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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 March 31, 2005



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 an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  x    No ̈



The number of shares outstanding of the registrants common stock as of April 30, 2005:



Common Stock  307,248,976 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 March 31, 2005 and 2004 and December 31, 2004       |  | 4 
|                               |  | Consolidated Statement of Net Earnings For the three months ended March 31, 2005 and 2004         |  | 5 
|                               |  | Consolidated Statement of Cash Flows For the three months ended March 31, 2005 and 2004           |  | 6 
|                               |  | Consolidated Statement of Stockholders Equity For the three months ended March 31, 2005 and 2004 |  | 8 
|                               |  | Note to Consolidated Financial Statements Accounting Policies                                     |  | 9 
|                               |  |                                                                                                   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 11
|                               |  | Overview                                                                                           |  | 11
|                               |  | Financial Highlights                                                                               |  | 13
|                               |  | Financial Condition                                                                                |  | 15
|                               |  | The Loan Portfolio                                                                                 |  | 15
|                               |  | Securities Available for Sale                                                                      |  | 23
|                               |  | Other Assets                                                                                       |  | 24
|                               |  | Deposits                                                                                           |  | 25
|                               |  | Borrowings                                                                                         |  | 26
|                               |  | Management of Risk                                                                                 |  | 27
|                               |  | Management of Interest Rate Risk                                                                   |  | 27
|                               |  | Management of Credit Risk                                                                          |  | 32
|                               |  | Management of Other Risks                                                                          |  | 38
|                               |  | Results of Operations                                                                              |  | 40
|                               |  | Net Interest Income                                                                                |  | 40
|                               |  | Noninterest Income                                                                                 |  | 42
|                               |  | General and Administrative Expenses                                                                |  | 42
|                               |  | Taxes on Income                                                                                    |  | 42
|                               |  | Liquidity and Capital Management                                                                   |  | 42
|                               |  | Off-Balance Sheet Arrangements and Contractual Obligations                                         |  | 45
|                               |  | Critical Accounting Policies and Uses of Estimates                                                 |  | 45
|                               |  | New Accounting Pronouncements                                                                      |  | 45
|                               |  |                                                                                                   
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                         |  | 46
|                               |  |                                                                                                   
|Item 4.                        |  | Controls and Procedures                                                                            |  | 46
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                   
|                               |  |                                                                                                   
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                |  | 47
|                               |  |                                                                                                   
|Item 5.                        |  | Other Information                                                                                  |  | 47
|                               |  |                                                                                                   
|Item 6.                        |  | Exhibits                                                                                           |  | 48



1



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##### Table of Contents



I
NDEX OF TABLES



|                                                                                                                               |  |     
|------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                               |  | Page
|Selected Financial Data                                                                                                        |  |     
|Financial Highlights (Table 1)                                                                                                 |  | 13  
|Asset, Liability, and Equity Components as Percentages of the Total Balance Sheet (Table 2)                                    |  | 15  
|Selected Financial Results (Table 28)                                                                                          |  | 40  
|Loan Portfolio                                                                                                                 |  |     
|Balance of Loans Receivable and MBS by Component (Table 3)                                                                     |  | 16  
|Loan Originations and Repayments (Table 4)                                                                                     |  | 16  
|Equity Lines of Credit and Fixed-Rate Second Mortgages (Table 5)                                                               |  | 17  
|Net Deferred Loan Costs (Table 6)                                                                                              |  | 18  
|Loan Originations by State (Table 7)                                                                                           |  | 18  
|Loan Portfolio by State (March 31, 2005) (Table 8)                                                                             |  | 19  
|Loan Portfolio by State (March 31, 2004) (Table 9)                                                                             |  | 20  
|ARM Originations by Index (Table 10)                                                                                           |  | 21  
|ARM Portfolio by Index (Table 11)                                                                                              |  | 22  
|Balance of First Mortgages with Original and Current LTV Ratios Greater Than 80% (Table 22)                                    |  | 34  
|Balance of Mortgages with Combined LTV Ratios Greater Than 80% (Table 23)                                                      |  | 35  
|Management of Credit Risk                                                                                                      |  |     
|First Mortgage Originations with LTVs or CLTVs Greater Than 80% (Table 21)                                                     |  | 34  
|Nonperforming Assets and Troubled Debt Restructured (Table 24)                                                                 |  | 36  
|Nonperforming Assets by State (March 31, 2005) (Table 25)                                                                      |  | 36  
|Nonperforming Assets by State (March 31, 2004) (Table 26)                                                                      |  | 37  
|Changes in Allowance for Loan Losses (Table 27)                                                                                |  | 38  
|Asset / Liability Management                                                                                                   |  |     
|Relationship between Indexes and Short-Term Market Interest Rates and Expected Impact on Primary Spread (Table 15)             |  | 28  
|Summary of Key Indexes (Table 16)                                                                                              |  | 29  
|Yield on Interest-Earning Assets, Cost of Funds, and Primary Spread (Table 17)                                                 |  | 30  
|Average Primary Spread (Table 18)                                                                                              |  | 30  
|Repricing of Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratios (Table 19)                        |  | 31  
|Average Earning Assets and Interest-Bearing Liabilities (Table 29)                                                             |  | 41  
|Deposits                                                                                                                       |  |     
|Deposits (Table 14)                                                                                                            |  | 26  
|Borrowings                                                                                                                     |  |     
|Maturities and Fair Value of the Interest Rate Swaps and the Related Hedged Senior Debt (Table 20)                             |  | 32  
|Regulatory Capital                                                                                                             |  |     
|Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements (March 31, 2005) (Table 30) |  | 44  
|Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements (March 31, 2004) (Table 31) |  | 44  
|Other                                                                                                                          |  |     
|Composition of Securities Available for Sale (Table 12)                                                                        |  | 24  
|Capitalized Mortgage Servicing Rights (Table 13)                                                                               |  | 25  



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.



3



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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)



|                                                                       |  |               |             |                 |   |              |  |   |           
|---------------------------------------------------------------------- |  | ------------- | ----------- | --------------- | - | ------------ |  | - | ----------
|                                                                       |  | March 31 2005 |             | December 312004 |   | March 312004
|Assets                                                                 |  |               |             |                 |   |              |  |   |           
|Cash                                                                   |  | $             | 311,607     |                 | $ | 292,421      |  | $ | 248,710   
|Securities available for sale, at fair value                           |  |               | 2,053,996   |                 |   | 1,374,385    |  |   | 1,123,463 
|Purchased mortgage-backed securities available for sale, at fair value |  |               | 13,548      |                 |   | 14,438       |  |   | 19,895    
|Purchased mortgage-backed securities held to maturity, at cost         |  |               | 357,843     |                 |   | 375,632      |  |   | 437,580   
|Mortgage-backed securities with recourse held to maturity, at cost     |  |               | 1,440,341   |                 |   | 1,719,982    |  |   | 2,342,210 
|                                                                       |  |               |            
|Loans receivable:                                                      |  |               |             |                 |   |              |  |   |           
|Loans held for sale                                                    |  |               | 40,988      |                 |   | 52,325       |  |   | 157,666   
|Loans held for investment less allowance for loan losses               |  |               | 105,641,104 |                 |   | 100,506,854  |  |   | 80,121,686
|                                                                       |  |               |             |                 |   |              |  |   |           
|Total Loans Receivable                                                 |  |               | 105,682,092 |                 |   | 100,559,179  |  |   | 80,279,352
|Interest earned but uncollected                                        |  |               | 298,693     |                 |   | 248,073      |  |   | 191,475   
|Investment in capital stock of Federal Home Loan Banks, at cost        |  |               | 1,662,312   |                 |   | 1,563,276    |  |   | 1,203,589 
|Foreclosed real estate                                                 |  |               | 10,840      |                 |   | 11,461       |  |   | 13,348    
|Premises and equipment, net                                            |  |               | 398,181     |                 |   | 391,523      |  |   | 367,579   
|Other assets                                                           |  |               | 358,396     |                 |   | 338,171      |  |   | 377,570   
|                                                                       |  |               |             |                 |   |              |  |   |           
|Total Assets                                                           |  | $             | 112,587,849 |                 | $ | 106,888,541  |  | $ | 86,604,771
|                                                                       |  |               |             |                 |   |              |  |   |           
|Liabilities and Stockholders Equity                                   |  |               |             |                 |   |              |  |   |           
|Deposits                                                               |  | $             | 55,593,265  |                 | $ | 52,965,311   |  | $ | 47,383,623
|Advances from Federal Home Loan Banks                                  |  |               | 35,511,757  |                 |   | 33,781,895   |  |   | 24,805,930
|Securities sold under agreements to repurchase                         |  |               | 4,050,000   |                 |   | 3,900,000    |  |   | 2,672,049 
|Bank notes                                                             |  |               | 2,485,936   |                 |   | 2,709,895    |  |   | 2,504,917 
|Senior debt                                                            |  |               | 5,955,989   |                 |   | 5,291,840    |  |   | 1,989,944 
|Taxes on income                                                        |  |               | 730,094     |                 |   | 561,772      |  |   | 627,431   
|Other liabilities                                                      |  |               | 681,310     |                 |   | 402,952      |  |   | 377,018   
|Stockholders equity                                                   |  |               | 7,579,498   |                 |   | 7,274,876    |  |   | 6,243,859 
|                                                                       |  |               |             |                 |   |              |  |   |           
|Total Liabilities and Stockholders Equity                             |  | $             | 112,587,849 |                 | $ | 106,888,541  |  | $ | 86,604,771
|                                                                       |  |               |             |                 |   |              |  |   |           



See notes to
consolidated financial statements.



4



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Golden West Financial Corporation

Consolidated Statement of Net Earnings

(Unaudited)

(Dollars in thousands
except per share figures)



|                                                    |  |                            |           |      |   |        
|--------------------------------------------------- |  | -------------------------- | --------- | ---- | - | -------
|                                                    |  | Three Months EndedMarch 31
|                                                    |  | 2005                       |           | 2004
|Interest Income:                                    |  |                            |           |      |   |        
|Interest on loans                                   |  | $                          | 1,258,615 |      | $ | 878,816
|Interest on mortgage-backed securities              |  |                            | 25,457    |      |   | 43,677 
|Interest and dividends on investments               |  |                            | 27,413    |      |   | 17,264 
|                                                    |  |                            |           |      |   |        
|                                                    |  |                            | 1,311,485 |      |   | 939,757
|Interest Expense:                                   |  |                            |           |      |   |        
|Interest on deposits                                |  |                            | 298,318   |      |   | 215,900
|Interest on advances                                |  |                            | 223,268   |      |   | 73,038 
|Interest on repurchase agreements                   |  |                            | 25,264    |      |   | 6,922  
|Interest on other borrowings                        |  |                            | 60,071    |      |   | 24,643 
|                                                    |  |                            |           |      |   |        
|                                                    |  |                            | 606,921   |      |   | 320,503
|                                                    |  |                            |           |      |   |        
|Net Interest Income                                 |  |                            | 704,564   |      |   | 619,254
|Provision for loan losses                           |  |                            | 884       |      |   | 241    
|                                                    |  |                            |           |      |   |        
|Net Interest Income after Provision for Loan Losses |  |                            | 703,680   |      |   | 619,013
|Noninterest Income:                                 |  |                            |           |      |   |        
|Fees                                                |  |                            | 63,922    |      |   | 40,674 
|Gain on the sale of securities, MBS, and loans      |  |                            | 1,758     |      |   | 2,962  
|Change in fair value of derivatives                 |  |                            | 219       |      |   | 1,082  
|Other                                               |  |                            | 16,714    |      |   | 15,089 
|                                                    |  |                            |           |      |   |        
|                                                    |  |                            | 82,613    |      |   | 59,807 
|Noninterest Expense:                                |  |                            |           |      |   |        
|General and administrative:                         |  |                            |           |      |   |        
|Personnel                                           |  |                            | 151,831   |      |   | 130,998
|Occupancy                                           |  |                            | 22,225    |      |   | 20,394 
|Technology and telecommunications                   |  |                            | 21,422    |      |   | 21,019 
|Deposit insurance                                   |  |                            | 1,855     |      |   | 1,770  
|Advertising                                         |  |                            | 7,540     |      |   | 5,256  
|Other                                               |  |                            | 19,366    |      |   | 20,077 
|                                                    |  |                            |           |      |   |        
|                                                    |  |                            | 224,239   |      |   | 199,514
|Earnings before Taxes on Income                     |  |                            | 562,054   |      |   | 479,306
|Taxes on income                                     |  |                            | 213,804   |      |   | 179,582
|                                                    |  |                            |           |      |   |        
|Net Earnings                                        |  | $                          | 348,250   |      | $ | 299,724
|                                                    |  |                            |           |      |   |        
|Basic Earnings Per Share                            |  | $                          | 1.13      |      | $ | 0.98   
|                                                    |  |                            |           |      |   |        
|Diluted Earnings Per Share                          |  | $                          | 1.12      |      | $ | 0.97   
|                                                    |  |                            |           |      |   |        



See notes to
consolidated financial statements.



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Golden West Financial Corporation

Consolidated Statement of Cash Flows

(Unaudited)

(Dollars in thousands)



|                                                                                    |  |                             |             |   |      |   |            |  
|----------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                    |  | Three Months Ended March 31 |            
|                                                                                    |  | 2005                        |             |   | 2004 |  
|Cash Flows from Operating Activities:                                               |  |                             |             |   |      |   |            |  
|Net earnings                                                                        |  | $                           | 348,250     |   |      | $ | 299,724    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                             |             |   |      |   |            |  
|Provision for loan losses                                                           |  |                             | 884         |   |      |   | 241        |  
|Amortization of net loan costs                                                      |  |                             | 59,815      |   |      |   | 31,963     |  
|Depreciation and amortization                                                       |  |                             | 12,996      |   |      |   | 10,883     |  
|Loans originated for sale                                                           |  |                             | (53,319     | ) |      |   | (140,231   | )
|Sales of loans                                                                      |  |                             | 91,114      |   |      |   | 131,589    |  
|Increase in interest earned but uncollected                                         |  |                             | (38,639     | ) |      |   | (6,812     | )
|Federal Home Loan Bank stock dividends                                              |  |                             | (15,665     | ) |      |   | (9,645     | )
|Decrease (increase) in other assets                                                 |  |                             | (30,534     | ) |      |   | 10,707     |  
|Increase in other liabilities                                                       |  |                             | 254,474     |   |      |   | 91,497     |  
|Increase in taxes on income                                                         |  |                             | 191,128     |   |      |   | 65,759     |  
|Other, net                                                                          |  |                             | (35,901     | ) |      |   | (2,694     | )
|                                                                                    |  |                             |             |   |      |   |            |  
|                                                                                    |  |                            
|Net cash provided by operating activities                                           |  |                             | 784,603     |   |      |   | 482,981    |  
|                                                                                    |  |                            
|Cash Flows from Investing Activities:                                               |  |                             |             |   |      |   |            |  
|New loan activity:                                                                  |  |                             |             |   |      |   |            |  
|New real estate loans originated for investment                                     |  |                             | (11,121,418 | ) |      |   | (9,253,631 | )
|Real estate loans purchased                                                         |  |                             | (168        | ) |      |   | (1,238     | )
|Other, net                                                                          |  |                             | (89,095     | ) |      |   | (199,069   | )
|                                                                                    |  |                             |             |   |      |   |            |  
|                                                                                    |  |                             | (11,210,681 | ) |      |   | (9,453,938 | )
|Real estate loan principal payments:                                                |  |                             |             |   |      |   |            |  
|Monthly payments                                                                    |  |                             | 334,451     |   |      |   | 370,378    |  
|Payoffs, net of foreclosures                                                        |  |                             | 5,851,043   |   |      |   | 4,038,819  |  
|                                                                                    |  |                             |             |   |      |   |            |  
|                                                                                    |  |                             | 6,185,494   |   |      |   | 4,409,197  |  
|Purchases of mortgage-backed securities held to maturity                            |  |                             | -0-         |   |      |   | (19,028    | )
|Repayments of mortgage-backed securities                                            |  |                             | 128,610     |   |      |   | 264,172    |  
|Proceeds from sales of foreclosed real estate                                       |  |                             | 11,249      |   |      |   | 12,248     |  
|Decrease (increase) in securities available for sale                                |  |                             | (738,258    | ) |      |   | 760,311    |  
|Purchases of Federal Home Loan Bank stock                                           |  |                             | (95,352     | ) |      |   | (42,507    | )
|Additions to premises and equipment                                                 |  |                             | (20,063     | ) |      |   | (18,761    | )
|                                                                                    |  |                             |             |   |      |   |            |  
|Net cash used in investing activities                                               |  |                             | (5,739,001  | ) |      |   | (4,088,306 | )



See notes to
consolidated financial statements.



