			991		147,323		288,589		(165	)		436,738
	Equity in net earnings of subsidiaries			707,536		—		—		(707,536	)		—

		Net earnings	$	709,152	$	240,368	$	467,437	$	(707,805	)	$	709,152


Note 18 —	Borrower and Investor Custodial Accounts

As of June 30, 2004 and December 31, 2003, the Company managed $17.9 billion and $14.4 billion, respectively, of off-balance sheet borrower and investor custodial cash accounts as well as related liabilities to

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

those borrowers and investors. Of these amounts, $8.4 billion and $5.9 billion, respectively, were included in the Company’s deposits, with the remaining balances held by other depository institutions.

These custodial accounts arose in connection with the Company’s servicing activities.

Note 19 — Loan Commitments

As of June 30, 2004 and December 31, 2003, the Company had undisbursed home equity lines of credit commitments of $6.8 billion and $4.8 billion, respectively, as well as undisbursed construction loan commitments of $487.9 million and $509.0 million, respectively.

Note 20 — Recently Issued Accounting Standards

In March 2004, the Emerging Issues Task Force of the FASB reached consensus opinions regarding the determination of whether an investment is considered impaired, whether the identified impairment is considered other-than-temporary, how to measure other-than-temporary impairment, and how to disclose unrealized losses on investments that are not other-than-temporarily impaired. The consensus opinions, detailed in Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” add to the Company’s impairment assessment requirements detailed in Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets.” The new measurement requirements are applicable to Countrywide’s Quarterly Report for this quarterly period ended June 30, 2004. The Company has included the new disclosure requirements in its 2003 Annual Report and in this Quarterly Report.

The effect of this pronouncement on Countrywide was to require management to include in its assessment of impairment of securities classified as available-for-sale whether the Company has the ability and intent to hold the investment for a reasonable period of time sufficient for the fair value of the security to recover, and whether evidence supporting the recoverability of the Company’s investment within a reasonable period of time outweighs evidence to the contrary. The implementation of these consensuses did not have a significant impact on the Company’s financial condition or earnings.


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

This Quarterly Report on Form 10-Q represents an update to the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2003. As such, you should read our Annual Report on Form 10-K to obtain an informed understanding of the following discussions.

Stock Splits Effected as Stock Dividends

In April of 2004, we completed a 3-for-2 stock split effected as a stock dividend. All references in the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations to the number of common shares and earnings per share amounts have been adjusted accordingly.

Overview

Countrywide’s core business is residential mortgage banking. In recent years, we have expanded into businesses related to mortgage banking. We have pursued this diversification to capitalize on meaningful opportunities to leverage our core business and to provide sources of earnings that are less cyclical than mortgage banking. We classify our businesses into five business segments — Mortgage Banking, Capital Markets, Banking, Insurance and Global Operations.

The mortgage banking business continues to be the primary source of our revenues and earnings. As a result, the primary influence on our operating results is the aggregate demand for mortgage loans in the U.S., which is affected by such external factors as prevailing mortgage rates and the strength of the U.S. housing market.

To date in 2004, the interest rate environment has been somewhat volatile, but generally rates are higher than those that prevailed in 2003. Forecasters predict a substantial reduction in U.S. mortgage production for 2004 as compared to 2003, due to an expected decline in mortgage refinance activity resulting from higher interest rates. We believe that a market within the forecasted range of $2.3 trillion to $2.5 trillion would still be favorable for our loan production business, although we would expect increased competitive pressures to have some impact on the profitability of that business. For the six months ended June 30, 2004, mortgage refinance activity declined from levels in 2003, however, the profitability from our investment in mortgage servicing rights increased. A decline in mortgage production generally results in a reduction in mortgage securities trading and underwriting volume. This occurred in the second quarter of 2004, and negatively impacted the profitability of our Capital Markets Segment. However, earnings in our Banking Segment increased, and is expected to continue to grow, primarily as a result of growth in our mortgage loan portfolio. As interest rates have increased, our pipeline of loans in process decreased from $57.4 billion at March 31, 2004, to $47.3 billion at June 30, 2004. The size of the pipeline is a leading indicator of funding performance in the short term.

Total U.S. residential mortgage loan originations were approximately $800 billion in the quarter ended June 30, 2004, a decrease of approximately $275 billion, or 26%, from the year-ago period (Source: Inside Mortgage Finance). During this same time period our production volume decreased 23%. Notwithstanding the decline in production in the quarter ended June 30, 2004 from the year-ago quarter, the pre-tax earnings in our Mortgage Banking Segment increased 118%. This was primarily the result of a reduction in net MSR impairment in the servicing sector combined with a significant increase in production sector margins driven by increased sales of Subprime Mortgage and Prime Home Equity Loans. Earnings from our related businesses

also increased. As a result, our net earnings reached $699.6 million in the quarter ended June 30, 2004, an increase of $316.8 million, or 83%, from the year-ago period.

The principal market risk we face is interest rate risk — the risk that the value of our assets or liabilities or our net interest income will change due to changes in interest rates. We manage this risk primarily through the natural counterbalance of our loan production operations and our investment in mortgage servicing rights, as well as through the use of various financial instruments including derivatives. The overall objective of our interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

We also face credit risk, primarily related to our residential mortgage production activities. Credit risk is the potential for financial loss resulting from the failure of a mortgagor or an institution to honor its contractual obligations to us. We manage mortgage credit risk principally by securitizing substantially all mortgage loans that we produce, and by only retaining high credit quality mortgages in our loan portfolio.

Our liquidity and financing requirements are significant. We meet these requirements in a variety of ways including use of the public corporate debt and equity markets, mortgage and asset-backed securities markets, and through the financing activities of our bank. The objective of our liquidity management is to ensure that sufficient diverse and reliable sources of cash are available to meet our funding needs on a cost-effective basis. Our ability to raise financing at the level and cost required to compete effectively is dependent on maintaining our high credit standing, which is evidenced primarily by our credit ratings.

The mortgage industry has undergone rapid consolidation in recent years and we expect this trend to continue in the future. Today the industry is dominated by large, sophisticated financial institutions. To compete effectively in the future, we will be required to maintain a high level of operational, technological and managerial expertise, as well as an ability to attract capital at a competitive cost. We believe that we will benefit from industry consolidation through increased market share and more rational price competition.

Countrywide is a diversified financial services company, with mortgage banking at its core. Our goal is to be the leader in the mortgage banking business in the future. We plan to leverage our position in mortgage banking to grow our related businesses.

Critical Accounting Policies

The accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to our mortgage securitization activities, the ongoing valuation of retained interests, particularly Mortgage Servicing Rights (“MSRs”), that arise from those activities, and interest rate risk management activities. Our critical accounting policies involve accounting for gains on sales of loans and securities, the valuation of MSRs and other retained interests, and accounting for our derivatives and interest rate risk management activities. These policies are described in further detail in our Annual Report on Form 10-K for the year ended December 31, 2003.

Results of Operations Comparison — Quarters Ended June 30, 2004 and 2003

Consolidated Earnings Performance

Our diluted earnings per share for the quarter ended June 30, 2004 were $2.24, a 64% increase over diluted earnings per share for the quarter ended June 30, 2003. Net earnings were $699.6 million, an 83% increase from the quarter ended June 30, 2003. This earnings performance was driven primarily by improved financial performance of our MSRs partially offset by decreased production sector pre-tax earnings resulting from a decline in mortgage loan production and sales.

Industry-wide, residential mortgage originations were approximately $800 billion during the second quarter of 2004, down from approximately $1,075 billion in the second quarter of 2003 (Source: Inside Mortgage Finance). Approximately 57% of the residential mortgages produced in the second quarter of 2004 were refinancing transactions compared to 72% in the second quarter of 2003. The balance of mortgages produced related to home purchases.

The decreased demand for mortgages resulted in lower loan production and sale volumes in the quarter ended June 30, 2004. Increased sales of higher-margin subprime and home equity loans bolstered the Loan Production Sector margin and enabled us to realize pre-tax earnings of $828.2 million for the quarter, a decrease of $381.6 million from the year-ago period.

The pre-tax earnings in the Loan Servicing Sector, which incorporates the performance of our MSRs and other retained interests, was $25.2 million for the quarter ended June 30, 2004, an improvement of $861.4 million over the year-ago period. This increase in pre-tax earnings was primarily attributable to a reduction in the combined amount of amortization and recovery of previous impairment, net of Servicing Hedge losses. In the quarter ended June 30, 2004, these items totaled $540.3 million, compared to $1,361.0 million of combined amortization and impairment, net of Servicing Hedge gains in the year-ago period.

The Mortgage Banking Segment produced pre-tax earnings of $876.4 million for the quarter ended June 30, 2004, an increase of 118% from the quarter ended June 30, 2003.

Our Diversified Businesses also were significant contributors to the earnings performance in the quarter ended June 30, 2004. In particular, our Banking Segment recorded pre-tax earnings of $119.1 million, an increase in earnings of $51.8 million over the year ago quarter, driven primarily by growth in mortgage loans held by Treasury Bank. The increase in the Banking Segment’s pre-tax earnings was partially offset by a decline in the Capital Markets Segment’s earnings, which declined $25.4 million. The decrease was due primarily to changing market conditions, which resulted in a decline in securities trading margins and reduced conduit activities. In total, Diversified Businesses contributed $266.4 million in pre-tax earnings for the quarter ended June 30, 2004, an increase of 22% from the year-ago period.

Operating Segment Results

Pre-tax earnings by segment are summarized below:



			Quarter Ended June 30,

			2004			2003


			(In thousands)
Mortgage Banking:
	Loan Production		$	828,183		$	1,209,793
	Loan Servicing			25,193			(836,247	)
	Loan Closing Services			23,069			28,872

		Total Mortgage Banking		876,445			402,418

Diversified Businesses:
	Capital Markets			89,631			115,051
	Banking			119,083			67,278
	Insurance			48,537			37,015
	Global Operations			9,683			(225	)
	Other			(545	)		(215	)

		Total Diversified Businesses		266,389			218,904

Pre-tax earnings			$	1,142,834		$	621,322

Mortgage loan production by segment and product is summarized below:



		Quarter Ended June 30,

		2004		2003


		(In millions)
Segment:
	Mortgage Banking	$	88,490	$	120,811
	Capital Markets’ conduit acquisitions		4,599		5,485
	Banking-Treasury Bank		6,574		3,914

		$	99,663	$	130,210

Product:
	Prime	$	82,808	$	121,581
	Prime Home Equity		7,301		4,373
	Subprime		9,554		4,256

		$	99,663	$	130,210

Mortgage Banking Segment

The Mortgage Banking Segment includes the Loan Production, Loan Servicing and Loan Closing Services Sectors.


	*Loan Production Sector*

The Loan Production Sector produces mortgage loans through the three production divisions of Countrywide Home Loans (“CHL”) — Consumer Markets, Wholesale Lending and Correspondent Lending, as well as through Full Spectrum Lending, Inc. (“FSLI”).

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



			Quarter Ended June 30,


			2004					2003

					Percentage of Loan					Percentage of Loan
			Amount		Production Volume			Amount		Production Volume


			(Dollar amounts in thousands)
Revenues:(1)
	Prime		$	999,371				$	1,586,263
	Prime Home Equity			237,736					36,637
	Subprime			315,211					186,703

		Total revenues		1,552,318		1.75	%		1,809,603		1.50	%

Expenses:
	Operating expenses			626,262		0.70	%		516,554		0.43	%
	Allocated corporate expenses			97,873		0.11	%		83,256		0.07	%

		Total expenses		724,135		0.81	%		599,810		0.50	%

Pre-tax earnings			$	828,183		0.94	%	$	1,209,793		1.00	%

(1) Because loan revenues are typically measured upon sale or securitization rather than at production, the percentage of loan production volume is not meaningful for each loan product.

Decreased demand for residential mortgages resulted in lower production volume in the quarter ended June 30, 2004 compared to the year-ago period. The resulting decline in our production was partially offset by an increase in our market share from the year-ago period. Our mortgage loan production market share was

13% in the quarter ended June 30, 2004, up from 12% in the quarter ended June 30, 2003 (Source: Inside Mortgage Finance).

Revenues declined over the year-ago period due primarily to a reduction in sales of Prime Mortgage Loans, which were $74.5 billion in the current quarter compared to $108.7 billion in the year-ago quarter. The decline in prime revenues was partially offset by increased sales of higher margin Subprime Mortgage and Prime Home Equity Loans. The increase in revenues as a percentage of loan volume in the current period is attributable to a shift in sale mix toward Subprime Mortgage and Prime Home Equity Loans, which generally have higher revenues than Prime Mortgage Loans.

