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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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

For the Quarterly Period ended June 30, 2006

OR



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



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Commission file number 1-4629

GOLDEN WEST FINANCIAL CORPORATION

Incorporated Pursuant to the Laws of Delaware State



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IRS  Employer Identification No. 95-2080059

1901 Harrison Street, Oakland, California 94612

(510) 446-3420



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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  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer x                Accelerated filer ̈Non-accelerated filer ̈

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

The number of shares outstanding of the registrants common stock as of July 31, 2006:

Common Stock  309,071,199 shares.



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##### Table of Contents

GOLDEN WEST FINANCIAL CORPORATION

TABLE OF CONTENTS



|                                                                                                   |  |         
|-------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                   |  | Page No.
|INDEX OF TABLES                                                                                    |  | 2       
|                                                                                                   | 
|Forward Looking Statements                                                                         |  | 3       
|                                                                                                   | 
|PART I  FINANCIAL INFORMATION                                                                     |  |         
|                                                                                                   | 
|Item 1. Financial Statements                                                                       |  |         
|                                                                                                   | 
|Consolidated Statement of Financial Condition  June 30, 2006 and 2005 and December 31, 2005       |  | 4       
|                                                                                                   | 
|Consolidated Statement of Net Earnings  For the three and six months ended June 30, 2006 and 2005 |  | 5       
|                                                                                                   | 
|Consolidated Statement of Cash Flows  For the three and six months ended June 30, 2006 and 2005   |  | 6       
|                                                                                                   | 
|Consolidated Statement of Stockholders Equity  For the six months ended June 30, 2006 and 2005   |  | 8       
|                                                                                                   | 
|Notes to Consolidated Financial Statements                                                         |  | 9       
|                                                                                                   | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations      |  | 14      
|                                                                                                   | 
|Overview                                                                                           |  | 14      
|                                                                                                   | 
|Financial Highlights                                                                               |  | 16      
|                                                                                                   | 
|Financial Condition                                                                                |  | 18      
|                                                                                                   | 
|The Loan Portfolio                                                                                 |  | 18      
|                                                                                                   | 
|Investments                                                                                        |  | 27      
|                                                                                                   | 
|Other Assets                                                                                       |  | 27      
|                                                                                                   | 
|Deposits                                                                                           |  | 28      
|                                                                                                   | 
|Borrowings                                                                                         |  | 29      
|                                                                                                   | 
|Management of Risk                                                                                 |  | 30      
|                                                                                                   | 
|Management of Interest Rate Risk                                                                   |  | 30      
|                                                                                                   | 
|Management of Credit Risk                                                                          |  | 36      
|                                                                                                   | 
|Management of Other Risks                                                                          |  | 45      
|                                                                                                   | 
|Results of Operations                                                                              |  | 47      
|                                                                                                   | 
|Net Interest Income                                                                                |  | 47      
|                                                                                                   | 
|Noninterest Income                                                                                 |  | 50      
|                                                                                                   | 
|General and Administrative Expenses                                                                |  | 50      
|                                                                                                   | 
|Taxes on Income                                                                                    |  | 50      
|                                                                                                   | 
|Liquidity and Capital Management                                                                   |  | 50      
|                                                                                                   | 
|Off-Balance Sheet Arrangements and Contractual Obligations                                         |  | 53      
|                                                                                                   | 
|Critical Accounting Policies and Uses of Estimates                                                 |  | 53      
|                                                                                                   | 
|New Accounting Pronouncements                                                                      |  | 53      
|                                                                                                   | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                 |  | 54      
|                                                                                                   | 
|Item 4. Controls and Procedures                                                                    |  | 54      
|                                                                                                   | 
|PART II  OTHER INFORMATION                                                                        |  |         
|                                                                                                   | 
|Item 6. Exhibits                                                                                   |  | 55      



1



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##### Table of Contents

INDEX OF TABLES



|                                                                                                                              |  |     
|----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                              |  | Page
|Selected Financial Data                                                                                                       |  |     
|Financial Highlights (Table 1)                                                                                                |  | 16  
|Asset, Liability, and Equity Components as Percentages of the Total Balance Sheet (Table 2)                                   |  | 18  
|Selected Financial Results (Table 28)                                                                                         |  | 47  
|Loan Portfolio                                                                                                                |  |     
|Balance of Loans Receivable and MBS by Component (Table 3)                                                                    |  | 19  
|Loan Originations and Repayments (Table 4)                                                                                    |  | 19  
|Equity Lines of Credit and Fixed-Rate Second Mortgages (Table 5)                                                              |  | 20  
|Net Deferred Loan Costs (Table 6)                                                                                             |  | 21  
|Loan Originations by State (Table 7)                                                                                          |  | 21  
|Loan Portfolio by State (June 30, 2006) (Table 8)                                                                             |  | 22  
|Loan Portfolio by State (June 30, 2005) (Table 9)                                                                             |  | 23  
|ARM Originations by Index (Table 10)                                                                                          |  | 24  
|ARM Portfolio by Index (Table 11)                                                                                             |  | 25  
|Mortgage Originations by LTV or CLTV Bands (Table 21)                                                                         |  | 38  
|Mortgage Portfolio Balance by LTV or CLTV Bands (Table 22)                                                                    |  | 40  
|Deferred Interest in the Loan Portfolio by LTV/CLTV Bands and Year of Origination (Table 23)                                  |  | 42  
|Management of Credit Risk                                                                                                     |  |     
|Nonperforming Assets and Troubled Debt Restructured (Table 24)                                                                |  | 43  
|Nonperforming Assets by State (June 30, 2006) (Table 25)                                                                      |  | 43  
|Nonperforming Assets by State (June 30, 2005) (Table 26)                                                                      |  | 44  
|Changes in Allowance for Loan Losses (Table 27)                                                                               |  | 45  
|Asset / Liability Management                                                                                                  |  |     
|Summary of Key ARM Indexes (Table 16)                                                                                         |  | 32  
|Relationship between Indexes and Short-Term Market Interest Rates and Expected Impact on Net Interest Margin (Table 17)       |  | 33  
|Federal Funds Rate, Golden Wests Net Interest Margin, ARM Indexes and Liability Costs (Table 18)                             |  | 34  
|Repricing of Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratios (Table 19)                       |  | 35  
|Average Earning Assets and Interest-Bearing Liabilities (Three Months Ended June 30) (Table 29)                               |  | 48  
|Average Earning Assets and Interest-Bearing Liabilities (Six Months Ended June 30) (Table 30)                                 |  | 49  
|Deposits                                                                                                                      |  |     
|Deposits (Table 15)                                                                                                           |  | 29  
|Borrowings                                                                                                                    |  |     
|Maturities and Fair Value of the Interest Rate Swaps and the Related Hedged Senior Debt (Table 20)                            |  | 36  
|Regulatory Capital                                                                                                            |  |     
|Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements (June 30, 2006) (Table 31) |  | 52  
|Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements (June 30, 2005) (Table 32) |  | 52  
|Other                                                                                                                         |  |     
|Federal Funds Sold, Securities Purchased Under Agreements to Resell, and Other Investments (Table 12)                         |  | 27  
|Securities Available for Sale (Table 13)                                                                                      |  | 27  
|Capitalized Mortgage Servicing Rights (Table 14)                                                                              |  | 28  



2



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##### Table of Contents

Forward Looking Statements

This report may contain various forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements include projections, statements of the plans and objectives of management for future operations, statements of future economic performance, assumptions underlying these
statements, and other statements that are not statements of historical facts. Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond Golden
Wests control. Should one or more of these risks, uncertainties or contingencies materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. Among the key risk factors that may have
a direct bearing on Golden Wests results of operations and financial condition are



| |  |  | competitive practices in the financial services industries;
| | - |  | -----------------------------------------------------------



| |  |  | operational and systems risks;
| | - |  | ------------------------------



| |  |  | general economic and capital market conditions, including fluctuations in interest rates;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | economic conditions in certain geographic areas; and
| | - |  | ----------------------------------------------------



| |  |  | the impact of current and future laws, governmental regulations and accounting and other rulings and guidelines affecting the financial services industry in general and Golden
Wests operations in particular.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, actual results may differ materially from the results discussed in any forward-looking
statements.



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

Golden West Financial Corporation

Consolidated Statement of Financial Condition

(Unaudited)

(Dollars in thousands)



|                                                                                          |  |             |             |                 |   |             |  |   |            
|----------------------------------------------------------------------------------------- |  | ----------- | ----------- | --------------- | - | ----------- |  | - | -----------
|                                                                                          |  | June 302006 |             | December 312005 |   | June 302005
|Assets                                                                                    |  |             |             |                 |   |             |  |   |            
|Cash                                                                                      |  | $           | 296,595     |                 | $ | 518,161     |  | $ | 301,269    
|Federal funds sold, securities purchased under agreement to resell, and other investments |  |             | 1,524,581   |                 |   | 1,321,626   |  |   | 1,091,702  
|Securities available for sale, at fair value                                              |  |             | 336,848     |                 |   | 382,499     |  |   | 590,848    
|Purchased mortgage-backed securities available for sale, at fair value                    |  |             | 10,131      |                 |   | 11,781      |  |   | 13,665     
|Purchased mortgage-backed securities held to maturity, at cost                            |  |             | 278,564     |                 |   | 303,703     |  |   | 338,659    
|Mortgage-backed securities with recourse held to maturity, at cost                        |  |             | 1,036,197   |                 |   | 1,168,480   |  |   | 1,346,080  
|Loans receivable:                                                                         |  |             |             |                 |   |             |  |   |            
|Loans held for sale                                                                       |  |             | 152,439     |                 |   | 83,365      |  |   | 48,636     
|Loans held for investment less allowance for loan losses                                  |  |             | 122,040,539 |                 |   | 117,798,600 |  |   | 110,999,190
|                                                                                          |  |             |             |                 |   |             |  |   |            
|Total Loans Receivable                                                                    |  |             | 122,192,978 |                 |   | 117,881,965 |  |   | 111,047,826
|Interest earned but uncollected                                                           |  |             | 452,807     |                 |   | 392,303     |  |   | 319,264    
|Investment in capital stock of Federal Home Loan Banks                                    |  |             | 1,917,927   |                 |   | 1,857,580   |  |   | 1,688,661  
|Foreclosed real estate                                                                    |  |             | 10,765      |                 |   | 8,682       |  |   | 8,769      
|Premises and equipment, net                                                               |  |             | 408,405     |                 |   | 403,084     |  |   | 403,121    
|Other assets                                                                              |  |             | 339,829     |                 |   | 365,299     |  |   | 335,814    
|                                                                                          |  |             |             |                 |   |             |  |   |            
|Total Assets                                                                              |  | $           | 128,805,627 |                 | $ | 124,615,163 |  | $ | 117,485,678
|                                                                                          |  |             |             |                 |   |             |  |   |            
|Liabilities and Stockholders Equity                                                      |  |             |             |                 |   |             |  |   |            
|Deposits                                                                                  |  | $           | 62,234,341  |                 | $ | 60,158,319  |  | $ | 59,226,140 
|Advances from Federal Home Loan Banks                                                     |  |             | 38,447,298  |                 |   | 38,961,165  |  |   | 35,755,870 
|Securities sold under agreements to repurchase                                            |  |             | 5,600,000   |                 |   | 5,000,000   |  |   | 4,450,000  
|Bank notes                                                                                |  |             | 2,182,961   |                 |   | 2,393,951   |  |   | 2,232,955  
|Senior debt                                                                               |  |             | 9,563,956   |                 |   | 8,194,266   |  |   | 6,736,979  
|Taxes on income                                                                           |  |             | 612,175     |                 |   | 547,653     |  |   | 594,348    
|Other liabilities                                                                         |  |             | 752,105     |                 |   | 688,844     |  |   | 552,943    
|Stockholders equity                                                                      |  |             | 9,412,791   |                 |   | 8,670,965   |  |   | 7,936,443  
|                                                                                          |  |             |             |                 |   |             |  |   |            
|Total Liabilities and Stockholders Equity                                                |  | $           | 128,805,627 |                 | $ | 124,615,163 |  | $ | 117,485,678
|                                                                                          |  |             |             |                 |   |             |  |   |            

See notes to consolidated financial statements.



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Golden West Financial Corporation

Consolidated Statement of Net Earnings

(Unaudited)

(Dollars in thousands
except per share figures)



|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|--------------------------------------------------- |  | -------------------------- | ----------- | ------------------------ | - | ----------- |  | ---- | ----------- |  | - | -----------
|                                                    |  | Three Months Ended June 30 |             | Six Months Ended June 30
|                                                    |  | 2006                       |             | 2005                     |   | 2006        |  | 2005
|Interest Income:                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Interest on loans                                   |  | $                          | 2,099,570   |                          | $ | 1,488,220   |  | $    | 4,054,155   |  | $ | 2,799,561  
|Interest on mortgage-backed securities              |  |                            | 21,093      |                          |   | 23,188      |  |      | 42,483      |  |   | 48,728     
|Interest and dividends on investments               |  |                            | 44,393      |                          |   | 28,745      |  |      | 87,803      |  |   | 56,158     
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|                                                    |  |                            | 2,165,056   |                          |   | 1,540,153   |  |      | 4,184,441   |  |   | 2,904,447  
|Interest Expense:                                   |  |                            |             |                          |   |             |  |      |             |  |   |            
|Interest on deposits                                |  |                            | 573,022     |                          |   | 365,029     |  |      | 1,085,041   |  |   | 663,347    
|Interest on advances                                |  |                            | 471,296     |                          |   | 273,911     |  |      | 900,752     |  |   | 497,179    
|Interest on repurchase agreements                   |  |                            | 73,512      |                          |   | 33,690      |  |      | 135,896     |  |   | 58,954     
|Interest on other borrowings                        |  |                            | 157,772     |                          |   | 72,007      |  |      | 290,232     |  |   | 132,078    
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|                                                    |  |                            | 1,275,602   |                          |   | 744,637     |  |      | 2,411,921   |  |   | 1,351,558  
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Net Interest Income                                 |  |                            | 889,454     |                          |   | 795,516     |  |      | 1,772,520   |  |   | 1,552,889  
|Provision for loan losses                           |  |                            | 2,758       |                          |   | 1,807       |  |      | 7,051       |  |   | 2,691      
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Net Interest Income after Provision for Loan Losses |  |                            | 886,696     |                          |   | 793,709     |  |      | 1,765,469   |  |   | 1,550,198  
|Noninterest Income:                                 |  |                            |             |                          |   |             |  |      |             |  |   |            
|Fees                                                |  |                            | 18,536      |                          |   | 14,244      |  |      | 31,495      |  |   | 25,357     
|Gain on the sale of securities and loans            |  |                            | 3,073       |                          |   | 1,847       |  |      | 5,256       |  |   | 3,605      
|Other                                               |  |                            | 21,851      |                          |   | 20,043      |  |      | 43,293      |  |   | 36,976     
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|                                                    |  |                            | 43,460      |                          |   | 36,134      |  |      | 80,044      |  |   | 65,938     
|Noninterest Expense:                                |  |                            |             |                          |   |             |  |      |             |  |   |            
|General and administrative:                         |  |                            |             |                          |   |             |  |      |             |  |   |            
|Personnel                                           |  |                            | 196,393     |                          |   | 159,791     |  |      | 389,382     |  |   | 311,622    
|Occupancy                                           |  |                            | 25,521      |                          |   | 22,568      |  |      | 50,089      |  |   | 44,793     
|Technology and telecommunications                   |  |                            | 26,542      |                          |   | 23,252      |  |      | 50,235      |  |   | 44,674     
|Deposit insurance                                   |  |                            | 1,916       |                          |   | 1,869       |  |      | 3,841       |  |   | 3,724      
|Advertising                                         |  |                            | 8,335       |                          |   | 7,045       |  |      | 14,848      |  |   | 14,585     
|Other                                               |  |                            | 27,963      |                          |   | 24,049      |  |      | 49,562      |  |   | 43,415     
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|                                                    |  |                            | 286,670     |                          |   | 238,574     |  |      | 557,957     |  |   | 462,813    
|Earnings before Taxes on Income                     |  |                            | 643,486     |                          |   | 591,269     |  |      | 1,287,556   |  |   | 1,153,323  
|Taxes on income                                     |  |                            | 253,108     |                          |   | 230,840     |  |      | 506,232     |  |   | 444,644    
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Net Earnings                                        |  | $                          | 390,378     |                          | $ | 360,429     |  | $    | 781,324     |  | $ | 708,679    
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Basic Earnings Per Share                            |  | $                          | 1.26        |                          | $ | 1.17        |  | $    | 2.53        |  | $ | 2.31       
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Diluted Earnings Per Share                          |  | $                          | 1.25        |                          | $ | 1.16        |  | $    | 2.50        |  | $ | 2.28       
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Dividends declared per common share                 |  | $                          | .08         |                          | $ | .06         |  | $    | .16         |  | $ | .12        
|                                                    |  |                            |             |                          |   |             |  |      |             |  |   |            
|Average common shares outstanding                   |  |                            | 308,736,887 |                          |   | 307,440,730 |  |      | 308,568,145 |  |   | 307,152,495
|Average diluted common shares outstanding           |  |                            | 312,072,356 |                          |   | 311,770,849 |  |      | 311,944,103 |  |   | 311,469,354

See notes to consolidated financial statements.



5



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##### Table of Contents

Golden West Financial Corporation

Consolidated Statement of Cash Flows

(Unaudited)

(Dollars in thousands)



|                                                                                                                  |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | - | ------------------------ | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                                  |  | Three Months Ended June 30 |             |   | Six Months Ended June 30 |  
|                                                                                                                  |  | 2006                       |             |   | 2005                     |   |             | 2006 |  |   | 2005        |  
|Cash Flows from Operating Activities:                                                                             |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|Net earnings                                                                                                      |  | $                          | 390,378     |   |                          | $ | 360,429     |      |  | $ | 781,324     |   |  | $ | 708,679     |  
|Adjustments to reconcile net earnings to net cash provided by operating activities:                               |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|Provision for loan losses                                                                                         |  |                            | 2,758       |   |                          |   | 1,807       |      |  |   | 7,051       |   |  |   | 2,691       |  
|Amortization of net deferred loan costs                                                                           |  |                            | 110,925     |   |                          |   | 80,904      |      |  |   | 205,078     |   |  |   | 140,719     |  
|Depreciation and amortization                                                                                     |  |                            | 14,107      |   |                          |   | 13,146      |      |  |   | 28,042      |   |  |   | 26,142      |  
|Loans originated for sale                                                                                         |  |                            | (94,156     | ) |                          |   | (59,857     | )    |  |   | (177,541    | ) |  |   | (113,176    | )
|Sales of loans                                                                                                    |  |                            | 329,581     |   |                          |   | 98,006      |      |  |   | 525,222     |   |  |   | 189,120     |  
|Increase in interest earned but uncollected                                                                       |  |                            | (31,587     | ) |                          |   | (29,659     | )    |  |   | (58,158     | ) |  |   | (68,298     | )
|Increase in deferred interest                                                                                     |  |                            | (248,793    | ) |                          |   | (70,029     | )    |  |   | (465,692    | ) |  |   | (105,585    | )
|Federal Home Loan Bank stock dividends                                                                            |  |                            | (24,014     | ) |                          |   | (17,261     | )    |  |   | (46,542     | ) |  |   | (32,926     | )
|Decrease (increase) in other assets                                                                               |  |                            | 7,543       |   |                          |   | 29,820      |      |  |   | 25,470      |   |  |   | (714        | )
|Increase (decrease) in other liabilities                                                                          |  |                            | 42,979      |   |                          |   | (104,904    | )    |  |   | 33,060      |   |  |   | 149,570     |  
|Increase (decrease) in taxes on income                                                                            |  |                            | (150,420    | ) |                          |   | (140,676    | )    |  |   | 82,842      |   |  |   | 50,452      |  
|Other, net                                                                                                        |  |                            | 3,053       |   |                          |   | 320         |      |  |   | 8,239       |   |  |   | (25         | )
|                                                                                                                  |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|Net cash provided by operating activities                                                                         |  |                            | 352,354     |   |                          |   | 162,046     |      |  |   | 948,395     |   |  |   | 946,649     |  
|Cash Flows from Investing Activities:                                                                             |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|New loan activity:                                                                                                |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|New real estate loans originated for portfolio                                                                    |  |                            | (11,597,057 | ) |                          |   | (13,393,126 | )    |  |   | (23,079,664 | ) |  |   | (24,514,544 | )
|Real estate loans purchased                                                                                       |  |                            | (255        | ) |                          |   | (458        | )    |  |   | (483        | ) |  |   | (626        | )
|Other, net                                                                                                        |  |                            | (276,736    | ) |                          |   | (124,883    | )    |  |   | (621,875    | ) |  |   | (213,978    | )
|                                                                                                                  |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|                                                                                                                  |  |                            | (11,874,048 | ) |                          |   | (13,518,467 | )    |  |   | (23,702,022 | ) |  |   | (24,729,148 | )
|Real estate loan principal repayments                                                                             |  |                            | 10,466,607  |   |                          |   | 8,095,020   |      |  |   | 19,281,062  |   |  |   | 14,280,514  |  
|Repayments of mortgage-backed securities                                                                          |  |                            | 77,918      |   |                          |   | 112,371     |      |  |   | 152,704     |   |  |   | 240,981     |  
|Proceeds from sales of foreclosed real estate                                                                     |  |                            | 11,580      |   |                          |   | 12,069      |      |  |   | 21,341      |   |  |   | 23,318      |  
|Decrease (increase) in federal funds sold, securities purchased under agreements to resell, and other investments |  |                            | 54,552      |   |                          |   | 583,212     |      |  |   | (202,955    | ) |  |   | (155,349    | )
|Decrease (increase) in securities available for sale                                                              |  |                            | 1,977       |   |                          |   | (199,997    | )    |  |   | 1,348       |   |  |   | (199,694    | )
|Purchases of Federal Home Loan Bank stock                                                                         |  |                            | (6,827      | ) |                          |   | -0-         |      |  |   | (16,151     | ) |  |   | (95,352     | )
|Additions to premises and equipment                                                                               |  |                            | (13,139     | ) |                          |   | (18,161     | )    |  |   | (33,919     | ) |  |   | (38,224     | )
|                                                                                                                  |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|Net cash used in investing activities                                                                             |  |                            | (1,281,380  | ) |                          |   | (4,933,953  | )    |  |   | (4,498,592  | ) |  |   | (10,672,954 | )

See notes to consolidated financial statements.



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##### Table of Contents

Golden West Financial Corporation

Consolidated Statement of Cash Flows (Continued)

(Unaudited)

(Dollars in thousands)



|                                                                                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                      |  | Three Months Ended June 30 |            |   | Six Months Ended June 30 |  
|                                                                                                                      |  | 2006                       |            |   | 2005                     |   |            | 2006 |  |   | 2005       |  
|Cash Flows from Financing Activities:                                                                                 |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net increase in deposits                                                                                              |  | $                          | 651,117    |   |                          | $ | 3,632,875  |      |  | $ | 2,076,022  |   |  | $ | 6,260,829  |  
|Additions to Federal Home Loan Bank advances                                                                          |  |                            | 3,150,000  |   |                          |   | 2,505,000  |      |  |   | 5,708,000  |   |  |   | 6,855,000  |  
|Repayments of Federal Home Loan Bank advances                                                                         |  |                            | (3,211,634 | ) |                          |   | (2,260,886 | )    |  |   | (6,221,867 | ) |  |   | (4,881,025 | )
|Proceeds from agreements to repurchase securities                                                                     |  |                            | 3,000,000  |   |                          |   | 2,300,000  |      |  |   | 6,400,000  |   |  |   | 4,300,000  |  
|Repayments of agreements to repurchase securities                                                                     |  |                            | (3,300,000 | ) |                          |   | (1,900,000 | )    |  |   | (5,800,000 | ) |  |   | (3,750,000 | )
|Decrease in bank notes                                                                                                |  |                            | (793,955   | ) |                          |   | (252,981   | )    |  |   | (210,990   | ) |  |   | (476,940   | )
|Net proceeds from senior debt                                                                                         |  |                            | 1,498,250  |   |                          |   | 748,875    |      |  |   | 2,096,450  |   |  |   | 1,446,009  |  
|Repayments of senior debt                                                                                             |  |                            | -0-        |   |                          |   | -0-        |      |  |   | (700,000   | ) |  |   | -0-        |  
|Dividends on common stock                                                                                             |  |                            | (24,697    | ) |                          |   | (18,440    | )    |  |   | (49,372    | ) |  |   | (36,854    | )
|Proceeds from the exercise of stock options                                                                           |  |                            | 6,472      |   |                          |   | 7,126      |      |  |   | 15,052     |   |  |   | 18,134     |  
|Excess tax benefits from stock option exercises                                                                       |  |                            | 7,572      |   |                          |   | -0-        |      |  |   | 15,336     |   |  |   | -0-        |  
|                                                                                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net cash provided by financing activities                                                                             |  |                            | 983,125    |   |                          |   | 4,761,569  |      |  |   | 3,328,631  |   |  |   | 9,735,153  |  
|                                                                                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net Increase (Decrease) in Cash                                                                                       |  |                            | 54,099     |   |                          |   | (10,338    | )    |  |   | (221,566   | ) |  |   | 8,848      |  
|Cash at beginning of period                                                                                           |  |                            | 242,496    |   |                          |   | 311,607    |      |  |   | 518,161    |   |  |   | 292,421    |  
|                                                                                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Cash at end of period                                                                                                 |  | $                          | 296,595    |   |                          | $ | 301,269    |      |  | $ | 296,595    |   |  | $ | 301,269    |  
|                                                                                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Supplemental cash flow information:                                                                                   |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Cash paid for:                                                                                                        |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Interest                                                                                                              |  | $                          | 1,272,752  |   |                          | $ | 733,351    |      |  | $ | 2,395,988  |   |  | $ | 1,301,228  |  
|Income taxes                                                                                                          |  |                            | 395,954    |   |                          |   | 371,517    |      |  |   | 408,858    |   |  |   | 394,193    |  
|Cash received for interest and dividends                                                                              |  |                            | 1,860,662  |   |                          |   | 1,472,329  |      |  |   | 3,614,049  |   |  |   | 2,697,638  |  
|Noncash investing activities:                                                                                         |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Loans receivable and loans underlying mortgage-backed securities converted from adjustable rate to fixed-rate         |  |                            | 295,912    |   |                          |   | 52,065     |      |  |   | 479,748    |   |  |   | 79,700     |  
|Loans transferred to foreclosed real estate                                                                           |  |                            | 12,003     |   |                          |   | 9,763      |      |  |   | 23,833     |   |  |   | 20,168     |  
|Loans securitized into mortgage-backed securities with recourse recorded as loans receivable                          |  |                            | 4,043,081  |   |                          |   | 6,955,757  |      |  |   | 8,613,123  |   |  |   | 8,105,725  |  
|Mortgage-backed securities held to maturity desecuritized into adjustable rate loans and recorded as loans receivable |  |                            | -0-        |   |                          |   | -0-        |      |  |   | -0-        |   |  |   | 163,416    |  
|Loans transferred to held for investment from loans held for sale                                                     |  |                            | 13,579     |   |                          |   | 3,912      |      |  |   | 16,052     |   |  |   | 5,928      |  

See notes to consolidated financial statements.