6



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##### Table of Contents

Golden West Financial Corporation

Consolidated Statement of Cash Flows (Continued)

(Unaudited)

(Dollars in thousands)



|                                                                                                                      |  |                             |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                      |  | Three Months Ended March 31 |           
|                                                                                                                      |  | 2005                        |            |   | 2004 |  
|Cash Flows from Financing Activities:                                                                                 |  |                             |            |   |      |   |            |  
|Net increase in deposits                                                                                              |  | $                           | 2,627,954  |   |      | $ | 656,658    |  
|Additions to Federal Home Loan Bank advances                                                                          |  |                             | 4,350,000  |   |      |   | 4,532,600  |  
|Repayments of Federal Home Loan Bank advances                                                                         |  |                             | (2,620,139 | ) |      |   | (1,726,905 | )
|Proceeds from agreements to repurchase securities                                                                     |  |                             | 2,000,000  |   |      |   | 1,501,503  |  
|Repayments of agreements to repurchase securities                                                                     |  |                             | (1,850,000 | ) |      |   | (1,850,839 | )
|Increase in federal funds purchased                                                                                   |  |                             | -0-        |   |      |   | -0-        |  
|Decrease in bank notes                                                                                                |  |                             | (223,959   | ) |      |   | (510,937   | )
|Net proceeds from senior debt                                                                                         |  |                             | 697,134    |   |      |   | 998,250    |  
|Dividends on common stock                                                                                             |  |                             | (18,414    | ) |      |   | (15,226    | )
|Exercise of stock options                                                                                             |  |                             | 11,008     |   |      |   | 8,108      |  
|                                                                                                                      |  |                             |            |   |      |   |            |  
|Net cash provided by financing activities                                                                             |  |                             | 4,973,584  |   |      |   | 3,593,212  |  
|                                                                                                                      |  |                             |            |   |      |   |            |  
|Net Increase (Decrease) in Cash                                                                                       |  |                             | 19,186     |   |      |   | (12,113    | )
|Cash at beginning of period                                                                                           |  |                             | 292,421    |   |      |   | 260,823    |  
|                                                                                                                      |  |                             |            |   |      |   |            |  
|Cash at end of period                                                                                                 |  | $                           | 311,607    |   |      | $ | 248,710    |  
|                                                                                                                      |  |                             |            |   |      |   |            |  
|Supplemental cash flow information:                                                                                   |  |                             |            |   |      |   |            |  
|Cash paid for:                                                                                                        |  |                             |            |   |      |   |            |  
|Interest                                                                                                              |  | $                           | 567,877    |   |      | $ | 302,571    |  
|Income taxes                                                                                                          |  |                             | 22,676     |   |      |   | 113,858    |  
|Cash received for interest and dividends                                                                              |  |                             | 1,260,865  |   |      |   | 932,043    |  
|Noncash investing activities:                                                                                         |  |                             |            |   |      |   |            |  
|Loans receivable and loans underlying mortgage-backed securities converted from adjustable rate to fixed-rate         |  |                             | 27,635     |   |      |   | 30,131     |  
|Loans transferred to foreclosed real estate                                                                           |  |                             | 10,405     |   |      |   | 11,548     |  
|Loans securitized into mortgage-backed securities with recourse recorded as loans receivable                          |  |                             | 1,149,968  |   |      |   | 677,213    |  
|Mortgage-backed securities held to maturity desecuritized into adjustable rate loans and recorded as loans receivable |  |                             | 163,416    |   |      |   | 1,024,116  |  
|Transfer of loans from held for sale to loans held for investment                                                     |  |                             | 2,016      |   |      |   | 1,383      |  



See notes to
consolidated financial statements.



7



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##### Table of Contents

Golden West Financial Corporation

Consolidated Statement of Stockholders Equity

(Unaudited)

(Dollars in thousands
except per share figures)



|                                                                           |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|-------------------------------------------------------------------------- |  | --------------------------------- |  | ----------- | ------ | ------------------------ | - | ---------------- |  | - | ----------------------------------- | - |  | ------------------------ | ------- | - |  | - | --------- | -
|                                                                           |  | Three Months Ended March 31, 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-              |  |   | 348,250                             |   |  |                          | -0-     |   |  |   | 348,250   |  
|Change in unrealized gains on securities available for sale                |  |                                   |  |             | -0-    |                          |   | -0-              |  |   | -0-                                 |   |  |                          | (36,222 | ) |  |   | (36,222   | )
|                                                                           |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Comprehensive income                                                       |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   | 312,028   |  
|Common stock issued upon exercise of stock options, including tax benefits |  | 602,050                           |  |             | 61     |                          |   | 10,947           |  |   | -0-                                 |   |  |                          | -0-     |   |  |   | 11,008    |  
|Cash dividends on common stock ($.06 per share)                            |  |                                   |  |             | -0-    |                          |   | -0-              |  |   | (18,414                             | ) |  |                          | -0-     |   |  |   | (18,414   | )
|                                                                           |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Balance at March 31, 2005                                                  |  | 307,126,766                       |  | $           | 30,713 |                          | $ | 274,717          |  | $ | 7,058,834                           |   |  | $                        | 215,234 |   |  | $ | 7,579,498 |  
|                                                                           |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|                                                                           | 
|                                                                           |  | Three Months Ended March 31, 2004 | 
|                                                                           |  | Number ofShares                   |  | CommonStock |        | AdditionalPaid-inCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TotalStockholdersEquity |        
|Balance at January 1, 2004                                                 |  | 304,238,216                       |  | $           | 15,212 |                          | $ | 220,923          |  | $ | 5,513,434                           |   |  | $                        | 197,699 |   |  | $ | 5,947,268 |  
|Net earnings                                                               |  |                                   |  |             | -0-    |                          |   | -0-              |  |   | 299,724                             |   |  |                          | -0-     |   |  |   | 299,724   |  
|Change in unrealized gains on securities available for sale                |  |                                   |  |             | -0-    |                          |   | -0-              |  |   | -0-                                 |   |  |                          | 3,985   |   |  |   | 3,985     |  
|                                                                           |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Comprehensive income                                                       |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   | 303,709   |  
|Common stock issued upon exercise of stock options, including tax benefits |  | 746,062                           |  |             | 37     |                          |   | 8,071            |  |   | -0-                                 |   |  |                          | -0-     |   |  |   | 8,108     |  
|Cash dividends on common stock ($.05 per share)                            |  |                                   |  |             | -0-    |                          |   | -0-              |  |   | (15,226                             | ) |  |                          | -0-     |   |  |   | (15,226   | )
|                                                                           |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  
|Balance at March 31, 2004                                                  |  | 304,984,278                       |  | $           | 15,249 |                          | $ | 228,994          |  | $ | 5,797,932                           |   |  | $                        | 201,684 |   |  | $ | 6,243,859 |  
|                                                                           |  |                                   |  |             |        |                          |   |                  |  |   |                                     |   |  |                          |         |   |  |   |           |  



See notes to
consolidated financial statements.



8



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A  Accounting Policies



The
Companys significant accounting policies 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, 2004 filed with the Securities and Exchange Commission (SEC)
on March 11, 2005 (SEC File No. 1-4629).



Principles of Consolidation



The consolidated financial statements of Golden West
Financial Corporation and subsidiaries (Golden West or Company), including World Savings Bank, FSB (WSB) and World Savings Bank, FSB (Texas) (WTX), for the three months ended March 31, 2005 and 2004 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-month periods have been included. The operating results for the three months ended March 31, 2005 are not necessarily
indicative of the results for the full year.



Stock-Based Compensation



The Company has a stock-based employee compensation
plan. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for
awards granted under the plan. Had compensation cost been determined using the fair value based method prescribed by Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123), the
Companys net income and earnings per share would have been reduced to the pro forma amounts indicated below:



Pro Forma Net Income and Earnings Per Share

(Dollars in thousands except per
share figures)

(Unaudited)



|                                                                                                                                            |  |                            |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                            |  | Three Months EndedMarch 31 |        
|                                                                                                                                            |  | 2005                       |         |   | 2004 |  
|Net income, as reported                                                                                                                     |  | $                          | 348,250 |   |      | $ | 299,724 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                            | (1,294  | ) |      |   | (2,253  | )
|                                                                                                                                            |  |                            |         |   |      |   |         |  
|Pro forma net income                                                                                                                        |  | $                          | 346,956 |   |      | $ | 297,471 |  
|                                                                                                                                            |  |                            |         |   |      |   |         |  
|Basic earning per share                                                                                                                     |  |                            |         |   |      |   |         |  
|As reported                                                                                                                                 |  | $                          | 1.13    |   |      | $ | 0.98    |  
|Pro forma                                                                                                                                   |  |                            | 1.13    |   |      |   | 0.98    |  
|Diluted earning per share                                                                                                                   |  |                            |         |   |      |   |         |  
|As reported                                                                                                                                 |  | $                          | 1.12    |   |      | $ | 0.97    |  
|Pro forma                                                                                                                                   |  |                            | 1.11    |   |      |   | 0.96    |  



9



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##### Table of Contents

New Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). This statement
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This Statement requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in
exchange for the award. This Statement eliminates the ability to account for share-based compensation transactions using APB 25.



In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107 which provides public companies additional
guidance in applying the provisions of SFAS 123R. The SAB expresses the views of the SEC staff regarding the interaction between SFAS 123R and certain existing SEC rules and regulations and provide the SEC staffs views regarding the valuation
of share-based payment arrangements for public companies. The SAB should be applied upon the adoption of SFAS 123R.



In April 2005, the SEC amended the date for compliance with SFAS 123R so that each entity that is not a small business issuer will be required to prepare
financial statements in accordance with Statement 123R beginning with the first interim or annual reporting period of the registrants first fiscal year beginning on or after December 15, 2005. The Company is evaluating the requirements of SFAS
123R and expects that the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123.



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 March 31
|                                                        |  | 2005                        |             | 2004
|Net income                                              |  | $                           | 348,250     |      | $ | 299,724    
|                                                        |  |                             |             |      |   |            
|Weighted average common shares                          |  |                             | 306,861,057 |      |   | 304,547,274
|Dilutive effect of outstanding common stock equivalents |  |                             | 4,678,677   |      |   | 5,533,888  
|                                                        |  |                             |             |      |   |            
|Diluted average common shares outstanding               |  |                             | 311,539,734 |      |   | 310,081,162
|                                                        |  |                             |             |      |   |            
|Basic earning per share                                 |  | $                           | 1.13        |      | $ | 0.98       
|Diluted earning per share                               |  | $                           | 1.12        |      | $ | 0.97       



10



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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 $112.6 billion as of March 31, 2005. The Companys principal operating subsidiary is World Savings Bank, FSB (WSB).
WSBs largest subsidiary is World Savings Bank, FSB (Texas) (WTX). As of March 31, 2005, we operated 279 savings branches in ten states and had lending operations in 38 states under the World name.



We have assumed that readers have reviewed or have access to the
Companys 2004 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,
2004, and for the year then ended. Copies of the Companys 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 website at www.sec.gov and the Companys website at www.gdw.com as soon as reasonably practicable after their filing with the Securities and Exchange Commission.



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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2004, as well as
material changes in results of operations during the three-month periods ended March 31, 2005 and 2004, respectively.



Quarter in Review



First quarter 2005 results included the following:



| |  |  | diluted earnings per share amounted to $1.12 for the first three months of 2005, up 15% from the $.97 reported for the first three months of 2004;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our loan portfolio increased to $107 billion, up 29% from $83 billion at March 31, 2004;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | net interest income grew 14% to $705 million due to loan portfolio growth partially offset by an average primary spread that decreased from 2.90% for the three months ended March
31, 2004 to 2.46% for the three months ended March 31, 2005;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



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##### Table of Contents

| |  |  | net chargeoffs to average loans and MBS were zero basis points for both the quarter ended March 31, 2005 and 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | our general and administrative expense to average assets ratio was .82% for the three months ended March 31, 2005 compared to .95% at March 31, 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our loan originations amounted to a first quarter record of $11.2 billion as compared to $9.4 billion for the first quarter of 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | nonperforming assets and troubled debt restructured remained at very low levels;
| | - |  | --------------------------------------------------------------------------------



| |  |  | deposits increased $2.6 billion in the first quarter of 2005 compared to an increase of $657 million in the first quarter of 2004; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our stockholders equity amounted to $7.6 billion at March 31, 2005 compared to $6.2 billion at March 31, 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------



12



---

##### Table of Contents



The following tables
summarize selected financial information about how we performed at and for the first quarter of 2005 as compared to prior periods.



