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                                              SECURITIES AND EXCHANGE COMMISSION
                                                          Washington, D.C. 20549
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                                                                       FORM 10-K
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(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934 for the fiscal year ended December 31, 2001.

| | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 for the transition period from ______________ to
    ______________.
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                                                  Commission File Number 1-13578

                                                          DOWNEY FINANCIAL CORP.
                          (Exact name of registrant as specified in its charter)

                                                                        DELAWARE
                  (State or other jurisdiction of incorporation or organization)
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3501 Jamboree Road, Newport Beach, California           92660
(Address of principal executive offices)              (Zip Code)

I.R.S. Employer Identification No.:  33-0633413

Registrant's telephone number, including area code:  (949) 854-0300

Securities registered pursuant to Section 12(b) of the Act:

 TITLE OF EACH CLASS                             NAME OF EACH EXCHANGE
------------------------------                 -------------------------
 Common Stock, $0.01 par value                   New York Stock Exchange
                                                 Pacific Exchange

Securities   registered   pursuant   to   Section   12(g)  of  the   Act:   None
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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 a check mark if  disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |_|

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  based  upon the  closing  sale  price of its  Common  Stock on
February 28, 2002, on the New York Stock Exchange was $1,018,509,053.

     At February 28, 2002,  28,213,048 shares of the Registrant's  Common Stock,
$0.01 par value were outstanding.

     DOCUMENTS  INCORPORATED BY REFERENCE:  Portions of the  Registrant's  Proxy
Statement to be filed with the Securities and Exchange  Commission in connection
with  the  Annual  Meeting  of  Stockholders  to be  held  April  24,  2002  are
incorporated by reference in Part III hereof.

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<PAGE>

TABLE OF CONTENTS

ITEM                                                                      PAGE
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PART I
   1.  BUSINESS..........................................................    1
          General........................................................    1
          Banking Activities.............................................    2
            Lending Activities...........................................    2
              Loan and Mortgage-Backed Securities Portfolio..............    3
              Residential Real Estate Lending............................    3
              Secondary Marketing and Loan Servicing Activities..........    5
              Commercial Real Estate and Multi-Family Lending............    5
              Construction Lending.......................................    6
              Commercial Lending.........................................    6
              Consumer Lending...........................................    6
            Investment Activities........................................    6
            Deposit Activities...........................................    7
            Borrowing Activities.........................................    7
            Capital Securities...........................................    7
            Asset/Liability Management...................................    8
            Earnings Spread..............................................    8
            Insurance Agency Activities..................................    8
          Real Estate Investment Activities..............................    8
          Competition....................................................    9
          Employees......................................................    9
          Regulation.....................................................    9
            General......................................................    9
            Regulation of Downey.........................................    9
            Regulation of the Bank.......................................   10
            Regulation of DSL Service Company............................   16
          Taxation.......................................................   17
          Factors That May Affect Future Results.........................   17
   2.  PROPERTIES........................................................   19
          Branches.......................................................   19
          Electronic Data Processing.....................................   19
   3.  LEGAL PROCEEDINGS.................................................   19
   4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS...................   19

PART II
   5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS............................................   20
   6.  SELECTED FINANCIAL DATA...........................................   21
   7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS......................................   23
          Overview.......................................................   23
          Results of Operations..........................................   25
             Net Interest Income.........................................   25
             Provision for Loan Losses...................................   27
             Other Income................................................   28
                Loan and Deposit Related Fees............................   28
                Real Estate and Joint Ventures Held for Investment.......   28
                Secondary Marketing Activities ..........................   29
                Other Category...........................................   29

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TABLE OF CONTENTS

ITEM                                                                      PAGE
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PART II----(CONTINUED)

             Operating Expense...........................................   30
             Provision for Income Taxes..................................   30
             Business Segment Reporting..................................   30
                Banking..................................................   31
                Real Estate Investment...................................   32
          Financial Condition............................................   33
             Loans and Mortgage-Backed Securities........................   33
             Investment Securities.......................................   37
             Investments in Real Estate and Joint Ventures...............   38
             Deposits....................................................   40
             Borrowings..................................................   41
             Capital Securities..........................................   42
             Asset/Liability Management and Market Risk..................   43
             Problem Loans and Real Estate...............................   48
                Non-Performing Assets....................................   48
                Delinquent Loans.........................................   50
                Allowance for Losses on Loans and Real Estate............   52
             Capital Resources and Liquidity.............................   58
             Regulatory Capital Compliance...............................   58
             Newly Adopted Accounting Principles.........................   59
             Current Accounting Issues...................................   59
             Sale of Subsidiary..........................................   60
   8.  FINANCIAL STATEMENTS..............................................   61
   9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURES...........................  106

PART III

  10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................  106
  11.  EXECUTIVE COMPENSATION............................................  106
  12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT.....................................................  106
  13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................  106

PART IV

  14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ON FORM 8-K....................................................  106
SIGNATURES ................................................................109

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<PAGE>

PART I

     Certain   matters   discussed   in  this  Annual   Report  may   constitute
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995 (the "Reform Act") and, as such, may involve risks
and  uncertainties.  These  forward-looking  statements  relate to,  among other
things, expectations of the business environment in which Downey Financial Corp.
("Downey,"  "we," "us" and "our") operates,  projections of future  performance,
perceived  opportunities in the market and statements regarding Downey's mission
and vision.  Downey's  actual results,  performance or  achievements  may differ
significantly from the results, performance or achievements expressed or implied
in such  forward-looking  statements.  For  discussion of the factors that might
cause such a difference, see Business--Factors That May Affect Future Results on
page 17.

ITEM 1. BUSINESS

GENERAL

     We were  incorporated in Delaware on October 21, 1994. On January 23, 1995,
after we obtained necessary  stockholder and regulatory  approvals,  we acquired
100% of the issued and  outstanding  capital  stock of Downey  Savings  and Loan
Association  (the  "Bank")  and the Bank's  stockholders  became  holders of our
stock.  Downey was thereafter  funded by the Bank and presently  operates as the
Bank's holding  company.  Our stock is traded on the New York Stock Exchange and
Pacific Exchange under the trading symbol "DSL."

     The Bank  was  formed  in 1957 as a  California-licensed  savings  and loan
association and converted to a federal charter in 1995. As of December 31, 2001,
it conducts  its  business  through 137 retail  deposit  branches,  including 68
full-service in-store branches. Residential loans are originated or purchased:

     o    by branch managers in our branches;

     o    by loan officers who solicit  loans from  realtors and other  business
          sources, to include via the internet from two California call centers;

     o    by  wholesale  loan  representatives  who obtain  loans  submitted  by
          mortgage brokers; and

     o    by  purchases  of loans from  correspondent  banking  institutions  or
          mortgage bankers.

     The Bank is regulated or affected by the  following  governmental  entities
and laws:

     o    As a federally  chartered savings  association,  the Bank's activities
          and investments  are generally  governed by the Home Owners' Loan Act,
          as  amended,  and  regulations  and  policies  of the Office of Thrift
          Supervision (the "OTS").

     o    The  Bank  and  Downey  are  subject  to the  primary  regulatory  and
          supervisory jurisdiction of the OTS.

     o    As a federally insured depository  institution,  the Bank is regulated
          and  supervised  by the Federal  Deposit  Insurance  Corporation  (the
          "FDIC") with respect to some of its activities and investments.

     o    The Bank is a member of the Federal Home Loan Bank (the "FHLB") of San
          Francisco, which is one of the 12 regional banks for federally insured
          depository institutions comprising the Federal Home Loan Bank System.

     o    The  Bank's   savings   deposits  are  insured   through  the  Savings
          Association Insurance Fund ("SAIF") of the FDIC, an instrumentality of
          the United States government.

     o    The Bank is regulated by the Federal  Reserve with respect to reserves
          the Bank is required to maintain against deposits and other matters.

     General  economic  conditions,  the  monetary  and fiscal  policies  of the
federal  government  and the  regulatory  policies of  governmental  authorities
significantly  influence  our  operations.   Additionally,   interest  rates  on
competing  investments  and general market  interest rates influence our deposit
flows and the costs we incur on interest-bearing  liabilities,  which represents
our cost of funds.  Similarly,  market  interest  rates and other  factors  that
affect the supply of and demand for housing and the availability of funds affect
our loan volume and our yields on loans and mortgage-backed securities.

     Our primary  business  is banking  and we are also  involved in real estate
investments, each of which we discuss further below.

                                       1
<PAGE>

BANKING ACTIVITIES

     Our primary business is banking. Our banking activities focus on:

     o    attracting funds from the general public and institutions; and

     o    originating and investing in loans,  primarily residential real estate
          mortgage loans, investment securities and mortgage-backed securities.

These mortgage-backed securities include mortgage pass-through securities issued
by other  entities and securities  issued or guaranteed by  government-sponsored
enterprises like the Federal  National  Mortgage  Association,  the Federal Home
Loan Mortgage Corporation and the Government National Mortgage Association.