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Golden West Financial Corporation

Consolidated Statement of Stockholders Equity

(Unaudited)

(Dollars in thousands)



|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|-------------------------------------------------------------------------- |  | ------------------------------ |  | ----------- | ------ | ------------------------ | - | ---------------- |  | - | ----------------------------------- | - |  | ------------------------ | ------- | - |  | - | --------- | -
|                                                                           |  | Six Months Ended June 30, 2006 | 
|                                                                           |  | Number ofShares                |  | CommonStock |        | AdditionalPaid-inCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TotalStockholdersEquity |        
|Balance at January 1, 2006                                                 |  | 308,041,776                    |  | $           | 30,804 |                          | $ | 338,997          |  | $ | 8,077,466                           |   |  | $                        | 223,698 |   |  | $ | 8,670,965 |  
|Net earnings                                                               |  |                                |  |             | -0-    |                          |   | -0-              |  |   | 781,324                             |   |  |                          | -0-     |   |  |   | 781,324   |  
|Change in unrealized gains on securities available for sale                |  |                                |  |             | -0-    |                          |   | -0-              |  |   | -0-                                 |   |  |                          | (28,639 | ) |  |   | (28,639   | )
|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Comprehensive income                                                       |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   | 752,685   |  
|Stock-based compensation                                                   |  |                                |  |             | -0-    |                          |   | 8,125            |  |   | -0-                                 |   |  |                          | -0-     |   |  |   | 8,125     |  
|Common stock issued upon exercise of stock options, including tax benefits |  | 897,973                        |  |             | 90     |                          |   | 30,298           |  |   | -0-                                 |   |  |                          | -0-     |   |  |   | 30,388    |  
|Cash dividends on common stock                                             |  |                                |  |             | -0-    |                          |   | -0-              |  |   | (49,372                             | ) |  |                          | -0-     |   |  |   | (49,372   | )
|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Balance at June 30, 2006                                                   |  | 308,939,749                    |  | $           | 30,894 |                          | $ | 377,420          |  | $ | 8,809,418                           |   |  | $                        | 195,059 |   |  | $ | 9,412,791 |  
|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  



|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|-------------------------------------------------------------------------- |  | ------------------------------ |  | ----------- | ------ | ------------------------ | - | ---------------- |  | - | ----------------------------------- | - |  | ------------------------ | ------- | - |  | - | --------- | -
|                                                                           |  | Six Months Ended June 30, 2005 | 
|                                                                           |  | Number ofShares                |  | CommonStock |        | AdditionalPaid-inCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TotalStockholdersEquity |        
|Balance at January 1, 2005                                                 |  | 306,524,716                    |  | $           | 30,652 |                          | $ | 263,770          |  | $ | 6,728,998                           |   |  | $                        | 251,456 |   |  | $ | 7,274,876 |  
|Net earnings                                                               |  |                                |  |             | -0-    |                          |   | -0-              |  |   | 708,679                             |   |  |                          | -0-     |   |  |   | 708,679   |  
|Change in unrealized gains on securities available for sale                |  |                                |  |             | -0-    |                          |   | -0-              |  |   | -0-                                 |   |  |                          | (28,392 | ) |  |   | (28,392   | )
|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Comprehensive income                                                       |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   | 680,287   |  
|Common stock issued upon exercise of stock options, including tax benefits |  | 1,236,110                      |  |             | 124    |                          |   | 18,010           |  |   | -0-                                 |   |  |                          | -0-     |   |  |   | 18,134    |  
|Cash dividends on common stock                                             |  |                                |  |             | -0-    |                          |   | -0-              |  |   | (36,854                             | ) |  |                          | -0-     |   |  |   | (36,854   | )
|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Balance at June 30, 2005                                                   |  | 307,760,826                    |  | $           | 30,776 |                          | $ | 281,780          |  | $ | 7,400,823                           |   |  | $                        | 223,064 |   |  | $ | 7,936,443 |  
|                                                                           |  |                                |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  

See notes to consolidated financial statements.



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A  Accounting Policies

The significant accounting policies of Golden West Financial Corporation and subsidiaries (Golden West or Company) are more fully described in Note A
to the Consolidated Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission (SEC) on March 8, 2006 (SEC File No. 1-4629).

Principles of Consolidation

The
Companys consolidated financial statements, including World Savings Bank, FSB (WSB) and World Savings Bank, FSB (Texas) (WTX), for the three and six months ended June 30, 2006 and 2005 are unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) that are necessary for a fair statement of the results for such three- and six-month periods have been included. The operating results for the three and six months ended
June 30, 2006 are not necessarily indicative of the results for the full year.

Certain reclassifications have been made to prior
year financial statements to conform to current year presentation. Specifically, prepayment fees and late charges received on the Companys loan portfolio were reclassified on the Consolidated Statement of Net Earnings from Noninterest
Income  Fees to Interest Income  Interest on loans and Interest Income  Interest on mortgage-backed securities. As a result of these reclassifications, net interest income increased by $76 million
and $129 million for the second quarter and six months ended June 30, 2005 and noninterest income decreased by the same amounts for those periods. For the second quarter and six months ended June 30, 2006, $98 million and $182
million, respectively, of prepayment fees and late charges were included in interest income. These reclassifications had no effect on Net Earnings. Prepayment fees and late charges on loans that the Company services for others continue
to be reported in Noninterest Income  Fees.

New Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 156, Accounting for
Servicing of Financial Assets  an amendment of FASB Statement No. 140 (SFAS 156). This Statement amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. It
permits an entity to choose either the amortization method or the fair value measurement method for subsequent measurement for each class of separately recognized servicing assets and servicing liabilities. This Statement will be effective for
fiscal years beginning after September 15, 2006, but early adoption is permitted. The Company is evaluating the two measurement methods. The adoption of this Statement is not expected to have a material impact on the Companys financial
statements.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123
(Revised), Share-Based Payment, (SFAS 123R) using the modified prospective transition method. Please refer to NOTE C  Stock Options for detail. FASB Staff Position (FSP) SFAS 123R, Transition Election Related to Accounting
for the Tax Effects of Share-Based Payment Awards provides a practical transition election related to accounting for the tax effects of share-based payments to employees. The Company elected to adopt the transition method described in the FSP.



9



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##### Table of Contents

In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this interpretation is
encouraged if the enterprise has not yet issued financial statements, including interim statements, in the period this interpretation is adopted. The Company does not expect the adoption of this interpretation to have a material impact on its
financial statements.

NOTE B  Earnings Per Share

The Company calculates Basic Earnings Per Share (EPS) and Diluted EPS in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). The following is a
summary of the calculation of basic and diluted EPS.

Computation of Basic and Diluted Earnings Per Share

(Dollars in thousands except per share figures)

(Unaudited)



|                                                        |  |                            |             |                          |   |             |  |      |             |  |   |            
|------------------------------------------------------- |  | -------------------------- | ----------- | ------------------------ | - | ----------- |  | ---- | ----------- |  | - | -----------
|                                                        |  | Three Months Ended June 30 |             | Six Months Ended June 30
|                                                        |  | 2006                       |             | 2005                     |   | 2006        |  | 2005
|Net earnings                                            |  | $                          | 390,378     |                          | $ | 360,429     |  | $    | 781,324     |  | $ | 708,679    
|                                                        |  |                            |             |                          |   |             |  |      |             |  |   |            
|Average common shares outstanding                       |  |                            | 308,736,887 |                          |   | 307,440,730 |  |      | 308,568,145 |  |   | 307,152,495
|Dilutive effect of outstanding common stock equivalents |  |                            | 3,335,469   |                          |   | 4,330,119   |  |      | 3,375,958   |  |   | 4,316,859  
|                                                        |  |                            |             |                          |   |             |  |      |             |  |   |            
|Average diluted common shares outstanding               |  |                            | 312,072,356 |                          |   | 311,770,849 |  |      | 311,944,103 |  |   | 311,469,354
|                                                        |  |                            |             |                          |   |             |  |      |             |  |   |            
|Basic earnings per share                                |  | $                          | 1.26        |                          | $ | 1.17        |  | $    | 2.53        |  | $ | 2.31       
|Diluted earnings per share                              |  | $                          | 1.25        |                          | $ | 1.16        |  | $    | 2.50        |  | $ | 2.28       

NOTE C  Stock Options

The Companys shareholder-approved 1996 Stock Option Plan authorized the issuance of up to 42 million shares of the Companys common stock for non-qualified and incentive stock option grants to key
employees. The 1996 Stock Option Plan expired on February 1, 2006, after which no further options may be granted under this Plan.

The
Companys shareholder-approved 2005 Stock Incentive Plan was effective on April 27, 2005. The 2005 Stock Incentive Plan authorizes the issuance of up to 25 million shares of the Companys common stock for awards to key employees
of non-qualified and incentive stock options, restricted stock, stock units, and stock appreciation rights. At June 30, 2006, all 25 million shares authorized under the 2005 Stock Incentive Plan were available for awards.

The exercise price for all non-qualified and incentive stock options granted under the 1996 Stock Option Plan was set at fair market value as of the date
of grant. The outstanding options under the 1996 Stock



10



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##### Table of Contents

Option Plan provide for vesting after two to five years, after which time the vested options may be exercised at any time until ten years after the date of
grant.

Outstanding options at June 30, 2006, were held by 661 employees and had expiration dates ranging from December 9,
2007 to January 30, 2016. A summary of the transactions follows.

Options Outstanding

(Dollars in thousands except per share figures)

(Unaudited)



|                                          |  |            |   |  |                                       |       |                                          |            |                         |   |        
|----------------------------------------- |  | ---------- | - |  | ------------------------------------- | ----- | ---------------------------------------- | ---------- | ----------------------- | - | -------
|                                          |  | Shares     |   |  | WeightedAverageExercisePrice PerShare |       | WeightedAverageRemainingContractual Life |            | AggregateIntrinsicValue
|Outstanding, December 31, 2005            |  | 10,262,688 |   |  | $                                     | 33.24 |                                          |            |                         |   |        
|Granted                                   |  | 2,000      |   |  |                                       | 70.90 |                                          |            |                         |   |        
|Exercised                                 |  | (897,973   | ) |  |                                       | 16.69 |                                          |            |                         |   |        
|Forfeited or expired                      |  | (49,200    | ) |  |                                       | 49.03 |                                          |            |                         |   |        
|                                          |  |            |   |  |                                       |       |                                          |            |                         |   |        
|Outstanding, June 30, 2006                |  | 9,317,515  |   |  | $                                     | 34.76 |                                          | 5.89 years |                         | $ | 367,506
|                                          |  |            |   |  |                                       |       |                                          |            |                         |   |        
|Vested, June 30, 2006                     |  | 4,458,115  |   |  | $                                     | 17.43 |                                          | 3.71 years |                         | $ | 253,089
|                                          |  |            |   |  |                                       |       |                                          |            |                         |   |        
|Nonvested, June 30, 2006                  |  | 4,859,400  |   |  | $                                     | 50.65 |                                          |            |                         |   |        
|                                          |  |            |   |  |                                       |       |                                          |            |                         |   |        
|Vested or expected to vest, June 30, 2006 |  | 9,317,515  |   |  | $                                     | 34.76 |                                          | 5.89 years |                         | $ | 367,506
|                                          |  |            |   |  |                                       |       |                                          |            |                         |   |        

All vested options are exercisable. The aggregate intrinsic value of options exercised during the
six months ended June 30, 2006 was $48.5 million.

The following table summarizes the status of the Companys nonvested options
as of June 30, 2006:

Nonvested Options

(Unaudited)



|                             |  |           |   |  |                                       |       |                                    |   |      
|---------------------------- |  | --------- | - |  | ------------------------------------- | ----- | ---------------------------------- | - | -----
|                             |  | Shares    |   |  | WeightedAverageExercisePrice PerShare |       | WeightedAverageFair ValuePer Share
|Balance at December 31, 2005 |  | 4,911,100 |   |  | $                                     | 50.61 |                                    | $ | 13.82
|Granted                      |  | 2,000     |   |  |                                       | 70.90 |                                    |   | 18.35
|Vested                       |  | (4,500    | ) |  |                                       | 34.02 |                                    |   | 8.64 
|Forfeited                    |  | (49,200   | ) |  |                                       | 49.03 |                                    |   | 13.36
|                             |  |           |   |  |                                       |       |                                    |   |      
|Balance at June 30, 2006     |  | 4,859,400 |   |  | $                                     | 50.65 |                                    | $ | 13.83
|                             |  |           |   |  |                                       |       |                                    |   |      

As of June 30, 2006, there was $36.7 million of total unrecognized compensation cost related
to nonvested stock-based compensation arrangements granted. The cost is expected to be recognized in full at the time of the merger discussed in Note D  Business Combinations, as all the nonvested options will become fully vested.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in the first six months of 2006: dividend yields of 0.7%; expected volatilities of 21%; expected lives of 5.0 years; and risk-free interest rates of 4.50%.



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The expected volatility is based on historical volatility of the Companys stock and other factors.
The expected term of the options granted represents the period of time that options granted are expected to be outstanding. It is estimated based on the historical exercise of options and employee turnover. The risk-free interest rate for periods
within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for its stock-based employee compensation plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). No stock-based employee compensation cost was recognized in the Consolidated Statement of Net Earnings for the three and six months ended June 30, 2005, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted
the fair value recognition provisions of FASB statement No. 123 (Revised), Share-Based Payment, (SFAS 123R) using the modified prospective transition method. Under this transition method, compensation cost recognized in the second
quarter and first six months of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with SFAS
123R, results for prior periods have not been restated.

As a result of adopting SFAS 123R on January 1, 2006, the Companys
earnings before taxes on income and net earnings for the three months ended June 30, 2006, were $3.8 million and $2.3 million lower, respectively, than if the Company had continued to account for stock-based compensation under APB 25
and were $7.4 million and $4.5 million lower, respectively, for the six months ended June 30, 2006. Basic earnings per share for the three and six months ended June 30, 2006 would have been $1.27 and $2.55, respectively, if the
Company had not adopted SFAS 123R compared to reported basic earnings per share of $1.26 and $2.53 for the three and six months ended June 30, 2006. Diluted earnings per share for the three and six months ended June 30, 2006 would
have been $1.26 and $2.52, respectively, if the Company had not adopted SFAS 123R, compared to reported diluted earnings per share of $1.25 and $2.50 for the three and six months ended June 30, 2006. Stock-based compensation included in net
deferred loan costs was $385 thousand and $766 thousand for the three and six months ended June 30, 2006.

Prior to the
adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires the cash flows resulting from the
tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The excess tax benefit of $7.6 million and $15.3 million for the three and six
months ended June 30, 2006 classified as a financing cash inflow would have been classified as an operating cash inflow if the Company had not adopted SFAS 123R.



12



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##### Table of Contents

The following table illustrates the effect on net earnings and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123 to options granted under the Companys stock option plans in the prior period presented. For purposes of this pro forma disclosure, the fair value of the options is estimated using a
Black-Scholes option-pricing model and amortized into expense over the options vesting periods.

Pro Forma Net Earnings and
Earnings Per Share

(Dollars in thousands except per share figures)

(Unaudited)



|                                                                                                                                            |  |                                 |         |   |                               |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ----------------------------- | - | ------- | -
|                                                                                                                                            |  | Three Months EndedJune 30,
2005 |         |   | Six Months EndedJune 30, 2005 |  
|Net earnings, as reported                                                                                                                   |  | $                               | 360,429 |   |                               | $ | 708,679 |  
|Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects                                |  |                                 | -0-     |   |                               |   | -0-     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                 | (1,507  | ) |                               |   | (2,801  | )
|                                                                                                                                            |  |                                 |         |   |                               |   |         |  
|Pro forma net earnings                                                                                                                      |  | $                               | 358,922 |   |                               | $ | 705,878 |  
|                                                                                                                                            |  |                                 |         |   |                               |   |         |  
|Basic earnings per share                                                                                                                    |  |                                 |         |   |                               |   |         |  
|As reported                                                                                                                                 |  | $                               | 1.17    |   |                               | $ | 2.31    |  
|Pro forma                                                                                                                                   |  |                                 | 1.17    |   |                               |   | 2.30    |  
|Diluted earnings per share                                                                                                                  |  |                                 |         |   |                               |   |         |  
|As reported                                                                                                                                 |  | $                               | 1.16    |   |                               | $ | 2.28    |  
|Pro forma                                                                                                                                   |  |                                 | 1.15    |   |                               |   | 2.27    |  

NOTE D  Business Combinations

On May 7, 2006, Golden West Financial Corporation and Wachovia Corporation (Wachovia) announced that they had entered into an Agreement
and Plan of Merger, dated as of May 7, 2006 (the Merger Agreement), that provides, among other things, for Golden West to merge with a wholly-owned subsidiary of Wachovia (the Merger). As a result of the Merger, the
outstanding shares of Golden West common stock, with respect to each shareholder of record of Golden West common stock, will be converted into the right to receive (A) a number of shares of Wachovia common stock equal to the product of
(i) 1.365 times (ii) the number of shares of Golden West common stock held by such holder of record times (iii) 77%, and (B) an amount in cash equal to the product of (i) $81.07 times (ii) the number of shares of Golden
West common stock held by such holder of record times (iii) 23%. Wachovia also entered into voting agreements, dated as of May 7, 2006 (the Voting Agreements), with the chairman and chief executive officers, Herbert and Marion
Sandler, and with Bernard Osher, a member of the Golden West Board of Directors. Under the Voting Agreements, the Sandlers and Mr. Osher agreed to vote, and gave Wachovia an irrevocable proxy to vote the Golden West shares beneficially owned by
them on May 7, 2006 or thereafter, in favor of the Merger and they agreed that they will not vote those shares in favor of another acquisition transaction. In the Merger Agreement, Golden West agreed to pay Wachovia a termination fee of $995
million under certain circumstances generally arising if Golden West or a third party takes certain actions that could prevent or impede consummation of the Merger. Wachovia agreed to elect two current Golden West directors to its board of directors
upon consummation of the Merger. The transaction is expected to close in the fourth quarter of 2006 contingent upon receipt of shareholder and regulatory approvals.



13



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

OVERVIEW

Headquartered in Oakland, California, Golden West Financial Corporation is one of the nations
largest financial institutions with assets of $128.8 billion as of June 30, 2006. Our principal operating subsidiary is World Savings Bank, FSB (WSB). WSB has a subsidiary, World Savings Bank, FSB (Texas) (WTX). As of
June 30, 2006, we operated 285 savings branches in ten states and had lending operations in 39 states under the World name.

We have assumed that readers have reviewed or have access to our 2005 Annual Report on Form 10-K, which contains the latest audited financial statements and notes thereto, together with Managements Discussion and Analysis of
Financial Condition and Results of Operations as of December 31, 2005, and for the year then ended. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to such reports are available, free of charge, through the Securities and Exchange Commission (SEC) website at www.sec.gov and our website at www.gdw.com as soon as reasonably practicable after their filing with the SEC.

Recent Developments

On May 7, 2006, Golden West
entered into an Agreement and Plan of Merger with Wachovia Corporation that provides for Golden West to merge with a wholly-owned subsidiary of Wachovia. The agreement is described in the joint proxy statement-prospectus filed by Wachovia
Corporation on July 24, 2006 with the SEC on Form S-4. The joint proxy statement-prospectus, which is available through the SECs website at www.sec.gov and our website at www.gdw.com, was mailed beginning July 26, 2006 to
holders of record of Golden Wests and Wachovias common stock at the close of business on July 11, 2006. Both companies plan to hold special shareholder meetings on August 31, 2006 to approve the transaction. The transaction is
expected to close in the fourth quarter of 2006 contingent upon receipt of shareholder and regulatory approvals.

Our Business Model

We are a residential mortgage portfolio lender. In order to increase net earnings under this business model, we focus principally on:



| |  |  | growing net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and
borrowings;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining a healthy primary spread, which is the difference between the yield on interest-earning assets and the cost of deposits and borrowings;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expanding the adjustable rate mortgage (ARM) portfolio, which is our primary earning asset;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | managing interest rate risk, principally by originating and retaining monthly adjusting ARMs in portfolio, and matching these ARMs with liabilities that respond in a similar manner
to changes in interest rates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | managing credit risk, principally by originating high-quality loans to minimize nonperforming assets and troubled debt restructured and by closely monitoring our loan portfolio;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining a strong capital position to support growth and provide operating flexibility;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | controlling expenses; and
| | - |  | -------------------------



| |  |  | managing operations risk through strong internal controls.
| | - |  | ----------------------------------------------------------

This discussion and analysis includes those material changes in liquidity and capital resources that have occurred since December 31, 2005, as well as material changes in results of operations during the three- and six-month
periods ended June 30, 2006 and 2005, respectively.



14



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##### Table of Contents

Quarter in Review

Results for the second quarter and first six months of 2006 included the following:



| |  |  | diluted earnings per share amounted to $1.25 and $2.50 for the second quarter and first six months of 2006, up 8% and 10% from the $1.16 and $2.28 reported for the comparable
periods in 2005;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | net interest income grew 14% to $1.8 billion for the first six months of 2006 due to loan portfolio growth and a steady net interest margin of 2.83% and 2.80% for the six months
ended June 30, 2006 and 2005, respectively;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our general and administrative expenses increased 21% from $463 million for the six months ended June 30, 2005 to $558 million for the six months ended June 30,
2006; because average assets grew more slowly than expenses between the same periods, our general and administrative expense to average assets ratio increased to .88% for the six months ended June 30, 2006 compared to .82% for the comparable
period in 2005;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our loans receivable portfolio increased to $122.2 billion at June 30, 2006, up 10% from $111.0 billion at June 30, 2005, and 99% of the loan portfolio was
ARMs at each of those period ends;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our second quarter loan originations amounted to $11.7 billion as compared to $13.5 billion for the second quarter of 2005 and $23.3 billion for the first six months of
2006 compared to $24.6 billion for the first half of 2005;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 99% of originations for the second quarter and first six months of 2006 were ARMs;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | there was a shift in the predominant index used for our loan originations, thereby changing the mix of the ARM loans in our portfolio from June 30, 2005 to June 30, 2006;
for the first six months of 2006, 95% of originations were indexed to the Cost of Savings Index (COSI), and from June 30, 2005 to June 30, 2006, COSI increased from 36% to 60% of our ARM portfolio while the percentage of loans indexed to
the Certificate of Deposit Index (CODI) decreased from 51% to 31% of our ARM portfolio during that same period;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ratio of nonperforming assets to total assets increased from .28% at June 30, 2005 to .37% at June 30, 2006 but remained at very low levels; net chargeoffs to
average loans and MBS were zero basis points for the three and six months ended June 30, 2006 and 2005;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | deposits increased $651 million in the second quarter of 2006 compared to an increase of $3.6 billion in the second quarter of 2005 and increased $2.1 billion for the six
months ended June 30, 2006 compared to an increase of $6.3 billion for the same period in 2005; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our stockholders equity increased to $9.4 billion at June 30, 2006 compared to $7.9 billion at June 30, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------

Certain reclassifications have been made to prior year financial statements to conform to current year presentation. Specifically, in the first quarter
of 2006, the Office of Thrift Supervision (OTS), our primary regulator, changed its financial reporting practice for the classification of fees received from the early prepayment of loans and loan late charges. This adjustment by the OTS led to a
change in industry practice in the reporting of prepayment fees and late charges in interest income rather than as previously reported in fee income. Accordingly, the Company reclassified prepayment fees and late charges received on the
Companys loans receivable on the Consolidated Statement of Net Earnings from Noninterest Income  Fees to Interest Income  Interest on loans and Interest Income  Interest on mortgage-backed
securities. As a result of these reclassifications, net interest income increased by $76 million and $129 million for the second quarter and six months ended June 30, 2005 and noninterest income decreased by the same amounts for
those periods. For the second quarter and six months ended June 30, 2006, $98 million and $182 million, respectively, of prepayment fees and late charges were included in interest income. Although these reclassifications had no effect on
Net Earnings, the yield on the loan portfolio, the net interest margin, and the primary spread were adjusted to reflect this change. Prepayment fees and late charges on loans that the Company services for others continue to be reported
in Noninterest Income  Fees.