Table 1



Financial Highlights

(Unaudited)

(Dollars in thousands except per share figures)



|                                                                   |  |              |             |   |                 |   |             |              |  |   |             |  
|------------------------------------------------------------------ |  | ------------ | ----------- | - | --------------- | - | ----------- | ------------ |  | - | ----------- | -
|                                                                   |  | March 312005 |             |   | December 312004 |   |             | March 312004 | 
|Assets                                                             |  | $            | 112,587,849 |   |                 | $ | 106,888,541 |              |  | $ | 86,604,771  |  
|                                                                   |  |              |            
|Loans receivable including mortgage-backed securities (MBS)(a)     |  |              | 107,493,824 |   |                 |   | 102,669,231 |              |  |   | 83,079,037  |  
|Adjustable rate mortgages including MBS(b)                         |  |              | 104,481,133 |   |                 |   | 99,730,701  |              |  |   | 79,889,765  |  
|Fixed-rate mortgages held for investment including MBS(b)          |  |              | 1,442,476   |   |                 |   | 1,550,548   |              |  |   | 1,817,821   |  
|Fixed-rate mortgages held for sale including MBS(b)                |  |              | 40,988      |   |                 |   | 52,325      |              |  |   | 157,666     |  
|Adjustable rate mortgages as a % of total loans receivable and MBS |  |              | 99          | % |                 |   | 98          | %            |  |   | 98          | %
|                                                                   |  |              |            
|Loans serviced for others with recourse                            |  | $            | 2,103,177   |   |                 | $ | 2,270,490   |              |  | $ | 2,879,413   |  
|Loans serviced for others without recourse                         |  |              | 2,212,748   |   |                 |   | 2,266,534   |              |  |   | 2,558,752   |  
|                                                                   |  |              |            
|Nonperforming assets/total assets                                  |  |              | .31         | % |                 |   | .32         | %            |  |   | .48         | %
|Troubled debt restructured/total assets                            |  |              | .00         | % |                 |   | .00         | %            |  |   | .01         | %
|Net chargeoffs/average loans                                       |  |              | .00         | % |                 |   | .00         | %            |  |   | .00         | %
|                                                                   |  |              |            
|Stockholders equity                                               |  | $            | 7,579,498   |   |                 | $ | 7,274,876   |              |  | $ | 6,243,859   |  
|Stockholders equity/total assets                                  |  |              | 6.73        | % |                 |   | 6.81        | %            |  |   | 7.21        | %
|Book value per common share                                        |  | $            | 24.68       |   |                 | $ | 23.73       |              |  | $ | 20.47       |  
|Common shares outstanding                                          |  |              | 307,126,766 |   |                 |   | 306,524,716 |              |  |   | 304,984,278 |  
|                                                                   |  |              |            
|Yield on interest-earning assets                                   |  |              | 5.02        | % |                 |   | 4.73        | %            |  |   | 4.55        | %
|Cost of funds                                                      |  |              | 2.62        | % |                 |   | 2.22        | %            |  |   | 1.63        | %
|Primary spread                                                     |  |              | 2.40        | % |                 |   | 2.51        | %            |  |   | 2.92        | %
|                                                                   |  |              |            
|Number of Employees:                                               |  |              |             |   |                 |   |             |              |  |   |             |  
|Full-time                                                          |  |              | 9,491       |   |                 |   | 9,399       |              |  |   | 8,765       |  
|Part-time                                                          |  |              | 1,049       |   |                 |   | 1,001       |              |  |   | 1,009       |  
|                                                                   |  |              |            
|World Savings Bank, FSB (WSB):                                     |  |              |             |   |                 |   |             |              |  |   |             |  
|Total assets                                                       |  | $            | 111,787,577 |   |                 | $ | 106,787,490 |              |  | $ | 86,510,697  |  
|Stockholders equity                                               |  |              | 7,706,837   |   |                 |   | 7,391,183   |              |  |   | 6,598,543   |  
|Stockholders equity/total assets                                  |  |              | 6.89        | % |                 |   | 6.92        | %            |  |   | 7.63        | %
|Regulatory capital ratios:(c)                                      |  |              |             |   |                 |   |             |              |  |   |             |  
|Tier 1 capital (core or leverage)                                  |  |              | 6.72        | % |                 |   | 6.71        | %            |  |   | 7.41        | %
|Total risk-based capital                                           |  |              | 12.93       | % |                 |   | 12.92       | %            |  |   | 14.12       | %
|World Savings Bank, FSB (Texas) (WTX):                             |  |              |             |   |                 |   |             |              |  |   |             |  
|Total assets                                                       |  | $            | 12,780,523  |   |                 | $ | 13,143,173  |              |  | $ | 11,668,678  |  
|Stockholders equity                                               |  |              | 692,751     |   |                 |   | 686,052     |              |  |   | 619,622     |  
|Stockholders equity/total assets                                  |  |              | 5.42        | % |                 |   | 5.22        | %            |  |   | 5.31        | %
|Regulatory capital ratios:(c)                                      |  |              |             |   |                 |   |             |              |  |   |             |  
|Tier 1 capital (core or leverage)                                  |  |              | 5.42        | % |                 |   | 5.22        | %            |  |   | 5.31        | %
|Total risk-based capital                                           |  |              | 24.16       | % |                 |   | 23.67       | %            |  |   | 23.81       | %



|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



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##### Table of Contents



Table 1 (continued)



Financial Highlights

(Unaudited)

(Dollars in thousands
except per share figures)



|                                                                              |  |                             |             |   |      |   |             |  
|----------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                              |  | Three Months Ended March 31 |            
|                                                                              |  | 2005                        |             |   | 2004 |  
|Real estate loans originated                                                  |  | $                           | 11,174,737  |   |      | $ | 9,393,862   |  
|New adjustable rate mortgages as a percentage of real estate loans originated |  |                             | 99          | % |      |   | 98          | %
|Refinances as a percentage of real estate loans originated                    |  |                             | 78          | % |      |   | 72          | %
|Deposits increase                                                             |  | $                           | 2,627,954   |   |      | $ | 656,658     |  
|Net earnings                                                                  |  |                             | 348,250     |   |      |   | 299,724     |  
|Basic earnings per share                                                      |  |                             | 1.13        |   |      |   | 0.98        |  
|Diluted earnings per share                                                    |  |                             | 1.12        |   |      |   | 0.97        |  
|Cash dividends on common stock                                                |  | $                           | .06         |   |      | $ | .05         |  
|Average common shares outstanding                                             |  |                             | 306,861,057 |   |      |   | 304,547,274 |  
|Average diluted common shares outstanding                                     |  |                             | 311,539,734 |   |      |   | 310,081,162 |  
|Ratios:(a)                                                                    |  |                             |             |   |      |   |             |  
|Net earnings/average stockholders equity (ROE)                               |  |                             | 18.78       | % |      |   | 19.65       | %
|Net earnings/average assets (ROA)                                             |  |                             | 1.27        | % |      |   | 1.42        | %
|Net interest margin(b)                                                        |  |                             | 2.60        | % |      |   | 2.99        | %
|General and administrative expense/average assets                             |  |                             | .82         | % |      |   | .95         | %
|Efficiency ratio(c)                                                           |  |                             | 28.49       | % |      |   | 29.38       | %



|(a) | Ratios are annualized by multiplying the quarterly computation by four. Averages are computed by adding the beginning balance and each month end balance during the
quarter and dividing by four.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------



14



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##### Table of Contents

FINANCIAL CONDITION



The
following table summarizes our major asset, liability, and equity components in percentage terms at March 31, 2005, December 31, 2004, and March 31, 2004.



TABLE 2



Asset, Liability, and
Equity Components as

Percentages of the Total Balance Sheet



|                                      |  |              |   |  |                 |   |  |              |  
|------------------------------------- |  | ------------ | - |  | --------------- | - |  | ------------ | -
|                                      |  | March 312005 |   |  | December 312004 |   |  | March 312004 |  
|Assets:                               |  |              |   |  |                 |   |  |              |  
|Cash and investments                  |  | 2.1          | % |  | 1.6             | % |  | 1.6          | %
|Loans receivable and MBS              |  | 95.5         |   |  | 96.0            |   |  | 95.9         |  
|Other assets                          |  | 2.4          |   |  | 2.4             |   |  | 2.5          |  
|                                      |  |              |   |  |                 |   |  |              |  
|                                      |  | 100.0        | % |  | 100.0           | % |  | 100.0        | %
|                                      |  |              |   |  |                 |   |  |              |  
|Liabilities and Stockholders Equity: |  |              |   |  |                 |   |  |              |  
|Deposits                              |  | 49.4         | % |  | 49.6            | % |  | 54.7         | %
|FHLB advances                         |  | 31.5         |   |  | 31.6            |   |  | 28.6         |  
|Other borrowings                      |  | 11.1         |   |  | 11.1            |   |  | 8.3          |  
|Other liabilities                     |  | 1.3          |   |  | 0.9             |   |  | 1.2          |  
|Stockholders equity                  |  | 6.7          |   |  | 6.8             |   |  | 7.2          |  
|                                      |  |              |   |  |                 |   |  |              |  
|                                      |  | 100.0        | % |  | 100.0           | % |  | 100.0        | %
|                                      |  |              |   |  |                 |   |  |              |  



The Loan Portfolio



Almost all of
our assets are 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 portfolio at March 31, 2005, December 31, 2004, and March
31, 2004.



15



---

##### Table of Contents

TABLE 3



Balance of Loans
Receivable and MBS by Component

(Dollars in thousands)



|                                                       |  |              |             |   |                 |   |             |              |  |   |            |  
|------------------------------------------------------ |  | ------------ | ----------- | - | --------------- | - | ----------- | ------------ |  | - | ---------- | -
|                                                       |  | March 312005 |             |   | December 312004 |   |             | March 312004 | 
|Loans                                                  |  | $            | 72,342,994  |   |                 | $ | 65,266,464  |              |  | $ | 57,519,461 |  
|Securitized loans(a)                                   |  |              | 31,809,871  |   |                 |   | 33,957,058  |              |  |   | 21,546,106 |  
|Other(b)                                               |  |              | 1,529,227   |   |                 |   | 1,335,657   |              |  |   | 1,213,785  |  
|                                                       |  |              |             |   |                 |   |             |              |  |   |            |  
|Total loans receivable                                 |  |              | 105,682,092 |   |                 |   | 100,559,179 |              |  |   | 80,279,352 |  
|                                                       |  |              |             |   |                 |   |             |              |  |   |            |  
|MBS with recourse(c)                                   |  |              | 1,440,341   |   |                 |   | 1,719,982   |              |  |   | 2,342,210  |  
|Purchased MBS                                          |  |              | 371,391     |   |                 |   | 390,070     |              |  |   | 457,475    |  
|                                                       |  |              |             |   |                 |   |             |              |  |   |            |  
|Total MBS                                              |  |              | 1,811,732   |   |                 |   | 2,110,052   |              |  |   | 2,799,685  |  
|                                                       |  |              |             |   |                 |   |             |              |  |   |            |  
|Total loans receivable and MBS                         |  | $            | 107,493,824 |   |                 | $ | 102,669,231 |              |  | $ | 83,079,037 |  
|                                                       |  |              |             |   |                 |   |             |              |  |   |            |  
|ARMs as a percentage of total loans receivable and MBS |  |              | 99          | % |                 |   | 98          | %            |  |   | 98         | %
|                                                       |  |              |             |   |                 |   |             |              |  |   |            |  



|(a) | Loans securitized after March 31, 2001 are classified as securitized loans and included in loans receivable. See Securitization Activity below.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|(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 months ended March 31, 2005 and 2004.



TABLE 4



Loan Originations and
Repayments

(Dollars in thousands)



|                                                                |  |                            |            |   |      |   |           |  
|--------------------------------------------------------------- |  | -------------------------- | ---------- | - | ---- | - | --------- | -
|                                                                |  | Three Months EndedMarch 31 |           
|                                                                |  | 2005                       |            |   | 2004 |  
|Loan Originations                                               |  |                            |            |   |      |   |           |  
|Real estate loans originated                                    |  | $                          | 11,174,737 |   |      | $ | 9,393,862 |  
|ARMs as a % of originations                                     |  |                            | 99         | % |      |   | 98        | %
|Fixed-rate mortgages as a % of originations                     |  |                            | 1          | % |      |   | 2         | %
|Refinances as a % of originations                               |  |                            | 78         | % |      |   | 72        | %
|Purchases as a % of originations                                |  |                            | 22         | % |      |   | 28        | %
|First mortgages originated for portfolio as a % of originations |  |                            | 98         | % |      |   | 96        | %
|First mortgages originated for sale as a % of originations      |  |                            | 0          | % |      |   | 1         | %
|Repayments                                                      |  |                            |            |   |      |   |           |  
|Loan and MBS repayments(a)                                      |  | $                          | 6,314,104  |   |      | $ | 4,673,369 |  
|Loan repayment rate(b)                                          |  |                            | 25         | % |      |   | 24        | %



|(a) | Loan and MBS repayments consist of monthly amortization and loan payoffs.
|--- | -------------------------------------------------------------------------



|(b) | The loan repayment rate is the quarterly repayments annualized as a percentage of the prior quarters ending loan and MBS balance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



The volume of our originations increased 19% in the first quarter of 2005
versus the same period in 2004 primarily due to the continued popularity of ARMs and an increase in the average loan size. Our ARM originations remained strong because the rates and payments on these loans remained lower than those on the



16



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##### Table of Contents

more traditional fixed-rate mortgages. We were able to take advantage of the favorable environment for ARM lending in 2005 because of prior investments that
increased the capacity of our loan operations.



Loan and MBS
repayments, including amortization and loan payoffs, were higher in the first quarter of 2005 as compared to the first quarter of 2004 as a result of an increase in the portfolio balance and a slight increase in the repayment rate. Repayments were
high in the first quarter of 2005 because interest rates remained low from a historical standpoint leading to continued high levels of both home purchases and refinance activity.



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. However, 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. We also originate a small volume of fixed-rate second
mortgages secured by second deeds of trust. Our general practice is to only originate second deeds of trust on properties that have a first mortgage with us. The following table provides information about our activity in fixed-rate second mortgages
and ELOCs for the three months ended March 31, 2005 and 2004.



TABLE 5



Equity Lines of Credit
and Fixed-Rate Second Mortgages

(Dollars in thousands)



|                                            |  |                            |           |      |   |          
|------------------------------------------- |  | -------------------------- | --------- | ---- | - | ---------
|                                            |  | Three Months EndedMarch 31
|                                            |  | 2005                       |           | 2004
|Equity Lines of Credit                      |  |                            |           |      |   |          
|New ELOCs established                       |  | $                          | 384,541   |      | $ | 475,079  
|ELOC outstanding balance                    |  |                            | 2,586,418 |      |   | 2,044,585
|ELOC maximum total line of credit available |  |                            | 3,957,814 |      |   | 3,054,615
|Fixed-Rate Second Mortgages                 |  |                            |           |      |   |          
|Fixed-rate second mortgage originations     |  | $                          | 1,344     |      | $ | 36,915   
|Sales of second mortgages                   |  |                            | -0-       |      |   | 312      
|Fixed-rate seconds held for investment      |  |                            | 112,021   |      |   | 82,538   



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 origination fees and certain loan origination costs. Over the
past five years, the combined amounts have resulted in net deferred costs. These net deferred loan costs are amortized as a yield reduction over the contractual life of the related loans, thereby lowering net interest income and the reported yield
on our loan portfolio. If a loan pays off before the end of its contractual life, any remaining net deferred cost is charged to loan interest income at that time.



17



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The following table provides information on net deferred loan costs for the three months ended March 31,
2005 and 2004.



TABLE 6



Net Deferred Loan Costs

(Dollars in thousands)



|                                                    |  |                            |         |   |      |   |         |  
|--------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                    |  | Three Months EndedMarch 31 |        
|                                                    |  | 2005                       |         |   | 2004 |  
|Beginning balance of net deferred loan costs        |  | $                          | 915,008 |   |      | $ | 547,318 |  
|Net loan costs deferred                             |  |                            | 125,520 |   |      |   | 100,135 |  
|Amortization of net deferred loan costs             |  |                            | (59,216 | ) |      |   | (31,503 | )
|Net deferred loan costs (fees) transferred from MBS |  |                            | 915     |   |      |   | (4,968  | )
|                                                    |  |                            |         |   |      |   |         |  
|Ending balance of net deferred loan costs           |  | $                          | 982,227 |   |      | $ | 610,982 |  
|                                                    |  |                            |         |   |      |   |         |  



The growth in net
deferred loan costs from March 31, 2004 to March 31, 2005 resulted primarily from the growth in the loan portfolio.