     Our primary sources of revenue from our banking business are:

     o    interest we earn on loans,  investment  securities and mortgage-backed
          securities;

     o    fees we earn in connection with loans and deposits;

     o    gains on sales of our loans, investment securities and mortgage-backed
          securities; and

     o    income we earn on loans and mortgage-backed  securities we service for
          investors.

     Our principal expenses in connection with our banking business are:

     o    interest  we  incur  on our  interest-bearing  liabilities,  including
          deposits, borrowings and capital securities; and

     o    general and administrative costs.

     Our primary sources of funds from our banking business are:

     o    deposits;

     o    principal  and  interest  payments  on our loans  and  mortgage-backed
          securities;

     o    proceeds from sales of our loans and mortgage-backed securities; and

     o    borrowings and capital securities.

Scheduled payments we receive on our loans and mortgage-backed  securities are a
relatively stable source of funds.  However,  the funds we receive from deposits
and prepayment of loans and mortgage-backed  securities vary widely.  Below is a
detailed discussion of our banking activities.

LENDING ACTIVITIES

     Historically,   our  lending  activities  have  primarily   emphasized  our
origination of first mortgage loans secured by residential properties and retail
neighborhood  shopping centers.  To a lesser extent, our lending activities have
emphasized  our  origination  of real  estate  loans  secured  by  multi-family,
commercial and industrial properties, including office buildings, land and other
properties with income  producing  capabilities.  In addition,  we have provided
construction  loan  financing  for single  family and  multi-family  residential
properties and commercial retail  neighborhood  shopping center projects.  These
construction  loan financings have included loans to joint ventures,  which were
being engaged in by DSL Service Company,  a wholly owned subsidiary of the Bank,
with other  participants.  We also  originate  loans to  businesses  through our
commercial banking operations.

     We originate  automobile loans directly through our branch network. We also
conducted an indirect  auto-lending  program through our purchase of new or used
automobile  sales  contracts  from auto dealers in California  and other western
states.  Downey Auto Finance  Corp., a previous  wholly owned  subsidiary of the
Bank,  operated this  indirect  auto-lending  program,  but was sold in February
2000.  For  more  information,  see  Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations--Financial  Condition--Sale  of
Subsidiary on page 60.

     Our primary focus will continue to be our origination of:

     o    adjustable rate single family mortgage loans, including subprime loans
          which carry higher interest rates; and

     o    consumer loans.

                                       2
<PAGE>

We will also continue our secondary  marketing  activities  of  originating  and
selling single family loans to various investors.

     For more  information,  see below  under  the  caption  entitled  Secondary
Marketing and Loan Servicing Activities on page 5. For additional information on
the  composition  of our  loan and  mortgage-backed  securities  portfolio,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Financial  Condition--Loans  and Mortgage-Backed  Securities on page
33.

LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO

     We carry  loans  receivable  held for  investment  at cost.  Our net  loans
receivable are adjusted for  amortization of premiums and accretion of discounts
which  are  recognized  in  interest  income  using  the  interest  method.  Our
investments in mortgage-backed  securities represent  participating interests in
pools of first  mortgage  loans  originated  and  serviced by the issuers of the
securities.  We carry  mortgage-backed  securities  held to  maturity  at unpaid
principal  balances,  which are adjusted for  unamortized  premiums and unearned
discounts.  We amortize premiums and discounts on mortgage-backed  securities by
using the interest  method over the remaining  period to  contractual  maturity,
adjusted for anticipated prepayments.

     We identify  loans that may be sold before their  maturity.  In our balance
sheets, we classify these as loans held for sale and record them at the lower of
amortized cost or fair value.  Amortized cost includes a basis adjustment to the
loan at funding  resulting  from the change in the fair value of the  associated
interest  rate  lock  derivative  from  the  date of  commitment  to the date of
funding.  We  recognize  net  unrealized  losses on these  loans,  if any,  in a
valuation allowance by making charges to our income.

     We carry  mortgage-backed  securities  available for sale at fair value. We
report net unrealized gains or losses on these securities net of income taxes in
stockholders'  equity and as a  separate  component  of our other  comprehensive
income until realized.

     The  residential  mortgage loans we originate  typically  have  contractual
maturities  at  origination  of 15 to 40 years.  To limit the interest rate risk
associated  with  these 15- to  40-year  maturities,  we,  among  other  things,
principally  originate adjustable rate mortgages for our own loan portfolio.  We
originate  fixed rate loans with the  intention  to sell the majority of them in
the secondary market on a non-recourse basis for cash.  However, we occasionally
originate  fixed rate loans for our own portfolio to facilitate the sale of real
estate we acquire in settlement of loans or which meet specific  yield and other
approved  guidelines.  For more information,  see Asset/Liability  Management on
page 8. In  addition,  the average  term of these fixed rate  mortgage  loans we
originate for our own portfolio historically has been significantly shorter than
their  contractual  maturity  due to loan  payoffs  as a result of home sales or
refinancings and prepayments.

RESIDENTIAL REAL ESTATE LENDING

     Our primary  lending  activity is our origination of mortgage loans secured
by single family residential  properties consisting of one-to-four units located
primarily  in  California.  We provide  these  mortgage  loans for  borrowers to
purchase  residences or to refinance their existing  mortgages at lower rates or
upon  different  terms.  Our primary  strategy is to originate  adjustable  rate
mortgages  for  our  portfolio  of  loans  we  hold  for  investment.  For  more
information,  see  Asset/Liability  Management  on page  8.  We  also  originate
residential fixed rate mortgage loans to meet consumer demand,  but we intend to
sell the majority of these loans in the secondary market,  rather than hold them
in our portfolio.  We may,  however,  place  residential fixed rate loans in our
portfolio of loans held for investment if these fixed rate loans are funded with
long-term  funds to mitigate  interest  rate risk.  In addition,  we originate a
small volume of fixed rate loans for our own  investment  if they meet  specific
yield and other  approved  guidelines,  or to facilitate our sale of real estate
acquired in settlement of loans. For more information,  see Secondary  Marketing
and Loan Servicing Activities on page 5.

     Our adjustable rate mortgages generally:

     o    begin with an incentive interest rate, which is an interest rate below
          the current market rate,  that adjusts to the applicable  index plus a
          defined  spread,  subject to periodic  and lifetime  caps,  after one,
          three, six or twelve months;

     o    provide that the maximum  interest rate we can charge borrowers cannot
          exceed the incentive rate by more than six to nine percentage  points,
          depending on the type of loan and the initial rate offered; and

     o    limit interest rate adjustments to 1% per adjustment  period for those
          that adjust  semi-annually and 2% per adjustment period for those that
          adjust annually.

                                       3
<PAGE>

     Most  of  our  adjustable   rate  mortgages   adjust  monthly   instead  of
semi-annually. These monthly adjustable rate mortgages:

     o    have a lifetime interest rate cap, but no specified  periodic interest
          rate adjustment cap;

     o    have a periodic  cap on changes in required  monthly  payments,  which
          adjust annually; and

     o    allow  for  negative  amortization,  which  is the  addition  to  loan
          principal of accrued  interest that exceeds the required  monthly loan
          payments.

Regarding  negative   amortization,   if  a  loan  incurs  significant  negative
amortization,  then  there is an  increased  risk  that  the  fair  value of the
underlying  collateral  on the loan would be  insufficient  to satisfy fully the
outstanding principal and interest. We currently impose a limit on the amount of
negative  amortization  for loans with  loan-to-value  ratios of 80% or less.  A
loan-to-value  ratio is the  ratio of the  principal  amount  of the loan to the
lower of the sales  price or  appraised  value at  origination  of the  property
securing the loan. The limit on negative amortization is that the principal plus
the added amount cannot exceed 125% of the original loan amount. This limit does
not apply to subprime  loans.  Rather,  for subprime  loans the  principal  plus
negative  amortization  cannot  exceed  110% of the  original  loan  amount.  At
year-end  2001,  loans  with the  higher  125%  limit on  negative  amortization
represented about one-fourth of our adjustable rate one-to-four unit residential
portfolio.  We permit  adjustable  rate  mortgages  to be assumed  by  qualified
borrowers.

     During 2001,  approximately  78% of our one-to-four  unit  residential real
estate loans were obtained by our wholesale loan  representatives but originated
through outside mortgage brokers. We pay our wholesale loan representatives on a
commission  basis. We consider the  compensation we pay outside mortgage brokers
when we set the overall  price of our mortgage  loan  products.  These  mortgage
brokers do not operate  from our offices and are not our  employees.  Our branch
mangers  and  residential  loan  officers  originated  approximately  22% of our
one-to-four unit residential  loans during 2001. We compensate  residential loan
officers  located in our call  centers on a salary basis plus a fixed amount per
loan they  originate.  Branch mangers and assistant  managers are  compensated a
fixed amount per loan they  originate.  Loan officers  located  outside our call
centers are  compensated on a commission  only basis and typically  receive loan
referrals from real estate agents, builders and customers.