15



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##### Table of Contents

The following tables summarize selected financial information about how we performed at and for the three
and six months ended June 30, 2006 as compared to prior periods.

TABLE 1

Financial Highlights

(Unaudited)

(Dollars in thousands except per share figures)



|                                                                   |  |             |             |   |                 |   |             |             |  |   |             |  
|------------------------------------------------------------------ |  | ----------- | ----------- | - | --------------- | - | ----------- | ----------- |  | - | ----------- | -
|                                                                   |  | June 302006 |             |   | December 312005 |   |             | June 302005 | 
|Assets                                                             |  | $           | 128,805,627 |   |                 | $ | 124,615,163 |             |  | $ | 117,485,678 |  
|Loans receivable including mortgage-backed securities (MBS)(a)     |  |             | 123,517,870 |   |                 |   | 119,365,929 |             |  |   | 112,746,230 |  
|Adjustable rate mortgages and MBS(b)                               |  |             | 120,488,468 |   |                 |   | 116,369,564 |             |  |   | 109,541,064 |  
|Fixed-rate mortgages held for investment including MBS(b)          |  |             | 1,214,222   |   |                 |   | 1,241,426   |             |  |   | 1,354,321   |  
|Fixed-rate mortgages held for sale including MBS(b)                |  |             | 152,439     |   |                 |   | 82,400      |             |  |   | 48,636      |  
|Adjustable rate mortgages as a % of total loans receivable and MBS |  |             | 99          | % |                 |   | 99          | %           |  |   | 99          | %
|Loans serviced for others with recourse                            |  | $           | 2,348,276   |   |                 | $ | 2,138,348   |             |  | $ | 2,028,880   |  
|Loans serviced for others without recourse                         |  |             | 1,970,045   |   |                 |   | 2,020,402   |             |  |   | 2,076,530   |  
|Nonperforming assets                                               |  | $           | 476,275     |   |                 | $ | 382,353     |             |  | $ | 330,942     |  
|Nonperforming assets/total assets                                  |  |             | .37         | % |                 |   | .31         | %           |  |   | .28         | %
|Troubled debt restructured/total assets                            |  |             | .00         | % |                 |   | .00         | %           |  |   | .00         | %
|Net chargeoffs/average loans                                       |  |             | .00         | % |                 |   | .00         | %           |  |   | .00         | %
|Stockholders equity                                               |  | $           | 9,412,791   |   |                 | $ | 8,670,965   |             |  | $ | 7,936,443   |  
|Stockholders equity/total assets                                  |  |             | 7.31        | % |                 |   | 6.96        | %           |  |   | 6.76        | %
|Book value per common share                                        |  | $           | 30.47       |   |                 | $ | 28.15       |             |  | $ | 25.79       |  
|Common shares outstanding                                          |  |             | 308,939,749 |   |                 |   | 308,041,776 |             |  |   | 307,760,826 |  
|Yield on interest-earning assets                                   |  |             | 7.02        | % |                 |   | 6.35        | %           |  |   | 5.64        | %
|Cost of funds                                                      |  |             | 4.56        | % |                 |   | 3.78        | %           |  |   | 2.99        | %
|Primary spread                                                     |  |             | 2.46        | % |                 |   | 2.57        | %           |  |   | 2.65        | %
|Number of Employees:                                               |  |             |             |   |                 |   |             |             |  |   |             |  
|Full-time                                                          |  |             | 11,678      |   |                 |   | 10,495      |             |  |   | 9,883       |  
|Part-time                                                          |  |             | 1,184       |   |                 |   | 1,109       |             |  |   | 1,076       |  
|World Savings Bank, FSB (WSB):                                     |  |             |             |   |                 |   |             |             |  |   |             |  
|Total assets                                                       |  | $           | 128,385,913 |   |                 | $ | 124,370,304 |             |  | $ | 117,033,998 |  
|Stockholders equity                                               |  |             | 9,384,249   |   |                 |   | 8,607,176   |             |  |   | 8,077,760   |  
|Stockholders equity/total assets                                  |  |             | 7.31        | % |                 |   | 6.92        | %           |  |   | 6.90        | %
|Regulatory capital ratios:(c)                                      |  |             |             |   |                 |   |             |             |  |   |             |  
|Tier 1 capital (core or leverage)                                  |  |             | 7.18        | % |                 |   | 6.76        | %           |  |   | 6.73        | %
|Total risk-based capital                                           |  |             | 13.68       | % |                 |   | 13.02       | %           |  |   | 12.93       | %
|World Savings Bank, FSB (Texas) (WTX):                             |  |             |             |   |                 |   |             |             |  |   |             |  
|Total assets                                                       |  | $           | 15,430,456  |   |                 | $ | 13,270,487  |             |  | $ | 13,408,229  |  
|Stockholders equity                                               |  |             | 817,713     |   |                 |   | 744,749     |             |  |   | 700,554     |  
|Stockholders equity/total assets                                  |  |             | 5.30        | % |                 |   | 5.61        | %           |  |   | 5.22        | %
|Regulatory capital ratios:(c)                                      |  |             |             |   |                 |   |             |             |  |   |             |  
|Tier 1 capital (core or leverage)                                  |  |             | 5.30        | % |                 |   | 5.61        | %           |  |   | 5.22        | %
|Total risk-based capital                                           |  |             | 23.64       | % |                 |   | 24.77       | %           |  |   | 23.07       | %



|(a) | Includes loans in process, net deferred loan costs, allowance for loan losses, and discounts.
|--- | ---------------------------------------------------------------------------------------------



|(b) | Excludes loans in process, net deferred loan costs, allowance for loan losses, and discounts.
|--- | ---------------------------------------------------------------------------------------------



|(c) | For regulatory purposes, the requirements to be considered well-capitalized are
5.0% for Tier 1 capital (core or leverage) and 10.0% for total risk-based capital.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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##### Table of Contents

TABLE 1 (continued)

Financial Highlights

(Unaudited)

(Dollars in thousands except per share figures)



|                                                                              |  |                           |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                              |  | Three Months EndedJune 30 |            |   | Six Months Ended June 30 |  
|                                                                              |  | 2006                      |            |   | 2005                     |   |            | 2006 |  |   | 2005       |  
|Real estate loans originated                                                  |  | $                         | 11,691,213 |   |                          | $ | 13,452,983 |      |  | $ | 23,257,205 |   |  | $ | 24,627,720 |  
|New adjustable rate mortgages as a percentage of real estate loans originated |  |                           | 99         | % |                          |   | 99         | %    |  |   | 99         | % |  |   | 99         | %
|Refinances as a percentage of real estate loans originated                    |  |                           | 84         | % |                          |   | 75         | %    |  |   | 84         | % |  |   | 76         | %
|Deposits increase                                                             |  | $                         | 651,117    |   |                          | $ | 3,632,875  |      |  | $ | 2,076,022  |   |  | $ | 6,260,829  |  
|Net earnings                                                                  |  |                           | 390,378    |   |                          |   | 360,429    |      |  |   | 781,324    |   |  |   | 708,679    |  
|Basic earnings per share                                                      |  |                           | 1.26       |   |                          |   | 1.17       |      |  |   | 2.53       |   |  |   | 2.31       |  
|Diluted earnings per share                                                    |  |                           | 1.25       |   |                          |   | 1.16       |      |  |   | 2.50       |   |  |   | 2.28       |  
|Ratios:(a)                                                                    |  |                           |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net earnings/average stockholders equity (ROE)                               |  |                           | 16.91      | % |                          |   | 18.59      | %    |  |   | 17.27      | % |  |   | 18.68      | %
|Net earnings/average assets (ROA)                                             |  |                           | 1.22       | % |                          |   | 1.25       | %    |  |   | 1.23       | % |  |   | 1.26       | %
|Net interest margin(b)                                                        |  |                           | 2.81       | % |                          |   | 2.80       | %    |  |   | 2.83       | % |  |   | 2.80       | %
|General and administrative expense/average assets                             |  |                           | .89        | % |                          |   | .83        | %    |  |   | .88        | % |  |   | .82        | %
|Efficiency ratio(c)                                                           |  |                           | 30.73      | % |                          |   | 28.69      | %    |  |   | 30.12      | % |  |   | 28.59      | %



|(a) | Ratios are annualized by multiplying the quarterly computation by four and the semi-annual
computation by two. Averages are computed by adding the beginning balance and each monthend balance during the quarter and six months and dividing by four and seven, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Net interest margin is net interest income divided by average earning assets.
|--- | -----------------------------------------------------------------------------



|(c) | Efficiency ratio is defined as general and administrative expense divided by the sum of net
interest income and noninterest income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------



17



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##### Table of Contents

FINANCIAL CONDITION

The following table summarizes our major asset, liability, and equity components in
percentage terms at June 30, 2006, December 31, 2005, and June 30, 2005.

TABLE 2

Asset, Liability, and Equity Components as

Percentages of the Total Balance Sheet



|                                      |  |             |   |  |                 |   |  |             |  
|------------------------------------- |  | ----------- | - |  | --------------- | - |  | ----------- | -
|                                      |  | June 302006 |   |  | December 312005 |   |  | June 302005 |  
|Assets:                               |  |             |   |  |                 |   |  |             |  
|Cash and investments                  |  | 1.7         | % |  | 1.8             | % |  | 1.7         | %
|Loans receivable and MBS              |  | 95.9        |   |  | 95.8            |   |  | 96.0        |  
|Other assets                          |  | 2.4         |   |  | 2.4             |   |  | 2.3         |  
|                                      |  |             |   |  |                 |   |  |             |  
|                                      |  | 100.0       | % |  | 100.0           | % |  | 100.0       | %
|                                      |  |             |   |  |                 |   |  |             |  
|Liabilities and Stockholders Equity: |  |             |   |  |                 |   |  |             |  
|Deposits                              |  | 48.3        | % |  | 48.3            | % |  | 50.4        | %
|FHLB advances                         |  | 29.8        |   |  | 31.2            |   |  | 30.4        |  
|Other borrowings                      |  | 13.5        |   |  | 12.5            |   |  | 11.4        |  
|Other liabilities                     |  | 1.1         |   |  | 1.0             |   |  | 1.0         |  
|Stockholders equity                  |  | 7.3         |   |  | 7.0             |   |  | 6.8         |  
|                                      |  |             |   |  |                 |   |  |             |  
|                                      |  | 100.0       | % |  | 100.0           | % |  | 100.0       | %
|                                      |  |             |   |  |                 |   |  |             |  

The Loan Portfolio

Almost all of our assets are monthly adjustable rate mortgages on residential properties.
We originate and retain these loans in portfolio. As discussed below, we emphasize ARMs with interest rates that change monthly to reduce our exposure to interest rate risk. We sell most of the fixed-rate loans that we originate, as well as loans
that customers convert from ARMs to fixed-rate loans.

Loans Receivable and Mortgage-Backed Securities

The following table shows the components of our loans receivable and mortgage-backed securities (MBS) portfolio at
June 30, 2006, December 31, 2005, and June 30, 2005.



18



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##### Table of Contents

TABLE 3

Balance of Loans Receivable and MBS by Component

(Dollars in thousands)



|                                                       |  |             |             |   |                 |   |             |             |  |   |             |  
|------------------------------------------------------ |  | ----------- | ----------- | - | --------------- | - | ----------- | ----------- |  | - | ----------- | -
|                                                       |  | June 302006 |             |   | December 312005 |   |             | June 302005 | 
|Loans                                                  |  | $           | 74,868,351  |   |                 | $ | 66,339,220  |             |  | $ | 74,586,845  |  
|Securitized loans(a)                                   |  |             | 45,661,886  |   |                 |   | 49,870,206  |             |  |   | 34,658,772  |  
|Other(b)                                               |  |             | 1,662,741   |   |                 |   | 1,672,539   |             |  |   | 1,802,209   |  
|                                                       |  |             |             |   |                 |   |             |             |  |   |             |  
|Total loans receivable                                 |  |             | 122,192,978 |   |                 |   | 117,881,965 |             |  |   | 111,047,826 |  
|                                                       |  |             |             |   |                 |   |             |             |  |   |             |  
|MBS with recourse(c)                                   |  |             | 1,036,197   |   |                 |   | 1,168,480   |             |  |   | 1,346,080   |  
|Purchased MBS                                          |  |             | 288,695     |   |                 |   | 315,484     |             |  |   | 352,324     |  
|                                                       |  |             |             |   |                 |   |             |             |  |   |             |  
|Total MBS                                              |  |             | 1,324,892   |   |                 |   | 1,483,964   |             |  |   | 1,698,404   |  
|                                                       |  |             |             |   |                 |   |             |             |  |   |             |  
|Total loans receivable and MBS                         |  | $           | 123,517,870 |   |                 | $ | 119,365,929 |             |  | $ | 112,746,230 |  
|                                                       |  |             |             |   |                 |   |             |             |  |   |             |  
|ARMs as a percentage of total loans receivable and MBS |  |             | 99          | % |                 |   | 99          | %           |  |   | 99          | %
|                                                       |  |             |             |   |                 |   |             |             |  |   |             |  



|(a) | Loans securitized after June 30, 2001 are classified as securitized loans and
included in loans receivable.
|--- | -----------------------------------------------------------------------------------------------------------



|(b) | Includes loans in process, net deferred loan costs, allowance for loan losses, and other
miscellaneous discounts.
|--- | -----------------------------------------------------------------------------------------------------------------



|(c) | Loans securitized prior to April 1, 2001 are classified as MBS with recourse held to
maturity.
|--- | ----------------------------------------------------------------------------------------------

The balance of loans receivable and MBS is affected primarily by loan originations and loan and MBS repayments.
The following table provides information about our loan originations and loan and MBS repayments for the three and six months ended June 30, 2006 and 2005.

TABLE 4

Loan Originations and Repayments

(Dollars in thousands)



|                                                                |  |                           |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------- |  | ------------------------- | ---------- | - | ----------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                |  | Three Months EndedJune 30 |            |   | Six Months EndedJune 30 |  
|                                                                |  | 2006                      |            |   | 2005                    |   |            | 2006 |  |   | 2005       |  
|Loan Originations                                               |  |                           |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Real estate loans originated                                    |  | $                         | 11,691,213 |   |                         | $ | 13,452,983 |      |  | $ | 23,257,205 |   |  | $ | 24,627,720 |  
|ARMs as a % of originations                                     |  |                           | 99         | % |                         |   | 99         | %    |  |   | 99         | % |  |   | 99         | %
|Fixed-rate mortgages as a % of originations                     |  |                           | 1          | % |                         |   | 1          | %    |  |   | 1          | % |  |   | 1          | %
|Refinances as a % of originations                               |  |                           | 84         | % |                         |   | 75         | %    |  |   | 84         | % |  |   | 76         | %
|Purchases as a % of originations                                |  |                           | 16         | % |                         |   | 25         | %    |  |   | 16         | % |  |   | 24         | %
|First mortgages originated for portfolio as a % of originations |  |                           | 97         | % |                         |   | 97         | %    |  |   | 97         | % |  |   | 98         | %
|First mortgages originated for sale as a % of originations      |  |                           | 1          | % |                         |   | 0          | %    |  |   | 1          | % |  |   | 0          | %
|Repayments                                                      |  |                           |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Loan and MBS repayments(a)                                      |  | $                         | 10,544,525 |   |                         | $ | 8,207,391  |      |  | $ | 19,433,766 |   |  | $ | 14,521,495 |  
|Loan and MBS repayment rate(b)                                  |  |                           | 35         | % |                         |   | 31         | %    |  |   | 33         | % |  |   | 28         | %



|(a) | Loan and MBS repayments consist of monthly amortization and loan payoffs. For ELOCs, only
amounts paid at the termination of the line of credit are included in repayments. Prior to 2006, repayments of ELOCs were not included in repayments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | The loan and MBS repayment rate for the three months ended June 30 is the quarterly
repayments annualized as a percentage of the prior quarters ending loan and MBS balance. The year-to-date repayments are annualized as a % of the beginning of the year loan and MBS balance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The dollar volume of our originations in the first six months of 2006 was lower than the same periods in
2005 due to a nationwide slow down in the demand for new mortgages.

Loan and MBS repayments, including amortization and loan payoffs, were
higher in the second quarter and first six months of 2006 as compared to the comparable periods in 2005 as a result of the larger portfolio balance and a higher repayment rate. Also, included in the 2006 repayment numbers are amounts paid at the
termination of an ELOC. Prior to 2006, ELOC terminations were not included in repayments. The repayment rate in 2006 increased because home sales continued at high levels, refinance activity remained high as borrowers continued to borrow against the
equity in their homes, and many borrowers opted to switch from an ARM loan to a fixed-rate mortgage in order to lock in the favorable rates and payments available on comparatively low-cost fixed-rate mortgages.

Equity Lines of Credit and Fixed-Rate Second Mortgages

Most of our loans are collateralized by first deeds of trust on one- to four-family homes. We also offer borrowers equity lines of credit (ELOCs). These ELOCs are collateralized typically by second deeds of trust and
occasionally by first deeds of trust. The ELOCs we originate are indexed either to the Certificate of Deposit Index (CODI) discussed in Management of Interest Rate RiskAsset/Liability Management or the Prime Rate as published in
the Money Rates table in The Wall Street Journal (Central Edition). For the six months ended June 30, 2006, $516 million of ELOCs were originated (includes only amounts drawn at the time of establishment), of which $500 million were
tied to CODI and $16 million were tied to the Prime Rate. We also originate a small volume of fixed-rate second mortgages secured by second deeds of trust. We originate second deeds of trust on properties that have a first mortgage with us. The
following table provides information about our activity in ELOCs and fixed-rate second mortgages for the three and six months ended June 30, 2006 and 2005.

TABLE 5

Equity Lines of Credit and Fixed-Rate Second Mortgages

(Dollars in thousands)



|                                            |  |                           |           |                         |   |           |  |      |           |  |   |          
|------------------------------------------- |  | ------------------------- | --------- | ----------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                            |  | Three Months EndedJune 30 |           | Six Months EndedJune 30
|                                            |  | 2006                      |           | 2005                    |   | 2006      |  | 2005
|Equity Lines of Credit                      |  |                           |           |                         |   |           |  |      |           |  |   |          
|ELOC originations(a)                        |  | $                         | 235,240   |                         | $ | 306,995   |  | $    | 515,927   |  | $ | 485,516  
|New ELOCs established(b)                    |  |                           | 508,411   |                         |   | 622,342   |  |      | 1,105,187 |  |   | 1,006,883
|ELOC outstanding balance                    |  |                           | 3,035,446 |                         |   | 2,656,826 |  |      | 3,035,446 |  |   | 2,656,826
|ELOC maximum total line of credit available |  |                           | 4,769,434 |                         |   | 4,128,996 |  |      | 4,769,434 |  |   | 4,128,996
|                                            |  |                           |           |                        
|Fixed-Rate Second Mortgages                 |  |                           |           |                         |   |           |  |      |           |  |   |          
|Fixed-rate second mortgage originations     |  | $                         | 2,325     |                         | $ | 2,310     |  | $    | 4,296     |  | $ | 3,654    
|Sales of second mortgages                   |  |                           | -0-       |                         |   | -0-       |  |      | -0-       |  |   | -0-      
|Fixed-rate seconds held for investment      |  |                           | 49,089    |                         |   | 91,092    |  |      | 49,089    |  |   | 91,092   



|(a) | Only the dollar amount of ELOCs drawn at the establishment of the line of credit is included
in originations.
|--- | -------------------------------------------------------------------------------------------------------------



|(b) | Includes the maximum total line of credit available for new ELOCs.
|--- | ------------------------------------------------------------------

Net Deferred Loan Costs

Included in the balance of loans receivable are net deferred loan costs associated with originating loans. In accordance with accounting principles generally accepted in the United States of America (GAAP), we defer loan fees charged and
certain loan origination costs. The combined amounts have resulted in net deferred costs. These net deferred loan costs are amortized over the contractual life of the related loans. The amortized amount lowers loan interest income and net interest
income which reduces the reported yield on our loan portfolio, our primary spread, and our net interest margin. If a loan pays off before the end of its contractual life, any



20



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##### Table of Contents

remaining net deferred cost is charged to loan interest income at that time. The vast majority of the amortization of net deferred loan costs shown in the
following table is accelerated amortization resulting from early payoffs of loans.

The following table provides information on net
deferred loan costs for the three and six months ended June 30, 2006 and 2005.

TABLE 6

Net Deferred Loan Costs

(Dollars in thousands)



|                                             |  |                           |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------- |  | ------------------------- | --------- | - | ----------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                             |  | Three Months EndedJune 30 |           |   | Six Months EndedJune 30 |  
|                                             |  | 2006                      |           |   | 2005                    |   |           | 2006 |  |   | 2005      |  
|Beginning balance of net deferred loan costs |  | $                         | 1,189,578 |   |                         | $ | 982,227   |      |  | $ | 1,152,143 |   |  | $ | 915,008   |  
|Net loan costs deferred                      |  |                           | 129,629   |   |                         |   | 148,968   |      |  |   | 261,084   |   |  |   | 274,488   |  
|Amortization of net deferred loan costs      |  |                           | (111,344  | ) |                         |   | (80,421   | )    |  |   | (205,370  | ) |  |   | (139,637  | )
|Net deferred loan costs transferred from MBS |  |                           | 13        |   |                         |   | 9         |      |  |   | 19        |   |  |   | 924       |  
|                                             |  |                           |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|Ending balance of net deferred loan costs    |  | $                         | 1,207,876 |   |                         | $ | 1,050,783 |      |  | $ | 1,207,876 |   |  | $ | 1,050,783 |  
|                                             |  |                           |           |   |                         |   |           |      |  |   |           |   |  |   |           |  

The increase in the balance of net deferred loan costs from June 30, 2005 to June 30,
2006 resulted primarily from the growth in the loan portfolio.

Lending Operations

At June 30, 2006, we had lending operations in 39 states. Our largest source of mortgage origination volume continues to be loans secured by
residential properties in California, which is the largest residential mortgage market in the United States. The following table shows originations for the three and six months ended June 30, 2006 and 2005 for Northern and Southern
California and for our next five largest origination states by dollar amount for the first six months of 2006.

TABLE 7

Loan Originations by State

(Dollars in thousands)



|                    |  |                           |            |                         |   |            |  |      |            |  |   |           
|------------------- |  | ------------------------- | ---------- | ----------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                    |  | Three Months EndedJune 30 |            | Six Months EndedJune 30
|                    |  | 2006                      |            | 2005                    |   | 2006       |  | 2005
|Northern California |  | $                         | 4,037,071  |                         | $ | 5,053,708  |  | $    | 8,138,909  |  | $ | 9,227,918 
|Southern California |  |                           | 3,650,500  |                         |   | 3,988,392  |  |      | 7,350,408  |  |   | 7,443,452 
|                    |  |                           |            |                         |   |            |  |      |            |  |   |           
|Total California    |  |                           | 7,687,571  |                         |   | 9,042,100  |  |      | 15,489,317 |  |   | 16,671,370
|Florida             |  |                           | 1,003,930  |                         |   | 1,010,300  |  |      | 1,970,800  |  |   | 1,745,522 
|New Jersey          |  |                           | 504,848    |                         |   | 523,018    |  |      | 931,467    |  |   | 924,099   
|Arizona             |  |                           | 355,263    |                         |   | 345,469    |  |      | 687,764    |  |   | 569,914   
|Virginia            |  |                           | 200,886    |                         |   | 305,787    |  |      | 417,771    |  |   | 558,425   
|Washington          |  |                           | 203,065    |                         |   | 203,235    |  |      | 384,133    |  |   | 364,989   
|Other states        |  |                           | 1,735,650  |                         |   | 2,023,074  |  |      | 3,375,953  |  |   | 3,793,401 
|                    |  |                           |            |                         |   |            |  |      |            |  |   |           
|Total               |  | $                         | 11,691,213 |                         | $ | 13,452,983 |  | $    | 23,257,205 |  | $ | 24,627,720
|                    |  |                           |            |                         |   |            |  |      |            |  |   |           



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The following tables show loans receivable and MBS with recourse by state at June 30, 2006 and 2005
for Northern and Southern California and all other states with more than 2% of the total loan balance at June 30, 2006.