Lending Operations



At March 31, 2005, we had lending operations in 38 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 months ended March 31, 2005 and 2004 for Northern and Southern California and for our next five
largest origination states by dollar amount in the first quarter of 2005.



TABLE 7



Loan Originations by
State

(Dollars in thousands)



|                    |  |                            |            |      |   |          
|------------------- |  | -------------------------- | ---------- | ---- | - | ---------
|                    |  | Three Months EndedMarch 31
|                    |  | 2005                       |            | 2004
|Northern California |  | $                          | 4,174,210  |      | $ | 3,359,826
|Southern California |  |                            | 3,455,060  |      |   | 2,984,834
|Florida             |  |                            | 735,222    |      |   | 513,560  
|New Jersey          |  |                            | 401,081    |      |   | 360,718  
|Virginia            |  |                            | 252,638    |      |   | 183,788  
|Arizona             |  |                            | 224,445    |      |   | 121,131  
|Illinois            |  |                            | 211,696    |      |   | 226,945  
|Other states        |  |                            | 1,720,385  |      |   | 1,643,060
|                    |  |                            |            |      |   |          
|Total               |  | $                          | 11,174,737 |      | $ | 9,393,862
|                    |  |                            |            |      |   |          



18



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The following tables show loans receivable and MBS with recourse by state at March 31, 2005 and 2004 for
Northern and Southern California and all other states with more than 2% of the total loan balance at March 31, 2005.



TABLE 8



Loan Portfolio by State

March 31, 2005

(Dollars in thousands)



|                                             |  |                          |             |                       |   |             |  |   |                          |  |   |             |      |  |        |  
|-------------------------------------------- |  | ------------------------ | ----------- | --------------------- | - | ----------- |  | - | ------------------------ |  | - | ----------- | ---- |  | ------ | -
|                                             |  | ResidentialReal Estate   |             | Commercial RealEstate |   | Total Loans |  |   | Loans as a % ofPortfolio | 
|State                                        |  | Single-Family1  4 Units |             | Multi-Family5+ Units  |   |             | 
|Northern California                          |  | $                        | 35,136,901  |                       | $ | 1,780,565   |  | $ | 8,926                    |  | $ | 36,926,392  |      |  | 34.97  | %
|Southern California                          |  |                          | 27,705,611  |                       |   | 1,495,519   |  |   | 960                      |  |   | 29,202,090  |      |  | 27.66  |  
|Florida                                      |  |                          | 6,359,991   |                       |   | 72,792      |  |   | 216                      |  |   | 6,432,999   |      |  | 6.09   |  
|New Jersey                                   |  |                          | 4,641,215   |                       |   | -0-         |  |   | 273                      |  |   | 4,641,488   |      |  | 4.40   |  
|Texas                                        |  |                          | 3,243,448   |                       |   | 147,541     |  |   | 120                      |  |   | 3,391,109   |      |  | 3.21   |  
|Illinois                                     |  |                          | 2,625,970   |                       |   | 139,356     |  |   | -0-                      |  |   | 2,765,326   |      |  | 2.62   |  
|Washington                                   |  |                          | 1,644,617   |                       |   | 738,969     |  |   | -0-                      |  |   | 2,383,586   |      |  | 2.26   |  
|Virginia                                     |  |                          | 2,218,006   |                       |   | 3,029       |  |   | -0-                      |  |   | 2,221,035   |      |  | 2.10   |  
|Other states(a)                              |  |                          | 17,208,141  |                       |   | 406,626     |  |   | 4,157                    |  |   | 17,618,924  |      |  | 16.69  |  
|                                             |  |                          |             |                       |   |             |  |   |                          |  |   |             |      |  |        |  
|Totals                                       |  | $                        | 100,783,900 |                       | $ | 4,784,397   |  | $ | 14,652                   |  |   | 105,582,949 |      |  | 100.00 | %
|                                             |  |                          |             |                       |   |             |  |   |                          |  |   |             |      |  |        |  
|Loans on deposits                            |  |                          |             |                       |   |             |  |   |                          |  |   | 10,257      |      |  |        |  
|Other(b)                                     |  |                          |             |                       |   |             |  |   |                          |  |   | 1,529,227   |      |  |        |  
|                                             |  |                          |             |                       |   |             |  |   |                          |  |   |             |      |  |        |  
|                                             |  |                          |             |                       |  
|Total loans receivable and MBS with recourse |  |                          |             |                       |   |             |  |   |                          |  |   | 107,122,433 |      |  |        |  
|MBS with recourse                            |  |                          |             |                       |   |             |  |   |                          |  |   | (1,440,341  | )(c) |  |        |  
|                                             |  |                          |             |                       |   |             |  |   |                          |  |   |             |      |  |        |  
|Total loans receivable                       |  |                          |             |                       |   |             |  |   |                          |  | $ | 105,682,092 |      |  |        |  
|                                             |  |                          |             |                       |   |             |  |   |                          |  |   |             |      |  |        |  



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



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



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



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TABLE 9



Loan Portfolio by State

March 31, 2004

(Dollars in thousands)



|                                             |  |                          |            |                        |   |             |  |   |                          |  |   |            |      |  |        |  
|-------------------------------------------- |  | ------------------------ | ---------- | ---------------------- | - | ----------- |  | - | ------------------------ |  | - | ---------- | ---- |  | ------ | -
|                                             |  | Residential Real Estate  |            | Commercial Real Estate |   | Total Loans |  |   | Loans as a % ofPortfolio | 
|State                                        |  | Single-Family1  4 Units |            | Multi-Family5+ Units   |   |             | 
|Northern California                          |  | $                        | 27,365,979 |                        | $ | 1,772,119   |  | $ | 10,498                   |  | $ | 29,148,596 |      |  | 35.81  | %
|Southern California                          |  |                          | 21,005,568 |                        |   | 1,491,572   |  |   | 1,932                    |  |   | 22,499,072 |      |  | 27.64  |  
|Florida                                      |  |                          | 4,639,816  |                        |   | 56,135      |  |   | 15                       |  |   | 4,695,966  |      |  | 5.77   |  
|New Jersey                                   |  |                          | 3,281,549  |                        |   | -0-         |  |   | 377                      |  |   | 3,281,926  |      |  | 4.03   |  
|Texas                                        |  |                          | 2,914,688  |                        |   | 139,422     |  |   | 239                      |  |   | 3,054,349  |      |  | 3.75   |  
|Illinois                                     |  |                          | 1,915,129  |                        |   | 143,080     |  |   | -0-                      |  |   | 2,058,209  |      |  | 2.53   |  
|Washington                                   |  |                          | 1,434,212  |                        |   | 700,839     |  |   | -0-                      |  |   | 2,135,051  |      |  | 2.62   |  
|Virginia                                     |  |                          | 1,502,135  |                        |   | 4,364       |  |   | -0-                      |  |   | 1,506,499  |      |  | 1.85   |  
|Colorado                                     |  |                          | 1,585,378  |                        |   | 177,117     |  |   | 3,902                    |  |   | 1,766,397  |      |  | 2.17   |  
|Other states(a)                              |  |                          | 11,071,538 |                        |   | 177,166     |  |   | 1,246                    |  |   | 11,249,950 |      |  | 13.83  |  
|                                             |  |                          |            |                        |   |             |  |   |                          |  |   |            |      |  |        |  
|Totals                                       |  | $                        | 76,715,992 |                        | $ | 4,661,814   |  | $ | 18,209                   |  |   | 81,396,015 |      |  | 100.00 | %
|                                             |  |                          |            |                        |   |             |  |   |                          |  |   |            |      |  |        |  
|Loans on deposits                            |  |                          |            |                        |   |             |  |   |                          |  |   | 11,762     |      |  |        |  
|Other(b)                                     |  |                          |            |                        |   |             |  |   |                          |  |   | 1,213,785  |      |  |        |  
|                                             |  |                          |            |                        |   |             |  |   |                          |  |   |            |      |  |        |  
|Total loans receivable and MBS with recourse |  |                          |            |                        |   |             |  |   |                          |  |   | 82,621,562 |      |  |        |  
|MBS with recourse                            |  |                          |            |                        |   |             |  |   |                          |  |   | (2,342,210 | )(c) |  |        |  
|                                             |  |                          |            |                        |   |             |  |   |                          |  |   |            |      |  |        |  
|Total loans receivable                       |  |                          |            |                        |   |             |  |   |                          |  | $ | 80,279,352 |      |  |        |  
|                                             |  |                          |            |                        |   |             |  |   |                          |  |   |            |      |  |        |  



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



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



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



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 our borrowings than whole loans. Because we have retained all of the beneficial interests in these MBS securitizations to date, the accounting rules require that securitizations formed
after March 31, 2001 be classified as securitized loans and included in our loans receivable. Securitization activity for the three months ended March 31, 2005 and 2004 amounted to $1.1 billion and $677 million, respectively. The volume of
securitization activity fluctuates depending on the amount of collateral needed for borrowings and liquidity risk 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



Most
of the ARMs that we originated in 2004 and 2005, and that we have been originating 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;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | a minimum monthly payment amount that changes annually;
| | - |  | -------------------------------------------------------



| |  |  | features that allow for deferred interest to accrue on the loans; and
| | - |  | ---------------------------------------------------------------------



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



20



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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 is reset annually. Additionally, we originate a small volume of ARMs
with interest only payments for the first five years and an interest rate that adjusts every six months subject to a periodic interest rate cap.



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. Additionally,
some borrowers choose to convert their ARM to a fixed-rate mortgage. During the first three months of 2005, $28 million of loans were converted at the customers request from ARMs to fixed-rate loans, compared to $30 million during the same
period in 2004. We sell most of the converted fixed-rate loans.



Interest Rates and Indexes. Almost all the 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 rate changes monthly. For most of our lending, the indexes used are the Certificate of Deposit Index (CODI), the Golden West Cost of Savings Index (COSI), and 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 the Prime Rate as published in the Money Rates
table in The Wall Street Journal (Central Edition) or to CODI.



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 months ended March 31, 2005 and 2004.



TABLE 10



Adjustable Rate
Mortgage Originations by Index (a)

(Dollars in thousands)



|          |  |                             |            |           |     |   |      |   |           |  |     |  
|--------- |  | --------------------------- | ---------- | --------- | --- | - | ---- | - | --------- |  | --- | -
|          |  | Three Months Ended March 31 |           
|ARM Index |  | 2005                        |            | % ofTotal |     |   | 2004 |   | % ofTotal | 
|CODI      |  | $                           | 6,472,036  |           | 58  | % |      | $ | 5,739,836 |  | 62  | %
|COSI      |  |                             | 4,337,776  |           | 39  | % |      |   | 3,090,223 |  | 34  | %
|COFI      |  |                             | 127,509    |           | 1   | % |      |   | 140,439   |  | 1   | %
|Prime     |  |                             | 175,491    |           | 2   | % |      |   | 240,982   |  | 3   | %
|          |  |                             |            |           |     |   |      |   |           |  |     |  
|Total     |  | $                           | 11,112,812 |           | 100 | % |      | $ | 9,211,480 |  | 100 | %
|          |  |                             |            |           |     |   |      |   |           |  |     |  



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



21



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The following table shows the distribution by index of the Companys outstanding balance of
adjustable rate mortgages (including ARM MBS) at March 31, 2005, December 31, 2004, and March 31, 2004.



TABLE 11



Adjustable Rate
Mortgage Portfolio by Index

(Including ARM MBS)

(Dollars in thousands)



|          |  |               |             |           |     |   |                 |   |            |  |     |              |  |           |            |  |     |  
|--------- |  | ------------- | ----------- | --------- | --- | - | --------------- | - | ---------- |  | --- | ------------ |  | --------- | ---------- |  | --- | -
|ARM Index |  | March 31 2005 |             | % ofTotal |     |   | December 312004 |   | % ofTotal  |  |     | March 312004 |  | % ofTotal |           
|CODI(a)   |  | $             | 55,599,449  |           | 53  | % |                 | $ | 52,412,249 |  | 52  | %            |  | $         | 34,412,793 |  | 43  | %
|COSI      |  |               | 33,240,552  |           | 32  | % |                 |   | 30,900,888 |  | 31  | %            |  |           | 26,008,318 |  | 33  | %
|COFI      |  |               | 12,770,727  |           | 12  | % |                 |   | 13,537,745 |  | 14  | %            |  |           | 17,031,621 |  | 21  | %
|Prime(b)  |  |               | 2,583,536   |           | 3   | % |                 |   | 2,575,524  |  | 3   | %            |  |           | 2,044,585  |  | 3   | %
|Other(c)  |  |               | 286,869     |           | 0   | % |                 |   | 304,295    |  | 0   | %            |  |           | 392,448    |  | 0   | %
|          |  |               |             |           |     |   |                 |   |            |  |     |              |  |           |            |  |     |  
|Total     |  | $             | 104,481,133 |           | 100 | % |                 | $ | 99,730,701 |  | 100 | %            |  | $         | 79,889,765 |  | 100 | %
|          |  |               |             |           |     |   |                 |   |            |  |     |              |  |           |            |  |     |  



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



|(b) | ELOCs tied to the Prime Rate.
|--- | -----------------------------



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



Monthly Payment Amount.For substantially all of our ARMs, the
borrowers minimum monthly payment is reset annually. The new monthly payment amount each year is usually calculated to be the amount necessary to amortize the outstanding loan balance at the then applicable interest rate over the remaining
term of the loan.



This new minimum monthly payment amount
generally cannot exceed the prior years 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 other loans, the 7.5% cap does not apply on the fifth annual payment change of the loan and every fifth annual payment change thereafter. On each annual payment change date when the 7.5% cap does not
apply, the new monthly payment amount will be set to an amount that would fully amortize the loan over its remaining term.



Substantially all of the ARMs we originate allow the borrowers to select a fixed monthly payment amount for an interim period after origination, typically
one year. After this interim period, the monthly payment amount resets annually as described above. The amount of the initial payment can range from a minimum payment that we set (which currently is lower than the amount of interest accruing on the
loan) to a fully amortizing payment.



The monthly statement for
most of our loans provides our borrowers with up to four payment options. These payment options include a fully amortizing payment, an interest-only payment, a minimum payment, 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.



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. For more than 20 years, our ARMs have allowed deferred interest to occur if the borrowers monthly payment is not large enough to pay the monthly interest accruing on the loan. Deferred



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interest refers to unpaid interest that is added to the outstanding principal balance. Borrowers always have the option to make a high enough monthly payment
to avoid 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.



Our loans provide that deferred interest may occur as long as the loan balance remains below either 125% or 110% of the
original mortgage amount. The 125% cap on the loan balance applies to loans with original loan to value ratios at or below 85%. The 110% cap applies to loans with original loan to value ratios above 85%. If the loan balance reaches the applicable
limit, additional deferred interest may not be allowed to occur and we may increase the monthly payment to an amount that would amortize the loan over its remaining term. In this case, the new 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 monthly payment amount would not be enough to fully amortize the loan by the scheduled
maturity date.