     We require  that our  residential  real estate loans be approved at various
levels of management,  depending upon the amount of the loan. On a single family
residential loan we originate for our portfolio, the maximum amount we generally
will lend is $1 million. Our average loan size, however, is much lower. In 2001,
our average loan size was $309,000.  We generally make loans with  loan-to-value
ratios not exceeding 80%. We will make loans with  loan-to-value  ratios of over
80%, if the borrower obtains private mortgage  insurance to reduce the effective
loan-to-value  ratio to between 70% to 78%,  consistent with secondary marketing
requirements. In addition, we require that borrowers obtain hazard insurance for
all  residential  real estate loans covering the lower of the loan amount or the
replacement value of the residence.

     In our approval  process for the loans we originate or purchase,  we assess
both the value of the property securing the loan and the applicant's  ability to
repay the loan. Loan underwriters  analyze the loan application and the property
involved.  Qualified  appraisers  on our staff or  approved  outside  appraisers
establish  the value of the  collateral  through the use of full  appraisals  or
alternative  valuation  formats  that meet  regulatory  requirements.  Appraisal
reports  prepared by outside  appraisers are  selectively  reviewed by our staff
appraisers or by approved fee appraisers.  We also obtain  information about the
applicant's  income,   financial  condition,   employment  and  credit  history.
Typically, we will verify an applicant's credit information for loans originated
by our retail loan  representatives.  For loans submitted from outside  mortgage
brokers,  we  require  the  mortgage  broker to  obtain,  review  and verify the
applicant's credit information and employment.

     On our adjustable rate mortgages we offer with incentive interest rates, we
currently qualify applicants:

     o    for loan programs with no negative amortization at the higher of:

          o    the initial incentive interest rate; or

          o    the fully indexed interest rate.

     o    for loan programs  that include  negative  amortization  and are owner
          occupied, at the minimum qualifying interest rate of 7.00%.

     o    for loan programs that include negative amortization and are non-owner
          occupied, at the minimum qualifying interest rate of 7.25%.

                                       4
<PAGE>

     Late in 1996,  we began  offering  one-to-four  unit  residential  loans to
borrowers who have or, in the case of purchases, will have equity in their homes
but whose credit rating contains  exceptions which preclude them from qualifying
for lower or better  market  interest  rates and terms.  We refer to these lower
grade credits,  which we  characterize  as "A-," "B" and "C" loans,  as subprime
loans in our loan  portfolio.  Our  subprime  loans are  characterized  by lower
loan-to-value  ratios and higher average interest rates than higher credit grade
loans or "A" loans. We believe these lower credit grade  borrowers  represent an
opportunity for us to earn a higher net return for the risks we assume.  We have
developed specific underwriting guidelines for each classification of adjustable
subprime  credit and qualify these  applicants  at the fully  indexed rate.  For
further information,  see Regulation--Regulation of the Bank--Regulatory Capital
Requirements on page 11.

SECONDARY MARKETING AND LOAN SERVICING ACTIVITIES

     As  part  of  our  secondary  marketing   activities,   we  originate  some
residential  real estate  adjustable  rate  mortgages and fixed rate  mortgages,
which we intend to sell.  Accordingly,  we classify these loans as held for sale
and carry them at the lower of cost or fair  value.  Amortized  cost  includes a
basis  adjustment to the loan at funding  resulting  from the change in the fair
value  of the  associated  interest  rate  lock  derivative  from  the  date  of
commitment  to the date of  funding.  These  loans are secured by first liens on
one-to-four  unit  residential  properties and generally  have  maturities of 30
years or less.

     Generally, we use various hedging programs to manage the interest rate risk
of our fixed rate mortgage origination  process.  For further  information,  see
Asset/Liability Management and Market Risk on page 43.

     We  believe   that   servicing   loans  for  others  can  be  an  important
asset/liability  management tool because it produces operating results which, in
response to changes in market interest  rates,  tend to move opposite to changes
in net interest income.  Because adjustable rate mortgages take longer to adjust
to market  interest rates,  net interest  income  associated with these loans is
expected to decline in periods of rising  interest rates and increase in periods
of falling rates. In contrast, the value of a loan servicing portfolio normally:

     o    increases as interest rates rise and loan prepayments decrease; and

     o    declines as interest rates fall and loan prepayments increase.

In addition,  increased  levels of servicing  activities and the  opportunity to
offer our other financial  services in servicing loans for others can provide us
with additional income with minimal additional overhead costs.

     Depending upon market pricing for servicing, we sell loans either servicing
retained or servicing released. When we sell loans servicing retained, we record
gains or losses  from these  loans at the time of sale.  We  calculate  gains or
losses from our sale as the  difference  between the net sales  proceeds and the
allocated basis of the loans sold. We capitalize  mortgage  servicing  rights we
acquire  through  either our purchase or origination of mortgage loans we intend
to sell with  servicing  rights  retained.  We  allocate  the total  cost of the
mortgage loans designated for sale to both the mortgage  servicing rights and to
the mortgage  loans without  mortgage  servicing  rights based on their relative
fair  values.  We  disclose  our  mortgage  servicing  rights  in our  financial
statements  and  include  them as a component  of the gain on sale of loans.  We
recognize impairment losses on the mortgage servicing rights through a valuation
allowance and record any  associated  provision as a component of loan servicing
fees. At December 31, 2001,  our mortgage  servicing  rights totaled $57 million
and during 2001 we recorded a $10.6  million  provision  for  impairment  of our
mortgage servicing rights.

     We may exchange  loans we originate for sale with  government  agencies for
mortgage-backed  securities  collateralized  by  these  loans.  Our cost for the
exchange,  a monthly  guaranty  fee, is expressed as a percentage  of the unpaid
principal  balance  and  is  deducted  from  interest  income.  We can  use  the
securities we receive to collateralize  various types of our borrowings at rates
that  frequently are more favorable than rates on other types of liabilities and
also carry a lower  risk-based  capital  requirement  than whole loans. We carry
these  mortgage-backed  securities available for sale at fair value. However, we
record no gain or loss on the  exchange  in our  statement  of income  until the
securities are sold to a third party.  Before we sell these  securities to third
parties,  we  show  all  changes  in  fair  value  as a  separate  component  of
stockholders'  equity as accumulated other  comprehensive  income, net of income
taxes.

COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING

     We have provided  permanent loans secured by retail  neighborhood  shopping
centers  and  multi-family  properties.  Our major  loan  officers  conduct  our
commercial real estate and multi-family lending activities.  We compensate these
officers on a salary basis.

                                       5
<PAGE>

     Commercial real estate and multi-family  loans generally entail  additional
risks as compared to single family residential mortgage lending. We subject each
loan,  including  loans to  facilitate  the sale of real  estate we own,  to our
underwriting standards, which generally include:

     o    our evaluation of the creditworthiness and reputation of the borrower;
          and

     o    the amount of the  borrower's  equity in the project as  determined on
          the basis of appraisal,  sales and leasing information on the property
          and cash flow projections.

     To protect the value of the security for our loan, we require  borrowers to
maintain  casualty  insurance  for the  loan  amount  or  replacement  cost.  In
addition,  for  non-residential  loans in excess of  $500,000,  we  require  the
borrower to obtain  comprehensive  general liability  insurance.  All commercial
real estate loans we originate must be approved by at least two of our officers,
one of  whom  must be the  originating  loan  account  officer  and the  other a
designated officer with appropriate loan approval authority.

CONSTRUCTION LENDING

     We  have  provided  construction  loan  financing  for  single  family  and
multi-family  residential  properties and commercial real estate projects,  like
retail  neighborhood  shopping  centers.  Our major  loan  officers  principally
originate these loans. We generally make construction loans at floating interest
rates  based  upon  the  prime or  reference  rate of a major  commercial  bank.
Generally,  we  require  a  loan-to-value  ratio of 75% or less on  construction
lending and we subject each loan to our underwriting standards.

     Construction  loans involve risks different from completed  project lending
because we advance loan funds based upon the security of the  completed  project
under  construction.  If the borrower  defaults on the loan, then we may have to
advance additional funds to finance the project's  completion before the project
can be sold.  Moreover,  construction  projects  are  affected by  uncertainties
inherent in estimating:

     o    construction costs;

     o    potential delays in construction time;

     o    market demand; and

     o    the accuracy of the value on the completed project.

     When providing  construction  loans, we require the general  contractor to,
among other things,  carry  contractor's  liability  insurance equal to specific
prescribed  minimum  amounts,  carry builder's risk insurance and have a blanket
bond against employee misappropriation.

COMMERCIAL LENDING

     We  originate  commercial  loans and  revolving  lines of credit  and issue
standby letters of credit for our middle market commercial  customers.  We offer
the various credit  products on both a secured and unsecured basis with interest
rates being either fixed or variable.  Our portfolio emphasis is toward secured,
floating  rate credit  facilities.  Our  commercial  banking group directs these
activities and focuses on our long-term,  relationship-based  customers. We also
utilize our retail branch network as a source of commercial customers,  with the
lending to these  customers being  typically  managed by the branch manager.  We
believe our commercial borrowers are desirable because these borrowers generally
have lower cost deposit accounts.

CONSUMER LENDING

     The Bank originates direct automobile loans, home equity loans and lines of
credit,  and other  consumer loan  products.  Before we make a consumer loan, we
assess the applicant's  ability to repay the loan and, if applicable,  the value
of the  collateral  securing the loan.  The risk involved with home equity loans
and lines of credit is similar to the risk involved with residential real estate
loans. We offer  customers a credit card through a third party,  who extends the
credit and services the loans made to our customers.