Operating expenses increased, both in dollars and as a percentage of loan volume, compared to the year-ago period due to a planned reduction in productivity to sustainable levels as well as to a shift in the divisional mix of production toward more retail production and less correspondent production.

These factors combined to produce relatively high profit margins (pre-tax earnings as a percentage of loan volume) for the Loan Production Sector.

The following table shows total Mortgage Banking loan production volume by division:



	Quarter Ended June 30,

	2004		2003


	(In millions)
Correspondent Lending Division	$	37,908	$	60,877
Consumer Markets Division		27,099		29,447
Wholesale Lending Division		19,848		28,719
Full Spectrum Lending, Inc.		3,635		1,768

	$	88,490	$	120,811

Mortgage Banking loan production for the quarter ended June 30, 2004 decreased 27% in comparison to the year-ago period. The decrease was due primarily to a decline in non-purchase loan production of 48%, partly offset by an increase in purchase production of 39%. The increase in purchase loans is significant because this component of the mortgage market offers relatively stable growth, averaging 10% per year over the last 10 years. The non-purchase, or refinance, component of the mortgage market is highly volatile because it is driven almost exclusively by prevailing mortgage rates.

The following table summarizes Mortgage Banking loan production by purpose and by interest rate type:



		Quarter Ended June 30,

		2004		2003


		(In millions)
Purpose:
	Purchase	$	41,176	$	29,559
	Non-purchase		47,314		91,252

		$	88,490	$	120,811

Interest Rate Type:
	Fixed Rate	$	47,973	$	106,586
	Adjustable Rate		40,517		14,225

		$	88,490	$	120,811

The volume of Mortgage Banking Prime Home Equity and Subprime Mortgage Loans produced (which is included in our total volume of loans produced) increased 117% during the current period from the prior period. Details are shown in the following table.



	Quarter Ended
	June 30,

	2004			2003


	(In millions)
Prime Home Equity Loans	$	5,239		$	2,959
Subprime Mortgage Loans		8,132			3,201

	$	13,371		$	6,160

Percent of total Mortgage Banking loan production		15.1	%		5.1	%

Prime Home Equity and Subprime Mortgage Loans carry historically higher profit margins, and the demand for such loans is believed to be less interest rate sensitive than the demand for prime home mortgage loans. Consequently, Management believes these loans will be a significant component of the sector’s future growth, in particular if mortgage rates continue to rise.

During the quarter ended June 30, 2004, the Loan Production Sector operated at approximately 114% of planned operational capacity, compared to 130% during the year-ago period. The primary capacity constraint in our loan origination activities is the number of loan operations personnel we have on staff. Therefore, we measure planned capacity with reference to the number of our loan operations personnel multiplied by the number of loans we expect each loan operations staff person to process under normal conditions. From its peak in the third quarter of 2003, the total number of operations personnel has been reduced by approximately 1,500. Concurrent with this reduction in operations personnel has been a reduction in productivity to more sustainable levels that will result in higher overall unit costs. We plan to continue building our sales staff despite any potential further drop in loan origination volume as a primary means to increase our market share.

The following table summarizes the number of people included in the Loan Production Sector workforce as of the dates indicated:



			Workforce at
			June 30,

			2004		2003

Sales				11,034		7,683
Operations:
	Regular employees			7,930		7,187
	Temporary staff			1,077		2,755

				9,007		9,942
Production technology				991		631
Administration and support				2,003		1,524

		Total workforce		23,035		19,780

The Consumer Markets Division continued to grow its commissioned sales force during the period. At June 30, 2004, the commissioned sales force numbered 4,262, an increase of 1,291 compared to June 30, 2003. The primary focus of the commissioned sales force is to increase overall purchase market share. The commissioned sales force contributed $10.0 billion in purchase originations during the quarter ended June 30, 2004, a 53% increase over the year-ago period. The purchase production generated by the commissioned sales force represented 74% of the Consumer Markets Division’s purchase production for the quarter ended June 30, 2004.

The Wholesale Lending Division and FSLI also continued to grow their sales forces as a core strategy to increase market share. At June 30, 2004, the sales force in the Wholesale Lending Division numbered 944, an

increase of 17% compared to June 30, 2003. FSLI expanded its sales force by 1,269, or 78% compared to June 30, 2003.


	*Loan Servicing Sector*

The Loan Servicing Sector reflects the performance of our investments in MSRs and other retained interests and associated risk management activities, as well as profits from sub-servicing activities in the United States. The Loan Servicing Sector includes a significant processing operation, consisting of approximately 5,900 employees who service our 5.5 million mortgage loans. How effectively this servicing operation manages costs and generates ancillary income from the portfolio has a significant impact on the long-term performance of this sector.

The following table summarizes the results for the Loan Servicing Sector:



		Quarter Ended June 30,


		2004						2003

					Percentage of						Percentage of
					Average Servicing						Average Servicing
		Amount			Portfolio*			Amount			Portfolio*


		(Dollar amounts in thousands)
Revenues		$	755,642			0.434	%	$	667,646			0.509	%
Servicing Hedge (losses) gains			(1,149,451	)		(0.660	)%		748,081			0.570	%
Amortization			(569,977	)		(0.327	)%		(557,274	)		(0.425	)%
Recovery (impairment)			1,179,127			0.677	%		(1,551,847	)		(1.183	)%
Operating expenses			(108,155	)		(0.062	)%		(85,469	)		(0.065	)%
Allocated corporate expenses			(19,109	)		(0.011	)%		(17,486	)		(0.013	)%
Interest expense, net			(62,884	)		(0.036	)%		(39,898	)		(0.030	)%

	Pre-tax earnings (loss)	$	25,193			0.015	%	$	(836,247	)		(0.637	)%

Average Servicing Portfolio		$	696,618,000					$	524,803,000

* Annualized

The Loan Servicing Sector contributed pre-tax earnings of $25.2 million during the recent period, driven by a recovery of previous impairment of our retained interests. The recovery of previous impairment of retained interests reflects the increase in value of our retained interests, which was primarily due to the low level of projected prepayments in our mortgage servicing portfolio. In general, the value of the MSRs and other retained interests is closely linked to the estimated life of the underlying loans, which increased during the quarter ended June 30, 2004 due to an increase in mortgage rates. The combined recovery of previous impairment of retained interests, net of amortization, was $609.2 million during the quarter ended June 30, 2004 compared to a combined amortization and impairment charge of $2,109.1 million during the quarter ended June 30, 2003.

During the quarter ended June 30, 2004, the Servicing Hedge generated a loss of $1,149.5 million. This loss resulted from an increase in long-term Treasury and swap rates, which indices underlie the derivatives that constitute the primary component of the Servicing Hedge. Amortization and impairment, net of the Servicing Hedge, was $540.3 million for the quarter ended June 30, 2004, a decrease of $820.7 million from the quarter ended June 30, 2003. In a stable interest rate environment, management would expect no significant impairment and would expect to incur expenses related to the Servicing Hedge driven primarily by time decay on options used in the hedge. Such servicing hedge expenses in turn depend on various factors such as the size and composition of the hedge, the shape of the yield curve and the level of implied interest rate volatility.

Despite a high level of prepayments, we increased our servicing portfolio to $726.2 billion at June 30, 2004, a 30% increase from June 30, 2003. At the same time, the overall weighted-average note rate of loans in our servicing portfolio declined from 6.4% to 5.9%.


	*Loan Closing Services Sector*

The LandSafe companies produced $23.1 million in pre-tax earnings, representing a decrease of 20% from the year-ago period. The decrease in LandSafe’s pre-tax earnings was primarily due to the decrease in our loan origination activity.

Diversified Businesses

To leverage our mortgage banking platform, as well as to reduce the variability of earnings due to changes in mortgage interest rates, we have expanded into other financial services. These other businesses are grouped into the following segments: Capital Markets, Banking, Insurance, and Global Operations.


	*Capital Markets Segment*

Our Capital Markets Segment achieved pre-tax earnings of $89.6 million for the quarter, a decrease of $25.4 million, or 22%, from the year-ago period. Total revenues were $161.7 million, a decrease of $6.9 million, or 4%, compared to the year-ago period. This segment’s performance was impacted by rising interest rates and a less favorable fixed income securities market. These factors led to reduced mortgage-backed securities trading volumes and margins and a decline in conduit activities. This segment has expanded its staffing and infrastructure to invest in the development of new lines of business, which contributed to an increase in expenses of $18.5 million, or 35%, compared to the year-ago period.

The following table shows pre-tax income of the Capital Markets Segment:



			Quarter Ended June 30,

			2004			2003


			(In thousands)
Revenues:
	Conduit		$	69,577		$	71,325
	Underwriting			65,680			45,539
	Securities trading			26,886			41,942
	Brokering			3,182			5,936
	Other			(3,640	)		3,829

		Total revenues		161,685			168,571
Expenses:
	Operating expenses			69,569			50,933
	Allocated corporate expenses			2,485			2,587

		Total expenses		72,054			53,520

Pre-tax earnings			$	89,631		$	115,051

During the quarter ended June 30, 2004, the Capital Markets Segment generated revenues totaling $69.6 million from its conduit activities, which include brokering and managing the acquisition, sale or securitization of whole loans on behalf of CHL. Conduit revenues for the quarter ended June 30, 2004 decreased 2% in comparison to the year-ago period primarily as a result of a decrease in the average inventory of conduit loans held combined with a decrease in mortgage sales.

Underwriting revenues increased $20.1 million over the year-ago period primarily as a result of increased sales of our subprime and home equity securities and an increase in third party underwriting business during the period.

Trading revenues declined 36% due to a 27% decline in trading volume, before giving effect to trading of U.S. Treasury securities. Including U.S. Treasury securities, the total securities volume traded increased 9% over the year-ago period. Effective January 15, 2004, Countrywide Securities Corporation (“CSC”) became a “Primary Dealer” and as such is an authorized counterparty with the Federal Reserve Bank of New York in its open market operations. As a result of this new status, trading activities associated with U.S. Treasury Securities are expected to begin generating meaningful revenues in the fourth quarter of 2004.

The following table shows the composition of CSC securities trading volume, which includes intersegment trades with the mortgage banking operations, by instrument:



		Quarter Ended June 30,

		2004		2003


		(In millions)
Mortgage-backed securities		$	526,677	$	773,801
U.S. Treasury securities			287,242		—
Asset-backed securities			43,324		10,207
Government agency debt			21,803		23,045
Other			2,531		4,802

	Total securities trading volume(1)	$	881,577	$	811,855

(1) Approximately 11% and 15% of the segment’s total securities trading volume was with CHL during the quarters ended June 30, 2004 and 2003, respectively.


	*Banking Segment*

The Banking Segment achieved pre-tax earnings of $119.1 million during the quarter ended June 30, 2004, as compared to $67.3 million for the year-ago period. Following is the composition of pre-tax earnings by company:



		Quarter Ended June 30,

		2004			2003


		(In thousands)
Treasury Bank (“Bank”)		$	104,936		$	49,972
Countrywide Warehouse Lending (“CWL”)			17,415			20,611
Allocated corporate expenses			(3,268	)		(3,305	)

	Pre-tax earnings	$	119,083		$	67,278

The Bank’s revenues and expenses are summarized in the following table:



		Quarter Ended June 30,

		2004			2003


		(In thousands)
Interest income		$	268,285		$	104,971
Interest expense			130,478			48,611

	Net interest income		137,807			56,360
Provision for loan losses			(8,930	)		(1,783	)

	Net interest income after provision for loan losses		128,877			54,577
Non-interest income			15,829			17,586
Non-interest expense			(39,770	)		(22,191	)

	Pre-tax earnings	$	104,936		$	49,972

The components of the Bank’s net interest income are summarized below:



				Quarter Ended June 30,


				2004						2003

				Dollars			Rate			Dollars			Rate


				(Dollar amounts in thousands)
Net interest income:
	Yield on interest-earning assets:
		Mortgage loans held for investment		$	235,214			4.50	%	$	65,921			4.45	%
		Securities available for sale			25,887			3.74	%		34,198			3.65	%
		Other			7,184			1.92	%		4,852			1.70	%

			Total yield on interest-earning assets		268,285			4.27	%		104,971			3.89	%

	Cost of interest-bearing liabilities:
		Deposits			62,690			1.78	%		26,408			1.52	%
		FHLB advances			67,630			2.98	%		21,822			3.25	%
		Other			158			1.06	%		381			1.29	%

			Total cost of interest-bearing liabilities		130,478			2.25	%		48,611			1.98	%

Net interest income				$	137,807			2.20	%	$	56,360			2.09	%

Efficiency ratio(1)					26	%					30	%
After-tax return on average assets					1.03	%					1.06	%

(1) Non-interest expense divided by the sum of net interest income plus non-interest income.