The amount of deferred interest included in the
loan portfolio amounted to $90 million, $55 million, and $23 million at March 31, 2005, December 31, 2004, and March 31, 2004, respectively. Deferred interest as a percentage of the total loan portfolio amounted to less than .09% of the total loan
portfolio at March 31, 2005, December 31, 2004 and March 31, 2004. Deferred interest increased from March 2004 to March 2005 primarily because the indexes on our ARMs increased and many borrowers made monthly payments that were lower than the amount
of interest accruing on their loans. The amount of deferred interest also increased in part due to the growth in the loan portfolio. The amount of deferred interest that may occur in the loan portfolio is uncertain and is influenced by a number of
factors outside our control, including changes in the underlying index, the amount and timing of borrowers monthly payments, and unscheduled principal payments. If the applicable index were to increase and remain at relatively high levels, the
amount of deferred interest occurring in the loan portfolio would be expected to trend higher, absent other mitigating factors such as increased prepayments or borrowers making monthly payments that meet or exceed the amount of interest then
accruing on their mortgage loan. Similarly, if the index were to decline and remain at relatively low levels, the amount of deferred interest occurring in the loan portfolio would be expected to trend lower.



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 before any reduction for loan servicing and guarantee fees) was 12.15% or 6.83% above the actual weighted average rate at March 31, 2005, versus 12.16% or 7.16% above the actual weighted average rate at December 31, 2004, and 12.20% or 7.46%
above the weighted average rate at March 31, 2004.



During the
life of some 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. A portion of our ARMs are subject to lifetime floors. At March 31, 2005, approximately $4.4
billion of our ARM loans (including MBS with recourse held to maturity) have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination or assumption. As of March 31, 2005, $1.2 billion of ARM loans
had reached their rate floors, compared to $1.6 billion at December 31, 2004, and $2.2 billion at March 31, 2004. The weighted average floor rate on the loans that had reached their floor was 5.43% at March 31, 2005 compared to 5.36% at December 31,
2004 and 5.34% at March 31, 2004. Without the floor, the average rate on these loans would have been 4.66% at March 31, 2005, 4.44% at December 31, 2004, and 4.28% at March 31, 2004.



Securities Available for Sale



Funds not immediately needed for operations are invested in short-term instruments, primarily in federal funds, short-term repurchase agreements collateralized by MBS, and Eurodollar time deposits. Our practice is to invest only with
counterparties that have high credit ratings. The balance of short-term securities available for



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sale may fluctuate due to our management of the Companys liquidity needs. In addition to short-term investments, we hold stock in Federal Home Loan
Mortgage Corporation (Freddie Mac). We obtained the Freddie Mac stock in 1984 and it has a cost basis of $6 million. The following table is a summary of information about investment securities, which the Company classifies as available for sale and
are reported at fair value.



TABLE 12



Composition of
Securities Available for Sale

(Dollars in thousands)



|                                                       |  |              |           |                 |   |              |  |   |          
|------------------------------------------------------ |  | ------------ | --------- | --------------- | - | ------------ |  | - | ---------
|                                                       |  | March 312005 |           | December 312004 |   | March 312004
|Federal funds                                          |  | $            | 899,914   |                 | $ | 861,353      |  | $ | 696,244  
|Short-term repurchase agreements collateralized by MBS |  |              | 775,000   |                 |   | -0-          |  |   | -0-      
|U.S. government obligation                             |  |              | 1,771     |                 |   | 1,760        |  |   | 1,764    
|Eurodollar time deposits                               |  |              | -0-       |                 |   | 75,000       |  |   | 75,000   
|                                                       |  |              |           |                 |   |              |  |   |          
|Short-term securities available for sale               |  |              | 1,676,685 |                 |   | 938,113      |  |   | 773,008  
|Freddie Mac stock                                      |  |              | 355,184   |                 |   | 414,194      |  |   | 331,917  
|Other                                                  |  |              | 22,127    |                 |   | 22,078       |  |   | 18,538   
|                                                       |  |              |           |                 |   |              |  |   |          
|Total securities available for sale                    |  | $            | 2,053,996 |                 | $ | 1,374,385    |  | $ | 1,123,463
|                                                       |  |              |           |                 |   |              |  |   |          



Included in the
balances above are net unrealized gains on investment securities available for sale of $351 million, $410 million, and $327 million at March 31, 2005, December 31, 2004, and March 31, 2004, respectively. The cost basis of the securities available
for sale portfolio at March 31, 2005, December 31, 2004, and March 31, 2004 was $1.7 billion, $964 million, and $796 million, respectively, with weighted average yields excluding equity securities of 2.90%, 2.08%, and 1.05% at March 31, 2005,
December 31, 2004, and March 31, 2004, respectively. At March 31, 2005, December 31, 2004, and March 31, 2004, 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 loan on the sale date. We do not have a large portfolio of mortgage servicing rights, primarily because we retain our ARM originations in portfolio and only sell a limited number of
fixed-rate loans to third parties. The following table shows the changes in capitalized mortgage servicing rights (CMSRs) for the three months ended March 31, 2005 and 2004.



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##### Table of Contents

TABLE 13



Capitalized Mortgage
Servicing Rights

(Dollars in thousands)



|                                |  |                            |        |   |      |   |        |  
|------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                |  | Three Months EndedMarch 31 |       
|                                |  | 2005                       |        |   | 2004 |  
|CMSRs                           |  |                            |        |   |      |   |        |  
|Balance, beginning of period    |  | $                          | 60,544 |   |      | $ | 88,967 |  
|New CMSRs from loan sales       |  |                            | 1,416  |   |      |   | 3,189  |  
|Amortization                    |  |                            | (7,779 | ) |      |   | (9,653 | )
|                                |  |                            |        |   |      |   |        |  
|Balance, end of period          |  |                            | 54,181 |   |      | $ | 82,503 |  
|Valuation Allowance             |  |                            |        |   |      |   |        |  
|Balance, beginning of period    |  |                            | (7,310 | ) |      |   | -0-    |  
|Recovery of valuation allowance |  |                            | 1,337  |   |      |   | -0-    |  
|                                |  |                            |        |   |      |   |        |  
|Balance, end of period          |  |                            | (5,973 | ) |      |   | -0-    |  
|                                |  |                            |        |   |      |   |        |  
|CMSRs, net                      |  | $                          | 48,208 |   |      | $ | 82,503 |  
|                                |  |                            |        |   |      |   |        |  



The estimated
amortization of the March 31, 2005 balance for the remainder of 2005 and the five years ending 2010 is $21.7 million (2005), $19.5 million (2006), $9.8 million (2007), $3.0 million (2008), $169 thousand (2009), and $1 thousand (2010). 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
March 31, 2005, December 31, 2004, and March 31, 2004 was $58 million, $62 million, and $87 million, respectively. The book value of the Companys CMSRs for certain of the Companys loan strata exceeded the fair value by $6 million at
March 31, 2005 and $7 million at December 31, 2004. As a result, we had an impairment valuation allowance of $6 million and $7 million at March 31, 2005 and December 31, 2004, respectively. The book value of the Companys CMSRs did not exceed
the fair value at March 31, 2004 and, therefore, no valuation allowance for impairment was required.



Deposits



We raise deposits
through our retail branch system, through the Internet, and, from time to time, through the money markets. Retail deposits increased during the first quarter of 2005 by $2.6 billion compared to an increase of $657 million in the first quarter of
2004. Retail deposit growth was higher in the first quarter of 2005 because the public found insured deposits to be an attractive investment, and we also received favorable customer response to our promoted products. During the first quarter of
2005, the Company promoted traditional certificate of deposit accounts and many customers transferred funds from transaction accounts to certificate of deposit accounts. At March 31, 2005 and 2004, transaction accounts represented 52% and 76%,
respectively, of the total balance of deposits. These transaction accounts included checking accounts, money market deposit accounts, and passbook accounts.



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##### Table of Contents

The table below shows the Companys deposits by interest rate and by remaining maturity at March 31,
2005 and 2004.



TABLE 14



Deposits

(Dollars in thousands)



|                                                       |  |          |   |      |        |            |      |      |   |        |   |           
|------------------------------------------------------ |  | -------- | - | ---- | ------ | ---------- | ---- | ---- | - | ------ | - | ----------
|                                                       |  | March 31
|                                                       |  | 2005     |   | 2004
|                                                       |  | Rate     |   |      | Amount |            | Rate |      |   | Amount
|Deposits by rate:                                      |  |          |   |      |        |            |      |      |   |        |   |           
|Interest-bearing checking accounts                     |  | 1.32     | % |      | $      | 5,072,338  |      | 1.38 | % |        | $ | 5,707,926 
|Savings accounts(a)                                    |  | 1.91     |   |      |        | 23,867,795 |      | 1.72 |   |        |   | 30,117,911
|Term certificate accounts with original maturities of: |  |          |   |      |        |            |      |      |   |        |   |           
|4 weeks to 1 year                                      |  | 2.95     |   |      |        | 16,850,485 |      | 1.43 |   |        |   | 4,289,165 
|1 to 2 years                                           |  | 2.67     |   |      |        | 4,988,871  |      | 1.27 |   |        |   | 2,281,347 
|2 to 3 years                                           |  | 2.45     |   |      |        | 1,319,087  |      | 2.56 |   |        |   | 1,457,279 
|3 to 4 years                                           |  | 3.25     |   |      |        | 1,090,829  |      | 3.68 |   |        |   | 1,338,233 
|4 years and over                                       |  | 4.53     |   |      |        | 2,370,395  |      | 4.72 |   |        |   | 2,143,177 
|Retail jumbo CDs                                       |  | 1.69     |   |      |        | 33,465     |      | 2.11 |   |        |   | 48,585    
|                                                       |  |          |   |      |        |            |      |      |   |        |   |           
|                                                       |  |          |   |      | $      | 55,593,265 |      |      |   |        | $ | 47,383,623
|                                                       |  |          |   |      |        |            |      |      |   |        |   |           
|Deposits by remaining maturity                         |  |          |   |      |        |            |      |      |   |        |   |           
|No contractual maturity                                |  | 1.80     | % |      | $      | 28,940,133 |      | 1.67 | % |        | $ | 35,825,837
|Maturity within one year                               |  | 2.91     |   |      |        | 22,993,596 |      | 1.82 |   |        |   | 7,934,895 
|1 to 5 years                                           |  | 3.71     |   |      |        | 3,658,774  |      | 3.73 |   |        |   | 3,619,683 
|Over 5 years                                           |  | 3.28     |   |      |        | 762        |      | 3.80 |   |        |   | 3,208     
|                                                       |  |          |   |      |        |            |      |      |   |        |   |           
|                                                       |  |          |   |      | $      | 55,593,265 |      |      |   |        | $ | 47,383,623
|                                                       |  |          |   |      |        |            |      |      |   |        |   |           



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



At March 31, the weighted average cost of deposits was 2.39% (2005) and 1.85% (2004).



Borrowings



In addition to
funding real estate loans with deposits, we also utilize borrowings. Most of our borrowings are variable interest rate instruments and are tied to the London Interbank Offered Rate (LIBOR). In the first quarter of 2005, borrowings increased by $2.3
billion to $48.0 billion from $45.7 billion at yearend 2004 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 FHLB capital stock that we own. FHLB advances amounted to $35.5 billion at March 31, 2005, compared to $33.8 billion
at December 31, 2004 and $24.8 billion at March 31, 2004.



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.



26



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##### Table of Contents

We borrow funds from the capital markets on both an unsecured and secured basis. Most of WSBs
capital market funding consists of unsecured bank notes. WSB has a bank note program that allows us to issue an aggregate amount of $8.0 billion of unsecured senior notes with maturities ranging from 270 days to thirty years. In March 2005, WSB
issued $700 million in notes under this program and $6.0 billion remains available for issuance under this program. Bank notes with maturities exceeding 270 days are reported as senior debt on the Consolidated Statement of Financial Condition. At
March 31, 2005, December 31, 2004, and March 31, 2004, WSB had $5.0 billion, $4.3 billion, and $998 million of long-term unsecured senior debt outstanding. As of March 31, 2005, 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 March 31, 2005, December 31, 2004 and March 31, 2004, WSB had $2.5 billion, $2.7
billion, and $2.5 billion, respectively, of short-term bank notes outstanding. As of March 31, 2005, 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 $4.1 billion, $3.9 billion, and
$2.7 billion at March 31, 2005, December 31, 2004, and March 31, 2004, respectively.



Golden West, at the holding company level, occasionally issues senior or subordinated unsecured debt, although none was issued in 2004 or 2005. At March 31, 2005 and at December 31, 2004, Golden West, at the holding
company level, had $993 million of senior debt outstanding compared to $992 million at March 31, 2004. Golden West had no subordinated debt outstanding during those time periods. As of March 31, 2005, 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 that changes in market interest rates 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 customers convert from ARMs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



27



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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



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, which means that the yield on our loan portfolio responds to movements in interest rates. At
March 31, 2005, ARMs constituted 99% of our loan and MBS portfolio, and 97% of our ARM portfolio adjusted monthly.



The primary difference between how our ARMs and liabilities respond to interest rate changes is principally timing related. Specifically, rates on our
liabilities tend to adjust more rapidly to interest rate changes than the yield on our ARM portfolio, primarily because of 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 may take a period of time before changes in market interest rates are significantly reflected in the indexes. In addition to the index lags, other structural features of
the ARMs, described under The Loan Portfolio - Structural Features of our ARMs, can delay the repricing of our assets.



This timing disparity between our assets and liabilities can temporarily affect our primary spread 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 chart 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 primary spread.



TABLE 15



Relationship between
Indexes and Short-Term Market Interest Rates

and Expected Impact on Primary Spread



|                                      |  |                                                                                                                                                                                                               
|------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Market Interest Rate Scenarios        |  | Relationship between Indexes and Short-Term Market Interest Rates and Expected Impact on Primary Spread                                                                                                       
|Market interest rates increase        |  | The index increase lags the market interest rate increase, and therefore the primary spread would normally be expected to narrow temporarily until the index catches up with the higher market
interest rates.
|                                      | 
|Market interest rates decline         |  | The index decrease lags the market interest rate decrease, and therefore the primary spread would normally be expected to widen temporarily until the index catches up with the lower market
interest rates.  
|                                      | 
|Market interest rates remain constant |  | The primary spread would normally be expected to stabilize when the index catches up to the current market rate level.                                                                                        



As the table above
indicates, although market rate changes impact the primary spread, 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
primary spread than a sharp rise or decline in rates.



To
mitigate the lags discussed above, our 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. The following table describes the indexes we use and shows how these indexes are intended to match with our liabilities. As



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##### Table of Contents

discussed in the table, ARMs funded with savings historically have had minimal repricing lags, while ARMs funded with LIBOR-based market-rate borrowings have
had larger repricing lags, but these have been principally timing related. In particular, most of the Companys interest rate sensitivity has come from CODI loans funded with borrowings.