INVESTMENT ACTIVITIES

     As a federally  chartered savings  association,  the Bank's ability to make
securities  investments  is prescribed  under the OTS  regulations  and the Home
Owners' Loan Act.  The Bank's  authorized  officers  make  investment  decisions
within guidelines established by the Bank's Board of Directors. The Bank manages
these  investments in an effort to produce the highest yield,  while at the same
time  maintaining  safety  of  principal,  minimizing  interest  rate  risk  and
complying with applicable regulations.

                                       6
<PAGE>

     We carry  securities  held to maturity at amortized  cost.  We adjust these
costs  for  amortization  of  premiums  and  accretion  of  discounts,  which we
recognize  as interest  income using the interest  method.  We carry  securities
available  for sale at fair  value.  We  exclude  unrealized  holding  gains and
losses, or valuation allowances  established for net unrealized losses, from our
earnings and report them as a separate component of our stockholders'  equity as
accumulated other comprehensive income, net of income taxes, unless the security
is deemed other than temporarily  impaired.  If the security is determined to be
other than  temporarily  impaired,  we charge the  amount of the  impairment  to
operations.  For  further  information  on the  composition  of  our  investment
portfolio,  see Management's  Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition--Investment Securities on page 37.

DEPOSIT ACTIVITIES

     We prefer to use deposits as our principal  source of funds for  supporting
our lending  activities,  because the cost of these funds generally is less than
that of borrowings  or other  funding  sources with  comparable  maturities.  We
traditionally   have  obtained  our  savings   deposits   primarily  from  areas
surrounding  the Bank's branch  offices.  However,  we  occasionally  raise some
retail deposits through Wall Street activities.

     General  economic  conditions  affect  deposit  flows.  Funds may flow from
depository  institutions such as savings  associations into direct vehicles like
government  and corporate  securities  or other  financial  intermediaries.  Our
ability to attract  and retain  deposits  will  continue to be affected by money
market conditions,  prevailing interest rates and available competing investment
vehicles.  Generally,  state or federal  regulation  does not restrict  interest
rates we pay on deposits.

     In 1996, we began establishing  full-service  branch facilities in selected
supermarket locations throughout California.  Each in-store branch offers a full
range of financial  services  including checking and savings accounts as well as
residential and consumer loans.

     When consistent with our maintenance of appropriate  capital levels, we may
consider  opportunities  to augment our retail  branch  system and deposit  base
through our acquisition of selected branches or deposits.

     For  further  information,  see  Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations--Financial  Condition--Deposits on
page 40.

BORROWING ACTIVITIES

     Our  principal  source of funds has been and  continues  to be  deposits we
raise through our retail  branch  system.  At various  times,  however,  we have
utilized  other  sources  to  fund  our  loan  origination  and  other  business
activities.  We have at times  relied upon our  borrowings  from the FHLB of San
Francisco as an  additional  source of funds.  The FHLB of San  Francisco  makes
advances to us through several different credit programs it offers.

     From time to time, we obtain additional sources of funds by selling some of
our securities and mortgage loans under agreements to repurchase.  These reverse
repurchase  agreements are generally  short-term and are  collateralized  by our
mortgage-backed  or investment  securities and our mortgage  loans. We only deal
with  investment  banking firms that are  recognized as primary  dealers in U.S.
government securities or major commercial banks in connection with these reverse
repurchase agreements.  In addition, we limit the amounts of our borrowings from
any single institution.

     For  further  information,  see  Management's  Discussion  and  Analysis of
Financial Condition and Results of  Operations--Financial  Condition--Borrowings
on page 41.

CAPITAL SECURITIES

     On July 23,  1999,  we issued $120  million in capital  securities  through
Downey  Financial  Capital  Trust  I.  The  capital   securities  pay  quarterly
cumulative  cash  distributions  at an annual rate of 10.00% of the  liquidation
value of $25 per share.  Of the $115 million of net  proceeds,  we invested $108
million as  additional  common stock of the Bank thereby  increasing  the Bank's
regulatory  core/tangible  capital by that same  amount.  The balance of the net
proceeds have been used for general corporate purposes.  For further information
regarding  our  capital  securities,  see  Note  18  on  page  91  of  Notes  to
Consolidated Financial Statements.

                                       7
<PAGE>

ASSET/LIABILITY MANAGEMENT

     Savings institutions are affected by interest rate risks to the degree that
their interest-bearing liabilities, consisting principally of customer deposits,
FHLB advances,  other borrowings and capital securities,  mature or reprice on a
different basis than their interest-earning  assets, which consist predominantly
of intermediate or long-term real estate loans. While having liabilities that on
average mature or reprice more frequently than assets may be beneficial in times
of  declining  interest  rates,  this  asset/liability  structure  may result in
declining  net earnings  during  periods of rising  interest  rates.  One of our
principal  objectives  is to manage the  effects of adverse  changes in interest
rates  on our  interest  income  while  maintaining  our  asset  quality  and an
acceptable  interest rate spread.  To improve the rate  sensitivity and maturity
balance of our interest-earning  assets and liabilities,  we have emphasized the
origination  of  loans  with  adjustable  interest  rates  or  relatively  short
maturities.  Loans with adjustable  interest rates have the beneficial effect of
allowing the yield on our assets to increase  during periods of rising  interest
rates,  although these loans have  contractual  limitations on the frequency and
extent of interest rate adjustments.

     For further information,  see Lending Activities on page 2 and Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Financial  Condition--Asset/Liability  Management and Market Risk on
page 43.

EARNINGS SPREAD

     We  determine  our net  interest  income  or the  interest  rate  spread by
calculating the difference between:

     o    the  yield  we  earn  on  our  interest-earning   assets  like  loans,
          mortgage-backed securities and investment securities; and

     o    the cost we pay on our  interest-bearing  liabilities  like  deposits,
          borrowings and capital securities.

Our net interest income is also determined by the relative dollar amounts of our
interest-earning assets and interest-bearing liabilities.

     Our effective  interest rate spread,  which  reflects the relative level of
our interest-earning assets to our interest-bearing liabilities, equals:

     o    the difference between interest income on our interest-earning  assets
          and interest expense on our interest-bearing liabilities, divided by

     o    our average interest-earning assets for the period.

     For information regarding our net income and the components thereof and for
management's analysis of our financial condition and results of operations,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  beginning on page 23. For  information  regarding  the return on our
assets and other selected  financial  data, see Selected  Financial Data on page
21.

INSURANCE AGENCY ACTIVITIES

     Downey Affiliated Insurance Agency was incorporated on January 25, 1995, as
Downey's wholly owned subsidiary.  We capitalized  Downey  Affiliated  Insurance
Agency on February 24, 1995 with $400,000.  In the 1995 second  quarter,  Downey
Affiliated  Insurance Agency commenced  operations at which time representatives
of Downey  Affiliated  Insurance  Agency were available in our branches to offer
annuity products. During 1996, Downey Affiliated Insurance Agency began offering
forced-placed casualty insurance policies on mortgage loans and stopped offering
annuity  products.  The offering of forced-placed  casualty  insurance  policies
ceased in April 1999.

REAL ESTATE INVESTMENT ACTIVITIES

     In addition to our primary  business of banking,  which has been  described
above,  we are also  involved in real estate  investment  activities,  which are
conducted  primarily  through DSL Service Company,  a wholly owned subsidiary of
the Bank. DSL Service Company is a diversified real estate  development  company
which was established in 1966 as a neighborhood  shopping center and residential
tract  developer,  as well as the  general  contractor  for  the  Bank's  branch
locations. Today its capabilities include development, construction and property
management  activities  relating to its portfolio of projects  primarily  within
California,  but also in Arizona.  In addition to DSL Service Company developing
its own real estate projects,  it associates with other qualified  developers to
engage  in joint  ventures.  The  primary  revenue  sources  of our real  estate
investment activities include net rental

                                       8
<PAGE>

income and gains from the sale of real estate investments.  The primary expenses
of our real estate  investment  activities are interest  expense and general and
administrative expense.

     Due to federal law, the Bank is prohibited  from making new  investments in
real estate  development and joint venture  operations and is required to deduct
the full amount of its  investment  in DSL Service  Company in  calculating  its
applicable  ratios under the core,  tangible and risk-based  capital  standards.
Savings associations  generally may invest in service corporation  subsidiaries,
like DSL Service Company, to the extent of 2% of the association's  assets, plus
up  to  an  additional  1% of  assets  for  investments  which  serve  primarily
community,   inner-city  or  community   development   purposes.   In  addition,
"conforming  loans" by the Bank to DSL's joint venture  partnerships are limited
to 50% of the Bank's risk-based capital.  "Conforming loans" are those generally
limited to 80% of  appraised  value,  bear a market rate of interest and require
payments  sufficient  to amortize the  principal  balance of the loan. We are in
compliance with each of these investment limitations.