TABLE 8

Loan Portfolio by State (a)

June 30, 2006

(Dollars in thousands)



|                                             |                           |                         |                      |                       |   |             |  |                          |       |  |   |             |  |        |  
|-------------------------------------------- | ------------------------- | ----------------------- | -------------------- | --------------------- | - | ----------- |  | ------------------------ | ----- |  | - | ----------- |  | ------ | -
|State                                        |                           | Residential Real Estate |                      | CommercialReal Estate |   | Total Loans |  | Loans as a % ofPortfolio |      
|                                             | Single-Family 1  4 Units |                         | Multi-Family5+ Units |                       |   |            
|Northern California                          |                           | $                       | 39,111,578           |                       | $ | 1,734,865   |  | $                        | 7,726 |  | $ | 40,854,169  |  | 33.61  | %
|Southern California                          |                           |                         | 31,837,621           |                       |   | 1,483,676   |  |                          | 791   |  |   | 33,322,088  |  | 27.41  |  
|                                             |                           |                         |                      |                       |   |             |  |                          |       |  |   |             |  |        |  
|Total California                             |                           |                         | 70,949,199           |                       |   | 3,218,541   |  |                          | 8,517 |  |   | 74,176,257  |  | 61.02  |  
|Florida                                      |                           |                         | 9,185,116            |                       |   | 79,677      |  |                          | 117   |  |   | 9,264,910   |  | 7.62   |  
|New Jersey                                   |                           |                         | 5,684,782            |                       |   | -0-         |  |                          | 252   |  |   | 5,685,034   |  | 4.68   |  
|Texas                                        |                           |                         | 3,195,514            |                       |   | 145,354     |  |                          | -0-   |  |   | 3,340,868   |  | 2.75   |  
|Illinois                                     |                           |                         | 2,800,035            |                       |   | 140,372     |  |                          | -0-   |  |   | 2,940,407   |  | 2.42   |  
|Virginia                                     |                           |                         | 2,678,438            |                       |   | 2,938       |  |                          | -0-   |  |   | 2,681,376   |  | 2.21   |  
|Arizona                                      |                           |                         | 2,603,461            |                       |   | 70,667      |  |                          | -0-   |  |   | 2,674,128   |  | 2.20   |  
|Washington                                   |                           |                         | 1,850,789            |                       |   | 726,281     |  |                          | -0-   |  |   | 2,577,070   |  | 2.12   |  
|Other states(b)                              |                           |                         | 17,848,964           |                       |   | 365,302     |  |                          | 498   |  |   | 18,214,764  |  | 14.98  |  
|                                             |                           |                         |                      |                       |   |             |  |                          |       |  |   |             |  |        |  
|Totals                                       |                           | $                       | 116,796,298          |                       | $ | 4,749,132   |  | $                        | 9,384 |  |   | 121,554,814 |  | 100.00 | %
|                                             |                           |                         |                      |                       |   |             |  |                          |       |  |   |             |  |        |  
|Loans on deposits                            |                           |                         |                      |                       |   |             |  |                          |       |  |   | 11,620      |  |        |  
|Other(c)                                     |                           |                         |                      |                       |   |             |  |                          |       |  |   | 1,662,741   |  |        |  
|                                             |                           |                         |                      |                       |   |             |  |                          |       |  |   |             |  |        |  
|Total loans receivable and MBS with recourse |                           |                         |                      |                       |   |             |  |                          |       |  | $ | 123,229,175 |  |        |  
|                                             |                           |                         |                      |                       |   |             |  |                          |       |  |   |             |  |        |  



|(a) | The table includes the balances of loans that were securitized and retained as MBS with recourse.
|--- | -------------------------------------------------------------------------------------------------



|(b) | Each state included in Other states had a total loan balance that was less than 2% of total loans at June 30, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------



|(c) | Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.
|--- | -----------------------------------------------------------------------------------------------------------------



22



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TABLE 9

Loan Portfolio by State (a)

June 30, 2005

(Dollars in thousands)



|                                             |                           |                         |                      |                       |   |             |  |                          |        |  |   |             |  |        |  
|-------------------------------------------- | ------------------------- | ----------------------- | -------------------- | --------------------- | - | ----------- |  | ------------------------ | ------ |  | - | ----------- |  | ------ | -
|State                                        |                           | Residential Real Estate |                      | CommercialReal Estate |   | Total Loans |  | Loans as a % ofPortfolio |       
|                                             | Single-Family 1  4 Units |                         | Multi-Family5+ Units |                       |   |            
|Northern California                          |                           | $                       | 36,674,156           |                       | $ | 1,792,433   |  | $                        | 8,744  |  | $ | 38,475,333  |  | 34.79  | %
|Southern California                          |                           |                         | 28,980,059           |                       |   | 1,491,936   |  |                          | 939    |  |   | 30,472,934  |  | 27.56  |  
|                                             |                           |                         |                      |                       |   |             |  |                          |        |  |   |             |  |        |  
|Total California                             |                           |                         | 65,654,215           |                       |   | 3,284,369   |  |                          | 9,683  |  |   | 68,948,267  |  | 62.35  |  
|Florida                                      |                           |                         | 6,961,902            |                       |   | 78,004      |  |                          | 213    |  |   | 7,040,119   |  | 6.37   |  
|New Jersey                                   |                           |                         | 4,946,456            |                       |   | -0-         |  |                          | 259    |  |   | 4,946,715   |  | 4.47   |  
|Texas                                        |                           |                         | 3,267,634            |                       |   | 149,676     |  |                          | 101    |  |   | 3,417,411   |  | 3.09   |  
|Illinois                                     |                           |                         | 2,763,398            |                       |   | 140,252     |  |                          | -0-    |  |   | 2,903,650   |  | 2.63   |  
|Virginia                                     |                           |                         | 2,364,885            |                       |   | 3,010       |  |                          | -0-    |  |   | 2,367,895   |  | 2.14   |  
|Arizona                                      |                           |                         | 1,814,903            |                       |   | 70,517      |  |                          | -0-    |  |   | 1,885,420   |  | 1.71   |  
|Washington                                   |                           |                         | 1,698,754            |                       |   | 741,147     |  |                          | -0-    |  |   | 2,439,901   |  | 2.21   |  
|Other states(b)                              |                           |                         | 16,289,556           |                       |   | 341,384     |  |                          | 1,257  |  |   | 16,632,197  |  | 15.03  |  
|                                             |                           |                         |                      |                       |   |             |  |                          |        |  |   |             |  |        |  
|Totals                                       |                           | $                       | 105,761,703          |                       | $ | 4,808,359   |  | $                        | 11,513 |  |   | 110,581,575 |  | 100.00 | %
|                                             |                           |                         |                      |                       |   |             |  |                          |        |  |   |             |  |        |  
|Loans on deposits                            |                           |                         |                      |                       |   |             |  |                          |        |  |   | 10,122      |  |        |  
|Other(c)                                     |                           |                         |                      |                       |   |             |  |                          |        |  |   | 1,802,209   |  |        |  
|                                             |                           |                         |                      |                       |   |             |  |                          |        |  |   |             |  |        |  
|Total loans receivable and MBS with recourse |                           |                         |                      |                       |   |             |  |                          |        |  | $ | 112,393,906 |  |        |  
|                                             |                           |                         |                      |                       |   |             |  |                          |        |  |   |             |  |        |  



|(a) | The table includes the balances of loans that were securitized and retained as MBS with recourse.
|--- | -------------------------------------------------------------------------------------------------



|(b) | Each state included in Other states had a total loan balance that was less than 2% of total at June 30, 2006.
|--- | -------------------------------------------------------------------------------------------------------------



|(c) | Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.
|--- | -----------------------------------------------------------------------------------------------------------------

Securitization Activity

We
often securitize our portfolio loans into mortgage-backed securities. We do this because MBS are a more valuable form of collateral for borrowings than whole loans. Because we have retained all of the beneficial interests in these MBS
securitizations to date, GAAP requires that securitizations formed after March 31, 2001 be classified as securitized loans and included in our loans receivable. Securitization activity for the three and six months ended June 30, 2006 amounted
to $4.0 billion and $8.6 billion, respectively, compared to $7.0 billion and $8.1 billion for the same periods in 2005. The volume of securitization activity fluctuates depending on the amount of collateral needed for borrowings and liquidity
management.

Loans securitized prior to April 1, 2001 are classified as MBS with recourse held to maturity. MBS that are classified as
held to maturity are those that we have the ability and intent to hold until maturity.

Structural Features of our ARMs

After bank regulators authorized ARMs in 1981 to help mortgage lenders better manage interest rate risk, we and other major
residential portfolio lenders in California and elsewhere evaluated various ARM products to find solutions that would benefit borrowers and also allow us to manage interest rate risk without assuming undue credit risk. The product selected by most
major residential portfolio lenders on the West Coast, and various others throughout the country, was a product often described as an option ARM because of the payment options available to borrowers. For the past 25 years, we have
continued to originate our version of the option ARM because we believe that borrowers benefit from its structural features and because we have developed pricing, underwriting, appraisal, and other processes over the years to help us manage
potential credit risks. Although we have originated some other types of ARMs, almost all of our ARMs are option ARMs.



23



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##### Table of Contents

The option ARMs that we have originated since 1981 have the following structural features that are
described in more detail below:



| |  |  | an interest rate that changes monthly and is based on an index plus a fixed margin set at origination;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | payment options;
| | - |  | ----------------



| |  |  | features that allow for deferred interest to be added to the loans; and
| | - |  | -----------------------------------------------------------------------



| |  |  | lifetime interest rate caps, and in some cases interest rate floors, that limit the range of interest rates on the loans.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

Interest Rates and Indexes. The option ARMs we originate have interest rates that change monthly based on an index plus a fixed margin that is set
at the time we make the loan. The index value changes monthly and consequently the loan interest rate changes monthly. For most of our lending, the indexes used are the Golden West Cost of Savings Index (COSI) and the Certificate of Deposit Index
(CODI). Our portfolio also contains loans indexed to the Eleventh District Cost of Funds Index (COFI). Details about these indexes, including the reporting and repricing lags associated with them, are discussed in Management of Interest Rate
RiskAsset/Liability Management. The ELOCs we originate are indexed either to CODI or the Prime Rate.

As further described in
Management of Interest Rate Risk - Asset/Liability Management, we have focused on originating ARMs with indexes that meet our customers needs and match well with our liabilities. The following table shows the distribution of ARM
originations by index for the three and six months ended June 30, 2006 and 2005.



TABLE 10

Adjustable Rate Mortgage Originations by Index (a)

(Dollars in thousands)



|          |      |                            |            |  |                          |      |  |           |            |  |      |   |           |   |            |      |     |           |  |   |            |  |     |  
|--------- | ---- | -------------------------- | ---------- |  | ------------------------ | ---- |  | --------- | ---------- |  | ---- | - | --------- | - | ---------- | ---- | --- | --------- |  | - | ---------- |  | --- | -
|ARM Index |      | Three Months Ended June 30 |            |  | Six Months Ended June 30 |     
|          | 2006 |                            | % ofTotal  |  |                          | 2005 |  | % ofTotal |            |  | 2006 |   | % ofTotal |   |            | 2005 |     | % ofTotal | 
|COSI      |      | $                          | 11,017,121 |  | 95                       | %    |  | $         | 8,467,456  |  | 63   | % |           | $ | 22,046,060 |      | 96  | %         |  | $ | 12,805,232 |  | 52  | %
|CODI(b)   |      |                            | 509,174    |  | 4                        | %    |  |           | 4,676,058  |  | 35   | % |           |   | 869,090    |      | 4   | %         |  |   | 11,148,094 |  | 46  | %
|COFI      |      |                            | 46,217     |  | 1                        | %    |  |           | 134,207    |  | 1    | % |           |   | 111,975    |      | 0   | %         |  |   | 261,716    |  | 1   | %
|Prime     |      |                            | 5,993      |  | 0                        | %    |  |           | 98,986     |  | 1    | % |           |   | 15,704     |      | 0   | %         |  |   | 274,477    |  | 1   | %
|LIBOR(c)  |      |                            | 2,350      |  | 0                        | %    |  |           | -0-        |  | 0    | % |           |   | 5,825      |      | 0   | %         |  |   | -0-        |  | 0   | %
|          |      |                            |            |  |                          |      |  |           |            |  |      |   |           |   |            |      |     |           |  |   |            |  |     |  
|Total     |      | $                          | 11,580,855 |  | 100                      | %    |  | $         | 13,376,707 |  | 100  | % |           | $ | 23,048,654 |      | 100 | %         |  | $ | 24,489,519 |  | 100 | %
|          |      |                            |            |  |                          |      |  |           |            |  |      |   |           |   |            |      |     |           |  |   |            |  |     |  



|(a) | Only the dollar amount of ELOCs drawn at the establishment of the line of credit is included in originations.
|--- | -------------------------------------------------------------------------------------------------------------



|(b) | Includes ELOCs tied to CODI.
|--- | ----------------------------



|(c) | LIBOR is the London Interbank Offered Rate.
|--- | -------------------------------------------

The proportion of our ARM originations tied to each index varies in different interest, operating, and competitive environments. In the first six months of 2006, COSI was appealing to our customers because COSI was lower than CODI and moved
more slowly than CODI as short-term interest rates rose. From December 31, 2005 until June 30, 2006, COSI increased by .70% from 3.24% to 3.94%, while CODI increased by .97% from 3.51% to 4.48% during the same period.



24



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##### Table of Contents

The following table shows the distribution by index of the Companys outstanding balance of
adjustable rate mortgages (including ARM MBS) at June 30, 2006, December 31, 2005, and June 30, 2005.

TABLE 11

Adjustable Rate Mortgage Portfolio by Index

(Including ARM MBS)

(Dollars in
thousands)



|          |  |              |             |           |     |   |                 |   |             |  |     |              |  |           |             |  |     |  
|--------- |  | ------------ | ----------- | --------- | --- | - | --------------- | - | ----------- |  | --- | ------------ |  | --------- | ----------- |  | --- | -
|ARM Index |  | June 30 2006 |             | % ofTotal |     |   | December 312005 |   | % ofTotal   |  |     | June 30 2005 |  | % ofTotal |            
|COSI      |  | $            | 71,908,586  |           | 60  | % |                 | $ | 56,382,694  |  | 48  | %            |  | $         | 39,211,027  |  | 36  | %
|CODI(a)   |  |              | 38,147,138  |           | 31  | % |                 |   | 47,557,461  |  | 41  | %            |  |           | 55,705,019  |  | 51  | %
|COFI      |  |              | 9,255,383   |           | 8   | % |                 |   | 10,408,640  |  | 9   | %            |  |           | 11,947,425  |  | 11  | %
|Prime     |  |              | 979,263     |           | 1   | % |                 |   | 1,793,888   |  | 2   | %            |  |           | 2,412,388   |  | 2   | %
|Other(b)  |  |              | 198,098     |           | 0   | % |                 |   | 226,881     |  | 0   | %            |  |           | 265,205     |  | 0   | %
|          |  |              |             |           |     |   |                 |   |             |  |     |              |  |           |             |  |     |  
|Total     |  | $            | 120,488,468 |           | 100 | % |                 | $ | 116,369,564 |  | 100 | %            |  | $         | 109,541,064 |  | 100 | %
|          |  |              |             |           |     |   |                 |   |             |  |     |              |  |           |             |  |     |  



|(a) | Includes ELOCs tied to CODI.
|--- | ----------------------------



|(b) | Primarily ARMs tied to the twelve-month rolling average of the One-Year Treasury Constant Maturity (TCM).
|--- | ---------------------------------------------------------------------------------------------------------

Between June 30, 2005 and June 30, 2006, the portion of our ARMs tied to the COSI index increased while the portion of ARMs tied to CODI
decreased. As further described in Management of Interest Rate Risk  Asset/Liability Management, a change in the index mix of loans in our portfolio can affect the yield on our interest-earning assets and our primary spread.

Payment Options.The option ARM provides our borrowers with up to four payment options. These payment options include a minimum
payment, an interest-only payment, a payment that enables the loan to pay off over its original term, and a payment that enables the loan to pay off 15 years from origination. In addition to these four specified payment options, borrowers may elect
a payment of any amount above the minimum payment.

Substantially all of the ARMs we originate allow the borrower to select an initial
monthly payment for the first year of the loan. The initial monthly payment selected is limited by a floor that we set and becomes the minimum monthly payment due on the loan. To maintain payment flexibility, nearly every new borrower selects the
initial monthly payment equal to the floor, even if the borrower intends to make higher monthly payments. The minimum monthly payment for substantially all our ARMs is reset annually. The new minimum monthly payment amount generally cannot exceed
the prior years minimum monthly payment amount by more than 7.5%. Periodically, this 7.5% cap does not apply. For example, for most of the loans this 7.5% cap does not apply on the tenth annual payment change of the loan and every fifth annual
payment change thereafter. For a small number of loans, the 7.5% cap does not apply on the fifth annual payment change of the loan and every fifth annual payment change thereafter.

Although most of our loans have payments due on a monthly cycle, a significant number of borrowers elect to make payments on a biweekly cycle. A biweekly
payment cycle results in a shorter period required to fully amortize the loan.

Deferred Interest. Deferred interest refers to
interest that is added to the outstanding loan principal balance when the payment a borrower makes is less than the monthly interest due on the loan. Our loans have had this deferred interest feature for a quarter of a century. Borrowers may always
make a high enough monthly payment to avoid or minimize deferred interest, and many borrowers do so. Borrowers may also pay down the balance of deferred interest in whole or in part at any time without a prepayment fee.



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##### Table of Contents

Our loans provide that deferred interest may occur as long as the loan balance remains below a cap based
on a percentage of the original mortgage amount. A 125% cap on the loan balance applies to loans with original loan-to-value ratios at or below 85%, which includes almost all of the loans we originate. Loans with original loan-to-values above 85%
have a 110% or 115% cap. If the loan balance reaches the applicable limit, additional deferred interest may not be allowed to occur and we may increase the minimum monthly payment to an amount that would amortize the loan over its remaining term. In
this case, the new minimum monthly payment amount could increase beyond the 7.5% annual payment cap described above, and continue to increase each month thereafter, if the applicable loan balance cap is still being reached and the current minimum
monthly payment amount would not be enough to fully amortize the loan by the scheduled maturity date.

The amount of deferred interest a
loan incurs depends on a number of factors outside our control, including changes in the underlying index and the borrowers payment behavior. If a loans index were to increase and remain at relatively high levels, the amount of deferred
interest on the loan would be expected to trend higher, absent other mitigating factors such as monthly payments that meet or exceed the amount of interest then due. Similarly, if the index were to decline and remain at relatively low levels, the
amount of deferred interest on the loan would be expected to trend lower.

Additional discussion of deferred interest can be found in
Management of Credit Risk  Close Monitoring of the Loan Portfolio.

Lifetime Caps and Floors. During the life of a
typical ARM loan, the interest rate may not be raised above a lifetime cap which is set at the time of origination or assumption. Virtually all of our ARMs are subject to a lifetime cap. The weighted average maximum lifetime cap rate on our ARM loan
portfolio (including MBS with recourse before any reduction for loan servicing and guarantee fees) was 12.08% or 4.92% above the actual weighted average rate at June 30, 2006, versus 12.15% or 5.68% above the actual weighted average rate at
December 31, 2005, and 12.15% or 6.41% above the weighted average rate at June 30, 2005.

During the life of some of our ARM
loans, the interest rate may not be decreased to a rate below a lifetime floor which is set at the time of origination or assumption. At June 30, 2006, approximately $4.6 billion of our ARM loans (including MBS with recourse) have lifetime
floors. As of June 30, 2006, $63 million of ARM loans had reached their rate floors, compared to $277 million at December 31, 2005, and $837 million at June 30, 2005. The weighted average floor rate on the loans
that had reached their floor was 6.93% at June 30, 2006 compared to 6.09% at December 31, 2005 and 5.61% at June 30, 2005. Without the floor, the average rate on these loans would have been 6.06% at June 30, 2006,
5.52% at December 31, 2005, and 5.02% at June 30, 2005.

Other Lending Activity

In addition to the monthly adjusting ARMs described above, we originate and have in portfolio a small volume of ARMs with initial interest rates and
monthly payments that are fixed for periods of 12 to 36 months, after which the interest rate adjusts monthly and the monthly payment resets annually. Additionally, we originate a small volume of ARMs where the interest rate adjusts every six months
subject to a periodic interest rate cap; some of these ARMs provide for interest-only payments for the first five years.

From time to
time, as part of our efforts to retain loans and loan customers, we may waive or temporarily modify certain terms of a loan. Some borrowers elect to modify their loans to fixed-rate loans for one, three, or five years. These modifications amounted
to $230 million and $415 million for the second quarter and first six months of 2006, respectively, compared to $92 million and $138 million for the comparable periods in 2005. We retain these modified loans in portfolio. Additionally,
some borrowers choose to convert their ARM to a fixed-rate mortgage for the remainder of the term. During the second quarter and first six months of 2006, $296 million and $480 million of loans were converted at the customers request from
ARMs to fixed-rate loans, compared to $52 million and $80 million during the same periods in 2005. We sell most of the converted fixed-rate loans.



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Investments

We invest funds not immediately needed to fund our loan operations in short-term instruments. Our
practice is to invest only with counterparties that have high credit ratings. Investments are reported in either Federal funds sold, securities purchased under agreements to resell, and other investments or Securities available for
sale, at fair value on the Consolidated Statement of Financial Condition. The following tables summarize information about the Companys investments.

TABLE 12

Federal Funds Sold, Securities Purchased Under Agreements to Resell,

and Other Investments

(Dollars in
Thousands)



|                                                                                                 |  |              |           |                 |   |              |  |   |          
|------------------------------------------------------------------------------------------------ |  | ------------ | --------- | --------------- | - | ------------ |  | - | ---------
|                                                                                                 |  | June 30 2006 |           | December 312005 |   | June 30 2005
|Federal funds sold                                                                               |  | $            | 1,124,581 |                 | $ | 1,096,626    |  | $ | 666,702  
|Securities purchased under agreements to resell                                                  |  |              | -0-       |                 |   | -0-          |  |   | -0-      
|Eurodollar time deposits                                                                         |  |              | 400,000   |                 |   | 225,000      |  |   | 425,000  
|                                                                                                 |  |              |           |                 |   |              |  |   |          
|Total federal funds sold, securities purchased under agreements to resell, and other investments |  | $            | 1,524,581 |                 | $ | 1,321,626    |  | $ | 1,091,702
|                                                                                                 |  |              |           |                 |   |              |  |   |          

The weighted average yields on federal funds sold, securities purchased under agreements to resell
and other investments were 5.30%, 4.11%, and 3.41% at June 30, 2006, December 31, 2005, and June 30, 2005, respectively.

TABLE 13

Securities Available for Sale

(Dollars in Thousands)



|                                    |  |             |         |                 |   |             |  |   |        
|----------------------------------- |  | ----------- | ------- | --------------- | - | ----------- |  | - | -------
|                                    |  | June 302006 |         | December 312005 |   | June 302005
|U.S. government obligation          |  | $           | 1,765   |                 | $ | 1,765       |  | $ | 1,761  
|Freddie Mac stock                   |  |             | 320,396 |                 |   | 367,267     |  |   | 366,593
|Other                               |  |             | 14,687  |                 |   | 13,467      |  |   | 222,494
|                                    |  |             |         |                 |   |             |  |   |        
|Total securities available for sale |  | $           | 336,848 |                 | $ | 382,499     |  | $ | 590,848
|                                    |  |             |         |                 |   |             |  |   |        

We hold stock in the Federal Home Loan Mortgage Corporation (Freddie Mac) that we obtained in 1984
with a cost basis of $6 million. Included in the balances above are net unrealized gains on Freddie Mac stock of $315 million, $362 million, and $361 million at June 30, 2006, December 31, 2005, and
June 30, 2005, respectively. The weighted average yields of securities available for sale, excluding equity securities, were 4.96%, 4.24%, and 3.38% at June 30, 2006, December 31, 2005, and June 30, 2005,
respectively. At June 30, 2006, December 31, 2005, and June 30, 2005, we had no securities held for trading.

Other Assets

Capitalized Mortgage Servicing Rights

The Company recognizes as assets the rights to service loans for others. When we retain the servicing rights upon the sale of loans, the allocated cost of
these rights is capitalized as an asset and then amortized over the expected life of the loan. The amount capitalized is based on the relative fair value of the servicing rights and the loans on the sale date. We do not have a large portfolio of
capitalized mortgage servicing rights (CMSRs), primarily because we retain our ARM originations in portfolio and only sell a limited number of fixed-rate loans to third parties. CMSRs are included in Other assets on the Consolidated
Statement of Financial Condition.



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##### Table of Contents

The following table shows the changes in CMSRs for the three and six months ended June 30, 2006 and
2005.

TABLE 14

Capitalized Mortgage Servicing Rights

(Dollars in thousands)



|                                |  |                           |        |   |                         |   |        |      |  |   |         |   |  |   |         |  
|------------------------------- |  | ------------------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                |  | Three Months EndedJune 30 |        |   | Six Months EndedJune 30 |  
|                                |  | 2006                      |        |   | 2005                    |   |        | 2006 |  |   | 2005    |  
|CMSRs                           |  |                           |        |   |                         |   |        |      |  |   |         |   |  |   |         |  
|Balance, beginning of period    |  | $                         | 35,518 |   |                         | $ | 54,181 |      |  | $ | 39,702  |   |  | $ | 60,544  |  
|New CMSRs from loan sales       |  |                           | 4,183  |   |                         |   | 1,335  |      |  |   | 6,437   |   |  |   | 2,751   |  
|Amortization                    |  |                           | (6,487 | ) |                         |   | (7,647 | )    |  |   | (12,925 | ) |  |   | (15,426 | )
|                                |  |                           |        |   |                         |   |        |      |  |   |         |   |  |   |         |  
|Balance, end of period          |  |                           | 33,214 |   |                         |   | 47,869 |      |  |   | 33,214  |   |  |   | 47,869  |  
|Valuation Allowance             |  |                           |        |   |                         |   |        |      |  |   |         |   |  |   |         |  
|Balance, beginning of period    |  |                           | -0-    |   |                         |   | (5,973 | )    |  |   | (568    | ) |  |   | (7,310  | )
|Recovery of valuation allowance |  |                           | -0-    |   |                         |   | 1,939  |      |  |   | 568     |   |  |   | 3,276   |  
|                                |  |                           |        |   |                         |   |        |      |  |   |         |   |  |   |         |  
|Balance, end of period          |  |                           | -0-    |   |                         |   | (4,034 | )    |  |   | -0-     |   |  |   | (4,034  | )
|                                |  |                           |        |   |                         |   |        |      |  |   |         |   |  |   |         |  
|CMSRs, net                      |  | $                         | 33,214 |   |                         | $ | 43,835 |      |  | $ | 33,214  |   |  | $ | 43,835  |  
|                                |  |                           |        |   |                         |   |        |      |  |   |         |   |  |   |         |  

The estimated amortization of the June 30, 2006 balance for the remainder of 2006 and the
five years ending 2011 is $12.3 million (2006), $14.6 million (2007), $5.7 million (2008), $663 thousand (2009), $27 thousand (2010), and $-0- (2011). Actual results may vary depending upon the level of the
payoffs of the loans currently serviced.