TABLE 16



Summary of Key Indexes



|                                                      |  |                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                            |  |                                                                                                                                                                                                             
|----------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                      |  | CODI                                                                                                                                                                                                                                                                                                                                        |  | COSI                                                                                                                                                                       |  | COFI                                                                                                                                                                                                        
|How the Index is Calculated                           |  | 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 Golden Wests cost of deposits as reported monthly.                                                                                                               |  | 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       |  | 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.                                                                                                        |  | COSI equals our own cost of deposits. COSI and the cost of our deposits are therefore matched subject only to the reporting lag described below.                           |  | Historically, COFI has tracked our cost of deposits. The match is not perfect since COFI includes the cost of savings and borrowings of many other institutions as well as our
own.                         
|                                                      |  |                                                                                                                                                                                                                                                                                                                                             | 
|% of First Quarter 2005 ARM Originations              |  | 58%                                                                                                                                                                                                                                                                                                                                         |  | 39%                                                                                                                                                                        |  | 1%                                                                                                                                                                                                          
|                                                      |  |                                                                                                                                                                                                                                                                                                                                             | 
|Percentage of ARM Portfolio at March 31, 2005         |  | 53%                                                                                                                                                                                                                                                                                                                                         |  | 32%                                                                                                                                                                        |  | 12%                                                                                                                                                                                                         
|                                                     
|Timing Lags (see descriptions in the paragraph below)
|                                                      |  |                                                                                                                                                                                                                                                                                                                                             | 
|Reporting Lag                                         |  | One month                                                                                                                                                                                                                                                                                                                                   |  | One month                                                                                                                                                                  |  | Two months                                                                                                                                                                                                  
|                                                      |  |                                                                                                                                                                                                                                                                                                                                             | 
|Repricing Lag                                         |  | 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. Historically, this lag has been largely offset
by a similar repricing lag on our deposits. However, the CODI repricing lag has not been offset by the much shorter lag on the Companys borrowings. |  | 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. |  | 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. 



29



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##### Table of Contents

As discussed above, market interest rate movements are the most significant factor that affects our
primary spread. The primary spread 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our efforts to attract deposits and competition in the retail investment market, which influence the pricing of our deposit products; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



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



The table below shows the primary spread, and its main components, at March 31, 2005, December 31, 2004, and March 31, 2004.



TABLE 17



Yield on
Interest-Earning Assets, Cost of Funds, and Primary Spread



|                                 |  |              |   |  |                 |   |  |              |  
|-------------------------------- |  | ------------ | - |  | --------------- | - |  | ------------ | -
|                                 |  | March 312005 |   |  | December 312004 |   |  | March 312004 |  
|Yield on loan portfolio and MBS  |  | 5.06         | % |  | 4.75            | % |  | 4.58         | %
|Yield on investments             |  | 2.90         |   |  | 2.08            |   |  | 1.05         |  
|                                 |  |              |   |  |                 |   |  |              |  
|Yield on interest-earning assets |  | 5.02         |   |  | 4.73            |   |  | 4.55         |  
|                                 |  |              |   |  |                 |   |  |              |  
|Cost of deposits                 |  | 2.39         |   |  | 2.08            |   |  | 1.85         |  
|Cost of borrowings               |  | 2.89         |   |  | 2.38            |   |  | 1.32         |  
|                                 |  |              |   |  |                 |   |  |              |  
|Cost of funds                    |  | 2.62         |   |  | 2.22            |   |  | 1.63         |  
|                                 |  |              |   |  |                 |   |  |              |  
|Primary spread                   |  | 2.40         | % |  | 2.51            | % |  | 2.92         | %
|                                 |  |              |   |  |                 |   |  |              |  



During 2004, the
Federal Reserves Open Market Committee raised the Federal Funds rate, a key short-term interest rate, five times, bringing the rate up to 2.25% at December 31, 2004 as compared to 1.00% at December 31, 2003. During the first quarter of 2005,
the Federal Reserves Open Market Committee raised the Federal Funds rate twice, bringing the rate up to 2.75% at March 31, 2005. As a consequence, our cost of funds, which is related primarily to the level of short-term market interest rates,
also increased. At the same time, the yield on our earning assets responded more slowly due to the ARM index lags described above.



The following table shows the average primary spread by quarter.



TABLE 18



Average Primary Spread



|                       |  |                       |   |  |             |   |  |             |   |  |             |   |  |             |  
|---------------------- |  | --------------------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                       |  | For the Quarter Ended |  
|                       |  | Mar. 312005           |   |  | Dec. 312004 |   |  | Sep. 302004 |   |  | Jun. 302004 |   |  | Mar. 312004 |  
|Average primary spread |  | 2.46                  | % |  | 2.60        | % |  | 2.70        | % |  | 2.86        | % |  | 2.90        | %
|                       |  |                       |   |  |             |   |  |             |   |  |             |   |  |             |  



For the five years
ended March 31, 2005, which included periods of both falling and rising interest rates, our primary spread averaged 2.70%.



Financial institutions 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



30



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##### Table of Contents

liabilities that reprice within certain time periods as of March 31, 2005, as well as the repricing gap and the cumulative repricing gap as a percentage of
assets.



TABLE 19



Repricing of Earning
Assets and Interest-Bearing

Liabilities, Repricing Gaps, and Gap Ratios

As of March 31, 2005

(Dollars in millions)



|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|---------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | ---------- |  | - | ----------- | - |  | ----- | ----- | - |  | - | -------
|                                               |  | Projected Repricing(a)
|                                               |  | 0  3Months            |         |   | 4  12Months |   |         | 1 - 5Years |  |   | Over 5Years |   |  | Total
|Earning Assets:                                |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Securities available for sale                  |  | $                      | 2,052   |   |              | $ | 2       |            |  | $ | -0-         |   |  | $     | -0-   |   |  | $ | 2,054  
|MBS:                                           |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Adjustable rate                                |  |                        | 1,366   |   |              |   | -0-     |            |  |   | -0-         |   |  |       | -0-   |   |  |   | 1,366  
|Fixed-rate                                     |  |                        | 21      |   |              |   | 48      |            |  |   | 184         |   |  |       | 193   |   |  |   | 446    
|Loans receivable:(b)(c)                        |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Adjustable rate                                |  |                        | 103,378 |   |              |   | 710     |            |  |   | 214         |   |  |       | -0-   |   |  |   | 104,302
|Fixed-rate held for investment                 |  |                        | 116     |   |              |   | 231     |            |  |   | 421         |   |  |       | 229   |   |  |   | 997    
|Fixed-rate held for sale                       |  |                        | 41      |   |              |   | -0-     |            |  |   | -0-         |   |  |       | -0-   |   |  |   | 41     
|Other(d)                                       |  |                        | 1,893   |   |              |   | -0-     |            |  |   | -0-         |   |  |       | 134   |   |  |   | 2,027  
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Total                                          |  | $                      | 108,867 |   |              | $ | 991     |            |  | $ | 819         |   |  | $     | 556   |   |  | $ | 111,233
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Interest-Bearing Liabilities:                  |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Deposits(e)                                    |  | $                      | 32,422  |   |              | $ | 19,512  |            |  | $ | 3,659       |   |  | $     | -0-   |   |  | $ | 55,593 
|FHLB advances                                  |  |                        | 34,412  |   |              |   | 78      |            |  |   | 445         |   |  |       | 577   |   |  |   | 35,512 
|Other borrowings                               |  |                        | 9,482   |   |              |   | 150     |            |  |   | 2,365       |   |  |       | 495   |   |  |   | 12,492 
|Impact of interest rate swaps                  |  |                        | 1,900   |   |              |   | -0-     |            |  |   | (1,900      | ) |  |       | -0-   |   |  |   | -0-    
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Total                                          |  | $                      | 78,216  |   |              | $ | 19,740  |            |  | $ | 4,569       |   |  | $     | 1,072 |   |  | $ | 103,597
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Repricing gap                                  |  | $                      | 30,651  |   |              | $ | (18,749 | )          |  | $ | (3,750      | ) |  | $     | (516  | ) |  | $ | 7,636  
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Cumulative gap                                 |  | $                      | 30,651  |   |              | $ | 11,902  |            |  | $ | 8,152       |   |  | $     | 7,636 |   |  |   |        
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        
|Cumulative gap as a percentage of total assets |  |                        | 27.2    | % |              |   | 10.6    | %          |  |   | 7.2         | % |  |       |       |   |  |   |        
|                                               |  |                        |         |   |              |   |         |            |  |   |             |   |  |       |       |   |  |   |        



|(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) | Excludes nonaccrual loans (90 days or more past due).
|--- | -----------------------------------------------------



|(c) | Includes loans in process. Loans in process are funded, interest-earning loans that have not
yet been entered into the loan servicing system due to the normal five to seven day processing lag.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Includes primarily cash in banks and Federal Home Loan Bank (FHLB) stock.
|--- | -------------------------------------------------------------------------



|(e) | Liabilities 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 yield on our assets to respond more slowly than the rates on our liabilities.



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 March 31, 2005, we had three interest



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rate swaps that were used to effectively convert payments on WSBs fixed-rate senior debt to floating-rate payments. We entered into one such swap with
a notional amount of $400 million in June 2004, another with a notional amount of $800 million in December 2004, and another with a notional amount of $700 million in March 2005. 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. At March 31, 2005, we do not hold any derivative financial
instruments for trading purposes.



The following table
illustrates as of March 31, 2005, 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 March 31, 2005

(Dollars in thousands)



|                                        |  |                                             |     |   |      |   |     |      |  |   |         |   |  |      |           |   |              |   |     |           |  |   |           |   |  |   |           |  
|--------------------------------------- |  | ------------------------------------------- | --- | - | ---- | - | --- | ---- |  | - | ------- | - |  | ---- | --------- | - | ------------ | - | --- | --------- |  | - | --------- | - |  | - | --------- | -
|                                        |  | Expected Maturity Date as of March 31, 2005 |    
|                                        |  | 2006                                        |     |   | 2007 |   |     | 2008 |  |   | 2009    |   |  | 2010 |           |   | TotalBalance |   |     | FairValue | 
|Hedged Fixed-Rate Senior Debt           |  |                                             |     |   |      |   |     |      |  |   |         |   |  |      |           |   |              |   |     |           |  |   |           |   |  |   |           |  
|Contractual maturity                    |  | $                                           | -0- |   |      | $ | -0- |      |  | $ | 700,000 |   |  | $    | 1,200,000 |   |              | $ | -0- |           |  | $ | 1,900,000 |   |  | $ | 1,866,820 |  
|Weighted average interest rate          |  |                                             | .00 | % |      |   | .00 | %    |  |   | 4.28    | % |  |      | 4.39      | % |              |   | .00 | %         |  |   | 4.35      | % |  |   |           |  
|Swap Contracts                          |  |                                             |     |   |      |   |     |      |  |   |         |   |  |      |           |   |              |   |     |           |  |   |           |   |  | $ | (23,884   | )
|Weighted average interest rate paid     |  |                                             | .00 | % |      |   | .00 | %    |  |   | 2.81    | % |  |      | 2.92      | % |              |   | .00 | %         |  |   | 2.88      | % |  |   |           |  
|Weighted average interest rate received |  |                                             | .00 | % |      |   | .00 | %    |  |   | 4.15    | % |  |      | 4.19      | % |              |   | .00 | %         |  |   | 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 3.04% at March 31, 2005. The range of floating interest rates paid on swap contracts in the
first three months of 2005 was 2.51% to 3.05%. The range of fixed interest rates received on swap contracts in the first three months of 2005 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 a mortgage loan and the value of the underlying collateral is not sufficient to cover the loan amount. We manage credit risk principally by originating high-quality loans. We also
mitigate credit risk through periodic loan reviews. Additionally, we closely monitor market trends, and take appropriate steps to protect our interests.



Our objective is to minimize nonperforming assets and troubled debt restructured 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 Process



As part of our underwriting process, we evaluate the creditworthiness of potential borrowers based primarily on credit history and an evaluation of the
potential borrowers ability to repay the loan. We use systems developed internally based on years of experience evaluating credit risk. Although we use technological tools to help with underwriting evaluations, our underwriting personnel
review each file and make final judgments. 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.



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Our appraisal process is separate from our underwriting process to assure independence and
accountability. We appraise the property that secures the loan by assessing its market value and marketability. We maintain an in-house staff to conduct and review property appraisals. Any external appraisers that we use are required to go through a
training program with us, and each appraisal is reviewed by our internal appraisal staff.



California Housing Market



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 to potential adverse conditions in California. The average loan size for our California one- to four-family first mortgage originations in the first quarter of 2005 was approximately $315 thousand.



Loan to Value Ratio



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 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.



Historically, loans with LTVs or CLTVs greater than 80% at origination result in greater credit losses as compared to loans originated with LTVs or CLTVs at 80% or lower. We therefore focus our lending activity on
loans that have LTVs or CLTVs at or below 80%. In addition, we take steps to reduce the potential credit risk with respect to new loans with LTVs or CLTVs over 80%. Among other things:



| |  |  | a significant percentage of first mortgage loans with LTVs over 80% carry mortgage insurance, which reimburses us for losses up to a specified percentage per loan, thereby reducing
the effective LTV to below 80%;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the LTV or CLTV may not exceed 95% of the appraised value of a single-family residence at the time of origination; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | we carry pool mortgage insurance on most ELOCs and most fixed-rate seconds held for investment when the CLTV exceeds 80% at origination; the cumulative losses covered by this pool
mortgage insurance are limited to 10% or 20% of the original balance of each insured pool.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



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The following table shows mortgage originations with LTVs or CLTV greater than 80% for the three months
ended March 31, 2005 and 2004.



TABLE 21



First Mortgage
Originations With

LTVs or CLTVs Greater Than 80%

(Dollars in thousands)



|                                                           |  |                             |         |   |      |   |         |  
|---------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                           |  | Three Months Ended March 31 |        
|                                                           |  | 2005                        |         |   | 2004 |  
|First mortgages with LTVs greater than 80%:                |  |                             |         |   |      |   |         |  
|With mortgage insurance                                    |  | $                           | 9,172   |   |      | $ | 25,890  |  
|With no mortgage insurance                                 |  |                             | 26,872  |   |      |   | 16,866  |  
|                                                           |  |                             |         |   |      |   |         |  
|Total                                                      |  | $                           | 36,044  |   |      | $ | 42,756  |  
|                                                           |  |                             |         |   |      |   |         |  
|Percentage of total originations                           |  |                             | .32     | % |      |   | .46     | %
|                                                           |  |                             |         |   |      |   |         |  
|First and second mortgages with CLTVs greater than 80%:(a) |  |                             |         |   |      |   |         |  
|With pool insurance on second mortgages                    |  | $                           | 573,370 |   |      | $ | 861,006 |  
|With no pool insurance                                     |  |                             | 2,973   |   |      |   | 128,129 |  
|                                                           |  |                             |         |   |      |   |         |  
|Total                                                      |  | $                           | 576,343 |   |      | $ | 989,135 |  
|                                                           |  |                             |         |   |      |   |         |  
|Percentage of total originations                           |  |                             | 5.16    | % |      |   | 10.53   | %
|                                                           |  |                             |         |   |      |   |         |  



|(a) | For ELOCs, only amounts drawn at the establishment of the line of credit are included in
originations. The CLTV calculation for this table excludes any unused portion of the line of credit. The CLTV data only includes firsts and seconds that were originated together in the same month.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table shows at March 31, 2005 and 2004 the outstanding
principal balance of first mortgages with original and current LTV ratios greater than 80%. LTV is based on the outstanding balance of the first mortgage divided by the most recent appraised value, which in most cases is the original appraised value
at origination.