     To the extent Downey or a subsidiary of Downey,  other than the Bank or its
subsidiaries,   makes  real  estate  investments,  the  above-mentioned  capital
deductions and  limitations  do not apply,  as they only pertain to the specific
investments by savings associations or their subsidiaries.

     For  further  information,  see  Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations--Financial  Condition--Investments
in Real Estate and Joint Ventures on page 38.

COMPETITION

     We face  competition  both in attracting  deposits and in making loans. Our
most direct  competition for deposits has  historically  come from other savings
institutions  and from commercial  banks located in our principal  market areas,
including many large financial  institutions based in other parts of the country
or their subsidiaries.  In addition, we face additional significant  competition
for investors' funds from short-term money market securities and other corporate
and government  securities.  Our ability to attract and retain savings  deposits
depends,  generally,  on our ability to provide a rate of return,  liquidity and
risk comparable to that offered by competing  investment  opportunities  and the
appropriate level of customer service.

     We  experience  competition  for real estate loans  principally  from other
savings institutions, commercial banks, mortgage banking companies and insurance
companies.  We compete for loans principally through our interest rates and loan
fees we charge and our efficiency  and quality of services we provide  borrowers
and real estate brokers.

EMPLOYEES

     At December 31, 2001, we had  approximately  1,966 full-time  employees and
545  part-time  employees.  We provide  our  employees  with  health and welfare
benefits and a retirement and savings plan.  Additionally,  we offer  qualifying
employees  participation  in our stock  purchase  plan.  Our  employees  are not
represented  by any union or collective  bargaining  group,  and we consider our
employee relations to be good.

REGULATION

GENERAL

     Federal  and state  law  extensively  regulates  savings  and loan  holding
companies and savings  associations.  This regulation is intended  primarily for
the  protection  of our  depositors  and the SAIF and not for the benefit of our
stockholders.  In the following information, we describe some of the regulations
applicable to us and the Bank.  We do not claim this  discussion is complete and
qualify our  discussion in its entirety by reference to applicable  statutory or
regulatory provisions.

REGULATION OF DOWNEY

     General.  We are a  savings  and loan  holding  company  and are  therefore
subject to  regulatory  oversight by the OTS.  Thus, we are required to register
and file  reports  with the OTS and are  regulated  and  examined by the OTS. In
addition,  the OTS has enforcement authority over us, which also permits the OTS
to restrict or prohibit our  activities  that it determines to be a serious risk
to the Bank.

     Activities  Restrictions.  As a savings and loan holding  company with only
one savings and loan association subsidiary, we generally are not limited by OTS
activity  restrictions,  provided the Bank satisfies the qualified thrift lender
test or meets the definition of a domestic  building and loan association in the
Internal Revenue Code. If we acquire control of another savings association as a
separate subsidiary of Downey, we would become a multiple

                                       9
<PAGE>

savings  and loan  holding  company.  As a  multiple  savings  and loan  holding
company,  our  activities,  other than the  activities  of the Bank or any other
SAIF-insured   savings   association,   would  become  subject  to  restrictions
applicable to bank holding  companies  unless these other  savings  associations
were acquired in a supervisory acquisition and each also satisfies the qualified
thrift  lender  test or meets the  definition  of a domestic  building  and loan
association.  Furthermore,  if we were in the future to sell control of the Bank
to any other company, such company would not succeed to our grandfathered status
as a unitary  thrift  holding  company and would be subject to the same business
activity  restrictions  as a bank holding  company.  For more  information,  see
Restrictions on Acquisitions below and Regulation of the Bank--Qualified  Thrift
Lender Test on page 13.

     Restrictions on  Acquisitions.  We must obtain approval from the OTS before
acquiring  control  of any other  SAIF-insured  association.  The OTS  generally
prohibits these types of  acquisitions if they result in a multiple  savings and
loan holding company  controlling  savings  associations in more than one state.
However,  the  OTS  permits  interstate   acquisitions  if  the  acquisition  is
authorized by specific  state  authorization  or a supervisory  acquisition of a
failing savings association.

     Federal  law  generally  provides  that no  "person,"  acting  directly  or
indirectly or through or in concert with one or more other persons,  may acquire
"control" of a federally insured savings  association unless the person gives at
least 60 days  written  notice to the OTS. The OTS then has the  opportunity  to
disapprove the proposed acquisition. In addition, no company may acquire control
of this type of an institution without prior OTS approval. These provisions also
prohibit,  among  other  things,  any  director or officer of a savings and loan
holding  company,  or any  individual  who owns or controls more than 25% of the
voting shares of a savings and loan holding company,  from acquiring  control of
any  savings  association  not a  subsidiary  of the  savings  and loan  holding
company, unless the acquisition is approved by the OTS.

     Furthermore,   no  company  may  acquire  control  of  an  insured  savings
association,  unless that company engages,  and continues to engage, only in the
financial  activities  permissible  for  a  Financial  Holding  Company,  unless
grandfathered  as a  unitary  savings  and loan  holding  company.  Downey  is a
grandfathered unitary savings and loan holding company.

     Financial   Holding  Company   Legislation.   On  November  12,  1999,  the
Gramm-Leach-Bliley  Act of 1999  (the  "Act")  was  signed  into  law.  This law
established a comprehensive  framework to permit  affiliations  among commercial
banks,  insurance  companies,  securities  firms  and  other  financial  service
providers by revising and  expanding  the Bank Holding  Company Act framework to
permit a  holding  company  to engage in a full  range of  financial  activities
through  a  new  entity  known  as a  "Financial  Holding  Company."  "Financial
activities"  is broadly  defined  to include  not only  banking,  insurance  and
securities activities,  but also merchant banking and additional activities that
the Federal Reserve Board,  in consultation  with the Secretary of the Treasury,
determines to be financial in nature,  related or  incidental to such  financial
activities,  or complementary  activities that do not pose a substantial risk to
the safety and soundness of  depository  institutions  or the  financial  system
generally.

     The Act provided that no company may acquire  control of an insured savings
association,  unless that company engages,  and continues to engage, only in the
financial  activities  permissible  for  a  Financial  Holding  Company,  unless
grandfathered  as a  unitary  savings  and loan  holding  company.  Downey  is a
grandfathered  unitary  savings and loan holding  company and we may continue to
operate  under  present law as long as we continue to control  only the Bank and
the Bank continues to meet the qualified thrift lender test.

     We do not believe that this law will have a material  adverse effect on our
operations in the near-term.  However, to the extent that the Act permits banks,
securities firms and insurance  companies to affiliate,  the financial  services
industry may experience further  consolidation.  The Act is intended to grant to
community  banks  certain  powers as a matter of right that larger  institutions
have  accumulated on an ad hoc basis and which unitary  savings and loan holding
companies, such as Downey, already possess. Nevertheless,  this Act may have the
result  of  increasing  the  amount  of  competition  that we face  from  larger
institutions and other types of companies offering financial  products,  many of
which may have greater financial resources than we do. In addition,  the Act may
have an anti-takeover effect because it may tend to limit the range of potential
acquirers of Downey to other  savings and loan holding  companies  and Financial
Holding Companies.

REGULATION OF THE BANK

     General.  The OTS and the FDIC  extensively  regulate  the Bank because the
Bank is a federally chartered,  SAIF-insured savings association.  The Bank must
ensure that its lending activities and its other investments comply with various
statutory and regulatory requirements. The Bank is also regulated by the Federal
Reserve.

                                       10
<PAGE>

     The OTS, in  conjunction  with the FDIC,  regularly  examines  the Bank and
prepares  reports for the Bank's Board of Directors to consider  with respect to
any deficiencies the OTS or the FDIC finds in the Bank's operations. Federal and
state laws also regulate the  relationship  between the Bank and its  depositors
and borrowers, especially in matters regarding the ownership of savings accounts
and the form and content of mortgage documents used by the Bank.

     The  Bank  must  file  reports  with the OTS and the  FDIC  concerning  its
activities and financial condition. In addition, the Bank must obtain regulatory
approvals  before  entering  into  some   transactions   like  mergers  with  or
acquisitions  of other financial  institutions.  This regulation and supervision
establishes a comprehensive  framework of activities in which an institution may
engage  and is  intended  primarily  for  the  protection  of the  SAIF  and our
depositors.  The  regulatory  structure  also gives the  regulatory  authorities
extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of assets and the  establishment  of adequate loan loss reserves
for regulatory purposes. Any change in regulations, whether by the OTS, the FDIC
or the Congress,  could have a material  adverse  impact on us, the Bank and our
operations.

     Insurance  of Deposit  Accounts.  The SAIF,  as  administered  by the FDIC,
insures the Bank's deposit  accounts up to the maximum amount  permitted by law.
The  FDIC  may  terminate   insurance  of  deposits  upon  a  finding  that  the
institution:

     o    has engaged in unsafe or unsound practices;

     o    is in an unsafe or unsound condition to continue operations; or

     o    has violated any applicable law, regulation,  rule, order or condition
          imposed by the FDIC or the institution's primary regulator.

     The FDIC charges an annual  assessment  for the insurance of deposits based
on the risk a particular  institution poses to its deposit insurance fund. Under
this system as of December 31,  2001,  SAIF members paid within a range of 0% to
0.27% of  insured  domestic  deposits,  depending  upon the  institution's  risk
classification.  This risk  classification is based on an institution's  capital
group and supervisory subgroup assignment.