The estimated fair value of CMSRs is regularly reviewed and can change up or down depending on
market conditions. We stratify the serviced loans by year of origination or modification, term to maturity, and loan type. If the estimated fair value of a loan strata is less than its book value, we establish a valuation allowance for the estimated
temporary impairment through a charge to noninterest income. We also recognize any other-than-temporary impairment as a direct write-down.

The estimated fair value of CMSRs as of June 30, 2006, December 31, 2005, and June 30, 2005 was $58 million, $54 million, and $53 million, respectively. The book value of the Companys CMSRs did not
exceed the fair value at June 30, 2006 and, therefore, no valuation allowance for impairment was required. The book value of the Companys CMSRs for certain of the Companys loan strata exceeded the fair value by $1 million
at December 31, 2005 and by $4 million at June 30, 2005, and, as a result, we had a valuation allowance of those amounts.

Deposits

We raise deposits on a retail basis through our branch system and the Internet, and, from time to
time, through the money markets. Retail deposits increased during the second quarter of 2006 by $651 million compared to an increase of $3.6 billion in the second quarter of 2005. Retail deposits increased during the first half of 2006 by
$2.1 billion compared to an increase of $6.3 billion in the first half of 2005. Deposit growth in the first half of 2006 was lower than the record level set in 2005 because in 2006 consumers had additional attractive investment alternatives,
including aggressively priced products advertised by competitors. Transaction accounts represented 25% of the total balance of deposits at June 30, 2006 compared to 32% at December 31, 2005 and 37% at June 30, 2005. These
transaction accounts included checking accounts, money market deposit accounts, and passbook accounts.



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##### Table of Contents

The following table shows the Companys deposits by interest rate and by remaining maturity at
June 30, 2006, December 31, 2005, and June 30, 2005.

TABLE 15

Deposits

(Dollars in thousands)



|                                                       |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           
|------------------------------------------------------ |  | ------------ | - | ---------------- | ------ | ------------ | ---- | ---- | - | ------ | - | ---------- |  | ---- | ------ |  | - | ----------
|                                                       |  | June 30 2006 |   | December 31 2005 |        | June 30 2005
|                                                       |  | Rate         |   |                  | Amount |              | Rate |      |   | Amount |   | Rate       |  |      | Amount
|Deposits by rate:                                      |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           
|Interest-bearing checking accounts                     |  | 1.65         | % |                  | $      | 4,300,789    |      | 1.69 | % |        | $ | 4,916,067  |  | 1.29 | %      |  | $ | 4,667,036 
|Savings accounts(a)                                    |  | 2.82         |   |                  |        | 11,333,631   |      | 2.20 |   |        |   | 14,141,337 |  | 1.87 |        |  |   | 17,118,861
|Term certificate accounts with original maturities of: |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           
|4 weeks to 1 year                                      |  | 4.51         |   |                  |        | 32,428,365   |      | 3.77 |   |        |   | 28,956,796 |  | 3.27 |        |  |   | 27,775,539
|1 to 2 years                                           |  | 4.33         |   |                  |        | 10,453,148   |      | 3.87 |   |        |   | 8,082,385  |  | 2.88 |        |  |   | 5,159,559 
|2 to 3 years                                           |  | 3.34         |   |                  |        | 878,256      |      | 2.90 |   |        |   | 1,086,506  |  | 2.58 |        |  |   | 1,241,198 
|3 to 4 years                                           |  | 3.21         |   |                  |        | 652,413      |      | 3.05 |   |        |   | 728,817    |  | 3.13 |        |  |   | 960,214   
|4 years and over                                       |  | 4.34         |   |                  |        | 2,172,679    |      | 4.33 |   |        |   | 2,227,145  |  | 4.40 |        |  |   | 2,276,600 
|Retail jumbo CDs                                       |  | 1.06         |   |                  |        | 15,060       |      | 1.31 |   |        |   | 19,266     |  | 1.64 |        |  |   | 27,133    
|                                                       |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           
|                                                       |  |              |   |                  | $      | 62,234,341   |      |      |   |        | $ | 60,158,319 |  |      |        |  | $ | 59,226,140
|                                                       |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           
|Deposits by remaining maturity:                        |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           
|No contractual maturity                                |  | 2.50         | % |                  | $      | 15,634,420   |      | 2.07 | % |        | $ | 19,057,404 |  | 1.75 | %      |  | $ | 21,785,897
|Maturity within one year                               |  | 4.44         |   |                  |        | 44,509,469   |      | 3.77 |   |        |   | 38,139,593 |  | 3.19 |        |  |   | 33,901,757
|1 to 5 years                                           |  | 3.92         |   |                  |        | 2,088,374    |      | 3.99 |   |        |   | 2,960,596  |  | 3.82 |        |  |   | 3,537,887 
|Over 5 years                                           |  | 4.23         |   |                  |        | 2,078        |      | 3.31 |   |        |   | 726        |  | 3.34 |        |  |   | 599       
|                                                       |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           
|                                                       |  |              |   |                  | $      | 62,234,341   |      |      |   |        | $ | 60,158,319 |  |      |        |  | $ | 59,226,140
|                                                       |  |              |   |                  |        |              |      |      |   |        |   |            |  |      |        |  |   |           



|(a) | Includes money market deposit accounts and passbook accounts.
|--- | -------------------------------------------------------------

The weighted average cost of deposits was 3.94% at June 30, 2006, 3.24% at December 31, 2005, and 2.70% at June 30, 2005.

Borrowings

In addition to funding real estate loans with deposits, we also utilize borrowings. Most of our
borrowings are variable interest rate instruments tied to LIBOR. In the first half of 2006, borrowings increased by $1.2 billion to $55.8 billion from $54.5 billion at yearend 2005 in order to fund the loan growth described earlier.

Advances from Federal Home Loan Banks

An important type of borrowing we use comes from the Federal Home Loan Banks (FHLBs). These borrowings are known as advances. WSB is a member of the FHLB of San Francisco, and WTX is a member of the FHLB
of Dallas. Advances are secured by pledges of certain loans, MBS, and capital stock of the FHLBs that we own. FHLB advances amounted to $38.4 billion at June 30, 2006, compared to $39.0 billion at December 31, 2005, and
$35.8 billion at June 30, 2005.

Other Borrowings

In addition to borrowing from the FHLBs, we borrow from other sources to maintain flexibility in managing the availability and cost of funds for the
Company.



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##### Table of Contents

We borrow funds from the capital markets on both a secured and unsecured basis. Most of WSBs
capital market funding consists of unsecured senior debt and bank notes. Debt securities with maturities 270 days or longer are reported as senior debt and debt securities with maturities less than 270 days are reported as bank notes on the
Consolidated Statement of Financial Condition. WSB has a program that allows for the issuance of up to an aggregate amount of $8.0 billion of unsecured senior notes with maturities ranging from 270 days to thirty years. WSB issued $2.1 billion in
notes under this program in the first half of 2006, $2.95 billion in 2005, and $1.3 billion in 2004, and as of June 30, 2006, $1.65 billion remained available for issuance under this program. WSB issued $3.0 billion of
senior debt under a prior program in 2004. As of June 30, 2006, December 31, 2005 and June 30, 2005, WSB had a total of $8.6 billion, $7.2 billion and $5.7 billion of long-term unsecured senior debt
outstanding. As of June 30, 2006, WSBs unsecured senior debt ratings were Aa3 and AA- from Moodys and S&P, respectively.

WSB also has a short-term bank note program that allows up to $5.0 billion of short-term notes with maturities of less than 270 days to be outstanding at any point in time. At June 30, 2006, December 31, 2005,
and June 30, 2005, WSB had $2.2 billion, $2.4 billion, and $2.2 billion, respectively, of short-term bank notes outstanding. As of June 30, 2006, WSBs short-term bank notes were rated P-1 and A-1+ by Moodys
and S&P, respectively.

We also borrow funds through transactions in which securities are sold under agreements to repurchase.
Securities sold under agreements to repurchase are entered into with selected major government securities dealers and large banks, using MBS from our portfolio as collateral, and amounted to $5.6 billion, $5.0 billion, and $4.5 billion at
June 30, 2006, December 31, 2005, and June 30, 2005, respectively.

Golden West, at the holding company level,
occasionally issues senior or subordinated unsecured debt. In December 2005, Golden West filed a registration statement that allows us to issue up to $2.0 billion of debt securities. As of June 30, 2006, no debt was outstanding under this
registration statement. At June 30, 2006, Golden West, at the holding company level, had $995 million of senior debt outstanding compared to $994 million at December 31, 2005 and June 30, 2005. Golden West had no subordinated
debt outstanding during those time periods. As of June 30, 2006, Golden Wests senior debt was rated A1 and A+ by Moodys and S&P, respectively, and its subordinated debt was rated A2 and A by Moodys and S&P,
respectively.

MANAGEMENT OF RISK

Our business strategy is to achieve sustainable earnings growth utilizing a low-risk
business approach. We continue to execute and refine our business model to manage the key risks associated with being a residential mortgage portfolio lender, namely interest rate risk and credit risk. We also manage other risks, such as
operational, regulatory, and management risk.

Management of Interest Rate Risk

Overview

Interest rate risk generally refers to the risk associated with changes in market interest rates that could adversely affect a companys financial
condition. We strive to manage interest rate risk through the operation of our business, rather than relying on capital market techniques such as derivatives. Our strategy for managing interest rate risk includes:



| |  |  | focusing on originating and retaining monthly adjusting ARMs in our portfolio;
| | - |  | ------------------------------------------------------------------------------



| |  |  | funding these ARM assets with liabilities that respond in a similar manner to changes in market rates; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | selling most of the limited number of fixed-rate loans that we originate, as well as fixed-rate loans that result from existing customers converting from ARMs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

As discussed further below, these strategies help us to maintain a close relationship between the yield
on our assets and the cost of our liabilities throughout the interest rate cycle and thereby limit the sensitivity of net interest income and our primary spread to changes in market rates.

Asset/Liability Management

Monthly-Adjusting ARMs. Our principal strategy to manage interest rate risk is to originate and keep in portfolio ARMs that provide interest rate sensitivity to the asset side of the balance sheet. The interest rates on most of our
ARMs adjust monthly. At June 30, 2006, ARMs constituted 99% of our loan and MBS portfolio, and 97% of our ARM portfolio adjusted monthly.

ARM Indexes and Liability Matching. The Companys ARM index strategy strives to match portions of our ARM portfolio with liabilities that have similar repricing characteristics, by which we mean the frequency of rate changes and
the responsiveness of rate changes to fluctuations in market interest rates. In addition, we take into consideration the built-in reporting and repricing lags that are inherent in the indexes. Reporting lags occur because of the time it takes to
gather the data needed to compute the indexes. Repricing lags occur because it takes a period of time before changes in market rate interest rates are significantly reflected in the indexes. The following table describes the ARM indexes we use and
shows how these indexes are intended to match with our liabilities.



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##### Table of Contents

TABLE 16

Summary of Key ARM Indexes



|                                                |  |                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                         
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                |  | COSI                                                                                                                                                                                    |  | CODI                                                                                                                                                                                                                                                                                    |  | COFI                                                                                                                                                                                                                    
|How the Index is Calculated                     |  | Equal to Golden Wests cost of savings as reported monthly.                                                                                                                             |  | Based on a market rate, specifically the monthly yield of three-month certificates of deposit (secondary market), as published by the Federal Reserve Board. CODI is calculated by adding the
twelve most recently published monthly yields together and dividing the result by twelve. |  | Equal to the monthly average cost of deposits and borrowings of savings institution members of the Federal Home Loan Bank Systems Eleventh District, which is comprised of California,
Arizona, and Nevada.            
|                                                |  |                                                                                                                                                                                         | 
|Matching and Activity Levels                    |  |                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                         
|                                                |  |                                                                                                                                                                                         | 
|How the Index Matches the Companys Liabilities |  | COSI equals our own cost of savings. COSI and the cost of our deposits are therefore matched subject only to the reporting lag described below.                                         |  | Historically, the three-month CD yield on which CODI is based has closely tracked LIBOR. Most of our borrowings from the FHLBs and the capital markets are based on LIBOR. The 12-month rolling
aspect of CODI creates a timing lag.                                                    |  | Historically, COFI has tracked our cost of savings. The match is not perfect however, because COFI includes the cost of savings and borrowings of many other institutions as well as our
own.                           
|                                                |  |                                                                                                                                                                                         | 
|% ARM Originations for First Six Months of 2006 |  | 96%                                                                                                                                                                                     |  | 4%                                                                                                                                                                                                                                                                                      |  | 0%                                                                                                                                                                                                                      
|                                                |  |                                                                                                                                                                                         | 
|Percentage of ARM Portfolio at
June 30, 2006    |  | 60%                                                                                                                                                                                     |  | 31%                                                                                                                                                                                                                                                                                     |  | 8%                                                                                                                                                                                                                      
|                                                |  |                                                                                                                                                                                         | 
|Timing Lags                                     |  |                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                         
|                                                |  |                                                                                                                                                                                         | 
|Reporting Lag                                   |  | One month                                                                                                                                                                               |  | One month                                                                                                                                                                                                                                                                               |  | Two months                                                                                                                                                                                                              
|                                                |  |                                                                                                                                                                                         | 
|Repricing Lag                                   |  | Yes, because the rates paid on many of our deposits may not respond immediately or fully to a change in market rates, but this lag is offset by the same repricing lag on our
deposits. |  | Yes, because CODI is a 12-month rolling average and it takes time before the index is able to reflect, or catch up with, a change in market rates.                                                                                                                                    |  | Yes, because the portfolio of liabilities comprising COFI do not all reprice immediately or fully to changes in market rates. Historically, this lag has been largely offset by a similar
repricing lag on our deposits.

As the table above suggests, we prefer to match COSI and COFI loans with deposits and CODI loans
with LIBOR-based borrowings. Several dynamics affect our ability to achieve our desired matching, including:



| |  |  | the relative values of our ARM indexes, which directly affect the index chosen by borrowers;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | the relative volumes of loan originations and repayments, which can alter the index mix of loans in the portfolio; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the volume of deposits we attract, which is influenced by competition and investment alternatives, and which directly affects the amount of LIBOR-based borrowings we must use to
fund the ARM portfolio.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the first half of 2006, COSI ARMs increased at a faster pace than our deposits, resulting in
LIBOR-based borrowings being used to fund some COSI and COFI ARMs. At June 30, 2006, the balance of COSI and COFI ARMs in our portfolio exceeded the balance of deposits by approximately $19 billion.



32



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Timing Lags. The difference between how our ARMs and how our liabilities respond to interest rate
changes is principally timing related. Specifically, while our ARM loans and savings deposits have historically repriced at a similar pace, our ARMs and LIBOR-based borrowings have historically repriced somewhat differently. In particular, most of
the Companys interest rate sensitivity results from slowly repricing ARM loans being funded with LIBOR-based borrowings that adjust more rapidly and completely to movements in short-term market interest rates.

This timing disparity between the repricing of our assets and liabilities can temporarily affect our net interest margin until the indexes are able to
reflect, or catch up with, the changes in market rates. Over a full interest rate cycle, the timing lags will tend to offset one another. The following table summarizes the different relationships the indexes and short-term market
interest rates could have at any point in time and the expected impact on our net interest margin.

TABLE 17

Relationship between Indexes and Short-Term Market Interest Rates

and Expected Impact on Net Interest Margin



|                                |  |                                                                                                                                                                                                
|------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Market Interest Rate Scenarios  |  | Relationship between Indexes and Short-Term Market Interest Rates and Expected Impact on
Net Interest Margin                                                                                   
|Market interest rates increase  |  | When market rates increase, our ARM indexes lag and therefore the net interest margin would normally be expected to narrow.                                                                    
|                                | 
|Market interest rates stabilize |  | When market rates stabilize after a period of rising rates, the net interest margin would normally be expected to increase as the indexes catch up with the higher market rate
level.          
|                                | 
|Market interest rates decrease  |  | When market interest rates decrease, our indexes lag and therefore the net interest margin would normally be expected to widen until the indexes catch up with the lower market interest
rates.

As the table above indicates, although market rate changes impact the net interest margin, the
impact is principally a timing issue until the market rates are reflected in the applicable index. Also, a gradual change in rates would tend to have less of an impact on the net interest margin than a sharp rise or decline in rates.

Other Net Interest Margin Influences. As discussed above, market interest rate movements are the most significant factor that affects our net
interest margin. The net interest margin is also influenced by:



| |  |  | the shape of the yield curve (the difference between short-term and long-term interest rates) and competition in the home lending market, both of which influence the pricing of our
adjustable and fixed-rate mortgage products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the prices that we pay for our borrowings;
| | - |  | ------------------------------------------

| |  |  | loan prepayment rates, which can influence the yield on our mortgage portfolio, for example when ARMs with higher yields pay off and are replaced by ARMs with lower yields; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | loan customer retention efforts which can result in changes to the pricing or terms of some of the Companys mortgages.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

Impact of Recent Increases In Market Interest Rates. The following table illustrates the impact that rising interest rates have had on Golden
Wests net interest margin. From June 2004 through June 2006, the Federal Reserves Open Market Committee raised the Federal Funds rate from 1.00% to 5.25%. Golden Wests average net interest margin declined when the Fed began raising
rates, as our loan indexes lagged behind the repricing of our LIBOR-based borrowings. With the steady pace of increases in the Fed Funds rate, the net interest margin stabilized by mid-2005 and has been relatively flat over the past year. When
short-term



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interest rates stop increasing, we expect that our ARM indexes will continue to rise as they catch up with short-term interest rates. We would
expect that this increase in the indexes would lead to an expanding net interest margin.

TABLE 18

Federal Funds Rate, Golden Wests Net Interest Margin, ARM Indexes and Liability Costs



|                       |  |                                  |   |  |             |   |  |             |   |  |             |   |  |             |  
|---------------------- |  | -------------------------------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                       |  | Average For the Six Months Ended |  
|                       |  | June 302006                      |   |  | Dec. 312005 |   |  | June 302005 |   |  | Dec. 312004 |   |  | June 302004 |  
|Fed Funds Rate(a)      |  | 4.79                             | % |  | 3.75        | % |  | 2.75        | % |  | 1.75        | % |  | 1.04        | %
|Net Interest Margin    |  | 2.83                             | % |  | 2.83        | % |  | 2.80        | % |  | 2.94        | % |  | 3.12        | %
|ARM Indexes            |  |                                  |   |  |             |   |  |             |   |  |             |   |  |             |  
|Effective COSI(a)      |  | 3.51                             | % |  | 2.92        | % |  | 2.35        | % |  | 1.95        | % |  | 1.85        | %
|Effective CODI(a)      |  | 3.92                             | % |  | 2.92        | % |  | 1.93        | % |  | 1.26        | % |  | 1.11        | %
|Liability Costs        |  |                                  |   |  |             |   |  |             |   |  |             |   |  |             |  
|GDW Cost of Savings(a) |  | 3.63                             | % |  | 3.01        | % |  | 2.45        | % |  | 1.99        | % |  | 1.85        | %
|3-Month LIBOR(b)       |  | 4.99                             | % |  | 4.06        | % |  | 3.06        | % |  | 2.03        | % |  | 1.21        | %



|(a) | Simple average of the month-end data point for the six month period.
|--- | --------------------------------------------------------------------



|(b) | Simple average of the average 3-month LIBOR rates in each of the six months in the period.
|--- | ------------------------------------------------------------------------------------------

Repricing Gap. Mortgage portfolio lenders often provide a table with information about the repricing gap,
which is the difference between the repricing of assets and liabilities. The following gap table shows the volume of assets and liabilities that reprice within certain time periods as of June 30, 2006, as well as the repricing gap and the
cumulative repricing gap as a percentage of assets.



34



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TABLE 19

Repricing of Earning Assets and Interest-Bearing Liabilities,

Repricing Gaps, and Gap Ratios

As of
June 30, 2006

(Dollars in millions)



|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|---------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | ---------- |  | - | ----------- | - |  | ----- | ----- | - |  | - | -------
|                                               |  | Projected Repricing(a)
|                                               |  | 0  3Months            |         |   | 4  12Months |   |         | 1 - 5Years |  |   | Over 5Years |   |  | Total
|Earning Assets:                                |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Investments                                    |  | $                      | 1,860   |   |              | $ | 2       |            |  | $ | -0-         |   |  | $     | -0-   |   |  | $ | 1,862  
|MBS:                                           |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Adjustable rate                                |  |                        | 991     |   |              |   | -0-     |            |  |   | -0-         |   |  |       | -0-   |   |  |   | 991    
|Fixed-rate                                     |  |                        | 14      |   |              |   | 34      |            |  |   | 150         |   |  |       | 136   |   |  |   | 334    
|Loans receivable:                              |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Adjustable rate                                |  |                        | 119,394 |   |              |   | 734     |            |  |   | 1,014       |   |  |       | -0-   |   |  |   | 121,142
|Fixed-rate held for investment                 |  |                        | 76      |   |              |   | 155     |            |  |   | 403         |   |  |       | 265   |   |  |   | 899    
|Fixed-rate held for sale                       |  |                        | 152     |   |              |   | -0-     |            |  |   | -0-         |   |  |       | -0-   |   |  |   | 152    
|Other(b)                                       |  |                        | 2,048   |   |              |   | -0-     |            |  |   | -0-         |   |  |       | 133   |   |  |   | 2,181  
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Total                                          |  | $                      | 124,535 |   |              | $ | 925     |            |  | $ | 1,567       |   |  | $     | 534   |   |  | $ | 127,561
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Interest-Bearing Liabilities:                  |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Deposits(c)                                    |  | $                      | 38,458  |   |              | $ | 21,686  |            |  | $ | 2,089       |   |  | $     | 2     |   |  | $ | 62,235 
|FHLB advances                                  |  |                        | 37,061  |   |              |   | 208     |            |  |   | 686         |   |  |       | 492   |   |  |   | 38,447 
|Other borrowings                               |  |                        | 14,276  |   |              |   | 450     |            |  |   | 2,125       |   |  |       | 496   |   |  |   | 17,347 
|Impact of interest rate swaps                  |  |                        | 1,900   |   |              |   | -0-     |            |  |   | (1,900      | ) |  |       | -0-   |   |  |   | -0-    
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Total                                          |  | $                      | 91,695  |   |              | $ | 22,344  |            |  | $ | 3,000       |   |  | $     | 990   |   |  | $ | 118,029
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Repricing gap                                  |  | $                      | 32,840  |   |              | $ | (21,419 | )          |  | $ | (1,433      | ) |  | $     | (456  | ) |  | $ | 9,532  
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Cumulative gap                                 |  | $                      | 32,840  |   |              | $ | 11,421  |            |  | $ | 9,988       |   |  | $     | 9,532 |   |  |   |        
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Cumulative gap as a percentage of total assets |  |                        | 25.5    | % |              |   | 8.9     | %          |  |   | 7.8         | % |  |       |       |   |  |   |        
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        



|(a) | Based on scheduled maturity or scheduled repricing; loans and MBS reflect scheduled
amortization and projected prepayments of principal based on current rates of prepayment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Includes primarily cash in banks and FHLB stock.
|--- | ------------------------------------------------



|(c) | Deposits with no maturity date, such as checking, passbook, and money market deposit
accounts, are assigned zero months.
|--- | ------------------------------------------------------------------------------------------------------------------------

If all repricing assets and liabilities responded equally to changes in the interest
rate environment, then the gap analysis would suggest that our earnings would rise when interest rates increase and would fall when interest rates decrease. However, as discussed above, the Companys experience has been that the timing lags in
our indexes tend to cause the rates on our liabilities to change more quickly than the yield on our assets.

Interest Rate Swaps

We manage interest rate risk principally through the operation of our business. On occasion, however, we do enter into derivative
contracts, particularly interest rate swaps. As of June 30, 2006, we had three interest rate swaps that were used to effectively convert payments on WSBs fixed-rate senior debt to floating-rate payments. These interest rate swaps were
designated as fair value hedges and qualified for what is called the shortcut method of hedge accounting. Because the swaps qualify for the shortcut method, an ongoing assessment of hedge effectiveness is not required, and the change in fair value
of the hedged item is deemed to be equal to the change in the fair value of the interest rate swap. Accordingly, changes in the fair value of these swaps had no impact on the Consolidated Statement of Net Earnings. We do not hold any derivative
financial instruments for trading purposes.



35



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The following table illustrates as of June 30, 2006, the maturities and weighted average rates
for the interest rate swaps and the hedged fixed-rate senior debt.