The increase in net interest income is primarily due to a $14.4 billion increase in average interest-earning assets, primarily mortgage loans, combined with an increase in net interest margin of 11 basis points. The yield on interest-earning assets increased by 38 basis points due largely to a shift in the mix of the Bank’s earning assets toward mortgage loans held for investment. The cost of interest-bearing liabilities increased due to the change in the mix of the Bank’s liabilities arising from Treasury Bank’s taking advantage of the availability of FHLB advances, which generally bear higher interest rates.

The composition of the Bank’s balance sheets was as follows:



		June 30, 2004					December 31, 2003

				Yield/					Yield/
		Dollar		Cost			Dollar		Cost


		(Dollar amounts in millions)
Assets
	Cash	$	113		0.86	%	$	143		0.97	%
	Short-term investments		960		1.11	%		350		1.00	%
	Mortgage loans, net		22,830		4.52	%		14,686		4.72	%
	Available-for-sale securities		2,554		3.65	%		3,564		4.30	%
	FHLB & FRB Stock		523		3.75	%		394		4.87	%
	Other assets		194		—			239		—

		$	27,174		4.35	%	$	19,376		4.57	%



			June 30, 2004						December 31, 2003

						Yield/						Yield/
			Dollar			Cost			Dollar			Cost


			(Dollar amounts in millions)
Liabilities
	Deposits:
		Company-controlled escrow deposit accounts	$	8,418			1.09	%	$	5,901			0.94	%
		Customer		7,052			2.93	%		3,435			3.18	%
	FHLB Advances			9,375			2.94	%		6,875			3.18	%
	Other borrowings			—			—			1,508			1.11	%
	Other liabilities			267			—			162			—

				25,112			2.30	%		17,881			2.28	%
	Shareholder’s equity			2,062						1,495

			$	27,174					$	19,376

Non-accrual loans			$	11.1					$	3.7
Capital ratios:
	Tier 1 Leverage			8.2	%					8.6	%
	Tier 1 Risk-based capital			12.0	%					12.8	%
	Total Risk-based capital			12.2	%					13.0	%

The Banking Segment also includes the operation of CWL. CWL’s pre-tax earnings decreased by $3.2 million during the quarter ended June 30, 2004 in comparison to the year-ago period, primarily due to a 13% decline in average mortgage warehouse advances. The decline in average mortgage warehouse advances was attributable to a decline in the overall mortgage originations market.


	*Insurance Segment*

The Insurance Segment’s pre-tax earnings increased 31% over the year-ago period, to $48.5 million. The following table shows pre-tax earnings by business line:



		Quarter Ended
		June 30,

		2004			2003


		(In thousands)
Balboa Reinsurance Company		$	30,993		$	24,366
Balboa Life and Casualty Operations(1)			22,814			16,252
Allocated corporate expenses			(5,270	)		(3,603	)

	Pre-tax earnings	$	48,537		$	37,015

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

The following table shows net insurance premiums earned for the carrier operations:



		Quarter Ended June 30,

		2004		2003


		(In thousands)
Balboa Life and Casualty Operations		$	148,687	$	136,552
Balboa Reinsurance Company			38,565		31,631

	Total net insurance premiums earned	$	187,252	$	168,183

Our Life and Casualty insurance business produced pre-tax earnings of $22.8 million, an increase of $6.6 million from the comparable quarter in 2003. The growth in earnings was driven by a $12.1 million, or

9%, increase in net earned premiums during the quarter ended June 30, 2004 in comparison to the year-ago quarter. The growth in net earned premiums was primarily attributable to growth in voluntary homeowners insurance.

Our mortgage reinsurance business produced $31.0 million in pre-tax earnings, an increase of 27% over the year-ago period, driven primarily by growth of 14% in the mortgage loans included in our loan servicing portfolio that are covered by reinsurance contracts combined with an overall increase in the ceded premium percentage.


	*Global Operations Segment*

Global Operations pre-tax earnings totaled $9.7 million, an increase of $9.9 million in comparison to the year-ago period. The increase in earnings was due to growth in the portfolio of mortgage loans subserviced on behalf of Global Home Loans’ minority joint venture partner, Barclays plc., along with a $6.5 million software impairment charge in the quarter ended June 30, 2003, which did not recur in the current period.

Detailed Line Item Discussion of Consolidated Revenue and Expense Items


	*Gain on Sale of Loans and Securities*

Gain on sale of loans and securities is summarized below for the quarters ended June 30, 2004 and 2003:



			Quarter Ended June 30,


			2004								2003


					Gain on Sale								Gain on Sale

								As Percentage								As Percentage
			Loans Sold		Amount			of Loans Sold			Loans Sold		Dollars			of Loans Sold


			(Dollar amounts in thousands)
Mortgage Banking:
	Prime Mortgage Loans		$	74,516,530	$	796,182			1.07	%	$	108,669,330	$	1,423,353			1.31	%
	Subprime Mortgage Loans			9,010,951		261,435			2.90	%		2,924,997		167,288			5.72	%
	Prime Home Equity Loans			6,109,663		150,698			2.47	%		—		—			—

		Production Sector		89,637,144		1,208,315			1.35	%		111,594,327		1,590,641			1.43	%
	Reperforming loans			582,839		18,574			3.19	%		775,697		61,112			7.88	%

			$	90,219,983		1,226,889					$	112,370,024		1,651,753

Capital Markets:
	Trading securities					(12,772	)							(15,762	)
	Conduit activities					56,407								66,788

						43,635								51,026
Other						6,807								8,148

					$	1,277,331							$	1,710,927

Gain on sale of Prime Mortgage Loans decreased in the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003 due primarily to lower Prime Mortgage Loan production and sales combined with lower margins. This reduction in gain on sale revenues was partially offset by increased net interest income associated with Prime Mortgage Loans as a result of the increase in the average holding period of the inventory, which shifts revenue from gain on sale to interest income. Gain on sale of Prime Home Equity and Subprime Mortgage Loans increased in the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003 due primarily to increased sales of these loans, partially offset by a decline in Subprime Mortgage Loan margins due to increased pricing competition and to less favorable secondary marketing execution. Inventory of these higher-margin products had been accumulated during recent periods of high origination volume. A portion of this inventory was sold in the quarter ended June 30, 2004.

Reperforming loans are reinstated loans that had previously defaulted and were repurchased from mortgage securities we issued. The note rate on these loans is typically higher than the current mortgage rate,

and therefore, their margin is typically higher than margins on Prime Mortgage Loans. A change in Ginnie Mae rules related to the repurchase of defaulted loans from Ginnie Mae securities has resulted in fewer loans available for repurchase, which has contributed to a lower gain on sale related to these loans.

Capital Markets’ revenues from its trading activities consist of gains on the sale of securities and net interest income. The decrease in Capital Markets’ gain on sale of loans related to its conduit activities was due to decreased acquisitions and sales during the quarter ended June 30, 2004 in comparison to the year-ago period.

In general, gain on sale of loans and securities is affected by numerous factors, including the volume and mix of loans sold, production channel mix, the level of price competition, the slope of the yield curve, and the effectiveness of our associated interest rate risk management activities.


	*Net Interest Income*

Net interest income is summarized below for the quarters ended June 30, 2004 and 2003:



			Quarter Ended June 30,

			2004			2003


			(In thousands)
Net interest income (expense):
	Mortgage Banking Segment loans and securities		$	310,300		$	184,689
	Banking Segment loans and securities			154,092			73,593
	Custodial balances			(40,912	)		(66,109	)
	Loan Servicing Sector interest expense			(80,512	)		(59,226	)
	Capital Markets Segment securities trading portfolio			97,180			105,103
	Reperforming loans			32,346			23,751
	Home equity AAA asset-backed securities			14,343			26,089
	Other			11,711			8,150

		Net interest income		498,548			296,040
	Provision for loan losses			(19,747	)		(7,222	)

		Net interest income after provision for loan losses	$	478,801		$	288,818

The increase in net interest income from Mortgage Banking loans and securities reflects an increase in the average mortgage loans, which was caused by an increase in the average period loans were held during the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003 combined with a higher overall net earnings rate that was attributable to a relative increase in earning rates during the current quarter. The rates earned on the loans and securities held for sale increased relative to the short-term rates used to finance such inventory. The increase in net interest income was partially offset by a reduction in gain on sale of Prime Mortgage Loans.

The increase in net interest income from the Banking Segment was primarily attributable to growth in mortgage loans held by the Bank. Average assets in the Banking Segment increased to $29.0 billion during the quarter, an increase of $13.8 billion over the year-ago quarter. The average net spread earned increased to 2.13% during the quarter June 30, 2004 from 1.94% during the quarter ended June 30, 2003.

Net interest expense from custodial balances decreased in the current period due to a decline in loan payoffs from the year-ago period. We are obligated to pass through monthly interest to security holders on paid-off loans at the underlying security rates, which were substantially higher than the short-term rates earned by us on the payoff float. The amount of such interest passed through to the security holders was $86.0 million and $121.2 million in the quarters ended June 30, 2004 and 2003, respectively. Partially offsetting the decrease in interest on loan payoffs was a decline in the earnings rate on the custodial balances from 1.10% during the quarter ended June 30, 2003 to 0.92% during the quarter ended June 30, 2004.

Interest expense allocated to the Loan Servicing Sector increased due to an increase in total sector assets.

The decrease in net interest income from the Capital Markets securities trading portfolio is attributable to a decrease in the average net spread earned from 1.38% in the quarter ended June 30, 2003 to 0.94% during the quarter ended June 30, 2004, partially offset by an increase of 30% in the average inventory of securities held in the quarter ended June 30, 2004.

Reperforming loans are reinstated loans that had previously defaulted and were repurchased from mortgage securities we issued. Such loans are subsequently securitized and resold. The increase in interest income related to this activity is a result of an increase in the average balance of such loans held.


	*Loan Servicing Fees and Other Income from Retained Interests*

Loan servicing fees and other income from retained interests are summarized below for the quarters ended June 30, 2004 and 2003:



		Quarter Ended June 30,

		2004		2003


		(In thousands)
Servicing fees, net of guarantee fees		$	566,389	$	469,645
Income from other retained interests			115,536		104,390
Late charges			41,939		35,476
Prepayment penalties			37,386		45,271
Global Operations Segment subservicing fees			26,287		22,107
Ancillary fees			15,095		16,021

	Total loan servicing fees and other income from retained interests	$	802,632	$	692,910

The increase in servicing fees, net of guarantee fees, was principally due to a 33% increase in the average servicing portfolio, partially offset by a reduction in the overall annualized net service fee earned from 0.36% of the average portfolio balance during the quarter ended June 30, 2003 to 0.33% during the quarter ended June 30, 2004. The reduction in the overall net service fee was largely due to the Company entering agreements with certain of its loan investors whereby it agreed to reduce its contractual servicing fee rate in exchange for interest-only stripped securities.

The increase in income from other retained interests was due primarily to a 7% increase in the average investment balances during the quarter ended June 30, 2004 combined with an increase in the average effective yield of these investments from 26% in the quarter ended June 30, 2003 to 27% in the quarter ended June 30, 2004. These investments include interest-only and principal-only securities as well as residual interests that arise from the securitization of nonconforming mortgage loans, particularly Subprime Mortgage and Prime Home Equity Loans.

Lower prepayment penalty income in the quarter ended June 30, 2004 corresponded to the decrease in subprime loan payoffs during the quarter.


	*Amortization of Mortgage Servicing Rights*

We recorded amortization of MSRs of $570.0 million during the quarter ended June 30, 2004 as compared to $557.3 million during the quarter ended June 30, 2003. The increase in amortization of MSRs was primarily due to the increase in MSRs arising from growth in our servicing portfolio. The MSR amortization rate was 26.9% for the quarter ended June 30, 2004 as compared to 29.1% for the quarter ended June 30, 2003.


	*Recovery (Impairment) of Retained Interest and Servicing Hedge (Losses) Gains*

Recovery (impairment) of retained interests and Servicing Hedge (losses) gains are detailed below for the quarters ended June 30, 2004 and 2003:



		Quarter Ended June 30,

		2004			2003


		(In thousands)
Recovery (impairment) of retained interests:
	MSRs	$	1,357,551		$	(1,491,487	)
	Other retained interests		(178,424	)		(60,360	)

		$	1,179,127		$	(1,551,847	)

Servicing Hedge (losses) gains recorded in earnings		$	(1,149,451	)	$	748,081

The recovery of previous impairment of mortgage servicing rights during the quarter ended June 30, 2004 resulted from an increase in the estimated fair value of MSRs driven by an increase in mortgage rates during the quarter. In the quarter ended June 30, 2004, we recognized impairment of other retained interests, primarily as a result of a decline in the value of subprime residual securities. The collateral underlying certain of these residuals is fixed-rate while the pass-through rate is floating. The increase in interest rates during the quarter resulted in a compression of the spread on such residuals, which resulted in a decline in their value. A lower mortgage interest rate environment during the quarter ended June 30, 2003, resulted in MSR impairment of $1,551.8 million.