     The Bank also pays, in addition to its normal deposit  insurance premium as
a member of the SAIF,  an  amount  equal to  approximately  0.0212%  of  insured
deposits toward the retirement of the Financing Corporation bonds (known as FICO
Bonds)  issued in the 1980s to assist in the  recovery  of the  savings and loan
industry. These assessments will continue until the FICO Bonds mature in 2017.

     Regulatory  Capital  Requirements.  The Bank must meet  regulatory  capital
standards to be deemed in compliance with OTS capital requirements.  OTS capital
regulations  require  savings  associations  to meet the following three capital
standards:

     o    tangible capital equal to 1.5% of total adjusted assets;

     o    leverage  capital,  or "core  capital,"  equal to 3% of total adjusted
          assets for institutions such as the Bank; and

     o    risk-based capital equal to 8.0% of total risk-based assets.

     A savings  association  with a greater than "normal" level of interest rate
exposure must deduct an interest rate risk  component in  calculating  its total
capital for  purposes of  determining  whether it meets its  risk-based  capital
requirement. Interest rate exposure is measured, generally, as equal to:

     o    the decline in an institution's  net portfolio value that would result
          from a 200 basis point increase or decrease in market  interest rates,
          whichever would result in a lower net portfolio value, divided by

     o    the estimated economic value of the savings association's assets.

     The interest rate risk component a savings association must deduct from its
total capital is equal to:

     o    one-half of the difference between an institution's  measured exposure
          and "normal" interest rate risk exposure, which the OTS defines as 2%,
          multiplied by

     o    the estimated  economic value of the  institution's  assets.

     In August 1995, the OTS indefinitely delayed implementation of its interest
rate risk regulation.  However,  based on the asset / liability structure of the
Bank at December 31, 2001, the Bank would not have been required

                                       11
<PAGE>

to deduct an interest rate component in calculating its total risk-based capital
had the OTS's interest rate risk regulation been in effect.

     The OTS views its capital regulation requirements as minimum standards, and
it expects most  institutions to maintain capital levels well above the minimum.
In addition,  the OTS  regulations  provide that the OTS may  establish  minimum
capital  levels higher than those  provided in the  regulations  for  individual
savings  associations,  upon a  determination  that  the  savings  association's
capital  is or may  become  inadequate  in  view of its  circumstances.  The OTS
regulations   provide  that  higher  individual   minimum   regulatory   capital
requirements may be appropriate in circumstances where, among others:

     o    a savings  association  has a high degree of exposure to interest rate
          risk,  prepayment  risk,  credit risk,  concentration  of credit risk,
          other risks arising from nontraditional  activities,  or similar risks
          or a high proportion of off-balance sheet risk;

     o    a  savings  association  is  growing,  either  internally  or  through
          acquisitions, at a rate that presents supervisory issues; or

     o    a savings  association  may be  adversely  affected by  activities  or
          condition of its holding  company,  affiliates,  subsidiaries or other
          persons,  or  savings  associations  with  which  it  has  significant
          business relationships.

The Bank is not  required  to meet any  individual  minimum  regulatory  capital
requirement.  At December 31, 2001, the Bank's  regulatory  capital exceeded all
minimum regulatory capital requirements.

     As a  result  of a  number  of  federally  insured  financial  institutions
extending  their risk  selection  standards  to  attract  lower  credit  quality
accounts due to their having higher interest rates and fees, the federal banking
regulatory  agencies jointly issued Interagency  Guidelines on Subprime Lending.
Subprime lending involves extending credit to individuals with less than perfect
credit histories.

     The agencies guidelines consider subprime lending a high-risk activity that
is unsafe and  unsound if the risks  associated  with  subprime  lending are not
properly  controlled.  Specifically,  the 2001  guidelines  direct  examiners to
expect  regulatory  capital one and  one-half  to three  times  higher than that
typically set aside for prime assets for institutions that:

     o    have subprime assets equal to 25% or higher of Tier 1 capital, or

     o    have  subprime   portfolios   experiencing  rapid  growth  or  adverse
          performance trends, are administered by inexperienced  management,  or
          have inadequate or weak controls.

     Our subprime  portfolio,  pursuant to our definition,  represented  192% of
Tier  1  capital  as of  year-end  2001.  Any  requirement  for  us to  maintain
additional  regulatory capital as a result of our activities in subprime lending
could have an adverse  affect on our future  prospects  and  operations  and may
restrict  our  ability to grow.  If we are unable to comply with any new capital
requirements  imposed  upon  regulatory  examination,  we may be  subject to the
prompt corrective action regulations of the OTS. Although we believe we maintain
appropriate  controls and  regulatory  capital for our subprime  activities,  we
cannot determine whether,  or to what extent,  additional  capital  requirements
will be imposed on us after periodic examinations by the OTS.

     The Home Owners' Loan Act permits  savings  associations  not in compliance
with the OTS capital  standards to seek an exemption from penalties or sanctions
for  noncompliance.  The  OTS  will  grant  an  exemption  only  if the  savings
association  meets  strict  requirements.  In  addition,  the OTS must  deny the
exemption in some circumstances. If the OTS does grant an exemption, the savings
association still may be exposed to enforcement  actions for other violations of
law or unsafe or unsound practices or conditions.

     Prompt  Corrective  Action.  The OTS's prompt  corrective action regulation
requires  the OTS to  take  mandatory  actions  and  authorizes  the OTS to take
discretionary   actions  against  a  savings   association   that  falls  within
undercapitalized capital categories specified in the regulation.

     The regulation establishes five categories of capital classification:

     o    "well capitalized;"

     o    "adequately capitalized;"

     o    "undercapitalized;"

                                       12
<PAGE>

     o    "significantly undercapitalized;" and

     o    "critically undercapitalized."

The regulation uses an institution's  risk-based  capital,  leverage capital and
tangible capital ratios to determine the institution's  capital  classification.
At December  31, 2001,  the Bank  exceeded  the capital  requirements  of a well
capitalized institution under applicable OTS regulations.

     Loans-to-One-Borrower.  Savings  associations  generally are subject to the
lending  limits  applicable  to national  banks.  With limited  exceptions,  the
maximum  amount that a savings  association  or a national  bank may lend to any
borrower,  including some related entities of the borrower,  at one time may not
exceed:

     o    15% of the unimpaired capital and surplus of the institution, plus

     o    an additional  10% of unimpaired  capital and surplus if the loans are
          fully secured by readily marketable collateral.

     Savings  associations  are  additionally  authorized  to make  loans to one
borrower, for any purpose:

     o    in an amount not to exceed $500,000; or

     o    by order of the Director of OTS, in an amount not to exceed the lesser
          of  $30,000,000  or 30% of  unimpaired  capital and surplus to develop
          residential housing, provided:

          o    the  purchase  price  of  each  single-family   dwelling  in  the
               development does not exceed $500,000;

          o    the  savings  association  is  in  compliance  with  its  capital
               requirements;

          o    the loans comply with applicable loan-to-value requirements; and

          o    the aggregate  amount of loans made under this authority does not
               exceed 15% of unimpaired capital and surplus.

     At  December  31,  2001,  the Bank's  loans-to-one-borrower  limit was $128
million based upon the 15% of unimpaired capital and surplus measurement.

     Qualified Thrift Lender Test. The OTS requires savings associations to meet
a qualified  thrift  lender test.  The  qualified  thrift lender test may be met
either  by  maintaining  a  specified  level  of  assets  in  qualified   thrift
investments  as  specified  in the  Home  Owners'  Loan  Act or by  meeting  the
definition  of a "domestic  building  and loan  association."  Qualified  thrift
investments  are  primarily   residential  mortgages  and  related  investments,
including  some   mortgage-related   securities.   The  required  percentage  of
investments  under the Home Owners' Loan Act is 65% of assets while the Internal
Revenue Code requires  investments of 60% of assets.  An association  must be in
compliance  with the qualified  thrift lender test or the definition of domestic
building and loan association on a monthly basis in nine out of every 12 months.
Associations  failing to meet the  qualified  thrift  lender test are  generally
allowed  only to engage in  activities  permitted  for both  national  banks and
savings associations.

     The FHLB  also  relies  on the  qualified  thrift  lender  test.  A savings
association  will  only  enjoy  full  borrowing  privileges  from an FHLB if the
savings  association is a qualified thrift lender.  As of December 31, 2001, the
Bank was in compliance with its qualified thrift lender test requirement and met
the definition of a domestic building and loan association.

     Affiliate Transactions.  Transactions between a savings association and its
"affiliates" are quantitatively  and qualitatively  restricted under the Federal
Reserve Act. Affiliates of a savings association include,  among other entities,
the savings  association's  holding  company and companies that are under common
control with the savings association.

     In general, a savings  association or its subsidiaries are limited in their
ability to engage in "covered transactions" with affiliates:

     o    to an amount equal to 10% of the association's capital and surplus, in
          the case of covered transactions with any one affiliate; and

     o    to an amount equal to 20% of the association's capital and surplus, in
          the case of covered transactions with all affiliates.