TABLE 20

Maturities and Fair Value of the Interest Rate Swaps and the Related Hedged Senior Debt

As of June 30, 2006

(Dollars in thousands)



|                                        |  |                                            |         |   |      |   |           |              |  |   |            |   |  |   |           |  
|--------------------------------------- |  | ------------------------------------------ | ------- | - | ---- | - | --------- | ------------ |  | - | ---------- | - |  | - | --------- | -
|                                        |  | Expected Maturity Date as of June 30, 2006 |        
|                                        |  | 2008                                       |         |   | 2009 |   |           | TotalBalance |  |   | Fair Value |  
|Hedged Fixed-Rate Senior Debt           |  |                                            |         |   |      |   |           |              |  |   |            |   |  |   |           |  
|Contractual maturity                    |  | $                                          | 700,000 |   |      | $ | 1,200,000 |              |  | $ | 1,900,000  |   |  | $ | 1,825,893 |  
|Weighted average interest rate          |  |                                            | 4.27    | % |      |   | 4.39      | %            |  |   | 4.34       | % |  |   |           |  
|Swap Contracts                          |  |                                            |         |   |      |   |           |              |  |   |            |   |  | $ | (67,772   | )
|Weighted average interest rate paid     |  |                                            | 5.24    | % |      |   | 5.32      | %            |  |   | 5.29       | % |  |   |           |  
|Weighted average interest rate received |  |                                            | 4.15    | % |      |   | 4.19      | %            |  |   | 4.18       | % |  |   |           |  

The net effect of these transactions was that the Company effectively converted fixed-rate senior
debt to floating-rate senior debt with a weighted average interest rate of 5.46% at June 30, 2006. The range of floating interest rates paid on swap contracts in the first six months of 2006 was 4.48% to 5.40%. The range of fixed interest
rates received on swap contracts in the first six months of 2006 was 4.09% to 4.39%.

Management of Credit Risk

Credit risk refers to the risk of loss if a borrower fails to perform under the
terms of a mortgage loan and the realized value upon the sale of the underlying collateral is not sufficient to cover the loan amount and the costs of foreclosure and sale.

Among the steps we take to manage credit risk are the following:



| |  |  | emphasizing high-quality loans on moderately priced properties;
| | - |  | ---------------------------------------------------------------



| |  |  | manually underwriting each loan we originate;
| | - |  | ---------------------------------------------



| |  |  | using internal appraisal staff to appraise most properties we lend on, and having our internal appraisal staff review each external appraisal before underwriting decisions are made;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting the amount we will lend relative to a propertys original appraised value;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | maintaining mortgage insurance and pool mortgage insurance coverage to reduce the potential credit risk of most loans with an original loan-to-value (LTV) or combined loan-to-value
(CLTV) over 80%; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | closely monitoring the loan portfolio and taking early steps to protect our interests.
| | - |  | --------------------------------------------------------------------------------------

Our objective is to minimize nonperforming assets to limit losses and thereby maintain high profitability. Our business strategy does not involve assuming additional credit risk in the portfolio in order to be able to
charge higher prices to consumers.

Underwriting and Appraisal Processes

Our underwriting process evaluates the creditworthiness of potential borrowers based primarily on credit history and an evaluation of the potential
borrowers ability to repay the loan. When evaluating a borrowers ability to pay, we assess the ability to make fully amortizing monthly payments, even if the borrower has the option to make a lower initial monthly payment. In our
underwriting decisions, we also evaluate the characteristics of the property and the loan transaction, including whether the borrower is purchasing or refinancing the property and will occupy the property. We use systems developed internally based
on decades of



36



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##### Table of Contents

experience evaluating credit risk. Although we use credit scores and technological tools to help with underwriting evaluations, our trained underwriting
personnel review each file and analyze a wide range of relevant factors when making final judgments. Higher-level approvals within the underwriting organization are obtained when circumstances warrant.

We appraise the property that secures the loan by assessing its market value and marketability. We maintain an internal staff to conduct and review
property appraisals. Any external appraisers we use for loans that we originate and retain in portfolio are required to go through a training program with us, and each external appraisal is reviewed by our internal appraisal staff. We do not rely on
any external automated valuation models (AVMs) in our appraisal process.

Our underwriting and appraisal processes are separate from our
loan origination process to assure independence and accountability. The underwriting and appraisal processes that we use for loans originated for sale may differ from that described above due to the purchasers specific standards and system
requirements.

Lending on Moderately Priced Properties

In our originations, we focus on high-quality loans on moderately priced properties because these properties tend to hold their values better than
high-priced properties, particularly in weak housing markets. We do not emphasize lending on higher-priced properties because of concerns about greater price volatility and the larger potential loss if these loans do not perform. Although we
originate a high volume of loans in California, we do virtually no lending in the more volatile high-priced end of the California real estate market. We have adopted this strategy in an effort to minimize our credit risk exposure if adverse
conditions were to occur in California. The average loan size for our California one- to four-family first mortgage originations for the first six months of 2006 was approximately $355 thousand compared to $325 thousand for the same period in 2005.

Loan-to-Value Ratio and Use of Mortgage Insurance

The loan-to-value ratio, or LTV, is the loan balance of a first mortgage expressed as a percentage of the appraised value of the property at the time of
origination. A combined loan-to-value, or CLTV, refers to the sum of the first and second mortgage loan balances as a percentage of the total appraised value at the time of origination. When we discuss LTVs below, we are referring to cases when our
borrower obtained only a first mortgage from us at origination. When we discuss CLTVs below, we are referring to cases when our borrower obtained both a first mortgage and a second mortgage from us. The second mortgage may be either a fixed-rate
loan or an ELOC.

The table below shows that we focus our lending activity on loans that have original LTVs or CLTVs at or below 80%, and
that few originations have LTVs or CLTVs greater than 90%. Historically, loans with LTVs or CLTVs at or below 80% at origination have resulted in lower losses compared to loans originated with LTVs or CLTVs above 80%.

The table also provides information about our use of primary mortgage insurance and pool mortgage insurance, which reduces the potential credit risk with
respect to new loans with LTVs or CLTVs over 80%. We use primary mortgage insurance on some first mortgage loans to reimburse us for losses up to a specified percentage per loan, thereby reducing the effective LTV to below 80%. Less than 1% of our
2006 and 2005 first mortgage originations with LTVs above 80% did not have mortgage insurance, and most of these uninsured loans had original LTVs below 85%. We carry pool mortgage insurance on most ELOCs and most fixed-rate seconds held for
investment when the CLTV exceeds 80% at origination. For ELOCs the cumulative losses covered by this pool mortgage insurance are limited to 10% or 20% of the aggregate of the highest balance of each loan originally in the pool. For fixed-rate
seconds the cumulative losses covered by this pool mortgage insurance are limited to 10% or 20% of the original balance of each insured pool. As loans in a pool pay off, the effective coverage for the remaining loans in the pool may exceed 10% or
20%.



37



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TABLE 21

Mortgage Originations by

LTV or CLTV Bands

(Dollars in Millions)



|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|----------------------------------------- |  | -------------------------- | ------ | --------- | ------------------------ | - | ------- | ---- | --------- |  | ----- | ------- |  | --------- | ------ |  | ------- | - | --------- | - | ------ |  | ----- | -
|                                          |  | Three Months Ended June 30 |        |           | Six Months Ended June 30 |  
|                                          |  | 2006                       |        |           | 2005                     |   |         | 2006 |           |  | 2005  |        
|                                          |  | $Volume                    |        | % ofTotal |                          |   | $Volume |      | % ofTotal |  |       | $Volume |  | % ofTotal |        |  | $Volume |   | % ofTotal |  
|First mortgage LTVs:                      |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|At or below 80.00%:                       |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|60.00% or less                            |  | $                          | 2,073  |           | 17.7                     | % |         | $    | 2,073     |  | 15.4  | %       |  | $         | 4,023  |  | 17.3    | % |           | $ | 3,912  |  | 15.9  | %
|60.01% to 70.00%                          |  |                            | 2,816  |           | 24.1                     |   |         |      | 3,114     |  | 23.1  |         |  |           | 5,625  |  | 24.2    |   |           |   | 5,841  |  | 23.7  |  
|70.01% to 80.00%                          |  |                            | 5,654  |           | 48.4                     |   |         |      | 6,948     |  | 51.7  |         |  |           | 11,269 |  | 48.5    |   |           |   | 12,672 |  | 51.4  |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 10,543 |           | 90.2                     |   |         |      | 12,135    |  | 90.2  |         |  |           | 20,917 |  | 90.0    |   |           |   | 22,425 |  | 91.0  |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|80.01% to 85.00%:                         |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|With mortgage insurance                   |  |                            | 9      |           | .1                       |   |         |      | 1         |  | .0    |         |  |           | 9      |  | .0      |   |           |   | 2      |  | .0    |  
|With no mortgage insurance                |  |                            | 67     |           | .6                       |   |         |      | 40        |  | .3    |         |  |           | 133    |  | .6      |   |           |   | 66     |  | .3    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 76     |           | .7                       |   |         |      | 41        |  | .3    |         |  |           | 142    |  | .6      |   |           |   | 68     |  | .3    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|85.01% to 90.00%:                         |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|With mortgage insurance                   |  |                            | 64     |           | .5                       |   |         |      | 3         |  | .0    |         |  |           | 66     |  | .3      |   |           |   | 6      |  | .0    |  
|With no mortgage insurance                |  |                            | 3      |           | .0                       |   |         |      | 0         |  | .0    |         |  |           | 3      |  | .0      |   |           |   | 1      |  | .0    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 67     |           | .5                       |   |         |      | 3         |  | .0    |         |  |           | 69     |  | .3      |   |           |   | 7      |  | .0    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Greater than 90.00%:                      |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|With mortgage insurance                   |  |                            | 3      |           | .0                       |   |         |      | 7         |  | .1    |         |  |           | 5      |  | .0      |   |           |   | 12     |  | .1    |  
|With no mortgage insurance                |  |                            | 1      |           | .0                       |   |         |      | 1         |  | .0    |         |  |           | 1      |  | .0      |   |           |   | 1      |  | .0    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 4      |           | .0                       |   |         |      | 8         |  | .1    |         |  |           | 6      |  | .0      |   |           |   | 13     |  | .1    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Total first mortgage LTVs                 |  |                            | 10,690 |           | 91.4                     |   |         |      | 12,187    |  | 90.6  |         |  |           | 21,134 |  | 90.9    |   |           |   | 22,513 |  | 91.4  |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|First and second mortgage CLTVs:(a)       |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|At or below 80.00%:                       |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|60.00% or less                            |  |                            | 179    |           | 1.5                      |   |         |      | 164       |  | 1.2   |         |  |           | 383    |  | 1.6     |   |           |   | 262    |  | 1.1   |  
|60.01% to 70.00%                          |  |                            | 126    |           | 1.1                      |   |         |      | 118       |  | .9    |         |  |           | 261    |  | 1.1     |   |           |   | 202    |  | .8    |  
|70.01% to 80.00%                          |  |                            | 133    |           | 1.1                      |   |         |      | 138       |  | 1.0   |         |  |           | 277    |  | 1.2     |   |           |   | 220    |  | .9    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 438    |           | 3.7                      |   |         |      | 420       |  | 3.1   |         |  |           | 921    |  | 3.9     |   |           |   | 684    |  | 2.8   |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|80.01% to 85.00%:                         |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|With pool insurance on seconds            |  |                            | 60     |           | .5                       |   |         |      | 94        |  | .7    |         |  |           | 138    |  | .6      |   |           |   | 164    |  | .7    |  
|With no pool insurance                    |  |                            | -0-    |           | .0                       |   |         |      | 1         |  | .0    |         |  |           | -0-    |  | .0      |   |           |   | 1      |  | .0    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 60     |           | .5                       |   |         |      | 95        |  | .7    |         |  |           | 138    |  | .6      |   |           |   | 165    |  | .7    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|85.01% to 90.00%:                         |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|With pool insurance on seconds            |  |                            | 484    |           | 4.2                      |   |         |      | 709       |  | 5.3   |         |  |           | 1,023  |  | 4.4     |   |           |   | 1,220  |  | 5.0   |  
|With no pool insurance                    |  |                            | 1      |           | .0                       |   |         |      | 3         |  | .0    |         |  |           | 2      |  | .0      |   |           |   | 5      |  | .0    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 485    |           | 4.2                      |   |         |      | 712       |  | 5.3   |         |  |           | 1,025  |  | 4.4     |   |           |   | 1,225  |  | 5.0   |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Greater than 90.00%:                      |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|With pool insurance on seconds            |  |                            | 17     |           | .2                       |   |         |      | 38        |  | .3    |         |  |           | 38     |  | .2      |   |           |   | 40     |  | .1    |  
|With no pool insurance                    |  |                            | 1      |           | .0                       |   |         |      | 1         |  | .0    |         |  |           | 1      |  | .0      |   |           |   | 1      |  | .0    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Subtotal                                  |  |                            | 18     |           | .2                       |   |         |      | 39        |  | .3    |         |  |           | 39     |  | .2      |   |           |   | 41     |  | .1    |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Total first and second CLTVs              |  |                            | 1,001  |           | 8.6                      |   |         |      | 1,266     |  | 9.4   |         |  |           | 2,123  |  | 9.1     |   |           |   | 2,115  |  | 8.6   |  
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  
|Total originations by LTV & CLTV bands(b) |  | $                          | 11,691 |           | 100.0                    | % |         | $    | 13,453    |  | 100.0 | %       |  | $         | 23,257 |  | 100.0   | % |           | $ | 24,628 |  | 100.0 | %
|                                          |  |                            |        |           |                          |   |         |      |           |  |       |         |  |           |        |  |         |   |           |   |        |  |       |  



|(a) | The CLTV calculation excludes any unused portion of a line of credit.
|--- | ---------------------------------------------------------------------



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The table below provides additional LTV and CLTV detail about our portfolio. Most of the loans in our
mortgage portfolio have LTVs or CLTVs at or below 80%, and we have only a small number of loans with LTVs or CLTVs above 90%. Most first mortgage loans with LTVs above 90% have primary mortgage insurance. The table also shows that we generally
maintain pool insurance for first and second loans with CLTVs above 80%, and that the limited balance of loans with CLTVs above 90% are almost all insured. Most of the uninsured first mortgages with LTVs between 80.01% and 85% were originated with
LTVs at or below 80% and subsequently increased above 80% due to deferred interest; at June 30, 2006, the weighted average LTV of these loans was 81.1% compared to 80.7% at December 31, 2005 and 80.4% at June 30, 2005. At
June 30, 2006, the aggregate average of LTVs and CLTVs on the loans in portfolio was 69% compared to 68% at December 31, 2005 and June 30, 2005.

The LTV and CLTV calculations that we provide generally do not take into account any changes in property values since the time of origination, even if market data suggests that properties have appreciated in value. We
recognize the limitations of this approach, but we use this convention because bank regulators historically have preferred original values for reporting purposes. Although the denominator of the LTV or CLTV calculation generally remains fixed, the
numerator does change over time, and could increase beyond the original loan balance if borrowers incur deferred interest or decrease below the original loan balance if borrowers amortize or pay down the principal on their loans.



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TABLE 22

Mortgage Portfolio Balance by

LTV or CLTV Bands (a)

(Dollars in Millions)



|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|---------------------------------------- |  | ------------ | ------- | --------- | ---------------- | - | ------- | ------------ | --------- |  | ----- | ------- |  | --------- | ------- |  | ----- | -
|                                         |  | June 30 2006 |         |           | December 31 2005 |   |         | June 30 2005 |          
|                                         |  | Balance      |         | % ofTotal |                  |   | Balance |              | % ofTotal |  |       | Balance |  | % ofTotal |        
|First mortgage LTVs:                     |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|At or below 80.00%:                      |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|60.00% or less                           |  | $            | 22,295  |           | 18.3             | % |         | $            | 21,786    |  | 18.6  | %       |  | $         | 20,746  |  | 18.8  | %
|60.01% to 70.00%                         |  |              | 23,037  |           | 19.0             |   |         |              | 23,234    |  | 19.8  |         |  |           | 22,804  |  | 20.6  |  
|70.01% to 80.00%                         |  |              | 40,123  |           | 33.0             |   |         |              | 40,549    |  | 34.5  |         |  |           | 40,593  |  | 36.7  |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 85,455  |           | 70.3             |   |         |              | 85,569    |  | 72.9  |         |  |           | 84,143  |  | 76.1  |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|80.01% to 85.00%:                        |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|With mortgage insurance                  |  |              | 72      |           | .1               |   |         |              | 71        |  | .1    |         |  |           | 79      |  | .1    |  
|With no mortgage insurance               |  |              | 16,719  |           | 13.7             |   |         |              | 13,072    |  | 11.1  |         |  |           | 8,542   |  | 7.7   |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 16,791  |           | 13.8             |   |         |              | 13,143    |  | 11.2  |         |  |           | 8,621   |  | 7.8   |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|85.01% to 90.00%:                        |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|With mortgage insurance                  |  |              | 215     |           | .2               |   |         |              | 171       |  | .2    |         |  |           | 173     |  | .2    |  
|With no mortgage insurance               |  |              | 33      |           | .0               |   |         |              | 25        |  | .0    |         |  |           | 22      |  | .0    |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 248     |           | .2               |   |         |              | 196       |  | .2    |         |  |           | 195     |  | .2    |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Greater than 90.00%:                     |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|With mortgage insurance                  |  |              | 89      |           | .1               |   |         |              | 114       |  | .1    |         |  |           | 160     |  | .1    |  
|With no mortgage insurance               |  |              | 25      |           | .0               |   |         |              | 23        |  | .0    |         |  |           | 27      |  | .0    |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 114     |           | .1               |   |         |              | 137       |  | .1    |         |  |           | 187     |  | .1    |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Total first mortgage LTVs                |  |              | 102,608 |           | 84.4             |   |         |              | 99,045    |  | 84.4  |         |  |           | 93,146  |  | 84.2  |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|First and second mortgage CLTVs:(b)      |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|At or below 80.00%:                      |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|60.00% or less                           |  |              | 4,821   |           | 4.0              |   |         |              | 4,569     |  | 3.9   |         |  |           | 3,906   |  | 3.5   |  
|60.01% to 70.00%                         |  |              | 3,450   |           | 2.8              |   |         |              | 3,390     |  | 2.9   |         |  |           | 3,096   |  | 2.8   |  
|70.01% to 80.00%                         |  |              | 4,331   |           | 3.6              |   |         |              | 4,214     |  | 3.6   |         |  |           | 4,048   |  | 3.7   |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 12,602  |           | 10.4             |   |         |              | 12,173    |  | 10.4  |         |  |           | 11,050  |  | 10.0  |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|80.01% to 85.00%:                        |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|With pool insurance on seconds           |  |              | 723     |           | .6               |   |         |              | 795       |  | .7    |         |  |           | 935     |  | .8    |  
|With no pool insurance                   |  |              | 686     |           | .5               |   |         |              | 423       |  | .3    |         |  |           | 312     |  | .3    |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 1,409   |           | 1.1              |   |         |              | 1,218     |  | 1.0   |         |  |           | 1,247   |  | 1.1   |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|85.01% to 90.00%:                        |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|With pool insurance on seconds           |  |              | 2,373   |           | 2.0              |   |         |              | 2,782     |  | 2.4   |         |  |           | 3,753   |  | 3.4   |  
|With no pool insurance                   |  |              | 15      |           | .0               |   |         |              | 14        |  | .0    |         |  |           | 18      |  | .0    |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 2,388   |           | 2.0              |   |         |              | 2,796     |  | 2.4   |         |  |           | 3,771   |  | 3.4   |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Greater than 90.00%:                     |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|With pool insurance on seconds           |  |              | 2,535   |           | 2.1              |   |         |              | 2,123     |  | 1.8   |         |  |           | 1,348   |  | 1.3   |  
|With no pool insurance                   |  |              | 11      |           | .0               |   |         |              | 11        |  | .0    |         |  |           | 15      |  | .0    |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Subtotal                                 |  |              | 2,546   |           | 2.1              |   |         |              | 2,134     |  | 1.8   |         |  |           | 1,363   |  | 1.3   |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Total first and second CLTVs             |  |              | 18,945  |           | 15.6             |   |         |              | 18,321    |  | 15.6  |         |  |           | 17,431  |  | 15.8  |  
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  
|Total portfolio by LTV and CLTV bands(c) |  | $            | 121,553 |           | 100.0            | % |         | $            | 117,366   |  | 100.0 | %       |  | $         | 110,577 |  | 100.0 | %
|                                         |  |              |         |           |                  |   |         |              |           |  |       |         |  |           |         |  |       |  



|(a) | The mortgage portfolio balances include deferred interest.
|--- | ----------------------------------------------------------



|(b) | The CLTV calculation excludes any unused portion of a line of credit.
|--- | ---------------------------------------------------------------------



|(c) | The total portfolio figures exclude loans on deposits, loans in process, net deferred loan costs, allowance for loans losses, and other miscellaneous premiums and
discounts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that by emphasizing original LTVs below 80%, minimizing loans with LTVs and CLTVs above 90%, and
insuring most loans with original LTVs or CLTVs above 80%, we have helped to mitigate our exposure to a disruption in the real estate market that could cause property values to decline. Nonetheless, it is



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##### Table of Contents

reasonable to expect that a significant decline in the values of residential real estate could result in increased rates of delinquencies, foreclosures, and
losses.

Close Monitoring of the Loan Portfolio

In addition to the steps we take to manage credit risk when loans are first originated, we also actively monitor our loan portfolio. In doing so, our objective is to detect any credit risk issues early so we can
mitigate risks in the portfolio and also can revise terms for new originations. For example, we do the following:



| |  |  | conduct periodic loan reviews;
| | - |  | ------------------------------



| |  |  | analyze market trends in lending territories and appropriately adjust loan terms, such as required original LTV or CLTV ratios;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | review loans that become nonperforming assets to evaluate if there were detectable signs we should incorporate into the training of underwriting and appraisal staff;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | identify segments of the portfolio that might have more vulnerability to credit risk, either because of geography, LTV or CLTV ratio, credit score, or a combination of these and
other factors; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | work with customers who may present potential risks, either now or in the future, and offer them counseling or other programs to try to reduce the potential for future problems.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a risk-averse portfolio lender, we closely monitor and analyze many factors that could impact the credit risk of
individual loans or segments of loans in the portfolio. One of these factors is deferred interest, which has received recent industry-wide attention largely because new participants in the option ARM market have been originating a greater volume of
loans that can incur deferred interest.

We have 25 years of experience managing a portfolio of loans structured to allow borrowers to
incur deferred interest. Our experience suggests that deferred interest is principally a loan-by-loan credit issue, and we carefully monitor the payment behavior and performance of all loans with deferred interest. We believe that most of the
deferred interest in our portfolio is on loans with limited credit risk. A loan may have limited credit risk for one or more reasons, including the following:



| |  |  | the loan had a low original LTV or CLTV;
| | - |  | ----------------------------------------



| |  |  | the property value appreciated, resulting in a low current LTV or CLTV;
| | - |  | -----------------------------------------------------------------------



| |  |  | the borrowers payment is at or near the fully-indexed rate;
| | - |  | ------------------------------------------------------------



| |  |  | the borrower has a strong credit history or substantial assets;
| | - |  | ---------------------------------------------------------------



| |  |  | the loan has a limited amount of deferred interest;
| | - |  | ---------------------------------------------------



| |  |  | the borrower periodically pays down a deferred interest balance; or
| | - |  | -------------------------------------------------------------------



| |  |  | the loan is covered by mortgage or pool insurance.
| | - |  | --------------------------------------------------

In
addition, as discussed above under The Loan Portfolio  Structural Features of our ARMs, we have structured our loans to try to reduce the potential credit risk that might result from a significant early increase in a
borrowers payment. In particular, most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance
reaches 125% of the original amount. We term this reamortization a recast. Historically, most loans in our portfolio have paid off before the loans payment is recast.

The following table shows the amount of deferred interest in the loan portfolio at June 30, 2006 by LTV and CLTV and year of origination. The table
shows that much of the deferred interest in the portfolio is in loans that we believe have limited credit risk, such as loans with LTVs or CLTVs at or below 80%. Based on published industry data, we also believe many of the properties securing the
loans we originated prior to 2006 have experienced price appreciation.