During the quarter ended June 30, 2004, long-term Treasury and swap rates increased, resulting in a Servicing Hedge loss of $1,149.5 million. During the quarter ended June 30, 2003, the Servicing Hedge generated a gain of $748.1 million as long-term Treasury and swap rates decreased.

The Servicing Hedge is intended to moderate the effect on earnings caused by changes in the estimated fair value of MSRs and other retained interests that generally result from changes in mortgage rates. Rising interest rates in the future will result in Servicing Hedge losses.


	*Net Insurance Premiums Earned*

The increase in net insurance premiums earned is primarily due to an increase in premiums earned on voluntary lines of businesses.


	*Commissions and Other Income*

Commissions and other income consisted of the following for the quarters ended June 30, 2004 and 2003:



		Quarter Ended June 30,

		2004		2003


		(In thousands)
Appraisal fees, net		$	18,439	$	19,669
Global Operations Segment processing fees			18,219		19,188
Credit report fees, net			17,371		21,604
Insurance agency commissions			16,037		13,149
Title services			11,961		12,940
Other			45,362		41,967

	Total commissions and other income	$	127,389	$	128,517

The decrease in processing fees earned in the Global Operations Segment was due to the decline in the number of loans processed.

The decrease in net appraisal, credit report and title services fees is primarily due to the decrease in mortgage loan production.


	*Compensation Expenses*

Compensation expenses are summarized below for the quarters ended June 30, 2004 and 2003:



		Quarter Ended June 30, 2004

		Mortgage			Diversified			Corporate
		Banking			Businesses			Administration		Total


		(Dollar amounts in thousands)
Base salaries		$	256,089		$	74,584		$	55,465	$	386,138
Incentive bonus and commissions			357,456			46,630			17,052		421,138
Payroll taxes and benefits			86,566			14,452			21,138		122,156
Deferral of loan origination costs			(149,777	)		(9,565	)		—		(159,342	)

	Total compensation expenses	$	550,334		$	126,101		$	93,655	$	770,090

Average workforce, including temporary staff			29,110			5,248			3,660		38,018



		Quarter Ended June 30, 2003

		Mortgage			Diversified			Corporate
		Banking			Businesses			Administration		Total


		(Dollar amounts in thousands)
Base salaries		$	227,487		$	63,994		$	48,443	$	339,924
Incentive bonus and commissions			293,931			35,534			7,578		337,043
Payroll taxes and benefits			66,703			10,394			9,840		86,937
Deferral of loan origination costs			(105,721	)		(5,465	)		—		(111,186	)

	Total compensation expenses	$	482,400		$	104,457		$	65,861	$	652,718

Average workforce, including temporary staff			25,660			4,925			3,064		33,649

Compensation expenses increased $117.4 million, or 18%, during the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003.

Compensation expenses in the Mortgage Banking Segment increased primarily due to growth in the loan production sales force. In the Loan Production Sector, compensation expenses increased $64.3 million, or 16%, as a result of a 19% increase in average staff, primarily the sales force. In the Loan Servicing Sector, compensation expense rose $6.1 million, or 10%, as a result of an increase in average staff of 1% to support a 21% increase in the number of loans serviced.

Incremental direct costs associated with the origination of loans are deferred when incurred. When the related loan is sold, the costs deferred are included as a component of gain on sale. See “Note 2 — Summary of Significant Accounting Policies — Financial Statement Reclassifications” in the Annual Report on Form 10-K for the year ended December 31, 2003 for a further discussion of deferred origination costs.

Compensation expenses increased in all other business segments and corporate areas, reflecting their growth and growth in the Company.


	*Occupancy and Other Office Expenses*

Occupancy and other office expenses for the quarter ended June 30, 2004 increased by $21.3 million or 15%, primarily to accommodate personnel growth in the loan production operations.


	*Insurance Claim Expenses*

Insurance claim expenses were $83.8 million, or 45%, of net insurance premiums earned for the quarter ended June 30, 2004, as compared to $85.9 million, or 51%, of net insurance premiums earned for the quarter ended June 30, 2003. Balboa Life and Casualty’s loss ratio (including allocated loss adjustment expenses) decreased from 56% for the quarter ended June 30, 2003 to 52% for the quarter ended June 30, 2004, due to lower claims experience in both voluntary homeowners’ and lender-placed insurance lines. Reinsurance claims expenses are a function of expected remaining losses and premiums. The related provision for claims expenses decreased $1.0 million from the quarter ended June 30, 2003.


	*Other Operating Expenses*

Other operating expenses for the quarters ended June 30, 2004 and 2003 are summarized below:



		Quarter Ended June 30,

		2004			2003


		(In thousands)
Marketing expense		$	41,659		$	25,462
Insurance commission expense			30,453			29,003
Professional fees			23,935			18,927
Travel and entertainment			19,274			15,646
Insurance			14,834			6,165
Other			60,342			49,967
Deferral of loan origination costs			(18,180	)		(19,539	)

	Total other operating expenses	$	172,317		$	125,631

The increase in marketing expense is due to increased advertising during the current quarter.

Insurance expense increased due to an increase in mortgage related to the growth in the Bank’s loan portfolio.

Results of Operations Comparison — Six Months Ended June 30, 2004 and 2003

Consolidated Earnings Performance

Our diluted earnings per share for the six months ended June 30, 2004 were $4.46, a 72% increase over diluted earnings per share for the six months ended June 30, 2003. Net earnings were $1,390.6 million, a 96% increase from the six months ended June 30, 2003. This earnings performance was driven primarily by improved financial performance of our MSRs partially offset by decreased production sector pre-tax earnings resulting from a decline in mortgage loan production and sales.

Industry-wide, residential mortgage originations were approximately $1,385 billion during the first six months of 2004, down from approximately $1,950 billion in the first six months of 2003 (Source: Inside Mortgage Finance). Approximately 58% of the residential mortgages produced in the six months ended June 30, 2004 were refinancing transactions triggered primarily by continued low mortgage rates. The balance of mortgages produced related to home purchases.

The decreased demand for mortgages resulted in lower production volumes in the six months ended June 30, 2004. The decrease in Prime Mortgage Loan volumes and sales was partially offset by increased sales of higher-margin Subprime Mortgage and Prime Home Equity Loans, which bolstered the Loan Production Sector margin and enabled us to realize pre-tax earnings of $1,770.1 million for the six months, a decrease of $322.0 million from the year-ago period.

The pre-tax loss in the Loan Servicing Sector, which incorporates the performance of our MSRs and other retained interests, was $133.0 million, an improvement of $1,257.3 million over the year-ago period. This decrease in pre-tax loss was primarily attributable to the combined amount of amortization and recovery of

previous impairment, net of Servicing Hedge losses. In the six months ended June 30, 2004, these items totaled $1,276.8 million, compared to $2,379.6 million in the year-ago period.

The Mortgage Banking Segment produced pre-tax earnings of $1,678.6 million for the six months ended June 30, 2004, an increase of 122% from the six months ended June 30, 2003.

Our Diversified Businesses also were significant contributors to the earnings performance in the six months ended June 30, 2004. In particular, our Banking Segment increased its pre-tax earnings by $114.1 million over the year ago period, driven primarily by growth in mortgage loans held by Treasury Bank. In addition, our Capital Markets Segment recorded pre-tax earnings of $242.8 million, as compared to $211.2 million in the year-ago period. This segment’s results in the current period were bolstered by increased revenues from its mortgage conduit and underwriting activities. In total, Diversified Businesses contributed $588.1 million in pre-tax earnings for the six months ended June 30, 2004, an increase of 51% from the year-ago period.

Operating Segment Results

Pre-tax earnings by segment are summarized below:



			Six Months Ended June 30,

			2004			2003


			(In thousands)
Mortgage Banking:
	Loan Production		$	1,770,070		$	2,092,093
	Loan Servicing			(133,026	)		(1,390,279	)
	Loan Closing Services			41,601			54,855

		Total Mortgage Banking		1,678,645			756,669

Diversified Businesses:
	Capital Markets			242,782			211,163
	Banking			224,691			110,611
	Insurance			100,532			61,773
	Global Operations			21,414			5,571
	Other			(1,270	)		103

		Total Diversified Businesses		588,149			389,221

Pre-tax earnings			$	2,266,794		$	1,145,890

Mortgage loan production by segment and product is summarized below:



		Six Months Ended
		June 30,

		2004		2003


		(In millions)
Segment:
	Mortgage Banking	$	155,974	$	217,406
	Capital Markets’ conduit acquisitions		7,923		9,559
	Banking-Treasury Bank		11,970		5,648

		$	175,867	$	232,613

Product:
	Prime	$	146,831	$	217,179
	Prime Home Equity		12,590		7,855
	Subprime		16,446		7,579

		$	175,867	$	232,613

Mortgage Banking Segment

The Mortgage Banking Segment includes the Loan Production, Loan Servicing and Loan Closing Services Sectors.


	*Loan Production Sector*

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



		Six Months Ended June 30,


		2004					2003

				Percent of Loan					Percent of Loan
		Dollars		Production Volume			Dollars		Production Volume


		(Dollar amounts in thousands)
Revenues:(1)
	Prime	$	1,754,964				$	2,880,573
	Prime Home Equity		459,641					49,692
	Subprime		899,856					254,039

	Total revenues		3,114,461		1.99	%		3,184,304		1.46	%

Expenses:
	Operating expenses		1,147,420		0.73	%		928,589		0.43	%
	Allocated corporate expenses		196,971		0.13	%		163,622		0.07	%

	Total expenses		1,344,391		0.86	%		1,092,211		0.50	%

	Pre-tax earnings	$	1,770,070		1.13	%	$	2,092,093		0.96	%

(1) Because loan revenues are typically measured upon sale or securitization rather than production, the percentage of loan production volume is not meaningful for each loan product.

Decreased demand for residential mortgages resulted in lower production volume in the six months ended June 30, 2004 compared to the year-ago period. The resulting decline in our production was partially offset by

an increase in our market share from the year-ago period. Our mortgage loan production market share was 13% in the six months ended June 30, 2004, up from 12% in the six months ended June 30, 2003 (Source: Inside Mortgage Finance).

Revenues decreased over the year ago period due to a reduction in production and sales of Prime Mortgage loans partially offset by an increase in sales of Subprime Mortgage and Prime Home Equity Loans. Combined sales of Subprime Mortgage and Prime Home Equity Loan products were $27.5 billion in the current six months compared to $4.2 billion in the year-ago period. The associated increase in revenues from sales of Subprime Mortgage and Prime Home Equity Loans was approximately $830.5 million. Revenues from sales of Prime Mortgage Loans decreased by approximately $1,245.8 million, primarily due to the reduction in volume combined with decreased margins.

The increase in revenues as a percentage of loan volume in the current period is attributable to a shift in sales mix toward Subprime Mortgage and Prime Home Equity Loans, which generally have higher revenues than Prime Mortgage Loans.

These factors combined to produce relatively high profit margins (pre-tax earnings as a percentage of loan volume) for the Loan Production Sector.

The following table shows total Mortgage Banking loan production volume by division:



	Six Months Ended
	June 30,

	2004		2003


	(In millions)
Correspondent Lending Division	$	66,695	$	110,699
Consumer Markets Division		47,334		51,689
Wholesale Lending Division		35,486		51,964
Full Spectrum Lending, Inc.		6,459		3,054

	$	155,974	$	217,406

Mortgage Banking loan production for the six months ended June 30, 2004 decreased 28% in comparison to the year-ago period. The decrease was due primarily to a decline in non-purchase loan production of 47% partly offset by an increase in purchase production of 34%.

The following table summarizes Mortgage Banking loan production by purpose and by interest rate type:



		Six Months Ended
		June 30,

		2004		2003


		(In millions)
Purpose:
	Purchase	$	68,790	$	51,435
	Non-purchase		87,184		165,971

		$	155,974	$	217,406

Interest Rate Type:
	Fixed Rate	$	88,804	$	192,196
	Adjustable Rate		67,170		25,210

		$	155,974	$	217,406

The volume of Mortgage Banking Prime Home Equity and Subprime Mortgage Loans produced (which is included in our total volume of loans produced) increased 108% during the current period from the prior period. Details are shown in the following table.