                                       13
<PAGE>

In addition,  a savings  association and its  subsidiaries may engage in covered
transactions  and  other  specified   transactions   only  on  terms  and  under
circumstances  that are  substantially the same, or at least as favorable to the
savings  association  or its  subsidiary,  as those  prevailing  at the time for
comparable  transactions with nonaffiliated  companies.  A "covered transaction"
includes:

     o    a loan or extension of credit to an affiliate;

     o    a purchase of investment securities issued by an affiliate;

     o    a purchase of assets from an affiliate, with some exceptions;

     o    the acceptance of securities  issued by an affiliate as collateral for
          a loan or extension of credit to any party; or

     o    the issuance of a guarantee,  acceptance or letter of credit on behalf
          of an affiliate.

In addition, under the OTS regulations:

     o    a savings association may not make a loan or extension of credit to an
          affiliate   unless  the   affiliate  is  engaged  only  in  activities
          permissible for bank holding companies;

     o    a savings  association  may not purchase or invest in securities of an
          affiliate other than shares of a subsidiary;

     o    a  savings  association  and  its  subsidiaries  may  not  purchase  a
          low-quality asset from an affiliate;

     o    covered  transactions  and  other  specified  transactions  between  a
          savings  association or its  subsidiaries  and an affiliate must be on
          terms and conditions  that are consistent  with safe and sound banking
          practices; and

     o    with some  exceptions,  each loan or  extension of credit by a savings
          association to an affiliate must be secured by collateral  with a fair
          value ranging from 100% to 130%,  depending on the type of collateral,
          of the amount of the loan or extension of credit.

     The  OTS  regulations   generally  exclude  all  non-bank  and  non-savings
association  subsidiaries of savings  associations from treatment as affiliates,
except to the extent that the OTS or the Federal  Reserve decides to treat these
subsidiaries as affiliates. The regulations also require savings associations to
make and retain records that reflect affiliate transactions in reasonable detail
and provides that specified  classes of savings  associations may be required to
give the OTS prior notice of affiliate transactions.

     Capital  Distribution   Limitations.   A  savings  association  that  is  a
subsidiary of a savings and loan holding company, such as the Bank, must file an
application  or a notice with the OTS at least 30 days  before  making a capital
distribution.  Savings  associations are not required to file an application for
permission  to make a  capital  distribution  and need only file a notice if the
following conditions are met:

     o    they are eligible for expedited treatment under OTS regulations;

     o    they would remain adequately capitalized after the distribution;

     o    the annual amount of capital  distribution  does not exceed net income
          for  that  year to date  added  to  retained  net  income  for the two
          preceding years; and

     o    the capital  distribution would not violate any agreements between the
          OTS and the savings association or any OTS regulations.

     Any other  situation  would require an  application to the OTS. The OTS may
disapprove an application or notice if the proposed capital distribution would:

     o    make   the   savings   association   undercapitalized,   significantly
          undercapitalized or critically undercapitalized,

     o    raise safety or soundness concerns or

     o    violate a statute,  regulation or agreement  with the OTS (or with the
          FDIC),  or a  condition  imposed  in an OTS  approved  application  or
          notice.

                                       14
<PAGE>

     Privacy.  Under the Financial  Services  Modernization Act, federal banking
regulators  adopted  rules  that  will  limit  the  ability  of banks  and other
financial  institutions to disclose  non-public  information  about consumers to
nonaffiliated  third parties.  Pursuant to those rules,  financial  institutions
must provide:

     o    initial notices to customers about their privacy policies,  describing
          the  conditions  under  which  they may  disclose  nonpublic  personal
          information to nonaffiliated third parties and affiliates;

     o    annual notices of their privacy policies to current customers; and

     o    a  reasonable  method for  customers  to "opt out" of  disclosures  to
          nonaffiliated third parties.

These privacy provisions affect how consumer  information is transmitted through
diversified financial companies and conveyed to outside vendors.

     Activities of Subsidiaries.  A savings  association  seeking to establish a
new subsidiary, acquire control of an existing company or conduct a new activity
through a  subsidiary  must provide 30 days prior notice to the FDIC and the OTS
and conduct any activities of the subsidiary in compliance with  regulations and
orders of the OTS.  The OTS has the power to  require a savings  association  to
divest any subsidiary or terminate any activity  conducted by a subsidiary  that
the OTS determines to pose a serious threat to the financial  safety,  soundness
or stability of the savings  association  or to be otherwise  inconsistent  with
sound banking practices.

     Community  Reinvestment Act and the Fair Lending Laws. Savings associations
have  a  responsibility  under  the  Community   Reinvestment  Act  and  related
regulations  of the OTS to help  meet the  credit  needs  of their  communities,
including low- and moderate-income neighborhoods.  In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their  lending  practices  on the basis of  characteristics  specified  in those
statutes.  An  institution's  failure  to  comply  with  the  provisions  of the
Community   Reinvestment   Act  could,  at  a  minimum,   result  in  regulatory
restrictions on its activities and the denial of applications.  In addition,  an
institution's  failure to comply with the Equal Credit  Opportunity  Act and the
Fair Housing Act could result in the OTS, other federal  regulatory  agencies as
well as the Department of Justice taking enforcement actions.

     Federal  Home Loan Bank  System.  The Bank is a member of the FHLB  system.
Among  other  benefits,  each FHLB  serves as a reserve or central  bank for its
members  within its assigned  region.  Each FHLB is financed  primarily from the
sale of consolidated  obligations of the FHLB system.  Each FHLB makes available
loans or advances to its members in compliance  with the policies and procedures
established by the Board of Directors of the individual FHLB.

     As an FHLB member,  the Bank is required to own capital stock in an FHLB in
an amount equal to the greater of:

     o    1% of its aggregate  outstanding  principal  amount of its residential
          mortgage loans, home purchase contracts and similar obligations at the
          beginning of each calendar year;

     o    5% of its FHLB advances or borrowings; or

     o    $500.

     The Bank's  required  investment in FHLB stock,  based on December 31, 2001
financial data, was $98 million. At December 31, 2001, the Bank had $113 million
of FHLB stock.

     The  Gramm-Leach-Bliley  Act made  significant  reforms to the FHLB system,
including:

     o    Expanded  Membership  - (i)  expands  the  uses  for,  and  types  of,
          collateral for advances;  (ii) eliminates bias toward qualified thrift
          lenders;  and (iii)  removes  capital  limits on  advances  using real
          estate  related  collateral  (e.g.,  commercial  real  estate and home
          equity loans).

     o    New Capital  Structure - each FHLB is allowed to establish two classes
          of stock: Class A is redeemable within six months of notice; and Class
          B is  redeemable  within five years  notice.  Class B is valued at 1.5
          times  the  value of Class A stock.  Each  FHLB  will be  required  to
          maintain minimum capital equal to 5% of equity.  Each FHLB,  including
          our FHLB of San  Francisco,  submitted  capital  plans for  review and
          approval by the Federal Housing Finance Board.

     o    Voluntary Membership - federally chartered savings associations,  such
          as the Bank, are no longer required to be members of the system.

                                       15
<PAGE>

     o    REFCorp  Payments  - changes  the  amount  paid by the  system on debt
          incurred in connection with the thrift crisis in the late 1980s from a
          fixed amount to 20% of net earnings after deducting certain expenses.

At this time it is not possible to predict the impact,  if any,  such changes or
capital plans will have on our financial condition or results of operation.

     Federal  Reserve  System.  The  Federal  Reserve  requires  all  depository
institutions  to  maintain  non-interest-bearing  reserves at  specified  levels
against  their  transaction  accounts  and  non-personal  time  deposits.  These
transaction accounts include checking,  NOW and Super NOW checking accounts. The
balances  a  savings  association  maintains  to meet the  reserve  requirements
imposed by the Federal Reserve may be used to satisfy the liquidity requirements
that are imposed by the OTS. At December  31, 2001,  the Bank was in  compliance
with these requirements.

     Proposed  Legislation.  From time to time, new laws are proposed that could
have an effect on the financial institutions industry. For example,  legislation
is currently  being  considered in the U.S. House of  Representatives  Financial
Institutions Subcommittee which would:

     o    Merge the Bank Insurance Fund ("BIF") and the SAIF.

     o    Increase  the current  deposit  insurance  coverage  limit for insured
          deposits to $130,000 and index future coverage limits to inflation.

     o    Increase deposit insurance coverage limits for municipal deposits.

     o    Double deposit  insurance  coverage  limits for individual  retirement
          accounts.

     o    Even out bank  deposit  insurance  premiums to avoid  sharp  increases
          during times of recession.

While we cannot predict whether such proposals will eventually  become law, they
could have an effect on our operations and the way we conduct business.