41



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##### Table of Contents

TABLE 23

Deferred Interest in the Loan Portfolio

by LTV/CLTV Bands and Year of Origination

As of June 30, 2006

(Dollars in Thousands)



|                                         |  |                         |        |      |   |         |  |               |         |       |   |        |  |   |        
|---------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- |  | ------------- | ------- | ----- | - | ------ |  | - | -------
|                                         |  | Year of Origination (a)
|                                         |  | 2006                    |        | 2005 |   | 2004    |  | 2003 andPrior |         | Total
|Deferred interest balance by LTV/CLTV(b) |  |                         |        |      |   |         |  |               |         |       |   |        |  |   |        
|At or below 80.00%                       |  |                         |        |      |   |         |  |               |         |       |   |        |  |   |        
|60.00% or less                           |  | $                       | 7,688  |      | $ | 53,990  |  | $             | 40,865  |       | $ | 14,998 |  | $ | 117,541
|60.01% to 70.00%                         |  |                         | 10,497 |      |   | 74,868  |  |               | 52,588  |       |   | 15,953 |  |   | 153,906
|70.01% to 80.00%                         |  |                         | 18,692 |      |   | 172,466 |  |               | 123,267 |       |   | 35,280 |  |   | 349,705
|                                         |  |                         |        |      |   |         |  |               |         |       |   |        |  |   |        
|Subtotal                                 |  |                         | 36,877 |      |   | 301,324 |  |               | 216,720 |       |   | 66,231 |  |   | 621,152
|                                         |  |                         |        |      |   |         |  |               |         |       |   |        |  |   |        
|80.01% to 85.00%                         |  |                         | 12,338 |      |   | 132,110 |  |               | 90,352  |       |   | 21,025 |  |   | 255,825
|85.01% to 90.00%                         |  |                         | 535    |      |   | 5,321   |  |               | 3,913   |       |   | 1,597  |  |   | 11,366 
|Greater than 90.00%(c)                   |  |                         | 1,074  |      |   | 14,152  |  |               | 8,765   |       |   | 2,174  |  |   | 26,165 
|                                         |  |                         |        |      |   |         |  |               |         |       |   |        |  |   |        
|Total deferred interest                  |  | $                       | 50,824 |      | $ | 452,907 |  | $             | 319,750 |       | $ | 91,027 |  | $ | 914,508
|                                         |  |                         |        |      |   |         |  |               |         |       |   |        |  |   |        



|(a) | The first liens origination year is used in this table if a second lien has a different origination year from the associated first lien.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|(b) | First mortgage LTVs and first and second mortgage CLTVs are both included in this table. These calculations rarely take into account any changes in property value
since the time of origination.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Approximately 99% of this deferred interest is on loans covered by primary mortgage or pool insurance.
|--- | ------------------------------------------------------------------------------------------------------

The aggregate amount of deferred interest in the loan portfolio amounted to $915 million, $449 million, and $160 million at
June 30, 2006, December 31, 2005, and June 30, 2005, respectively. Deferred interest amounted to.74% of the total loan portfolio at June 30, 2006 compared to .38% at December 31, 2005 and .14% at June 30,
2005. Deferred interest levels increased primarily because the balance of ARM loans in our portfolio increased by $45 billion since 2003, the indexes on our ARMs increased, the minimum payment on most new and many existing loans was less than the
interest due, and many borrowers made monthly payments that were lower than the amount of interest due. We do not believe the aggregate amount of deferred interest in the portfolio is a principal indicator of credit risk exposure.

Based on our 25-year track record with ARM loans that have the potential for deferred interest, together with our underwriting and appraisal processes,
we believe we can manage incremental credit risk that may be associated with loans with deferred interest. We continually analyze the portfolio and market trends to try to detect issues early enough so we can minimize future credit losses.

Asset Quality

An important measure of the soundness of our loan and MBS portfolio is the ratio of nonperforming assets (NPAs) and troubled debt restructured (TDRs) to total assets. Nonperforming assets include nonaccrual loans (that is, loans, including
loans securitized into MBS with recourse, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on nonaccrual loans. TDRs are made up of loans on which delinquent payments have been
capitalized or on which temporary interest rate reductions have been made, primarily to customers impacted by adverse economic conditions.

Our credit risk management practices have enabled us to have low NPAs and TDRs throughout our history. However, even by our standards, NPAs and TDRs have been unusually low in recent years. Although we believe that our lending practices
have historically been the primary contributor to our low NPAs and TDRs, the sustained period of low interest rates and rapid home price appreciation during the past several years



42



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contributed to the low level of NPAs and TDRs. It is unlikely that such historically low levels of NPAs and TDRs will continue indefinitely. As the table
below shows, there has been an increase in NPAs during the past year.

The following table sets forth the components of our NPAs and TDRs
and the various ratios to total assets at June 30, 2006, December 31, 2005, and June 30, 2005.

TABLE 24

Nonperforming Assets and Troubled Debt Restructured

(Dollars in thousands)



|                                       |  |             |         |   |                 |   |         |             |  |   |         |  
|-------------------------------------- |  | ----------- | ------- | - | --------------- | - | ------- | ----------- |  | - | ------- | -
|                                       |  | June 302006 |         |   | December 312005 |   |         | June 302005 | 
|Nonaccrual loans                       |  | $           | 465,510 |   |                 | $ | 373,671 |             |  | $ | 322,173 |  
|Foreclosed real estate                 |  |             | 10,765  |   |                 |   | 8,682   |             |  |   | 8,769   |  
|                                       |  |             |         |   |                 |   |         |             |  |   |         |  
|Total nonperforming assets             |  | $           | 476,275 |   |                 | $ | 382,353 |             |  | $ | 330,942 |  
|                                       |  |             |         |   |                 |   |         |             |  |   |         |  
|TDRs                                   |  | $           | 122     |   |                 | $ | 124     |             |  | $ | 126     |  
|                                       |  |             |         |   |                 |   |         |             |  |   |         |  
|Ratio of NPAs to total assets          |  |             | .37     | % |                 |   | .31     | %           |  |   | .28     | %
|                                       |  |             |         |   |                 |   |         |             |  |   |         |  
|Ratio of TDRs to total assets          |  |             | .00     | % |                 |   | .00     | %           |  |   | .00     | %
|                                       |  |             |         |   |                 |   |         |             |  |   |         |  
|Ratio of NPAs and TDRs to total assets |  |             | .37     | % |                 |   | .31     | %           |  |   | .28     | %
|                                       |  |             |         |   |                 |   |         |             |  |   |         |  

The following tables set forth the components of our NPAs for Northern and Southern California and
for all states with more than 2% of the total loan balance at June 30, 2006.

TABLE 25

Nonperforming Assets by State

June 30, 2006

(Dollars in thousands)



|                    |  |                         |         |                              |   |                         |  |                |     |    |   |       |  |       |       |  |   |         |  |      |  
|------------------- |  | ----------------------- | ------- | ---------------------------- | - | ----------------------- |  | -------------- | --- | -- | - | ----- |  | ----- | ----- |  | - | ------- |  | ---- | -
|                    |  | Nonaccrual Loans(a) (b) |         | Foreclosed Real Estate (FRE) |   |                         |  | NPAs as a % of |    
|                    |  | Residential RealEstate  |         | CommercialReal               |   | Residential Real Estate |  | Total          |    
|State               |  | 1  4                   |         | 5+                           |   | Estate                  |  | 1 - 4          |     | 5+ |   | NPAs  |  | Loans |      
|Northern California |  | $                       | 124,931 |                              | $ | 108                     |  | $              | -0- |    | $ | 639   |  | $     | -0-   |  | $ | 125,678 |  | .31  | %
|Southern California |  |                         | 87,772  |                              |   | -0-                     |  |                | 340 |    |   | 621   |  |       | -0-   |  |   | 88,733  |  | .27  |  
|                    |  |                         |         |                              |   |                         |  |                |     |    |   |       |  |       |       |  |   |         |  |      |  
|                    |  |                         | 212,703 |                              |   | 108                     |  |                | 340 |    |   | 1,260 |  |       | -0-   |  |   | 214,411 |  | .29  |  
|Florida             |  |                         | 28,143  |                              |   | -0-                     |  |                | -0- |    |   | 310   |  |       | -0-   |  |   | 28,453  |  | .31  |  
|New Jersey          |  |                         | 22,692  |                              |   | -0-                     |  |                | -0- |    |   | -0-   |  |       | -0-   |  |   | 22,692  |  | .40  |  
|Texas               |  |                         | 41,232  |                              |   | -0-                     |  |                | -0- |    |   | 2,549 |  |       | 1,662 |  |   | 45,443  |  | 1.36 |  
|Illinois            |  |                         | 19,410  |                              |   | -0-                     |  |                | -0- |    |   | -0-   |  |       | -0-   |  |   | 19,410  |  | .66  |  
|Virginia            |  |                         | 2,437   |                              |   | -0-                     |  |                | -0- |    |   | -0-   |  |       | -0-   |  |   | 2,437   |  | .09  |  
|Arizona             |  |                         | 3,018   |                              |   | -0-                     |  |                | -0- |    |   | -0-   |  |       | -0-   |  |   | 3,018   |  | .11  |  
|Washington          |  |                         | 10,879  |                              |   | -0-                     |  |                | -0- |    |   | -0-   |  |       | -0-   |  |   | 10,879  |  | .42  |  
|Other states(c)     |  |                         | 123,437 |                              |   | 1,111                   |  |                | -0- |    |   | 4,984 |  |       | -0-   |  |   | 129,532 |  | .71  |  
|                    |  |                         |         |                              |   |                         |  |                |     |    |   |       |  |       |       |  |   |         |  |      |  
|Totals              |  | $                       | 463,951 |                              | $ | 1,219                   |  | $              | 340 |    | $ | 9,103 |  | $     | 1,662 |  | $ | 476,275 |  | .39  | %
|                    |  |                         |         |                              |   |                         |  |                |     |    |   |       |  |       |       |  |   |         |  |      |  



|(a) | Nonaccrual loans are loans that are 90 days or more past due and interest is not recognized
on these loans.
|--- | -----------------------------------------------------------------------------------------------------------



|(b) | The balances include loans that were securitized into MBS with recourse.
|--- | ------------------------------------------------------------------------



|(c) | Each state included in Other states has a total loan balance that is less than 2% of total
loans at June 30, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------



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TABLE 26

Nonperforming Assets by State

June 30, 2005

(Dollars in thousands)



|                    |  |                         |         |                |   |                        |  |               |     |    |   |       |  |       |     |  |   |         |  |      |  
|------------------- |  | ----------------------- | ------- | -------------- | - | ---------------------- |  | ------------- | --- | -- | - | ----- |  | ----- | --- |  | - | ------- |  | ---- | -
|                    |  | Nonaccrual Loans(a) (b) |         | FRE            |   | Total                  |  | NPAs asa % of |    
|                    |  | Residential Real Estate |         | CommercialReal |   | ResidentialReal Estate |  |              
|State               |  | 1  4                   |         | 5+             |   | Estate                 |  | 1 - 4         |     | 5+ |   | NPAs  |  | Loans |    
|Northern California |  | $                       | 84,828  |                | $ | -0-                    |  | $             | -0- |    | $ | 637   |  | $     | -0- |  | $ | 85,465  |  | .22  | %
|Southern California |  |                         | 42,226  |                |   | -0-                    |  |               | 104 |    |   | -0-   |  |       | -0- |  |   | 42,330  |  | .14  |  
|                    |  |                         |         |                |   |                        |  |               |     |    |   |       |  |       |     |  |   |         |  |      |  
|                    |  |                         | 127,054 |                |   | -0-                    |  |               | 104 |    |   | 637   |  |       | -0- |  |   | 127,795 |  | .19  |  
|Florida             |  |                         | 18,716  |                |   | -0-                    |  |               | -0- |    |   | -0-   |  |       | -0- |  |   | 18,716  |  | .27  |  
|New Jersey          |  |                         | 19,583  |                |   | -0-                    |  |               | -0- |    |   | 159   |  |       | -0- |  |   | 19,742  |  | .40  |  
|Texas               |  |                         | 37,693  |                |   | -0-                    |  |               | -0- |    |   | 5,293 |  |       | -0- |  |   | 42,986  |  | 1.26 |  
|Illinois            |  |                         | 14,331  |                |   | -0-                    |  |               | -0- |    |   | -0-   |  |       | -0- |  |   | 14,331  |  | .49  |  
|Virginia            |  |                         | 2,126   |                |   | -0-                    |  |               | -0- |    |   | -0-   |  |       | -0- |  |   | 2,126   |  | .09  |  
|Arizona             |  |                         | 3,291   |                |   | -0-                    |  |               | -0- |    |   | -0-   |  |       | -0- |  |   | 3,291   |  | .17  |  
|Washington          |  |                         | 10,092  |                |   | -0-                    |  |               | -0- |    |   | -0-   |  |       | -0- |  |   | 10,092  |  | .41  |  
|Other states(c)     |  |                         | 87,498  |                |   | 1,685                  |  |               | -0- |    |   | 2,680 |  |       | -0- |  |   | 91,863  |  | .55  |  
|                    |  |                         |         |                |   |                        |  |               |     |    |   |       |  |       |     |  |   |         |  |      |  
|Totals              |  | $                       | 320,384 |                | $ | 1,685                  |  | $             | 104 |    | $ | 8,769 |  | $     | -0- |  | $ | 330,942 |  | .30  | %
|                    |  |                         |         |                |   |                        |  |               |     |    |   |       |  |       |     |  |   |         |  |      |  



|(a) | Nonaccrual loans are loans that are 90 days or more past due and interest is not recognized
on these loans.
|--- | -----------------------------------------------------------------------------------------------------------



|(b) | The balances include loans that were securitized into MBS with recourse.
|--- | ------------------------------------------------------------------------



|(c) | Each state included in Other states has a total loan balance that is less than 2% of total
loans at June 30, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------

The low balance of NPAs at June 30, 2006, although still indicative of a strong
economy, increased from June 30, 2005, reflecting both the growth of the loan portfolio and some initial signs of moderation in various housing markets. In particular, rising interest rates in general and high home prices in some regions have
somewhat reduced demand for home purchases, leading to lower rates of home value appreciation in some markets and flat to declining prices in others. Should demand continue to weaken, we could see further increases in our level of NPAs. Relatively
high levels of NPAs persist in Texas due to weakness in certain residential lending markets. Other states included in the June 30, 2006 table above with ratios of NPAs as a percentage of loans over 1.00% were Indiana, Ohio, Michigan, Minnesota,
Wisconsin, South Dakota, North Carolina, and Nebraska. The aggregate amount of NPAs in those states was $53 million or 1.68% of total outstanding loans in those states at June 30, 2006. We closely monitor all delinquencies and take
appropriate steps to protect our interests. Interest foregone on nonaccrual loans (loans 90 days or more past due) amounted to $3.9 million and $7.3 million for the three and six months ended June 30, 2006, compared to
$179 thousand and $1.5 million for the second quarter and first six months of 2005.

Allowance for Loan Losses

The allowance for loan losses reflects our estimate of the probable credit losses inherent in the loans receivable balance. Each
quarter we review the allowance. Additions to or reductions from the allowance are reflected in the provision for loan losses in current earnings.

In order to evaluate the adequacy of the allowance, we determine an allocated component and an unallocated component. The allocated component consists of reserves on loans that we evaluate on a pool basis, primarily our large portfolio of
one-to four-family loans, as well as loans that we evaluate on an individual basis, such as major multi-family and commercial real estate loans. However, the entire allowance is available to absorb credit losses inherent in the total loan receivable
balance.

To evaluate the adequacy of the reserves for pooled loans, we use a model that is based on our historical repayment rates,
foreclosure rates, and loss experience over multiple business cycles. Data for the model is gathered using an internal database that identifies and measures losses on loans and foreclosed real estate broken down by age of the loan. To evaluate the
adequacy of reserves on individually evaluated loans, we measure



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impairment based on the fair value of the collateral taking into consideration the estimated sale price, cost of refurbishing the security property, payment
of delinquent property taxes, and costs of disposal.

We have also established an unallocated component to address the imprecision and
range of probable outcomes inherent in our estimates of credit losses. The amount of the unallocated reserve takes into consideration many factors, including trends in economic growth, unemployment, housing market activity, home prices for the
nation and individual geographic regions, and the level of mortgage turnover. The ratios of allocated allowance and unallocated allowance to total allowance may change from period to period.

The table below shows the changes in the allowance for loan losses for the three and six months ended June 30, 2006 and 2005.

TABLE 27

Changes in Allowance for Loan Losses

(Dollars in thousands)



|                                                                                                                 |  |                           |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ----------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                 |  | Three Months EndedJune 30 |         |   | Six Months EndedJune 30 |  
|                                                                                                                 |  | 2006                      |         |   | 2005                    |   |         | 2006 |  |   | 2005    |  
|Beginning allowance for loan losses                                                                              |  | $                         | 299,965 |   |                         | $ | 290,192 |      |  | $ | 295,859 |   |  | $ | 290,110 |  
|Provision for losses                                                                                             |  |                           | 2,758   |   |                         |   | 1,807   |      |  |   | 7,051   |   |  |   | 2,691   |  
|Loans charged off                                                                                                |  |                           | (1,160  | ) |                         |   | (824    | )    |  |   | (2,571  | ) |  |   | (2,050  | )
|Recoveries                                                                                                       |  |                           | 506     |   |                         |   | 512     |      |  |   | 1,730   |   |  |   | 936     |  
|                                                                                                                 |  |                           |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Ending allowance for loan losses                                                                                 |  | $                         | 302,069 |   |                         | $ | 291,687 |      |  | $ | 302,069 |   |  | $ | 291,687 |  
|                                                                                                                 |  |                           |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Annualized ratio of provision for loan losses to average loans receivable and MBS with recourse held to maturity |  |                           | .01     | % |                         |   | .01     | %    |  |   | .01     | % |  |   | .01     | %
|                                                                                                                 |  |                           |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Annualized ratio of net chargeoffs to average loans receivable and MBS with recourse held to maturity            |  |                           | .00     | % |                         |   | .00     | %    |  |   | .00     | % |  |   | .00     | %
|                                                                                                                 |  |                           |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Ratio of allowance for loan losses to total loans held for investment and MBS with recourse held to maturity     |  |                           |         |   |                         |   |         |      |  |   | .24     | % |  |   | .26     | %
|                                                                                                                 |  |                           |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Ratio of allowance for loan losses to NPAs                                                                       |  |                           |         |   |                         |   |         |      |  |   | 63.4    | % |  |   | 88.1    | %
|                                                                                                                 |  |                           |         |   |                         |   |         |      |  |   |         |   |  |   |         |  

The provision for loan losses reflected the increase in nonperforming assets.

Management of Other Risks

We manage other risks that are common to companies in other industries, including
operational, regulatory, and management risk.

Operational Risk

Operational risk refers to the risk of loss resulting from inadequate or failed processes or systems, human factors, or external events. These events
could result in financial losses and other negative consequences, including reputational harm.

We mitigate operational risk in a variety
of ways, including the following:



| |  |  | we promote a corporate culture focused on high ethical conduct, superior customer service, and continual process and productivity improvements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we focus our efforts on a single line of business;
| | - |  | --------------------------------------------------



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| |  |  | our management and Board of Directors generally have long tenures with the Company, giving us the benefit of experience and institutional memory in managing through business cycles
and addressing other strategic issues;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our business managers have the responsibility for adopting and monitoring appropriate controls for their business units, both under long-standing banking regulations and
Section 404 of the Sarbanes-Oxley Act;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we have maintained an Internal Audit Department for decades that regularly audits our business, including operational controls and information security; the Internal Audit
Department reports directly to the Audit Committee of the Board of Directors, all of the members of which are independent directors under the New York Stock Exchanges corporate governance standards;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we maintain strong relationships and open dialogue with our regulators, who regularly conduct evaluations of our operations and controls;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our management has regular discussions with rating agencies that routinely evaluate our creditworthiness;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | our business managers and other employees, as well as internal and external legal counsel and auditors, understand they are expected to communicate any material issues not otherwise
properly addressed promptly to senior management and, if appropriate, the Board of Directors or a committee thereof;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we monitor the strength and reputations of our counterparties;
| | - |  | --------------------------------------------------------------



| |  |  | we perform as many of the business functions and operations internally as economically feasible to retain control of our operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we have and enforce codes of conduct and ethics for employees, officers, and directors; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | we have insurance and contingency plans in place in case of enterprise-wide business interruption.
| | - |  | --------------------------------------------------------------------------------------------------

Although these actions cannot fully protect us from all operational risks, we believe that they do help protect us from many adverse events and also
reduce the severity of issues that might arise.

Regulatory Risk

By regulatory risk, we mean the risk that laws or regulations could change in a manner that adversely affects our business. This is a risk that is largely
outside our control, although we participate in and monitor legal, regulatory, and judicial developments that could impact our business. Among the issues that have received attention recently include:



| |  |  | laws and regulations that impact lending, deposit, and mutual fund activities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | rules that affect the amount of regulatory capital that banks and other types of financial institutions are required to maintain;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes to the regulation of the housing government sponsored enterprises, including the Federal Home Loan Banks; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | federal and state privacy laws and regulations that impact how customer information can be used.
| | - |  | ------------------------------------------------------------------------------------------------

We continue to work with policymakers, trade groups, and others to try to ensure that any legal or regulatory developments reflect sound public policy
and do not uniquely and adversely affect us.

Management Risk

Management risk is mitigated by having well-trained and experienced employees in key positions who can assume management roles in both the immediate and
longer-term future. In addition, senior management meets at least twice a year with the Board of Directors in executive sessions to discuss recommendations and evaluations of potential successors to key members of management, along with a review of
any development plans that are recommended for such individuals.



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RESULTS OF OPERATIONS

The following table summarizes selected income statement results for the three and six
months ended June 30, 2006 and 2005.

TABLE 28

Selected Financial Results

(Dollars in thousands)



|                                    |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|----------------------------------- |  | -------------------------- | ----------- | - | ------------------------ | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                    |  | Three Months Ended June 30 |             |   | Six Months Ended June 30 |  
|                                    |  | 2006                       |             |   | 2005                     |   |             | 2006 |  |   | 2005        |  
|Interest income                     |  | $                          | 2,165,056   |   |                          | $ | 1,540,153   |      |  | $ | 4,184,441   |   |  | $ | 2,904,447   |  
|Interest expense                    |  |                            | 1,275,602   |   |                          |   | 744,637     |      |  |   | 2,411,921   |   |  |   | 1,351,558   |  
|                                    |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|Net interest income                 |  |                            | 889,454     |   |                          |   | 795,516     |      |  |   | 1,772,520   |   |  |   | 1,552,889   |  
|Provision for loan losses           |  |                            | 2,758       |   |                          |   | 1,807       |      |  |   | 7,051       |   |  |   | 2,691       |  
|Noninterest income                  |  |                            | 43,460      |   |                          |   | 36,134      |      |  |   | 80,044      |   |  |   | 65,938      |  
|General and administrative expenses |  |                            | 286,670     |   |                          |   | 238,574     |      |  |   | 557,957     |   |  |   | 462,813     |  
|Taxes on income                     |  |                            | 253,108     |   |                          |   | 230,840     |      |  |   | 506,232     |   |  |   | 444,644     |  
|                                    |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|Net earnings                        |  | $                          | 390,378     |   |                          | $ | 360,429     |      |  | $ | 781,324     |   |  | $ | 708,679     |  
|                                    |  |                            |             |   |                          |   |             |      |  |   |             |   |  |   |             |  
|Average earning assets              |  | $                          | 126,654,282 |   |                          | $ | 113,599,941 |      |  |   | 125,449,969 |   |  | $ | 111,018,059 |  
|Net interest margin                 |  |                            | 2.81        | % |                          |   | 2.80        | %    |  |   | 2.83        | % |  |   | 2.80        | %

Net Interest Income

The largest component of our revenue and earnings is net interest income, which is the
difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Long-term growth of our net interest income, and hence earnings, is related to the ability to expand the
mortgage portfolio, our primary earning asset, by originating and retaining high-quality adjustable rate mortgages. In the short term, however, net interest income can be influenced by business conditions, especially movements in short-term interest
rates and changes in the ARM index mix.

The 14% increase in net interest income in the first six months of 2006 compared with the prior
year resulted primarily from a slightly higher net interest margin and the growth in the loan portfolio, our principal earning asset. Between June 30, 2006 and June 30, 2005, our earning asset balance increased by
$11 billion or 10%. This growth resulted from strong mortgage originations which more than offset loan repayments and loan sales.