	Six Months Ended
	June 30,

	2004			2003


	(Dollar amounts
	in millions)
Prime Home Equity Loans	$	8,968		$	5,502
Subprime Mortgage Loans		14,180			5,640

	$	23,148		$	11,142

Percent of total Mortgage Banking loan production		14.8	%		5.1	%

Prime Home Equity and Subprime Mortgage Loans carry higher profit margins historically, and the demand for such loans is believed to be less interest rate sensitive than the demand for prime home mortgage loans. Consequently, Management believes these loans will be a significant component of the sector’s future growth, in particular if mortgage rates continue to rise.

During the six months ended June 30, 2004, the Loan Production Sector operated at approximately 110% of planned operational capacity, compared to 123% during the year-ago period.


	*Loan Servicing Sector*

The following table summarizes the results for the Loan Servicing Sector:



		Six Months Ended June 30,


		2004						2003

					Percentage of						Percentage of
					Average Servicing						Average Servicing
		Amount			Portfolio*			Amount			Portfolio*


		(Dollar amounts in thousands)
Revenues		$	1,527,506			0.451	%	$	1,274,544			0.512	%
Servicing Hedge (losses) gains			(476,655	)		(0.141	)%		754,442			0.303	%
Amortization			(983,659	)		(0.290	)%		(919,774	)		(0.369	)%
Recovery (impairment)			183,482			0.054	%		(2,214,260	)		(0.889	)%
Operating expenses			(211,706	)		(0.063	)%		(177,526	)		(0.071	)%
Allocated corporate expenses			(37,354	)		(0.011	)%		(34,857	)		(0.014	)%
Interest expense, net			(134,640	)		(0.039	)%		(72,848	)		(0.030	)%

	Pre-tax loss	$	(133,026	)		(0.039	)%	$	(1,390,279	)		(0.558	)%

Average Servicing Portfolio		$	677,247,000					$	498,178,000

* Annualized

The pre-tax loss in the Loan Servicing Sector was $133.0 million during the recent period, an improvement of $1,257.3 million from the year-ago period. In the current period, mortgage rates increased which resulted in recovery of previous impairment totaling $183.5 million. In the prior period, rates declined resulting in impairment of retained interests totaling $2,214.3 million. The combined amounts of amortization

and impairment or recovery of previous impairment were $800.2 million and $3,134.0 million during the six months ended June 30, 2004 and 2003, respectively.

The loss generated by the Servicing Hedge during the six months ended June 30, 2004, resulted from an increase in long-term Treasury and swap rates, which indices underlie the derivatives and securities that constitute the primary component of the Servicing Hedge. Amortization and impairment recovery of previous impairment, net of the Servicing Hedge, was $1,276.8 million for the six months ended June 30, 2004, a decrease of $1,102.8 million from the six months ended June 30, 2003.


	*Loan Closing Services Sector*

The LandSafe companies produced $41.6 million in pre-tax earnings, representing a decrease of 24% from the year-ago period. The decrease in LandSafe’s pre-tax earnings was primarily due to the decrease in our loan origination activity.

Diversified Businesses

To leverage our mortgage banking platform, as well as to reduce the variability of earnings due to changes in mortgage interest rates, we have engaged in other financial services. These other businesses are grouped into the following segments: Capital Markets, Banking, Insurance, and Global Operations.


	*Capital Markets Segment*

Our Capital Markets Segment achieved pre-tax earnings of $242.8 million for the six months, an increase of $31.6 million, or 15%, from the year-ago period. Total revenues were $385.1 million, an increase of $53.9 million, or 16% compared to the year-ago period.

The following table shows revenues, expenses and pre-tax earnings of the Capital Markets Segment:



			Six Months Ended
			June 30,

			2004			2003


			(In thousands)
Revenues:
	Conduit		$	176,910		$	134,946
	Underwriting			128,942			81,868
	Securities trading			76,024			102,261
	Brokering			7,214			9,544
	Other			(4,009	)		2,581

		Total revenues		385,081			331,200
Expenses:
	Operating expenses			137,504			114,733
	Allocated corporate expenses			4,795			5,304

		Total expenses		142,299			120,037

Pre-tax earnings			$	242,782		$	211,163

During the six months ended June 30, 2004, the Capital Markets Segment generated revenues totaling $176.9 million from its conduit activities, which include brokering and managing the acquisition, sale or securitization of whole loans on behalf of CHL. Conduit revenues for the six months ended June 30, 2004

increased 31% in comparison to the year-ago period primarily as a result of an increase in the amount of mortgage loans acquired by the conduit.

Underwriting revenues increased $47.1 million over the year-ago period primarily as a result of increased sales of our subprime and home equity securities during the period as well as an increase in third party underwriting business.

Trading revenues declined 26% due to a 20% decline in trading volume, before giving effect to trading of U.S. Treasury securities. Including U.S. Treasury securities, the total securities volume traded increased 8% over the year-ago period. Effective January 15, 2004, CSC became a “Primary Dealer” and as such is an authorized counterparty with the Federal Reserve Bank of New York in its open market operations. As a result of this new status, trading activities associated with U.S. Treasury Securities are expected to begin generating meaningful revenues in the fourth quarter of 2004.

The following table shows the composition of CSC securities trading volume, which includes intersegment trades with the mortgage banking operations, by instrument:



		Six Months Ended
		June 30,

		2004		2003


		(In millions)
Mortgage-backed securities		$	1,025,828	$	1,377,719
U.S. Treasury securities			415,481		—
Asset-backed securities			80,931		18,393
Government agency debt			40,346		48,753
Other			9,430		7,027

	Total securities trading volume(1)	$	1,572,016	$	1,451,892

(1) Approximately 11% and 14% of the segment’s total securities trading volume was with CHL during the six months ended June 30, 2004 and 2003, respectively.


	*Banking Segment*

The Banking Segment achieved pre-tax earnings of $224.7 million during the six months ended June 30, 2004, as compared to $110.6 million for the year-ago period. Following is the composition of pre-tax earnings by company:



		Six Months Ended
		June 30,

		2004			2003


		(In thousands)
Treasury Bank (“Bank”)		$	198,524		$	78,199
Countrywide Warehouse Lending (“CWL”)			33,040			38,712
Allocated corporate expenses			(6,873	)		(6,300	)

	Pre-tax earnings	$	224,691		$	110,611

The Bank’s revenues and expenses are summarized in the following table:



		Six Months Ended
		June 30,

		2004			2003


		(In thousands)
Interest income		$	496,301		$	169,908
Interest expense			240,498			79,485

	Net interest income		255,803			90,423
Provision for loan losses			(17,338	)		(4,278	)

	Net interest income after provision for loan losses		238,465			86,145
Non-interest income			32,040			33,241
Non-interest expense			(71,981	)		(41,187	)

	Pre-tax earnings	$	198,524		$	78,199

The components of the Bank’s net interest income are summarized below:



				Six Months Ended June 30,


				2004						2003

				Dollars			Rate			Dollars			Rate


				(Dollar amounts in thousands)
Net interest income:
	Yield on interest-earning assets:
		Mortgage loans held for investment		$	422,349			4.53	%	$	99,730			4.59	%
		Securities available for sale			61,595			3.96	%		61,688			3.63	%
		Other			12,357			2.05	%		8,490			1.66	%

			Total yield on interest-earning assets		496,301			4.32	%		169,908			3.88	%

	Cost of interest-bearing liabilities:
		Deposits			107,089			1.78	%		45,005			1.58	%
		FHLB advances			128,832			3.05	%		33,810			3.35	%
		Other			4,577			1.10	%		670			1.29	%

			Total cost of interest-bearing liabilities		240,498			2.26	%		79,485			2.03	%

Net interest income				$	255,803			2.24	%	$	90,423			2.08	%

Efficiency ratio(1)					25	%					33	%
After-tax return on average assets					1.06	%					1.02	%

(1) Non-interest expense divided by the sum of net interest income plus non-interest income.

The increase in net interest income is primarily due to a $14.2 billion increase in average interest-earning assets, primarily mortgage loans, combined with an increase in net interest margin of 16 basis points. The yield on interest-earning assets increased by 44 basis points due largely to a shift in the mix of the Bank’s earning assets toward mortgage loans held for investment. The cost of interest-bearing liabilities increased due to the change in the mix of the Bank’s liabilities arising from Treasury Bank’s taking advantage of the availability of FHLB advances, which generally bear higher interest rates.

The Banking Segment also includes the operation of CWL. CWL’s pre-tax earnings decreased by $5.7 million during the six months ended June 30, 2004 in comparison to the year-ago period, primarily due to an 18% decline in average mortgage warehouse advances. The decline in average mortgage warehouse advances was attributable to a decline in the overall mortgage originations market.


	*Insurance Segment*

The Insurance Segment’s pre-tax earnings increased 63% over the year-ago period, to $100.5 million. The following table shows pre-tax earnings by business line:



		Six Months Ended
		June 30,

		2004			2003


		(In thousands)
Balboa Reinsurance Company		$	63,745		$	43,498
Balboa Life and Casualty Operations(1)			46,818			25,260
Allocated corporate expenses			(10,031	)		(6,985	)

	Pre-tax earnings	$	100,532		$	61,773

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

The following table shows net insurance premiums earned for the carrier operations:



		Six Months Ended
		June 30,

		2004		2003


		(In thousands)
Balboa Life and Casualty Operations		$	306,821	$	279,936
Balboa Reinsurance Company			75,814		59,383

	Total net insurance premiums earned	$	382,635	$	339,319

Our Life and Casualty insurance business produced pre-tax earnings of $46.8 million, an increase of $21.6 million from the comparable period in 2003. The growth in earnings was driven by a $26.9 million, or 10%, increase in net earned premiums during the six months ended June 30, 2004 in comparison to the year-ago period. The growth in net earned premiums was primarily attributable to growth in lender-placed insurance and voluntary homeowners insurance.

Our mortgage reinsurance business produced $63.7 million in pre-tax earnings, an increase of 47% over the year-ago period, driven primarily by growth of 14% in the mortgage loans included in our loan servicing portfolio that are covered by reinsurance contracts combined with an overall increase in the ceded premium percentage.


	*Global Operations Segment*

Global Operations pre-tax earnings totaled $21.4 million, an increase of $15.8 million in comparison to the year-ago period. The increase in earnings was due to growth in the portfolio of mortgage loans subserviced on behalf of Global Home Loans’ minority joint venture partner, Barclays plc., along with a $6.5 million software impairment in the six months ended June 30, 2003, which did not recur in the current period.

Detailed Line Item Discussion of Consolidated Revenue and Expense Items


	*Gain on Sale of Loans and Securities*

Gain on sale of loans and securities is summarized below for the six months ended June 30, 2004 and 2003:



			Six Months Ended June 30,


			2004								2003


					Gain on Sale								Gain on Sale

								As percentage								As percentage
			Loans Sold		Amount			of Loans Sold			Loans Sold		Dollars			of Loans Sold


			(Dollar amounts in thousands)
Mortgage Banking:
	Prime Mortgage Loans		$	134,116,657	$	1,346,047			1.00	%	$	188,105,182	$	2,591,892			1.38	%
	Subprime Mortgage Loans			18,626,405		794,657			4.27	%		4,111,962		228,793			5.56	%
	Prime Home Equity Loans			8,867,161		265,802			3.00	%		39,128		1,155			2.95	%

		Production Sector		161,610,223		2,406,506			1.49	%		192,256,272		2,821,840			1.47	%
	Reperforming loans			2,056,976		100,524			4.89	%		1,826,678		127,359			6.97	%

			$	163,667,199		2,507,030					$	194,082,950		2,949,199

Capital Markets:
	Trading securities					(36,356	)							(21,253	)
	Conduit activities					153,157								120,412

						116,801								99,159
Other						12,167								15,139

					$	2,635,998							$	3,063,497

Gain on sale of Prime Mortgage Loans decreased in the six months ended June 30, 2004 as compared to the period ended June 30, 2003 due primarily to lower Prime Mortgage Loan production and sales combined with lower margins. This reduction in gain on sale revenues was partially offset by increased net interest income associated with Prime Mortgage Loans as a result of the increase in the average holding period of the inventory, which shifts revenue from gain on sale to interest income. Gain on sale of Prime Home Equity and Subprime Mortgage Loans increased in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 due primarily to increased sales of these loans. Inventory of these higher-margin products had been accumulated during recent periods of high origination volume. A portion of this inventory was sold in the six months ended June 30, 2004.

Reperforming loans are reinstated loans that had previously defaulted and were repurchased from mortgage securities we issued. The decrease in gain on sale of reperforming loans is due to a decrease in margins on these products partially offset by an increase in the volume of loans sold. The note rate on these loans is typically higher than the current mortgage rate, and therefore, the margin on these loans is typically higher than margins on Prime Mortgage Loans.

Capital Markets’ revenues from its trading activities consist of gains on the sale of securities and net interest income. The increase in Capital Markets’ gain on sale of loans related to its conduit activities was due to increased acquisitions and sales during the six months ended June 30, 2004 in comparison to the year-ago period.