TABLE 22



Balance of First
Mortgages With Original and Current

Loan to Value Ratios Greater Than 80%(a) (b)

(Dollars in thousands)



|                                                                       |  |                |         |   |      |   |         |  
|---------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                       |  | As of March 31 |        
|                                                                       |  | 2005           |         |   | 2004 |  
|First mortgages with original and current LTV ratios greater than 80%: |  |                |         |   |      |   |         |  
|With mortgage insurance                                                |  | $              | 437,820 |   |      | $ | 546,930 |  
|With no mortgage insurance                                             |  |                | 172,856 |   |      |   | 152,835 |  
|                                                                       |  |                |         |   |      |   |         |  
|Total                                                                  |  | $              | 610,676 |   |      | $ | 699,765 |  
|                                                                       |  |                |         |   |      |   |         |  
|Percentage of total loan portfolio                                     |  |                | 1       | % |      |   | 1       | %
|                                                                       |  |                |         |   |      |   |         |  



|(a) | LTV is based on the outstanding balance of the first mortgage divided by the most recent
appraised value, which in most cases is the original appraised value at origination.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Excludes loan balances with original LTV ratios over 80% that now have current LTV ratios
below 80%, as well as loan balances with original LTV ratios under 80% that have current LTV ratios over 80%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table shows at March 31, 2005 and 2004 the outstanding principal balance of combined first
and second mortgages with CLTV ratios greater than 80%. CLTV is based on the outstanding balance of the combined first and second mortgages divided by the most recent appraised value.



TABLE 23



Balance of Mortgages
With

Combined Loan to Value Ratios Greater Than 80%(a)

(Dollars in thousands)



|                                                              |  |                |           |   |      |   |           |  
|------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                              |  | As of March 31 |          
|                                                              |  | 2005           |           |   | 2004 |  
|First and second mortgages with CLTV ratios greater than 80%: |  |                |           |   |      |   |           |  
|With pool insurance on second mortgages                       |  | $              | 6,132,769 |   |      | $ | 5,382,315 |  
|With no pool insurance                                        |  |                | 345,449   |   |      |   | 769,933   |  
|                                                              |  |                |           |   |      |   |           |  
|Total                                                         |  | $              | 6,478,218 |   |      | $ | 6,152,248 |  
|                                                              |  |                |           |   |      |   |           |  
|Percentage of total loan portfolio                            |  |                | 6         | % |      |   | 7         | %
|                                                              |  |                |           |   |      |   |           |  



|(a) | CLTV is based on the outstanding balance of the first and second mortgage divided by the most
recent appraised value.
|--- | ---------------------------------------------------------------------------------------------------------------------



At March 31, 2005,
December 31, 2004, and March 31, 2004, the aggregate average of LTVs and CLTVs on the loans in portfolio was 68%, 69%, and 69%, respectively.



We believe that by emphasizing LTVs below 80%, and insuring most loans with 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 reasonable to expect that a significant decline in the values of residential real estate could result in increased rates of delinquencies,
foreclosures, and 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 contributed to the low level of NPAs and TDRs. It is unlikely that
such historically low levels of NPAs and TDRs will continue indefinitely.



35



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##### Table of Contents

The following table sets forth the components of our NPAs and TDRs and the various ratios to total assets
at March 31, 2005, December 31, 2004, and March 31, 2004.



TABLE 24



Nonperforming Assets
and Troubled Debt Restructured

(Dollars in thousands)



|                                       |  |              |         |   |                 |   |         |              |  |   |         |  
|-------------------------------------- |  | ------------ | ------- | - | --------------- | - | ------- | ------------ |  | - | ------- | -
|                                       |  | March 312005 |         |   | December 312004 |   |         | March 312004 | 
|Nonaccrual loans                       |  | $            | 342,394 |   |                 | $ | 332,329 |              |  | $ | 399,904 |  
|Foreclosed real estate                 |  |              | 10,840  |   |                 |   | 11,461  |              |  |   | 13,348  |  
|                                       |  |              |         |   |                 |   |         |              |  |   |         |  
|Total nonperforming assets             |  | $            | 353,234 |   |                 | $ | 343,790 |              |  | $ | 413,252 |  
|                                       |  |              |         |   |                 |   |         |              |  |   |         |  
|TDRs                                   |  | $            | 3,121   |   |                 | $ | 3,810   |              |  | $ | 5,122   |  
|                                       |  |              |         |   |                 |   |         |              |  |   |         |  
|Ratio of NPAs to total assets          |  |              | .31     | % |                 |   | .32     | %            |  |   | .48     | %
|                                       |  |              |         |   |                 |   |         |              |  |   |         |  
|Ratio of TDRs to total assets          |  |              | .00     | % |                 |   | .00     | %            |  |   | .01     | %
|                                       |  |              |         |   |                 |   |         |              |  |   |         |  
|Ratio of NPAs and TDRs to total assets |  |              | .32     | % |                 |   | .33     | %            |  |   | .48     | %
|                                       |  |              |         |   |                 |   |         |              |  |   |         |  



The following tables
sets 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 March 31, 2005.



TABLE 25



Nonperforming Assets
by State

March 31, 2005

(Dollars in thousands)



|                    |  |                        |         |                             |   |                        |       |                  |     |  |   |        |  |   |     |  |   |         |  |      |  
|------------------- |  | ---------------------- | ------- | --------------------------- | - | ---------------------- | ----- | ---------------- | --- |  | - | ------ |  | - | --- |  | - | ------- |  | ---- | -
|                    |  | Nonaccrual Loans(a)(b) |         | ForeclosedReal Estate (FRE) |   | TotalNPAs              |       | NPAs a %of Loans |    
|                    |  | ResidentialReal Estate |         | CommercialReal Estate       |   | ResidentialReal Estate |       | 5+               |     | 
|State               |  | 1 - 4                  |         | 5+                          |   |                        | 1 - 4 |                  |     | 
|Northern California |  | $                      | 95,867  |                             | $ | -0-                    |       | $                | -0- |  | $ | 907    |  | $ | -0- |  | $ | 96,774  |  | .26  | %
|Southern California |  |                        | 49,677  |                             |   | 47                     |       |                  | 104 |  |   | -0-    |  |   | -0- |  |   | 49,828  |  | .17  |  
|Florida             |  |                        | 23,845  |                             |   | -0-                    |       |                  | -0- |  |   | -0-    |  |   | -0- |  |   | 23,845  |  | .37  |  
|New Jersey          |  |                        | 20,083  |                             |   | -0-                    |       |                  | -0- |  |   | 101    |  |   | -0- |  |   | 20,184  |  | .43  |  
|Texas               |  |                        | 37,877  |                             |   | -0-                    |       |                  | -0- |  |   | 5,221  |  |   | -0- |  |   | 43,098  |  | 1.27 |  
|Illinois            |  |                        | 14,801  |                             |   | -0-                    |       |                  | -0- |  |   | 129    |  |   | -0- |  |   | 14,930  |  | .54  |  
|Washington          |  |                        | 10,171  |                             |   | -0-                    |       |                  | -0- |  |   | -0-    |  |   | -0- |  |   | 10,171  |  | .43  |  
|Virginia            |  |                        | 1,523   |                             |   | -0-                    |       |                  | -0- |  |   | -0-    |  |   | -0- |  |   | 1,523   |  | .07  |  
|Other states(c)     |  |                        | 88,206  |                             |   | 193                    |       |                  | -0- |  |   | 4,482  |  |   | -0- |  |   | 92,881  |  | .53  |  
|                    |  |                        |         |                             |   |                        |       |                  |     |  |   |        |  |   |     |  |   |         |  |      |  
|Totals              |  | $                      | 342,050 |                             | $ | 240                    |       | $                | 104 |  | $ | 10,840 |  | $ | -0- |  | $ | 353,234 |  | .33  | %
|                    |  |                        |         |                             |   |                        |       |                  |     |  |   |        |  |   |     |  |   |         |  |      |  



|(a) | Nonaccrual loans 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.
|--- | -------------------------------------------------------------------------------------------------



36



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TABLE 26



Nonperforming Assets
by State

March 31, 2004

(Dollars in thousands)



|                    |  |                         |         |                       |   |                         |       |                     |     |  |   |        |  |   |     |  |   |         |  |      |  
|------------------- |  | ----------------------- | ------- | --------------------- | - | ----------------------- | ----- | ------------------- | --- |  | - | ------ |  | - | --- |  | - | ------- |  | ---- | -
|                    |  | Nonaccrual Loans(a)(b)  |         | FRE                   |   | TotalNPAs               |       | NPAs as a % ofLoans |    
|                    |  | Residential Real Estate |         | CommercialReal Estate |   | Residential Real Estate |       |                    
|State               |  | 1  4                   |         | 5+                    |   |                         | 1 - 4 |                     | 5+  |  |  
|Northern California |  | $                       | 106,289 |                       | $ | 567                     |       | $                   | -0- |  | $ | 2,157  |  | $ | -0- |  | $ | 109,013 |  | .37  | %
|Southern California |  |                         | 72,953  |                       |   | 490                     |       |                     | 105 |  |   | -0-    |  |   | -0- |  |   | 73,548  |  | .33  |  
|Florida             |  |                         | 27,395  |                       |   | -0-                     |       |                     | -0- |  |   | 722    |  |   | -0- |  |   | 28,117  |  | .60  |  
|New Jersey          |  |                         | 23,223  |                       |   | -0-                     |       |                     | -0- |  |   | 76     |  |   | -0- |  |   | 23,299  |  | .71  |  
|Texas               |  |                         | 40,147  |                       |   | -0-                     |       |                     | -0- |  |   | 3,895  |  |   | -0- |  |   | 44,042  |  | 1.44 |  
|Illinois            |  |                         | 14,702  |                       |   | 162                     |       |                     | -0- |  |   | 815    |  |   | -0- |  |   | 15,679  |  | .76  |  
|Washington          |  |                         | 16,392  |                       |   | 25                      |       |                     | -0- |  |   | 461    |  |   | -0- |  |   | 16,878  |  | .79  |  
|Virginia            |  |                         | 2,824   |                       |   | -0-                     |       |                     | -0- |  |   | -0-    |  |   | -0- |  |   | 2,824   |  | .19  |  
|Colorado            |  |                         | 9,992   |                       |   | 60                      |       |                     | -0- |  |   | 486    |  |   | -0- |  |   | 10,538  |  | .60  |  
|Other states(c)     |  |                         | 84,578  |                       |   | -0-                     |       |                     | -0- |  |   | 4,736  |  |   | -0- |  |   | 89,314  |  | .79  |  
|                    |  |                         |         |                       |   |                         |       |                     |     |  |   |        |  |   |     |  |   |         |  |      |  
|Totals              |  | $                       | 398,495 |                       | $ | 1,304                   |       | $                   | 105 |  | $ | 13,348 |  | $ | -0- |  | $ | 413,252 |  | .51  | %
|                    |  |                         |         |                       |   |                         |       |                     |     |  |   |        |  |   |     |  |   |         |  |      |  



|(a) | Nonaccrual loans 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.
|--- | -------------------------------------------------------------------------------------------------



The lower balance of total NPAs at March 31, 2005 as compared to March 31,
2004 reflected the impact of the continued strong housing market and prevailing economic conditions. We attribute the relatively high level of NPAs in Texas to economic difficulties in the state over the past several years. Although economic
conditions may be improving in Texas, some weakness remains in the residential lending market. 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 an expense of $1.3 million for the three months ended March 31, 2005, compared to an expense of $1.2 million for the first quarter of 2004.



Allowance for Loan Losses



The Company provides specific valuation allowances for losses on loans when impaired and a write-down on foreclosed real
estate when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating probable loan losses that is based on both the Companys historical loss experience in the loan
portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by the age of the loan. This approach also takes into
consideration current trends in economic growth, unemployment, housing market activity, and home prices for the nation and individual geographical regions. Based on the analysis of historical performance, current conditions, and other risks,
management estimates a range of loss allowances by type of loan and risk category to cover probable losses in the portfolio. One-to-four single-family real estate loans are evaluated as a group. In addition, periodic reviews are made of major
multi-family and commercial real estate loans and foreclosed real estate. Where indicated, valuation allowances are established or adjusted. In estimating probable losses, consideration is given to the estimated sales price, cost of refurbishing the
security property, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings based upon quarterly reviews of the portfolio and the methodology
and historical analyses are reviewed quarterly.



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##### Table of Contents

The table below shows the changes in the allowance for loan losses for the three months ended March 31,
2005 and 2004.



TABLE 27



Changes in Allowance
for Loan Losses

(Dollars in thousands)



|                                                                                                                 |  |                            |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                 |  | Three Months EndedMarch 31 |        
|                                                                                                                 |  | 2005                       |         |   | 2004 |  
|Beginning allowance for loan losses                                                                              |  | $                          | 290,110 |   |      | $ | 289,937 |  
|Provision for losses                                                                                             |  |                            | 884     |   |      |   | 241     |  
|Loans charged off                                                                                                |  |                            | (1,226  | ) |      |   | (1,064  | )
|Recoveries                                                                                                       |  |                            | 424     |   |      |   | 237     |  
|                                                                                                                 |  |                            |         |   |      |   |         |  
|Ending allowance for loan losses                                                                                 |  | $                          | 290,192 |   |      | $ | 289,351 |  
|                                                                                                                 |  |                            |         |   |      |   |         |  
|Annualized ratio of provision for loan losses to average loans receivable and MBS with recourse held to maturity |  |                            | .00     | % |      |   | .00     | %
|                                                                                                                 |  |                            |         |   |      |   |         |  
|Annualized ratio of net chargeoffs to average loans receivable and MBS with recourse held to maturity            |  |                            | .00     | % |      |   | .00     | %
|                                                                                                                 |  |                            |         |   |      |   |         |  
|Ratio of allowance for loan losses to total loans held for investment and MBS with recourse held to maturity     |  |                            | .27     | % |      |   | .35     | %
|                                                                                                                 |  |                            |         |   |      |   |         |  
|Ratio of allowance for loan losses to NPAs                                                                       |  |                            | 82.2    | % |      |   | 70.0    | %
|                                                                                                                 |  |                            |         |   |      |   |         |  



The provision
for losses charged to expense in the first quarter of 2005 was comparable to the provision for the same period in 2004. The provision continued to reflect the low level of nonperforming assets and net chargeoffs that we experienced as a result of
the strong nationwide housing market and the prevailing economic conditions.



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;
| | - |  | --------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38



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##### Table of Contents

| |  |  | 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:



| |  |  | state 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.



39



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##### Table of Contents

RESULTS OF OPERATIONS



The
following table summarizes selected income statement results for the three months ended March 31, 2005 and 2004.



TABLE 28



Selected Financial
Results

(Dollars in thousands)



|                                    |  |                            |           |      |   |        
|----------------------------------- |  | -------------------------- | --------- | ---- | - | -------
|                                    |  | Three Months EndedMarch 31
|                                    |  | 2005                       |           | 2004
|Interest income                     |  | $                          | 1,311,485 |      | $ | 939,757
|Interest expense                    |  |                            | 606,921   |      |   | 320,503
|                                    |  |                            |           |      |   |        
|Net interest income                 |  |                            | 704,564   |      |   | 619,254
|Provision for loan losses           |  |                            | 884       |      |   | 241    
|Noninterest income                  |  |                            | 82,613    |      |   | 59,807 
|General and administrative expenses |  |                            | 224,239   |      |   | 199,514
|Taxes on income                     |  |                            | 213,804   |      |   | 179,582
|                                    |  |                            |           |      |   |        
|Net earnings                        |  | $                          | 348,250   |      | $ | 299,724
|                                    |  |                            |           |      |   |        



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.