47



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TABLE 29

Average Daily Balances, Annualized Average Yield, and End of Period Yield

for Earning Assets and Interest-Bearing Liabilities

(Dollars in thousands)



|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|-------------------------------------- |  | -------------------------------- | ----------- | ---------------------- | -------------------------------- | - | ----------------- | ---- | --- | ------------------------ | - | ---------------------- |  | ---- | ----------------- |  | ---- | ---
|                                       |  | Three Months Ended June 30, 2006 |             |                        | Three Months Ended June 30, 2005 |  
|                                       |  | Average Daily Balances(a)        |             | AnnualizedAverageYield |                                  |   | End ofPeriodYield |      |     | Average DailyBalances(a) |   | AnnualizedAverageYield |  |      | End ofPeriodYield | 
|ASSETS                                 |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Loans receivable and MBS(b)            |  | $                                | 122,027,011 |                        | 6.95                             | % |                   | 7.04 | %   |                          | $ | 109,275,616            |  | 5.53 | %                 |  | 5.67 | %  
|Investments                            |  |                                  | 1,445,285   |                        | 5.64                             |   |                   | 5.30 | (c) |                          |   | 1,284,946              |  | 3.57 |                   |  | 3.41 | (c)
|Invest. in capital stock of FHLBs      |  |                                  | 1,899,165   |                        | 5.06                             |   |                   | n/a  | (d) |                          |   | 1,676,794              |  | 4.12 |                   |  | n/a  | (d)
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Earning assets                         |  | $                                | 125,371,461 |                        | 6.91                             | % |                   | 7.02 | %   |                          | $ | 112,237,356            |  | 5.49 | %                 |  | 5.64 | %  
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|LIABILITIES                            |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Deposits:                              |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Checking accounts                      |  | $                                | 4,229,571   |                        | 1.79                             | % |                   | 1.65 | %   |                          | $ | 4,877,341              |  | 1.29 | %                 |  | 1.29 | %  
|Savings accounts(e)                    |  |                                  | 12,200,789  |                        | 2.62                             |   |                   | 2.82 |     |                          |   | 19,721,922             |  | 1.88 |                   |  | 1.87 |    
|Term accounts                          |  |                                  | 44,766,411  |                        | 4.24                             |   |                   | 4.42 |     |                          |   | 32,670,653             |  | 3.14 |                   |  | 3.25 |    
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Total deposits                         |  |                                  | 61,196,771  |                        | 3.75                             |   |                   | 3.94 |     |                          |   | 57,269,916             |  | 2.55 |                   |  | 2.70 |    
|Advances from FHLBs                    |  |                                  | 37,842,540  |                        | 4.98                             |   |                   | 5.23 |     |                          |   | 35,573,076             |  | 3.08 |                   |  | 3.29 |    
|Reverse repurchases                    |  |                                  | 5,883,351   |                        | 5.00                             |   |                   | 5.21 |     |                          |   | 4,393,333              |  | 3.07 |                   |  | 3.25 |    
|Other borrowings(f)                    |  |                                  | 12,301,510  |                        | 5.13                             |   |                   | 5.34 |     |                          |   | 8,529,261              |  | 3.38 |                   |  | 3.58 |    
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Interest-bearing liabilities           |  | $                                | 117,224,172 |                        | 4.35                             | % |                   | 4.56 | %   |                          | $ | 105,765,586            |  | 2.82 | %                 |  | 2.99 | %  
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Average net yield                      |  |                                  |             |                        | 2.56                             | % |                   |      |     |                          |   |                        |  | 2.67 | %                 |  |      |    
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Primary Spread                         |  |                                  |             |                        |                                  |   |                   | 2.46 | %   |                          |   |                        |  |      |                   |  | 2.65 | %  
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Net interest income                    |  | $                                | 889,454     |                        |                                  |   |                   |      |     |                          | $ | 795,516                |  |      |                   |  |      |    
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Net yield on average earning assets(g) |  |                                  |             |                        | 2.84                             | % |                   |      |     |                          |   |                        |  | 2.84 | %                 |  |      |    
|                                       |  |                                  |             |                        |                                  |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    



|(a) | Includes balances of assets and liabilities that were acquired and matured within the same month.
|--- | -------------------------------------------------------------------------------------------------



|(b) | Includes nonaccrual loans (loans that are 90 days or more past due).
|--- | --------------------------------------------------------------------



|(c) | Freddie Mac stock pays dividends; no end of period interest yield applies.
|--- | --------------------------------------------------------------------------



|(d) | FHLB stock pays dividends; no end of period interest yield applies.
|--- | -------------------------------------------------------------------



|(e) | Includes money market deposit accounts and passbook accounts.
|--- | -------------------------------------------------------------



|(f) | As of June 30, 2006, the Company had entered into three interest rate swaps to effectively convert certain fixed-rate debt to variable-rate debt. The effect of
the interest rate swaps is reflected in the average yield and end of period yield.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) | Net interest income divided by daily average of earning assets.
|--- | ---------------------------------------------------------------



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##### Table of Contents

TABLE 30

Average Daily Balances, Annualized Average Yield, and End of Period Yield

for Earning Assets and Interest-Bearing Liabilities

(Dollars in thousands)



|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|-------------------------------------- |  | ----------------------------- | ----------- | ---------------------- | ----------------------------- | - | ----------------- | ---- | --- | ------------------------ | - | ---------------------- |  | ---- | ----------------- |  | ---- | ---
|                                       |  | Six Months EndedJune 30, 2006 |             |                        | Six Months EndedJune 30, 2005 |  
|                                       |  | Average Daily Balances(a)     |             | AnnualizedAverageYield |                               |   | End ofPeriodYield |      |     | Average DailyBalances(a) |   | AnnualizedAverageYield |  |      | End ofPeriodYield | 
|ASSETS                                 |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Loans receivable and MBS(b)            |  | $                             | 120,983,861 |                        | 6.77                          | % |                   | 7.04 | %   |                          | $ | 106,793,322            |  | 5.33 | %                 |  | 5.67 | %  
|Investments                            |  |                               | 1,543,983   |                        | 5.34                          |   |                   | 5.30 | (c) |                          |   | 1,427,025              |  | 3.26 |                   |  | 3.41 | (c)
|Invest. in capital stock of FHLBs      |  |                               | 1,883,880   |                        | 4.94                          |   |                   | n/a  | (d) |                          |   | 1,652,180              |  | 3.99 |                   |  | n/a  | (d)
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Earning assets                         |  | $                             | 124,411,724 |                        | 6.73                          | % |                   | 7.02 | %   |                          | $ | 109,872,527            |  | 5.29 | %                 |  | 5.64 | %  
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|LIABILITIES                            |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Deposits:                              |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Checking accounts                      |  | $                             | 4,453,845   |                        | 1.75                          | % |                   | 1.65 | %   |                          | $ | 5,012,505              |  | 1.31 | %                 |  | 1.29 | %  
|Savings accounts(e)                    |  |                               | 12,778,868  |                        | 2.45                          |   |                   | 2.82 |     |                          |   | 24,058,349             |  | 1.89 |                   |  | 1.87 |    
|Term accounts                          |  |                               | 43,707,671  |                        | 4.07                          |   |                   | 4.42 |     |                          |   | 26,571,422             |  | 3.03 |                   |  | 3.25 |    
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Total deposits                         |  |                               | 60,940,384  |                        | 3.56                          |   |                   | 3.94 |     |                          |   | 55,642,276             |  | 2.38 |                   |  | 2.70 |    
|Advances from FHLBs                    |  |                               | 38,064,022  |                        | 4.73                          |   |                   | 5.23 |     |                          |   | 35,322,553             |  | 2.82 |                   |  | 3.29 |    
|Reverse repurchases                    |  |                               | 5,700,988   |                        | 4.77                          |   |                   | 5.21 |     |                          |   | 4,178,570              |  | 2.82 |                   |  | 3.25 |    
|Other borrowings(f)                    |  |                               | 11,830,686  |                        | 4.91                          |   |                   | 5.34 |     |                          |   | 8,355,412              |  | 3.16 |                   |  | 3.58 |    
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Interest-bearing liabilities           |  | $                             | 116,536,080 |                        | 4.14                          | % |                   | 4.56 | %   |                          | $ | 103,498,811            |  | 2.61 | %                 |  | 2.99 | %  
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Average net yield                      |  |                               |             |                        | 2.59                          | % |                   |      |     |                          |   |                        |  | 2.68 | %                 |  |      |    
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Primary Spread                         |  |                               |             |                        |                               |   |                   | 2.46 | %   |                          |   |                        |  |      |                   |  | 2.65 | %  
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Net interest income                    |  | $                             | 1,772,520   |                        |                               |   |                   |      |     |                          | $ | 1,552,889              |  |      |                   |  |      |    
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Net yield on average earning assets(g) |  |                               |             |                        | 2.85                          | % |                   |      |     |                          |   |                        |  | 2.83 | %                 |  |      |    
|                                       |  |                               |             |                        |                               |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    



|(a) | Includes balances of assets and liabilities that were acquired and matured within the same
month.
|--- | -------------------------------------------------------------------------------------------------



|(b) | Includes nonaccrual loans (loans that are 90 days or more past due).
|--- | --------------------------------------------------------------------



|(c) | Freddie Mac stock pays dividends; no end of period interest yield applies.
|--- | --------------------------------------------------------------------------



|(d) | FHLB stock pays dividends; no end of period interest yield applies.
|--- | -------------------------------------------------------------------



|(e) | Includes money market deposit accounts and passbook accounts.
|--- | -------------------------------------------------------------



|(f) | As of June 30, 2006, the Company had entered into three interest rate swaps to
effectively convert certain fixed-rate debt to variable-rate debt. The effect of the interest rate swaps is reflected in the average yield and end of period yield.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) | Net interest income divided by daily average of earning assets.
|--- | ---------------------------------------------------------------



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Noninterest Income

Noninterest income for the second quarter and first six months of 2006 was comparable to
the amounts reported in the same periods in 2005.

General and Administrative Expenses

G&A expenses increased in the second quarter and first six months of
2006 by 20% and 21% respectively. The increase was due primarily to the continued investment in resources, mainly personnel, to support future growth. In addition, as a result of adopting SFAS 123R on January 1, 2006, the Company
recognized $3.8 million and $7.4 million of stock option expense in salary expense for the three and six months ended June 30, 2006, respectively.

G&A as a percentage of average assets (the G&A ratio) on an annualized basis was .89% and .88% for the second quarter and first six months of 2006 compared to .83% and .82% for the same periods in
2005. The G&A ratio was higher in the second quarter and first six months of 2006 as compared to the same periods in 2005 because average assets grew slower than the growth in G&A expense and because of the stock option expense recognized in
2006 as noted above. G&A as a percentage of net interest income plus noninterest income (the efficiency ratio) amounted to 30.73% and 30.12% for the second quarter and first six months of 2006 compared to 28.69% and 28.59% for the
second quarter and first six months of 2005.

Taxes on Income

We utilize the accrual method of accounting for income tax purposes. Taxes as a percentage of
earnings were 39.3% for both the second quarter and first six months of 2006 compared to 39.0% and 38.6% for the comparable periods in 2005. From quarter to quarter, the effective tax rate may fluctuate due to various state tax matters, particularly
changes in the volume of business activity in the various states in which we operate.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity Management

The objective of our liquidity management is to ensure we have sufficient liquid resources to meet all our obligations in a timely and cost-effective
manner under both normal operational conditions and periods of market stress. We monitor our liquidity position on a daily basis so that we have sufficient funds available to meet operating requirements, including supporting our lending and deposit
activities and replacing maturing obligations. We also review our liquidity profile on a regular basis to ensure that the capital needs of Golden West and its bank subsidiaries are met and that we can maintain strong credit ratings.

The creation and maintenance of collateral is an important component of our liquidity management. Loans, securitized loans, and to a much smaller extent
purchased MBS are available to be used as collateral for borrowings. Our objective is to maintain a sufficient supply and variety of collateral so that we have the flexibility to access different secured borrowings at any time. We regularly test
ourselves against various scenarios to confirm that we would have more than sufficient collateral to meet borrowing needs under both current and adverse market conditions

The principal sources of funds for Golden West at the holding company level are dividends from subsidiaries, interest on investments, and the proceeds from the issuance of debt securities. Various statutory and
regulatory restrictions and tax considerations limit the amount of dividends WSB can distribute to Golden West. The principal liquidity needs of Golden West are for the payment of interest and principal on debt securities, capital contributions to
its insured bank subsidiary, dividends to stockholders, the repurchase of Golden West stock, and general and administrative expenses. At June 30, 2006, December 31, 2005, and June 30, 2005, Golden Wests total cash
and investments amounted to $1.0 billion, $1.0 billion, and $827 million, respectively.



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##### Table of Contents

WSBs principal sources of funds are cash flows generated from loan repayments; deposits; borrowings
from the FHLB of San Francisco; borrowings from its WTX subsidiary; bank notes; debt collateralized by mortgages, MBS, or securities; sales of loans; earnings; and borrowings from Golden West. In addition, WSB has other alternatives available to
provide liquidity or finance operations including wholesale certificates of deposit, federal funds purchased, and additional borrowings from private and public offerings of debt. Furthermore, under certain conditions, WSB may borrow from the
Federal Reserve Bank of San Francisco to meet short-term cash needs. As of June 30, 2006, WSB maintained approximately $10.0 billion of collateral with the Federal Reserve Bank of San Francisco to expedite its ability to borrow
from the Federal Reserve Bank if necessary.

Capital Management

Strong capital levels are important for the safe and sound operation of a financial institution. One of our key operating objectives is to maintain a strong capital position to support growth of our loan portfolio and
provide substantial operating flexibility. Also, capital invested in earning assets enhances profit. Maintaining strong capital reserves also allows our bank subsidiaries to meet and exceed regulatory capital requirements and contributes to
favorable credit ratings. As of June 30, 2006, WSB, our primary subsidiary, had credit ratings of Aa3 and AA-, respectively, from Moodys Investors Service and Standard & Poors, the nations two leading credit
evaluation agencies.

Stockholders Equity

Our stockholders equity amounted to $9.4 billion, $8.7 billion, and $7.9 billion at June 30, 2006, December 31, 2005, and June 30, 2005, respectively. All of our
stockholders equity is tangible common equity. Stockholders equity increased by $742 million during the first six months of 2006 as a result of net earnings partially offset by decreased market values of securities available for
sale and by the payment of quarterly dividends to stockholders. Stockholders equity increased by $662 million during the first six months of 2005 as a result of net earnings partially offset by the decreased market values of securities
available for sale and the payment of quarterly dividends to stockholders. Our stockholders equity to total asset ratio was 7.31%, 6.96%, and 6.76% at June 30, 2006, December 31, 2005, and June 30, 2005,
respectively.

Uses of Capital

As in prior years, we retained most of our earnings in the first six months of 2006. The 17% annualized growth in our net worth for the first six months of 2006 allowed us to support the growth in our loan portfolio.
Expanding the balance of our loans receivable is the first priority for use of our capital, because these earning assets generate the net interest income that is our largest source of revenue.

In September 2001, the Companys Board of Directors authorized the repurchase of up to 31,733,708 shares. Unless modified or revoked by the Board of
Directors, the 2001 authorization does not expire. We did not purchase any shares of Golden West common stock in the first six months of 2006. As of June 30, 2006, 17,671,358 shares remained available for purchase under the stock purchase
program that our Board of Directors authorized. Earnings from WSB are expected to continue to be the major source of funding for the stock repurchase program. The repurchase of Golden West stock is not intended to have a material impact on the
normal liquidity of the Company.

Regulatory Capital

Our bank subsidiaries, WSB and WTX, are subject to capital requirements described in detail in Note R to the Notes to Consolidated Financial Statements
included in the Form 10-K. As of June 30, 2006, the date of the most recent report to the Office of Thrift Supervision, WSB and WTX were considered well-capitalized, the highest capital tier established by the OTS and other bank
regulatory agencies. There are no conditions or



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##### Table of Contents

events that have occurred since that date that we believe would have an impact on the well-capitalized categorization of WSB or WTX. These high
capital levels qualify our bank subsidiaries for the minimum federal deposit insurance rates and enable our subsidiaries to minimize time-consuming and expensive regulatory burdens.

The following tables show WSBs and WTXs regulatory capital ratios and compare them to the OTS minimum requirements at June 30, 2006
and 2005.

TABLE 31

Regulatory Capital Ratios, Minimum Capital Requirements,

and Well-Capitalized Capital Requirements

June 30, 2006

(Dollars in thousands)



|                          |  |         |           |       |                             |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|------------------------- |  | ------- | --------- | ----- | --------------------------- | - | ------- | ----------------------------------- | --------- |  | ---- | ------- |  | ----- | --------- |  | ----- | -
|                          |  | ACTUAL  |           |       | MINIMUM CAPITALREQUIREMENTS |   |         | WELL-CAPITALIZEDCAPITALREQUIREMENTS |          
|                          |  | Capital |           | Ratio |                             |   | Capital |                                     | Ratio     |  |      | Capital |  | Ratio |          
|WSB and Subsidiaries      |  |         |           |       |                             |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 9,190,363 |       | 7.18                        | % |         | $                                   | 1,921,199 |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 9,190,363 |       | 7.18                        |   |         |                                     | 5,123,196 |  | 4.00 |         |  | $     | 6,403,995 |  | 5.00  | %
|Tier 1 risk-based         |  |         | 9,190,363 |       | 13.26                       |   |         |                                     |          |  |     |         |  |       | 4,158,411 |  | 6.00  |  
|Total risk-based          |  |         | 9,484,041 |       | 13.68                       |   |         |                                     | 5,544,548 |  | 8.00 |         |  |       | 6,930,685 |  | 10.00 |  
|WTX                       |  |         |           |       |                             |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 817,713   |       | 5.30                        | % |         | $                                   | 231,464   |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 817,713   |       | 5.30                        |   |         |                                     | 617,237   |  | 4.00 |         |  | $     | 771,546   |  | 5.00  | %
|Tier 1 risk-based         |  |         | 817,713   |       | 23.56                       |   |         |                                     |          |  |     |         |  |       | 208,235   |  | 6.00  |  
|Total risk-based          |  |         | 820,312   |       | 23.64                       |   |         |                                     | 277,647   |  | 8.00 |         |  |       | 347,058   |  | 10.00 |  

TABLE 32

Regulatory Capital Ratios, Minimum Capital Requirements,

and Well-Capitalized Capital Requirements

June 30, 2005

(Dollars in thousands)



|                          |  |         |           |       |                             |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|------------------------- |  | ------- | --------- | ----- | --------------------------- | - | ------- | ----------------------------------- | --------- |  | ---- | ------- |  | ----- | --------- |  | ----- | -
|                          |  | ACTUAL  |           |       | MINIMUM CAPITALREQUIREMENTS |   |         | WELL-CAPITALIZEDCAPITALREQUIREMENTS |          
|                          |  | Capital |           | Ratio |                             |   | Capital |                                     | Ratio     |  |      | Capital |  | Ratio |          
|WSB and Subsidiaries      |  |         |           |       |                             |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 7,847,569 |       | 6.73                        | % |         | $                                   | 1,750,170 |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 7,847,569 |       | 6.73                        |   |         |                                     | 4,667,120 |  | 4.00 |         |  | $     | 5,833,899 |  | 5.00  | %
|Tier 1 risk-based         |  |         | 7,847,569 |       | 12.46                       |   |         |                                     |          |  |     |         |  |       | 3,777,600 |  | 6.00  |  
|Total risk-based          |  |         | 8,138,359 |       | 12.93                       |   |         |                                     | 5,036,799 |  | 8.00 |         |  |       | 6,295,999 |  | 10.00 |  
|WTX                       |  |         |           |       |                             |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 700,554   |       | 5.22                        | % |         | $                                   | 201,123   |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 700,554   |       | 5.22                        |   |         |                                     | 536,329   |  | 4.00 |         |  | $     | 670,411   |  | 5.00  | %
|Tier 1 risk-based         |  |         | 700,554   |       | 22.99                       |   |         |                                     |          |  |     |         |  |       | 182,834   |  | 6.00  |  
|Total risk-based          |  |         | 703,107   |       | 23.07                       |   |         |                                     | 243,779   |  | 8.00 |         |  |       | 304,724   |  | 10.00 |  



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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Like other mortgage lenders and in the ordinary
course of our business, we engage in financial transactions that are not recorded on the balance sheet. We also enter into certain contractual obligations. For additional information on off-balance sheet arrangements and other contractual
obligations, see Off-Balance Sheet Arrangements and Contractual Obligations in the Companys 2005 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND USES OF ESTIMATES

Our financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events, including interest rate
levels and repayments. These estimates and assumptions affect the amounts reported in the financial statements. Management reviews and approves our significant accounting policies on a quarterly basis and discusses them with the Audit Committee at
least annually. The policy regarding the determination of our allowance for loan losses is our most critical accounting policy and is described in Critical Accounting Policies and Uses of Estimates and in Note A to the Consolidated
Financial Statements of the Companys 2005 Annual Report on Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140 (SFAS 156). This Statement amends SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable. It permits an entity to choose either the amortization method or the fair value measurement method for subsequent measurement for each class of separately recognized servicing
assets and servicing liabilities. This Statement will be effective for fiscal years beginning after September 15, 2006, but early adoption is permitted. The Company is evaluating the two subsequent measurement methods. The adoption of this
Statement is not expected to have a material impact on the Companys financial statements.

Effective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB statement No. 123 (Revised), Share-Based Payment, (SFAS 123R) using the modified prospective transition method. Please refer to NOTE C  Stock Options under
Item 1 above for detail. FASB Staff Position (FSP) SFAS 123R, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards provides a practical transition election related to accounting for the tax
effects of share-based payments to employees. The Company elected to adopt the transition method described in the FSP.

In June 2006, FASB
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
Earlier application of the provisions of this interpretation is encouraged if the enterprise has not yet issued financial statements, including interim statements, in the period this interpretation is adopted. The Company does not expect the
adoption of this interpretation to have a material impact on its financial statements.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We estimate the sensitivity of our net interest income, net earnings, and capital ratios to interest rate changes and anticipated growth based on simulations using an asset/ liability model which takes into account the lags described on
pages 31 through 33. The simulation model projects net interest income, net earnings, and capital ratios based on a significant interest rate increase that is sustained for a thirty-six month period. The model is based on the actual maturity and
repricing characteristics of interest-rate sensitive assets and liabilities which takes into account the lags previously described. For mortgage assets, the model incorporates assumptions regarding the impact of changing interest rates on prepayment
rates, which are based on our historical prepayment experience. The model also factors in projections for loan and liability growth. Based on the information and assumptions in effect at June 30, 2006, a 200 basis point rate increase
sustained over a thirty-six month period would temporarily reduce our net interest margin, but would not adversely affect our long-term profitability and financial strength.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Disclosure Controls and
Procedures

The Company has carried out an evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of June 30, 2006. Based upon that
evaluation, the Chief Executive Officers and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Companys periodic SEC filings.

Internal Control Over Financial
Reporting

No changes were made in the Companys internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls during the quarter ended June 30, 2006.



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PART II. OTHER INFORMATION



|ITEM 6. | EXHIBITS
|------- | --------



|            |  |                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                             
|2 (a)       |  | Agreement and Plan of Merger, dated May 7, 2006, among the Company, Wachovia Corporation and a wholly-owned subsidiary of Wachovia, is incorporated by reference to Exhibit 2.1 of the 8-K/A
filed on May 11, 2006.                                                                                                                                                     
|            | 
|3 (a)       |  | Restated Certificate of Incorporation, as amended, is incorporated by reference to Exhibit 3(a) to the Companys Quarterly Report on Form 10-Q (File No. 1-4629) for
the quarter ended June 30, 2004.                                                                                                                                                                   
|            | 
|3 (b)       |  | By-Laws of the Company, as amended, are incorporated by reference to Exhibit 3(b) to the Companys Quarterly Report on Form 10-Q (file No. 1-4629) for the quarter ended June 30,
2004.                                                                                                                                                                                 
|            | 
|4 (a)       |  | The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt, the authorized principal amount of which does not exceed
10% of the total assets of the Company.                                                                                                                                  
|            | 
|9 (a)       |  | Voting and Support Agreements, dated May 7, 2006, by and between Wachovia Corporation and each of Herbert M. Sandler, Marion O. Sandler and Bernard A. Osher, are incorporated by reference to
Exhibits 99.B., 99.C and 99.D of the Schedule 13D filed on May 17, 2006.                                                                                                 
|            | 
|10 (a)      |  | 1996 Stock Option Plan, as amended and restated February 2, 1996, and as further amended May 2, 2001, is incorporated by reference to Exhibit 10(a) of the
Companys Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 2002.                                                                                                                 
|            | 
|10 (b)      |  | Incentive Bonus Plan, as amended and restated, is incorporated by reference to Exhibit A of the Companys Definitive Proxy Statement on Schedule 14A, filed on
March 15, 2002, for the Companys 2002 Annual Meeting of Stockholders.                                                                                                                                   
|            | 
|10 (c)      |  | Deferred Compensation Agreement between the Company and James T. Judd is incorporated by reference to Exhibit 10(b) of the Companys Annual Report on Form 10-K (File
No. 1-4629) for the year ended December 31, 1986.                                                                                                                                                 
|            | 
|10 (d)      |  | Deferred Compensation Agreement between the Company and Russell W. Kettell is incorporated by reference to Exhibit 10(c) of the Companys Annual Report on
Form 10-K (File No. 1-4629) for the year ended December 31, 1986.                                                                                                                                            
|            | 
|10 (e)      |  | Deferred Compensation Agreement between the Company and Gary R. Bradley is incorporated by reference to Exhibit 10 (e) of the Companys Annual Report on Form 10-K (File No. 1-4629) for
the year ended December 31, 2005.                                                                                                                                              
|            | 
|10 (f)      |  | Form of Supplemental Retirement Agreement between the Company and certain executive officers is incorporated by reference to Exhibit 10(g) to the Companys Annual Report on
Form 10-K (File No. 1-4629) for the year ended December 31, 2002.                                                                                                                          
|            | 
|10 (g)      |  | Form of Indemnification Agreement for use by the Company with its directors is incorporated by reference to Exhibit 10(h) of the Companys Quarterly Report on Form 10-Q (File
No. 1-4629) for the quarter ended June 30, 2003.                                                                                                                                         
|            | 
|10 (h)      |  | 2005 Stock Incentive Plan is incorporated by reference to Exhibit A of the Companys Definitive Proxy Statement and Schedule 14A, filed on March 11, 2005, for the
Companys 2005 Annual Meeting of Stockholders. The Form of Nonstatutory Stock Option Agreement under the 2005 Stock Incentive Plan is incorporated by reference to the 8-K filed on October 25, 2005.



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|            |  |                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                  
|31.1        |  | Section 302 Certification of Principal Executive Officer.                                                                    
|            | 
|31.2        |  | Section 302 Certification of Principal Executive Officer.                                                                    
|            | 
|31.3        |  | Section 302 Certification of Principal Financial Officer.                                                                    
|            | 
|32          |  | Section 906 Certification of Principal Executive Officers and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.



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Signatures

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



|                      |  |  |  |                                                                          
|--------------------- |  |  |  | -------------------------------------------------------------------------
|                      |  |  |  | GOLDEN WEST FINANCIAL CORPORATION                                        
|                      |  | 
|Dated: August 3, 2006 |  |  |  | /s/ Russell W. Kettell                                                   
|                      |  |  |  | Russell W. Kettell President and Chief Financial
Officer                 
|                      |  | 
|                      |  |  |  | /s/ William C. Nunan                                                     
|                      |  |  |  | William C. Nunan Group Senior Vice President and Chief Accounting Officer



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