	*Net Interest Income*

Net interest income is summarized below for the six months ended June 30, 2004 and 2003:



			Six Months Ended
			June 30,

			2004			2003


			(In thousands)
Net interest income (expense):
	Mortgage Banking Segment loans and securities		$	660,152		$	305,699
	Banking Segment loans and securities			280,566			123,930
	Custodial balances			(79,964	)		(108,661	)
	Servicing Sector interest expense			(166,416	)		(121,044	)
	Capital Markets Segment securities trading portfolio			228,842			200,883
	Reperforming loans			57,244			62,746
	Home equity AAA asset-backed securities			29,554			42,518
	Other			20,765			17,962

		Net interest income		1,030,743			524,033
	Provision for loan losses			(40,528	)		(14,825	)

		Net interest income after provision for loan losses	$	990,215		$	509,208

The increase in net interest income from Mortgage Banking loans and securities reflects an increase in the average mortgage loans, which was caused by an increase in the average period loans were held during the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 combined with a higher overall net earnings rate that was attributable to a relative increase in earning rates during the current quarter. The rates earned on the loans and securities held for sale increased relative to the short-terms rates used to finance such inventory. The increase in net interest income was partially offset by a reduction in gain on sale of Prime Mortgage Loans.

The increase in net interest income from the Banking Segment was primarily attributable to growth in mortgage loans in the Bank. Average assets in the Banking Segment increased to $26.3 billion during the six months, an increase of $13.5 billion over the year-ago period. The average net spread earned increased to 2.14% during the six months ended June 30, 2004 from 1.94% during the six months ended June 30, 2003.

Net interest expense from custodial balances decreased in the current period due to the decrease in loan payoffs from the year-ago period. We are obligated to pass through monthly interest to security holders on paid-off loans at the underlying security rates, which were substantially higher than the short-term rates earned by us on the payoff float. The amount of such interest passed through to the security holders was $154.0 million and $210.7 million in the six months ended June 30, 2004 and 2003, respectively. Partially offsetting the decrease in interest on loan payoffs was a decline in the earnings rate on the custodial balances from 1.15% during the six months ended June 30, 2003 to 0.88% during the six months ended June 30, 2004.

Interest expense allocated to the Loan Servicing Sector increased due to an increase in total sector assets.

The increase in net interest income from the Capital Markets securities trading portfolio is attributable to an increase of 46% in the average inventory of securities held, partially offset by a decrease in the average net spread earned from 1.43% in the six months ended June 30, 2003 to 1.06% in the six months ended June 30, 2004.

Reperforming loans are reinstated loans that had previously defaulted and were repurchased from mortgage securities we issued. Such loans are subsequently securitized and resold. The decrease in interest income related to this activity is a result of a decrease in the average balance of such loans held.


	*Loan Servicing Fees and Other Income from Retained Interests*

Loan servicing fees and other income from retained interests are summarized below for the six months ended June 30, 2004 and 2003:



		Six Months Ended
		June 30,

		2004		2003


		(In thousands)
Servicing fees, net of guarantee fees		$	1,124,352	$	896,557
Income from other retained interests			189,194		173,357
Late charges			85,271		70,623
Prepayment penalties			79,977		80,746
Global Operations Segment subservicing fees			52,977		44,023
Ancillary fees			27,642		30,863

	Total loan servicing fees and other income from retained interests	$	1,559,413	$	1,296,169

The increase in servicing fees, net of guarantee fees, was principally due to a 36% increase in the average servicing portfolio, partially offset by a reduction in the overall annualized net service fee earned from 0.36% of the average portfolio balance during the six months ended June 30, 2003 to 0.33% during the six months ended June 30, 2004. The reduction in the overall net service fee was largely due to the Company entering agreements with certain of its loan investors whereby it agreed to reduce its contractual servicing fee rate in exchange for interest-only stripped securities.

The increase in income from other retained interests was due primarily to a 5% increase in average investment balances during the six months ended June 30, 2004 combined with an increase in the average effective yield of these investments from 23% in the six months ended June 30, 2003 to 24% in the six months ended June 30, 2004. These investments include interest-only and principal-only securities as well as residual interests that arise from the securitization of nonconforming mortgage loans, particularly Subprime and Home Equity Loans.

The increase in subservicing fees earned in the Global Operations Segment was primarily due to growth in the portfolio subserviced. The Global Operations subservicing portfolio was $110 billion and $97 billion at June 30, 2004 and 2003, respectively.


	*Amortization of Mortgage Servicing Rights*

We recorded amortization of MSRs of $983.7 million during the six months ended June 30, 2004 as compared to $919.8 million during the six months ended June 30, 2003. The increase in amortization of MSRs was primarily due to the increase in the cost basis of the MSRs attributable to growth in our servicing portfolio. The MSR amortization rate was 23.4% for the six months ended June 30, 2004 as compared to 23.9% for the six months ended June 30, 2003.


	*Recovery (Impairment) of Retained Interest and Servicing Hedge (Losses) Gains*

Impairment of retained interests and Servicing Hedge gains are detailed below for the six months ended June 30, 2004 and 2003:



		Six Months Ended
		June 30,

		2004			2003


		(In thousands)
Recovery (impairment) of retained interests:
	MSRs	$	455,321		$	(2,094,429	)
	Other retained interests		(271,839	)		(119,831	)

		$	183,482		$	(2,214,260	)

Servicing Hedge (losses) gains recorded in earnings		$	(476,655	)	$	754,442

The recovery of previous impairment of MSRs during the six months ended June 30, 2004 resulted from an increase in the estimated fair value of MSRs driven by an increase in mortgage rates during the period. In the six months ended June 30, 2004, we recognized impairment of other retained interests, primarily as a result of a decline in the value of subprime securities. The collateral underlying certain of these residuals is fixed-rate while the pass-through rate is floating. The increase in interest rates during the current period resulted in a compression of the spread on such residuals, which resulted in a decline in their value.

During the six months ended June 30, 2004, long-term Treasury and swap rates increased, resulting in a Servicing Hedge loss of $476.7 million. During the six months ended June 30, 2003, the Servicing Hedge generated a gain of $754.4 million as long-term Treasury and swap rates decreased.


	*Net Insurance Premiums Earned*

The increase in net insurance premiums earned is primarily due to an increase in premiums earned on lender-placed and voluntary lines of businesses.


	*Commissions and Other Income*

Commissions and other income consisted of the following for the six months ended June 30, 2004 and 2003:



		Six Months Ended
		June 30,

		2004		2003


		(In thousands)
Global Operations Segment processing fees		$	39,509	$	37,522
Credit report fees, net			35,252		39,444
Appraisal fees, net			33,437		35,093
Insurance agency commissions			31,973		26,412
Title services			22,754		24,727
Other			85,245		79,537

	Total commissions and other income	$	248,170	$	242,735


	*Compensation Expenses*

Compensation expenses are summarized below for the six months ended June 30, 2004 and 2003:



		Six Months Ended June 30, 2004

		Mortgage			Diversified			Corporate
		Banking			Businesses			Administration		Total


		(Dollar amounts in thousands)
Base salaries		$	485,692		$	146,348		$	109,707	$	741,747
Incentive bonus and commissions			606,258			93,838			42,366		742,462
Payroll taxes and benefits			172,527			30,097			38,220		240,844
Deferral of loan origination costs			(258,334	)		(15,965	)		—		(274,299	)

	Total compensation expenses	$	1,006,143		$	254,318		$	190,293	$	1,450,754

Average workforce, including temporary staff			27,747			5,150			3,554		36,451



		Six Months Ended June 30, 2003

		Mortgage			Diversified			Corporate
		Banking			Businesses			Administration		Total


		(Dollar amounts in thousands)
Base salaries		$	427,138		$	124,060		$	94,073	$	645,271
Incentive bonus and commissions			504,667			84,074			22,826		611,567
Payroll taxes and benefits			133,163			22,257			22,316		177,736
Deferral of loan origination costs			(192,276	)		(9,669	)		—		(201,945	)

	Total compensation expenses	$	872,692		$	220,722		$	139,215	$	1,232,629

Average workforce, including temporary staff			24,252			4,926			2,967		32,145

Compensation expenses increased $218.1 million, or 18%, during the six months ended June 30, 2004 as compared to the six months ended June 30, 2003.

Compensation expenses in the Mortgage Banking Segment increased primarily due to growth in the loan production sales force. In the Loan Production Sector, compensation expenses increased $118.4 million, or 16%, as a result of a 19% increase in average staff, primarily the sales force. In the Loan Servicing Sector, compensation expense rose $17.4 million, or 15%, as a result of an increase in average staff of 5% to support a 21% increase in the number of loans serviced.

Incremental direct costs associated with the origination of loans are deferred when incurred. When the related loan is sold, the costs deferred are included as a component of gain on sale. See “Note 2 — Summary of Significant Accounting Policies — Financial Statement Reclassifications” in the December 31, 2003 Form 10-K for a further discussion of deferred origination costs.

Compensation expenses increased in all other business segments and corporate areas reflecting their growth and growth in the Company.


	*Occupancy and Other Office Expenses*

Occupancy and other office expenses for the six months ended June 30, 2004 increased by $61.6 million or 23%, primarily to accommodate personnel growth in the loan production operations, which accounted for 91% of the increase.


	*Insurance Claim Expenses*

Insurance claim expenses were $168.4 million, or 44%, of net insurance premiums earned for the six months ended June 30, 2004, as compared to $173.9 million, or 51%, of net insurance premiums earned for the six months ended June 30, 2003. Balboa Life and Casualty’s loss ratio (including allocated loss adjustment expenses) decreased from 56% for the six months ended June 30, 2003 to 51% for the six months ended June 30, 2004, due to lower claims experience in both voluntary homeowners’ and lender-placed insurance lines. Reinsurance claims expenses are a function of expected remaining losses and premiums. The related provision for claims expenses decreased $3.0 million from the six months ended June 30, 2003.


	*Other Operating Expenses*

Other operating expenses for the six months ended June 30, 2004 and 2003 are summarized below:



		Six Months Ended
		June 30,

		2004			2003


		(In thousands)
Marketing expense		$	73,795		$	46,792
Insurance commission expense			63,364			61,877
Professional fees			43,553			35,144
Travel and entertainment			36,531			29,088
Insurance			29,077			13,935
Other			108,567			97,200
Deferral of loan origination costs			(33,245	)		(35,503	)

	Total other operating expenses	$	321,642		$	248,533

The increase in marketing expenses is due to increased advertising during the current period.

Insurance expense increased due to an increase in mortgage insurance related to the growth in the Bank’s loan portfolio.

Quantitative and Qualitative Disclosure About Market Risk

The primary market risk we face is interest rate risk. From an enterprise perspective, the Company manages this risk through the natural counterbalance of its loan production and servicing businesses. The Company also uses various financial instruments, including derivatives, to manage the interest rate risk related specifically to its Committed Pipeline, Mortgage Loan Inventory and Mortgage-Backed Securities held for sale, MSRs and other retained interests, trading securities as well as a portion of its debt. 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.