The 14% increase in net interest income in 2005 compared with the prior year resulted primarily from the growth in the loan portfolio, our principal earning asset. Between March 31, 2005 and March 31, 2004, our
earning asset balance increased by $26 billion or 30%. This growth resulted from strong mortgage originations which more than offset loan repayments and loan sales. Partially offsetting the benefit to net interest income of a larger average earning
asset balance in the first quarter of 2005 was a decrease in our average primary spread, which is the monthly average of the month end difference between the yield on loans and other investments and the rate paid on deposits and borrowings. The
primary spread is discussed under Management of Interest Rate Risk - Asset/Liability Management.



40



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##### Table of Contents

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 March 31, 2005 |             |                        | Three Months Ended March 31, 2004 |  
|                                       |  | Average DailyBalances(a)          |             | AnnualizedAverageYield |                                   |   | End ofPeriodYield |      |     | Average DailyBalances(a) |   | AnnualizedAverageYield |  |      | End ofPeriodYield | 
|ASSETS                                 |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Loans receivable and MBS(b)            |  | $                                 | 104,311,027 |                        | 4.92                              | % |                   | 5.06 | %   |                          | $ | 80,035,313             |  | 4.61 | %                 |  | 4.58 | %  
|Investments                            |  |                                   | 1,569,104   |                        | 2.99                              |   |                   | 2.90 |     |                          |   | 2,300,472              |  | 1.32 |                   |  | 1.05 |    
|Invest. in capital stock of FHLBs      |  |                                   | 1,627,567   |                        | 3.85                              |   |                   | n/a  | (c) |                          |   | 1,164,331              |  | 3.31 |                   |  | n/a  | (c)
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Earning assets                         |  | $                                 | 107,507,698 |                        | 4.88                              | % |                   | 5.02 | %   |                          | $ | 83,500,116             |  | 4.50 | %                 |  | 4.55 | %  
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|LIABILITIES                            |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Deposits:                              |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Checking accounts                      |  | $                                 | 5,147,670   |                        | 1.33                              | % |                   | 1.32 | %   |                          | $ | 5,621,653              |  | 1.37 | %                 |  | 1.38 | %  
|Savings accounts(d)                    |  |                                   | 28,086,093  |                        | 1.92                              |   |                   | 1.91 |     |                          |   | 30,181,061             |  | 1.71 |                   |  | 1.72 |    
|Term accounts                          |  |                                   | 20,466,834  |                        | 2.86                              |   |                   | 3.02 |     |                          |   | 11,228,746             |  | 2.41 |                   |  | 2.42 |    
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Total deposits                         |  |                                   | 53,700,597  |                        | 2.22                              |   |                   | 2.39 |     |                          |   | 47,031,460             |  | 1.84 |                   |  | 1.85 |    
|Advances from FHLBs                    |  |                                   | 35,072,030  |                        | 2.55                              |   |                   | 2.83 |     |                          |   | 23,352,318             |  | 1.25 |                   |  | 1.23 |    
|Reverse repurchases                    |  |                                   | 3,963,806   |                        | 2.55                              |   |                   | 2.80 |     |                          |   | 2,469,771              |  | 1.12 |                   |  | 1.10 |    
|Other borrowings(e)                    |  |                                   | 8,181,564   |                        | 2.94                              |   |                   | 3.19 |     |                          |   | 5,427,155              |  | 1.82 |                   |  | 1.96 |    
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Interest-bearing liabilities           |  | $                                 | 100,917,997 |                        | 2.41                              | % |                   | 2.62 | %   |                          | $ | 78,280,704             |  | 1.64 | %                 |  | 1.63 | %  
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Average net yield                      |  |                                   |             |                        | 2.47                              | % |                   |      |     |                          |   |                        |  | 2.86 | %                 |  |      |    
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Primary Spread                         |  |                                   |             |                        |                                   |   |                   | 2.40 | %   |                          |   |                        |  |      |                   |  | 2.92 | %  
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Net interest income                    |  | $                                 | 704,564     |                        |                                   |   |                   |      |     |                          | $ | 619,254                |  |      |                   |  |      |    
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    
|Net yield on average earning assets(f) |  |                                   |             |                        | 2.62                              | % |                   |      |     |                          |   |                        |  | 2.97 | %                 |  |      |    
|                                       |  |                                   |             |                        |                                   |   |                   |      |     |                          |   |                        |  |      |                   |  |      |    



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



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



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



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



|(e) | The Company entered into two interest rate swaps in 2004 and one in 2005 to effectively
convert certain fixed-rate debt to variable rate debt. Because the swaps qualify as fair value hedges, the debt is recorded at fair value.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

Noninterest Income



The increase
in noninterest income for the first three months of 2005 as compared to the first quarter of 2004 resulted primarily from an increase in prepayment fees.



General and Administrative Expenses



G&A expenses increased in the first quarter of 2005 to support the record loan volume and the continued investment in resources to support future growth.



G&A as a percentage of average assets (the G&A ratio) on an annualized basis was .82% for the first
quarter of 2005 compared to .95% for the same period in 2004. The G&A ratio was lower in the first quarter of 2005 as compared to the first quarter of 2004 because the Companys strong asset growth over the past 12 months more than offset
the increase in G&A expense. G&A as a percentage of net interest income plus noninterest income (the efficiency ratio) amounted to 28.49% for the first quarter of 2005 compared to 29.38% for the first quarter of 2004.



Taxes on Income



We utilize the
accrual method of accounting for income tax purposes. Taxes as a percentage of earnings were 38.0% for the first quarter of 2005 compared to 37.5% for the comparable period in 2004. 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 uses of funds at Golden West are for the payment of interest
and principal on debt securities, capital contributions to its insured bank subsidiary, dividends to stockholders, the purchase of Golden West stock, and general and administrative expenses. At March 31, 2005, December 31, 2004, and March 31, 2004,
Golden Wests total cash and investments amounted to $846 million, $817 million, and $627 million, respectively.



42



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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 March 31, 2005, WSB maintained approximately $5.5 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 March 31, 2005, WSB, our primary subsidiary, had long-term unsecured 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 $7.6 billion, $7.3 billion, and $6.2 billion at March 31, 2005, December 31, 2004,
and March 31, 2004, respectively. All of our stockholders equity is tangible common equity. Stockholders equity increased by $305 million during the first three months of 2005 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 $297 million during the first three months of 2004 as a result of net earnings and the increased market
values of securities available for sale partially offset by the payment of quarterly dividends to stockholders.



Uses of Capital



As in prior years, we retained most of our earnings in the first quarter of 2005. The 17% annualized growth in our net worth for the first three months of
2005 allowed us to support the substantial 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. Even with high asset growth of 5% for the first three months of 2005, our stockholders equity to asset ratio was 6.73% at March 31, 2005.



We did not purchase any shares of Golden West common stock in 2005. As of March 31, 2005, 18,656,358 shares remained
available for purchase under the stock purchase program that our Board of Directors has authorized. Since October 1993, 102.5 million shares have been purchased under the stock repurchase program and retired at a cost of $1.4 billion. Earnings from
WSB are expected to continue to be the major source of funding for the stock purchase program. The purchase 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 A to the Notes to Consolidated Financial Statements included in the Form 10-K. As of March 31, 2005, the most recent notification from the Office of Thrift Supervision categorized WSB and WTX as
well-capitalized, the highest capital tier established by the OTS and other bank regulatory agencies. There are no conditions or events that have occurred since that notification that we believe would have an impact on the
well-capitalized



43



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##### Table of Contents

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 March 31, 2005 and 2004.



TABLE 30



Regulatory Capital
Ratios, Minimum Capital Requirements,

and Well-Capitalized Capital Requirements

As of March 31, 2005

(Dollars in
thousands)



|                          |  |         |           |       |                            |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|------------------------- |  | ------- | --------- | ----- | -------------------------- | - | ------- | ----------------------------------- | --------- |  | ---- | ------- |  | ----- | --------- |  | ----- | -
|                          |  | ACTUAL  |           |       | MINIMUMCAPITALREQUIREMENTS |   |         | WELL-CAPITALIZEDCAPITALREQUIREMENTS |          
|                          |  | Capital |           | Ratio |                            |   | Capital |                                     | Ratio     |  |      | Capital |  | Ratio |          
|WSB and Subsidiaries      |  |         |           |       |                            |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 7,484,304 |       | 6.72                       | % |         | $                                   | 1,671,672 |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 7,484,304 |       | 6.72                       |   |         |                                     | 4,457,793 |  | 4.00 |         |  | $     | 5,572,241 |  | 5.00  | %
|Tier 1 risk-based         |  |         | 7,484,304 |       | 12.45                      |   |         |                                     |          |  |     |         |  |       | 3,608,026 |  | 6.00  |  
|Total risk-based          |  |         | 7,773,330 |       | 12.93                      |   |         |                                     | 4,810,702 |  | 8.00 |         |  |       | 6,013,377 |  | 10.00 |  
|                          |  |         |           |       |                            |  
|WTX                       |  |         |           |       |                            |   |         |                                     |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 692,751   |       | 5.42                       | % |         | $                                   | 191,708   |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 692,751   |       | 5.42                       |   |         |                                     | 511,221   |  | 4.00 |         |  | $     | 639,026   |  | 5.00  | %
|Tier 1 risk-based         |  |         | 692,751   |       | 24.08                      |   |         |                                     |          |  |     |         |  |       | 172,604   |  | 6.00  |  
|Total risk-based          |  |         | 695,049   |       | 24.16                      |   |         |                                     | 230,139   |  | 8.00 |         |  |       | 287,673   |  | 10.00 |  



TABLE 31



Regulatory Capital
Ratios, Minimum Capital Requirements,

and Well-Capitalized Capital Requirements

As of March 31, 2004

(Dollars in
thousands)



|                          |  |         |           |       |                             |   |         |                                       |           |  |      |         |  |       |           |  |       |  
|------------------------- |  | ------- | --------- | ----- | --------------------------- | - | ------- | ------------------------------------- | --------- |  | ---- | ------- |  | ----- | --------- |  | ----- | -
|                          |  | ACTUAL  |           |       | MINIMUMCAPITAL REQUIREMENTS |   |         | WELL-CAPITALIZED CAPITAL REQUIREMENTS |          
|                          |  | Capital |           | Ratio |                             |   | Capital |                                       | Ratio     |  |      | Capital |  | Ratio |          
|WSB and Subsidiaries      |  |         |           |       |                             |   |         |                                       |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 6,390,365 |       | 7.41                        | % |         | $                                     | 1,292,885 |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 6,390,365 |       | 7.41                        |   |         |                                       | 3,447,694 |  | 4.00 |         |  | $     | 4,309,617 |  | 5.00  | %
|Tier 1 risk-based         |  |         | 6,390,365 |       | 13.51                       |   |         |                                       |          |  |     |         |  |       | 2,837,753 |  | 6.00  |  
|Total risk-based          |  |         | 6,678,685 |       | 14.12                       |   |         |                                       | 3,783,670 |  | 8.00 |         |  |       | 4,729,588 |  | 10.00 |  
|                          |  |         |           |       |                             |  
|WTX                       |  |         |           |       |                             |   |         |                                       |           |  |      |         |  |       |           |  |       |  
|Tangible                  |  | $       | 619,622   |       | 5.31                        | % |         | $                                     | 175,033   |  | 1.50 | %       |  |       |          |  |      |  
|Tier 1 (core or leverage) |  |         | 619,622   |       | 5.31                        |   |         |                                       | 466,755   |  | 4.00 |         |  | $     | 583,444   |  | 5.00  | %
|Tier 1 risk-based         |  |         | 619,622   |       | 23.77                       |   |         |                                       |          |  |     |         |  |       | 156,416   |  | 6.00  |  
|Total risk-based          |  |         | 620,665   |       | 23.81                       |   |         |                                       | 208,555   |  | 8.00 |         |  |       | 260,693   |  | 10.00 |  



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##### Table of Contents

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 2004 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 preparations 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. These policies are described in Critical Accounting Policies and Uses of Estimates and in Note A to the Consolidated
Financial Statements of the Companys 2004 Annual Report on Form 10-K.



NEW ACCOUNTING PRONOUNCEMENTS



In
December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This Statement eliminates the ability to account for share-based compensation transactions
using APB 25.



In March 2005, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107 which provides public companies additional guidance in applying the provisions of SFAS 123R. The SAB expresses the views of the SEC staff regarding the interaction between SFAS 123R and
certain existing SEC rules and regulations and provide the SEC staffs views regarding the valuation of share-based payment arrangements for public companies. The SAB should be applied upon the adoption of SFAS 123R.



In April 2005, the SEC amended the date for compliance with SFAS 123R so that
each entity that is not a small business issuer will be required to prepare financial statements in accordance with Statement 123R beginning with the first interim or annual reporting period of the registrants first fiscal year beginning on or
after December 15, 2005. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123.



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##### Table of Contents

|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 28 through 30. 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 March 31, 2005, a 200 basis point rate increase sustained over a thirty-six month period would temporarily reduce our primary spread, 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 March 31, 2005. 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 significant changes were made in
the Companys internal controls or in other factors that could significantly affect these controls during the quarter ended March 31, 2005.



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##### Table of Contents

PART II. OTHER INFORMATION



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



|(a) | April 26, 2005 - Annual Meeting
|--- | -------------------------------



|                                                                                               |  |             |  |            |  |           |  |           
|---------------------------------------------------------------------------------------------- |  | ----------- |  | ---------- |  | --------- |  | ----------
|                                                                                               |  | For         |  | Against    |  | Withheld  |  | Abstain   
|(b)    Directors elected:                                                                      |  |             |  |            |  |           |  |           
|Louis J. Galen                                                                                 |  | 276,005,982 |  |            |  | 3,934,805 |  |           
|Antonia Hernandez                                                                              |  | 276,260,067 |  |            |  | 3,680,720 |  |           
|Bernard A. Osher                                                                               |  | 275,523,107 |  |            |  | 4,417,680 |  |           
|                                                                                               |  |             |  |           
|(c)    Approve the 2005 Stock Incentive Plan                                                   |  | 176,422,474 |  | 64,444,174 |  |           |  | 12,994,847
|                                                                                               |  |             |  |           
|(d)    Ratification of Auditors:                                                               |  |             |  |            |  |           |  |           
|                                                                                               |  |             |  |           
|Appointment of Deloitte & Touche LLP, independent public accountants, for the fiscal year 2005 |  | 277,140,932 |  | 1,178,262  |  |           |  | 1,621,592 



Other Directors continuing in office
are:



Maryellen C. Herringer, Patricia A. King, Kenneth T. Rosen, Herbert M.
Sandler, and Marion O. Sandler, and Leslie Tang Schilling.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



On January 27, 2005, pursuant to Section 10A of the Securities Exchange Act of 1934, the Audit Committee of the Board of Directors of the Company approved
the engagement of Deloitte & Touche LLP to perform auditing services and certain non-audit services for the Company for the year ended December 31, 2005. The non-audit services include tax compliance and planning, reviews of Federal and
California tax returns, and the licensing of software for enterprise zone credit determinations.



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##### Table of Contents

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



|            |  |                                                                                                                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                            
|            | 
|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
March 31, 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.                 
|            | 
|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)       |  | Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, 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 March 31, 1998.
|            | 
|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 March 31, 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.                                      
|            | 
|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.                                                                                                                          



|* | Pursuant to Item 601(b)(32) of Regulation S-K, this exhibit is furnished rather than filed with this report.
|- | ------------------------------------------------------------------------------------------------------------



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##### Table of Contents



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: May 9, 2005 |  |  |  | /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



49