	*Impact of Changes in Interest Rates on the Net Value of the Company’s Interest Rate — Sensitive Financial Instruments*

We perform various sensitivity analyses that quantify the net financial impact of changes in interest rates on our interest rate-sensitive assets, liabilities and commitments. These analyses incorporate assumed changes in the interest rate environment including selected hypothetical (instantaneous) parallel shifts in the yield curve. Utilizing these analyses, the following table summarizes the estimated change in fair value of our

interest rate-sensitive assets, liabilities and commitments as of June 30, 2004, given several hypothetical (instantaneous) parallel shifts in the yield curve:



				Change in Fair Value

Change in Interest Rates (basis points)				-100			-50			+50			+100


				(In millions)
MSRs and other financial instruments:
	MSRs and other retained interests			$	(2,416	)	$	(1,041	)	$	713		$	1,137
	Impact of Servicing Hedge:
		Swap-based			1,153			413			(229	)		(367	)
		Treasury-based			454			104			(6	)		226

			MSRs and other retained interests, net		(809	)		(524	)		478			996

	Committed Pipeline				192			151			(261	)		(590	)
	Mortgage Loan Inventory				1,098			649			(775	)		(1,607	)
	Impact of associated derivative instruments:
		Mortgage-based			(1,425	)		(841	)		1,036			2,218
		Treasury-based			48			11			27			76

			Committed pipeline and mortgage loan inventory, net		(87	)		(30	)		27			97

	Treasury Bank:
		Securities portfolio			73			42			(47	)		(95	)
		Mortgage loans			378			198			(214	)		(436	)
		Deposit liabilities			(154	)		(78	)		78			157
		FHLB advances			(234	)		(114	)		109			214

					63			48			(74	)		(160	)

	Notes payable and capital securities				(497	)		(250	)		249			490
	Impact of associated derivative instruments:
		Swap-based			62			31			(32	)		(63	)

			Notes payable and capital securities, net		(435	)		(219	)		217			427

	Prime home equity line of credit senior securities				2			1			(1	)		(2	)
	Other mortgage loans held for investment				33			16			(18	)		(37	)
	Insurance company investment portfolios				39			20			(21	)		(42	)

Net change in fair value related to MSRs and financial instruments				$	(1,194	)	$	(688	)	$	608		$	1,279

Net change in fair value related to broker-dealer trading securities				$	(34	)	$	(11	)	$	2		$	(3	)

The following table summarizes the estimated change in fair value of the Company’s interest rate-sensitive assets, liabilities and commitments as of December 31, 2003, given several hypothetical (instantaneous) parallel shifts in the yield curve:



	Change in Fair Value

Change in Interest Rate (basis points)	-100			-50			+50			+100


	(In millions)
Net change in fair value related to MSRs and financial instruments	$	(668	)	$	(630	)	$	831		$	1,747

Net change in fair value related to broker-dealer trading securities	$	(1	)	$	2		$	(10	)	$	(28	)

These sensitivity analyses are limited in that they were performed at a particular point in time; are subject to the accuracy of various assumptions used, including prepayment forecasts and discount rates; and do not incorporate other factors that would impact the Company’s overall financial performance in such scenarios, most significantly the impact of changes in loan production earnings that result from changes in interest rates. In addition, not all of the changes in fair value would impact current period earnings. For example, MSRs are carried at the lower of cost or market and impairment reserves are computed by interest rate stratum. Therefore, absent hedge accounting, the increase in the value of the MSRs that is recorded in current period earnings would be limited to recovery of the impairment reserve for each stratum. The total impairment reserve was $0.4 billion at June 30, 2004. For the above reasons, the preceding estimates should not be viewed as an earnings forecast.


	*Foreign Currency Risk*

We occasionally issue medium-term notes denominated in a foreign currency. We manage the foreign currency risk associated with these medium-term notes through currency swap transactions. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollar obligations, thereby eliminating the associated foreign currency risk. As a result, potential changes in the exchange rates of foreign currencies denominating such medium-term notes would not have a net financial impact on future earnings, fair values or cash flows.

Credit Risk


	*Securitization*

Substantially all mortgage loans we produce are securitized and sold into the secondary mortgage market. As described in our Annual Report on Form 10-K for the year ended December 31, 2003, the degree to which credit risk on the underlying loans is transferred through the securitization process depends on the structure of the securitization. Our prime first mortgage loans generally are securitized on a non-recourse basis, while Prime Home Equity Loans and Subprime Mortgage Loans generally are securitized with limited recourse for credit losses.

Our exposure to credit losses related to our limited recourse securitization activities is limited to the carrying value of our subordinated interests and to the contractual limit of reimbursable losses under our

corporate guarantees less the recorded liability for such guarantees. These amounts at June 30, 2004 are as follows:


		June 30, 2004

		(In thousands)
Subordinated Interests:
	Subprime residual securities	$	700,065
	Prime home equity residual securities		305,993
	Prime home equity transferors’ interests		185,869
	Subordinated mortgage-backed pass-through securities		2,637

		$	1,194,564

Corporate guarantees in excess of recorded reserves		$	161,646

The carrying value of the residual securities is net of expected future credit losses.

Related to our non-recourse and limited recourse securitization activities, the total credit losses experienced for the six months ended June 30, 2004 and 2003 are summarized as follows:



	Six Months Ended
	June 30,

	2004		2003


	(In thousands)
Subprime securitizations with retained residual interest	$	31,976	$	26,535
Repurchased or indemnified loans		21,545		14,890
Prime home equity securitizations with retained residual interest		12,613		6,942
Subprime securitizations with corporate guarantee		11,090		18,621
Prime home equity securitizations with corporate guarantee		5,612		365
VA losses in excess of VA guarantee		755		1,248

	$	83,591	$	68,601


	*Mortgage Reinsurance*

We provide mortgage reinsurance on mortgage loans included in our servicing portfolio through contracts with several primary mortgage insurance companies. Under these contracts, we absorb mortgage insurance losses in excess of a specified percentage of the principal balance of a given pool of loans, subject to a cap, in exchange for a portion of the pool’s mortgage insurance premium. As of June 30, 2004, approximately $69.0 billion of mortgage loans in our servicing portfolio are covered by such mortgage reinsurance contracts. The reinsurance contracts place limits on our maximum exposure to losses. At June 30, 2004, the maximum aggregate losses under the reinsurance contracts were $412.2 million. We are required to pledge securities to cover this potential liability. For the six months ended June 30, 2004, we did not experience any losses under our reinsurance contracts.


	*Mortgage Loans Held for Sale*

At June 30, 2004, mortgage loans held for sale amounted to $19.5 billion. While the loans are in inventory, we bear credit risk after taking into consideration primary mortgage insurance (which is generally required for conventional loans with a loan-to-value ratio greater than 80%), FHA insurance or VA guarantees. Historically, credit losses related to loans held for sale have not been significant.


	*Portfolio Lending Activities*

We have a growing portfolio of mortgage loans held for investment, consisting primarily of Prime Mortgage and Prime Home Equity Loans, which amounted to $29.3 billion at June 30, 2004. This portfolio is

held primarily at the Bank. A portion of the Prime Home Equity Loans held in the bank are covered by a pool insurance policy that provides partial protection against credit losses. Otherwise, we generally retain full credit exposure on these loans.

We also provide short-term secured mortgage loan warehouse advances to various lending institutions, which totaled $3.3 billion at June 30, 2004. We incurred no credit losses related to this activity in the six months ended June 30, 2004.

Our allowance for credit losses related to loans held for investment amounted to $105.8 million at June 30, 2004.


	*Counterparty Credit Risk*

We have exposure to credit loss in the event of nonperformance by our trading counterparties and counterparties to our various over-the-counter derivative financial instruments. We manage this credit risk by selecting only well-established, financially strong counterparties, spreading the credit risk among many such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any single counterparty.

The aggregate amount of counterparty credit exposure at June 30, 2004, before and after collateral held by Countrywide, was as follows:


	(In millions)

Aggregate credit exposure before collateral held	$	678
Less: collateral held		(266	)

Net aggregate unsecured credit exposure	$	412

For the six months ended June 30, 2004, the Company incurred no credit losses due to the non-performance of any of its counterparties.

Loan Servicing

The following table sets forth certain information regarding our servicing portfolio of single-family mortgage loans, including loans and securities held for sale and loans subserviced for others, for the periods indicated.



		Six Months Ended June 30,

		2004			2003


		(In millions)
Summary of changes in the servicing portfolio:
Beginning owned servicing portfolio		$	630,451		$	441,267
Add: Loan production			175,867			232,613
	Purchased MSRs		13,497			2,633
Less: Runoff(1)			(109,615	)		(128,907	)

Ending owned servicing portfolio			710,200			547,606
Subservicing portfolio			16,027			11,518

	Total servicing portfolio	$	726,227		$	559,124



			June 30,

			2004			2003

Composition of owned servicing portfolio at period end:
	Conventional mortgage		$	569,625		$	444,126
	FHA-insured mortgage			41,841			43,938
	VA-guaranteed mortgage			13,492			14,142
	Subprime Mortgage			52,496			27,159
	Prime Home Equity			32,746			18,241

		Total owned servicing portfolio	$	710,200		$	547,606

Delinquent mortgage loans(2):
	30 days			2.14	%		2.24	%
	60 days			0.61	%		0.68	%
	90 days or more			0.73	%		0.87	%

		Total delinquent mortgage		3.48	%		3.79	%

Loans pending foreclosure(2)				0.37	%		0.47	%

Delinquent mortgage loans(2):
	Conventional			2.06	%		2.03	%
	Government			12.28	%		11.91	%
	Subprime Mortgage			10.27	%		12.70	%
	Prime Home Equity			0.61	%		0.69	%
		Total delinquent mortgage		3.48	%		3.79	%
Loans pending foreclosure(2):
	Conventional			0.18	%		0.21	%
	Government			1.08	%		1.18	%
	Subprime Mortgage			1.88	%		2.71	%
	Prime Home Equity			0.03	%		0.05	%
		Total loans pending foreclosure		0.37	%		0.47	%

(1) Runoff refers to scheduled principal repayments on loans and unscheduled prepayments (partial prepayments or total prepayments due to refinancing, modification, sale, condemnation or foreclosure).

(2) Excludes subserviced loans and loans purchased at a discount due to their non-performing status and is expressed as a percentage of total number of loans serviced.

We attribute the overall decline in delinquencies in our servicing portfolio primarily to the relative overall increase in the conventional and Prime Home Equity portfolios, which carry lower delinquency rates than the government and subprime portfolios. We believe the delinquency rates in our servicing portfolio are consistent with industry experience for similar mortgage loan portfolios.

Liquidity and Capital Resources

We regularly forecast our potential funding needs over short and long-term horizons, taking into account debt maturities and potential peak balance sheet levels. Available reliable sources of liquidity are appropriately sized to meet potential future financing requirements. We currently have $62.9 billion in reliable sources of short-term liquidity, which represents an increase of $10.4 billion from December 31, 2003. Management believes we have adequate financing capability to meet our current needs.

At June 30, 2004 and December 31, 2003, our regulatory capital ratios were as follows:



				June 30, 2004				December 31, 2003
		Minimum
		Required(1)		Ratio		Amount		Ratio		Amount


				(Dollar amounts in thousands)
Tier 1 Leverage Capital			5.0%		8.2%	$	9,457,318		8.3%	$	8,082,963
Risk-Based Capital
	Tier 1		6.0%		11.9%	$	9,457,318		12.8%	$	8,082,963
	Total		10.0%		12.6%	$	10,029,785		13.7%	$	8,609,996

(1) Minimum required to qualify as “well-capitalized.”


	*Cash Flow*

Cash flow provided by operating activities was $7.2 billion for the six months ended June 30, 2004 compared to net cash used in operating activities of $13.4 billion for the six months ended June 30, 2003. The increase in cash flow from operations for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 was primarily due to a $25.3 billion net decrease in cash used to fund Mortgage Loan Inventory.

Net cash used by investing activities was $9.1 billion for the six months ended June 30, 2004, compared to $14.3 billion for the six months ended June 30, 2003. The decrease in net cash used in investing activities was primarily attributable to a $8.4 billion decrease in cash used to fund available-for-sale securities, partially offset by a $1.5 billion increase in cash used to fund loans held for investment and a $2.8 billion increase in securities purchased under agreements to resell.

Net cash provided by financing activities for the six months ended June 30, 2004 totaled $2.0 billion, compared to $27.6 billion for the six months ended June 30, 2003. The decrease in cash provided by financing activities was comprised of a $26.8 billion net decrease in short-term (primarily secured) borrowings, offset by a $0.3 billion net increase in long-term debt.

Off-Balance Sheet Arrangements and Contractual Obligations


	*Off-Balance Sheet Arrangements and Guarantees*

In the ordinary course of our business we engage in financial transactions that are not recorded on our balance sheet. (See Note 2 — “Summary of Significant Accounting Policies” in the December 31, 2003 10-K for a description of our consolidation policy.) Such transactions are structured to manage our interest rate, credit or liquidity risks, diversify funding sources or to optimize our capital.

Substantially all of our off-balance sheet arrangements relate to the securitization of mortgage loans. In accordance with SFAS 140, our mortgage loan securitizations are normally structured as sales, and involve the transfer of the mortgage loans to “qualifying special-purpose entities” that are not subject to consolidation. In a securitization, an entity transferring the assets is able to convert those assets into cash. Special-purpose entities used in such securitizations obtain cash to acquire the assets by issuing securities to investors. In a securitization, we customarily provide representations and warranties with respect to the mortgage loans transferred. In addition, we generally retain the right to service the transferred mortgage loans.

We also generally have the right to repurchase mortgage loans from the special-purpose entity if the remaining outstanding balance of the mortgage loans falls to a level where the cost of servicing the loans exceeds the revenues we earn.

Our Prime Mortgage Loans generally are securitized on a non-recourse basis, while Prime Home Equity and Subprime Mortgage Loans generally are securitized with limited recourse for credit losses. During the six months ended June 30, 2004, we securitized $26.0 billion Subprime Mortgages and Prime Home Equity Loans with limited recourse for credit losses. Our exposure to credit losses related to our limited recourse securitization activities is limited to the carrying value of our subordinated interests and to the contractual limit of reimbursable losses under our corporate guarantees less the recorded liability for such guarantees. For

a further discussion of our exposure to credit risk, see the section in this Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Credit Risk.”

Management does not believe that any of its off-balance sheet arrangements have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


	*Contractual Obligations*

The following table summarizes our significant contractual obligations at June 30, 2004, with the exception of short-term borrowing arrangements and pension and post-retirement benefit plans.


	Less than						More than
	1 Year		1-3 Years		3-5 Years		5 Years		Total


	(In thousands)
Obligations:
Notes payable	$	6,709,580	$	13,865,662	$	7,235,888	$	5,311,203	$	33,122,333
Time deposits	$	1,856,405	$	2,036,016	$	1,914,268	$	403,104	$	6,209,793
Operating leases	$	98,623	$	172,456	$	128,068	$	28,217	$	427,364
Purchase obligations	$	154,461	$	33,425	$	5,183	$	7	$	193,076

As of June 30, 2004, the Company had undisbursed home equity lines of credit and construction loan commitments of $6.8 billion and $487.9 million, respectively.

Prospective Trends

Total United States mortgage originations were estimated at approximately $3.8 trillion for 2003. Forecasters estimate the market for 2004 will be substantially less than the market for 2003. We believe that a market within the forecasted range of $2.3 to $2.5 trillion would be favorable for our loan production business, although we would expect increased competitive pressures to have some impact on its profitability. This forecast would imply lessening pressure on our loan servicing business due to a reduction in mortgage loan prepayment activity. In our capital markets business, such a drop in mortgage originations would likely result in a reduction in mortgage securities trading and underwriting volume, which would have a negative impact on its profitability.

According to the trade publication, Inside Mortgage Finance, the top five originators produced 46.5% of all loans originated during the first six months of calendar 2004, as well as the six months ended December 31, 2003. Following is a comparison of market share for the top five originators, according to Inside Mortgage Finance:


		Six Months			Six Months
		Ended			Ended
Institution		June 30, 2004			December 31, 2003

Countrywide			12.7	%		11.2	%
Wells Fargo Home Mortgage			11.6	%		12.8	%
Washington Mutual			9.9	%		11.1	%
Chase Home Finance			6.8	%		8.0	%
Bank of America Mortgage(1)			5.5	%		—
CitiMortgage Corp.(1)			—			3.4	%

	Total for Top Five		46.5	%		46.5	%

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

We believe the consolidation trend will continue, as market forces will continue to drive out weak competitors. We believe Countrywide will benefit from this trend through increased market share and more rational pricing competition.

Compared to Countrywide, the other industry leaders are less reliant on the secondary mortgage market as an outlet for adjustable rate mortgages, due to their greater portfolio lending capacity. This could place us at a competitive disadvantage in the future if the demand for adjustable rate mortgages increases significantly, the secondary mortgage market does not provide a competitive outlet for these loans and we are unable to develop an adequate portfolio lending capacity. Recently, the demand for adjustable rate mortgages has increased as interest rates have risen; however, the secondary market continues to be a viable outlet for these products.

Regulatory Trends

The regulatory environments in which we operate have an impact on the activities in which we may engage, how the activities may be carried out and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably. For example, proposed state and federal legislation targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability of mortgage credit for those potential borrowers with less than prime-quality credit histories. This could result in a reduction of otherwise legitimate sub-prime lending opportunities. Similarly, certain proposed state and federal privacy legislation, if passed, could have an adverse impact on our ability to cross-sell the non-mortgage products our various divisions offer to customers in a cost effective manner.

Implementation of New Accounting Standards

In March 2004, the Emerging Issues Task Force of the FASB reached consensus opinions regarding the determination of whether an investment is considered impaired, whether the identified impairment is considered other-than-temporary, how to measure other-than-temporary impairment, and how to disclose unrealized losses on investments that are not other-than-temporarily impaired. The consensus opinions, detailed in Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”, add to the Company’s impairment assessment requirements detailed in Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets.” The new measurement requirements are applicable to Countrywide’s Quarterly Report for this quarterly period ended June 30, 2004. The Company has included the new disclosure requirements in its 2003 Annual Report and in this Quarterly Report.

Factors That May Affect Future Results

We make forward-looking statements in this report and in other reports we file with the SEC. In addition, we make forward-looking statements in press releases and our management may make forward-looking statements orally to analysts, investors, the media and others.

Generally, forward-looking statements include:

• Projections of our revenues, income, earnings per share, capital expenditures, dividends or capital structure or other financial items

• Descriptions of our plans or objectives for future operations, products or services

• Forecasts of our future financial performance

• Descriptions of assumptions underlying or relating to any of the foregoing

Forward-looking statements give management’s expectation about the future and are not guarantees. Words like “believe,” “expect,” “anticipate,” “promise,” “plan” and other expressions or words of similar

meanings, as well as future or conditional verbs such as “will,” “would,” “should,” “could,” or “may” are generally intended to identify forward-looking statements. There are a number of factors, many of which are beyond our control, that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

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

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

• Changes in general business, economic, and political conditions

• Ineffective management of the volatility inherent in the mortgage banking business

• Competition within the financial services industry

• Significant changes in regulation governing our business

• Incomplete or inaccurate information provided by customers and counterparties

• A decline in U.S. housing prices or the level of activity in the U.S. housing market

• The loss of investment-grade credit ratings, which may result in an increased cost of debt or loss of access to corporate debt markets

• A reduction in the availability of secondary markets for mortgage loan products

• A reduction in government support of homeownership

• A change in our relationship with housing-related government agencies and Government-Sponsored Entities (GSEs)

• Ineffective hedging activities

• Competition within each business segment

• Natural disasters, events, or circumstances that affect the level of claims in the insurance segment

Other risk factors are described elsewhere in this document as well as in other reports and documents that we file with or furnish to the SEC including the Company’s Annual Report on Form 10-K. Other factors that may not be described in any such report or document could also cause results to differ from our expectations. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.


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

In response to this Item, the information set forth on pages 61 to 63 of this Form 10-Q is incorporated herein by reference.


Item 4.	*Controls and Procedures*

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

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table shows Company repurchases of its common stock for each calendar month during the six months ended June 30, 2004.

Total Number of

Shares Purchased

Maximum Number of

Total Number

as Part of Publicly

Shares That May Yet Be

of Shares

Average Price Paid

Announced Plan

Purchased Under the

Calendar Month

Purchased(1)

per Share

or Program(1)

Plan or Program(1)

January

3,051

47.96

n/a

February

—

n/a

March

4,754

61.29

n/a

April

14,123

57.23

n/a

May

—

n/a

June

—

n/a

Total

21,928

56.75

n/a

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

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

On June 16, 2004, the Annual Meeting of Stockholders of the Company was held. The agenda items for such meeting are shown below together with the vote of the Company’s Common Stock with respect to such agenda items.

1. The election of five Class II Directors to serve until the 2007 Annual Meeting of Stockholders.


Class II Nominees	Votes For		Votes Withheld

Henry G. Cisneros		235,009,728		7,688,166
Robert J. Donato		229,393,528		13,304,366
Michael E. Dougherty		225,368,933		17,328,961
Martin R. Melone		237,413,720		5,284,174
Harley W. Snyder		230,124,541		12,573,353

The terms of Jeffrey M. Cunningham, Ben M. Enis, Edwin Heller, Gwendolyn S. King, Stanford L. Kurland, Angelo R. Mozilo, Oscar P. Robertson and Keith P. Russell continued after such meeting.

2. Approval of an amendment to the Company’s 2000 Equity Incentive Plan.


Votes For:			162,489,780
Votes Against:			42,772,487
Abstentions:			2,158,579
Broker Non-Votes:			35,277,048

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


†10	.97	First Amendment to 2000 Equity Incentive Plan of the Company, amended as of November 12, 2003.
†10	.98	Second Amendment to 2000 Equity Incentive Plan of the Company, amended as of November 12, 2003.
†10	.99	2000 Equity Incentive Plan of the Company, as amended and restated on June 16, 2004.
†10	.100	Fourth Amendment to the Company’s Stock Option Financing Plan, as amended and restated, dated July 23, 2004.
10	.101	364-Day Credit Agreement, dated as of May 12, 2004, among CHL, the Company ABN AMRO Bank N.V. and Deutsche Bank Securities Inc., as Documentation Agents, Citicorp USA, Inc., as Syndication Agent, the Lenders party hereto, Bank of America, N.A., as Administrative Agent, and JPMorgan Chase Bank, as Managing Administrative Agent.
10	.102	364-Day Credit Agreement, dated as of May 12, 2004, among CHL, the Company, Commerzbank AG, New York and Grand Cayman Branches and Societe Generale, as Documentation Agents, BNP Paribas, as Syndication Agent, the Lenders party hereto, Barclays Bank PLC, as Administrative Agent, and Royal Bank of Canada, as Managing Administrative Agent.
10	.103	Five-Year Credit Agreement, dated as of May 12, 2004, among CHL, the Company, ABN AMRO Bank N.V. and Deutsche Bank Securities Inc., as Documentation Agents, Citicorp USA, Inc., as Syndication Agent, the Lenders party hereto, Bank of America, N.A., as Administrative Agent, and JPMorgan Chase Bank, as Managing Administrative Agent.
12	.1	Computation of the Ratio of Earnings to Fixed Charges
31	.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32	.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

† Constitutes a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K

On April 12, 2004, the Company furnished a report on Form 8-K regarding its operational statistics for the month ended March 31, 2004 and its thirteen-month statistical data.

On April 21, 2004, the Company furnished a report on Form 8-K regarding its operations and financial condition for the quarter period ended March 31, 2004.

On May 11, 2004, the Company furnished a report on Form 8-K regarding its operational statistics for the month ended April 30, 2004 and its thirteen-month statistical data.

On June 8, 2004, the Company furnished a report on Form 8-K regarding its operational statistics for the month ended May 31, 2004 and its thirteen-month statistical data.

On July 9, 2004, the Company furnished a report on Form 8-K regarding its operational statistics for the month ended June 30, 2004 and its thirteen-month statistical data.

On July 26, 2004, the Company furnished a report on Form 8-K regarding its operations and financial condition for the quarter period ended June 30, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COUNTRYWIDE FINANCIAL CORPORATION

(Registrant)


Date: August 6, 2004		/s/ STANFORD L. KURLAND

		President and Chief Operating Officer

Date: August 6, 2004		/s/ THOMAS K. MCLAUGHLIN

		Executive Managing Director and Chief Financial Officer


	•	Exclude the trust preferred securities issued by the subsidiary trusts, formerly reflected in a separate mezzanine category on the consolidated balance sheets,

	•	Include the junior subordinated debentures issued by Countrywide Home Loans, Inc. (“CHL”) and the Company to the subsidiary trusts, currently reflected in Notes Payable, and

	•	Include CHL’s and the Company’s investments in the subsidiary trusts, currently reflected in Other Assets.


(1)	Because loan revenues are typically measured upon sale or securitization rather than at production, the percentage of loan production volume is not meaningful for each loan product.


(1)	Approximately 11% and 15% of the segment’s total securities trading volume was with CHL during the quarters ended June 30, 2004 and 2003, respectively.


(1)	Non-interest expense divided by the sum of net interest income plus non-interest income.


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


(1)	Approximately 11% and 14% of the segment’s total securities trading volume was with CHL during the six months ended June 30, 2004 and 2003, respectively.


(1)	Runoff refers to scheduled principal repayments on loans and unscheduled prepayments (partial prepayments or total prepayments due to refinancing, modification, sale, condemnation or foreclosure).

(2)	Excludes subserviced loans and loans purchased at a discount due to their non-performing status and is expressed as a percentage of total number of loans serviced.


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


	•	Projections of our revenues, income, earnings per share, capital expenditures, dividends or capital structure or other financial items

	•	Descriptions of our plans or objectives for future operations, products or services

	•	Forecasts of our future financial performance

	•	Descriptions of assumptions underlying or relating to any of the foregoing


	•	Changes in general business, economic, and political conditions

	•	Ineffective management of the volatility inherent in the mortgage banking business

	•	Competition within the financial services industry

	•	Significant changes in regulation governing our business

	•	Incomplete or inaccurate information provided by customers and counterparties

	•	A decline in U.S. housing prices or the level of activity in the U.S. housing market

	•	The loss of investment-grade credit ratings, which may result in an increased cost of debt or loss of access to corporate debt markets

	•	A reduction in the availability of secondary markets for mortgage loan products

	•	A reduction in government support of homeownership

	•	A change in our relationship with housing-related government agencies and Government-Sponsored Entities (GSEs)

	•	Ineffective hedging activities

	•	Competition within each business segment

	•	Natural disasters, events, or circumstances that affect the level of claims in the insurance segment


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


†	Constitutes a management contract or compensatory plan or arrangement