REGULATION OF DSL SERVICE COMPANY

     DSL  Service  Company  is  licensed  as a  real  estate  broker  under  the
California  Real  Estate  Law and as a  contractor  with the  Contractors  State
License  Board.  Thus,  the real  estate  investment  activities  of DSL Service
Company, including development,  construction and property management activities
relating to its  portfolio  of  projects,  are governed by a variety of laws and
regulations.  Changes in the laws and  regulations  or their  interpretation  by
agencies and the courts occur  frequently.  DSL Service Company must comply with
various  federal,  state  and local  laws,  ordinances,  rules  and  regulations
concerning zoning,  building design,  construction,  hazardous waste and similar
matters.  Environmental  laws and regulations  also affect the operations of DSL
Service  Company,  including  regulations  pertaining to  availability of water,
municipal sewage treatment capacity, land use, protection of endangered species,
population density and preservation of the natural terrain and coastlines. These
and other requirements could become more restrictive in the future, resulting in
additional time and expense in connection with DSL Service Company's real estate
activities.

     With regard to environmental matters, the construction products industry is
regulated by federal, state and local laws and regulations pertaining to several
areas  including  human  health  and safety and  environmental  compliance.  The
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund  Amendments and Reauthorization Act of 1986, as well as
analogous laws in some states,  create joint and several  liability for the cost
of cleaning up or correcting releases to the environment of designated hazardous
substances. Among those who may be held jointly and severally liable are:

     o    those who generated the waste;

     o    those who arranged for disposal;

     o    those who owned or operated the disposal  site or facility at the time
          of disposal; and

     o    current owners.

     In  general,  this  liability  is  imposed  in  a  series  of  governmental
proceedings  initiated by the government's  identification of a site for initial
listing as a "Superfund site" on the National Priorities List or a similar state
list and the government's  identification of potentially responsible parties who
may be liable for cleanup costs. None of the DSL Service Company's project sites
are listed as a "Superfund site."

                                       16
<PAGE>

     In addition,  California courts have imposed  warranty-like  responsibility
upon  developers  of new housing for defects in structure  and the housing site,
including soil conditions. This responsibility is not necessarily dependent upon
a finding that the developer was negligent.

     As a licensed  entity,  DSL Service Company is also examined and supervised
by the California  Department of Real Estate and the  Contractors  State License
Board.

TAXATION

     Federal. A savings institution is taxed like other corporations for federal
income tax  purposes,  and are  required to comply with income tax  statutes and
regulations  similar to those applicable to large  commercial  banks. The Bank's
bad debt deduction is determined  under the specific  charge-off  method,  which
allows the Bank to take an income tax  deduction  for these loans only when they
have been determined to be wholly or partially worthless.

     In addition to the regular income tax,  corporations are also subject to an
alternative  minimum  tax.  This  tax is  computed  at 20% of the  corporation's
regular  taxable  income,  after taking certain  adjustments  into account.  The
alternative minimum tax applies to the extent that it exceeds the regular income
tax liability.

     A corporation that incurs alternative  minimum tax generally is entitled to
take this tax as a credit  against its regular tax  liability  in later years to
the extent  that the  regular tax  liability  in these  later years  exceeds the
alternative minimum tax.

     State. The Bank uses California's  financial corporation income tax rate to
compute its  California  franchise tax  liability.  This rate is higher than the
California  non-financial  corporation  income tax rate  because  the  financial
corporation  income  tax rate  reflects  an amount  "in lieu" of local  personal
property and business license taxes that are paid by non-financial corporations,
but not by banks or other  financial  corporations.  The  financial  corporation
income tax rate was 10.84% for both 2001 and 2000.

     The Bank files a California  franchise  tax return on a combined  reporting
basis.  Other income and  franchise  tax returns are filed on a  separate-entity
basis in various other states. The Bank anticipates that additional state income
and  franchise  tax  returns  will be  required  in future  years as its lending
business is expanded nationwide.

     The Internal  Revenue  Service and various  state taxing  authorities  have
examined  our tax  returns for all tax years  through  1995,  and are  currently
reviewing  returns filed for the 1996 and 1997 tax years. The Bank's  management
believes it has adequately provided for potential exposure with regard to issues
that may be raised  in the  years  currently  under  examination.  Our tax years
subsequent to 1997 remain open to review by federal and state tax authorities.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     The  following  discusses  certain  factors  which may affect our financial
results and operations and should be considered in evaluating Downey.

     Economic Conditions and Geographic Concentrations.  Downey is headquartered
in and its  operations  are  concentrated  in  California.  As a result  of this
geographic concentration, our results depend largely upon economic conditions in
the state.  Leading  business  forecasters and economists  predict that economic
growth will likely be modest in 2002 and unemployment  rates will likely rise. A
significant  contributor  to the projected  2002 forecast is the impact from the
terrorist  attack occurring on September 11, 2001 resulting in job losses in the
travel  and  entertainment  sector  and other  businesses.  A  deterioration  in
economic  conditions  could have a material adverse impact on the quality of our
loan and real estate portfolios and the demand for our products and services.

     Interest Rates.  We anticipate  that  short-term  interest rate levels will
likely remain  relatively  stable  throughout most of 2002, with the possibility
rates might increase  modestly in the latter part of the year. If interest rates
vary  substantially  from present levels, our results may differ materially from
current  levels.  Changes in interest  rates will influence the growth of loans,
investments  and deposits and affect the rates  received on loans and investment
securities and paid on deposits. Changes in interest rates also affect the value
of our  recorded  mortgage  servicing  rights on loans we  service  for  others,
generally  increasing in value as interest  rates rise and declining as interest
rates fall.  If  interest  rates were to increase  significantly,  the  economic
feasibility  of real  estate  investment  activities  also  could  be  adversely
affected.

                                       17
<PAGE>

     Government  Regulation and Monetary Policy. The financial services industry
is  subject  to  extensive   federal  and  state   supervision  and  regulation.
Significant  new laws or changes in, or repeals of,  existing laws may cause our
results to differ materially.  Further, federal monetary policy, particularly as
implemented  through the Federal  Reserve System,  significantly  affects credit
conditions for Downey, primarily through open market operations in United States
government   securities,   the  discount   rate  for   borrowings   and  reserve
requirements,  and a material change in these conditions would be likely to have
a material impact on our results.

     Competition.  The banking  and  financial  services  business in our market
areas is highly  competitive.  The  increasingly  competitive  environment  is a
result  primarily of changes in  regulation,  changes in technology  and product
delivery  systems,  and the accelerating  pace of consolidation  among financial
services providers. Our results may differ if circumstances affecting the nature
or level of competition change.

     Credit  Quality.  A significant  source of risk arises from the possibility
that losses will be sustained because borrowers,  guarantors and related parties
may fail to perform in accordance with the terms of their loans. We have adopted
prudent underwriting and loan quality monitoring systems,  procedures and credit
policies,  including  the  establishment  and review of the  allowance  for loan
losses,  that  management  believes  are  appropriate  to minimize  this risk by
tracking loan  performance,  assessing  the  likelihood  of  nonperformance  and
diversifying our loan portfolio. Such policies and procedures,  however, may not
prevent unexpected losses that could materially adversely affect our results.

                                       18
<PAGE>

ITEM 2. PROPERTIES

BRANCHES

     The  corporate  offices of Downey,  the Bank and DSL  Service  Company  are
located at 3501 Jamboree Road,  Newport Beach,  California  92660.  Part of that
corporate  facility  houses a branch  office  of the Bank.  Certain  departments
(warehousing,  record  retention,  etc.) are  located in other  owned and leased
facilities  in Orange  County,  California.  The majority of our  administrative
operations, however, are located in our corporate headquarters.

     At December 31, 2001, we had 137  branches.  We owned the building and land
occupied by 59 of our branches and we owned one branch  building on leased land.
We operate  branches in 77  locations  (including  68 in-store  locations)  with
leases or licenses  expiring at various dates through August 2011,  with options
to extend the term.

     The net book value of our owned branches, including the one on leased land,
totaled $84 million at December 31,  2001,  and the net book value of our leased
branch  offices  totaled $3 million at December 31, 2001.  The net book value of
our furniture and fixtures,  including electronic data processing equipment, was
$25 million at December 31, 2001.

     For additional information regarding our offices and equipment,  see Note 1
on page 68 and Note 9 on page 84 of Notes to Consolidated Financial Statements.

ELECTRONIC DATA PROCESSING

     We utilize a  mainframe  computer  system  with use of various  third-party
vendors' software for retail deposit operations, loan servicing,  accounting and
loan  origination  functions,   including  our  operations  conducted  over  the
Internet.  The net  book  value of our  electronic  data  processing  equipment,
including personal computers and software, was $13 million at December 31, 2001.

ITEM 3. LEGAL PROCEEDINGS

     We have been named as a defendant in legal actions  arising in the ordinary
course of business, none of which, in the opinion of management, is material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

     No matters were  submitted  to  shareholders  during the fourth  quarter of
2001.

                                       19
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock is traded on the New York Stock Exchange  ("NYSE") and the
Pacific Exchange ("PCX") with the trading symbol "DSL." At February 28, 2002, we
had  approximately  757  stockholders  of record  (not  including  the number of
persons or  entities  holding  stock in nominee or street name  through  various
brokerage firms) and 28,213,048 outstanding shares of common stock.

     The following table sets forth for the quarters indicated the range of high
and low sale  prices  per  share of our  common  stock as  reported  on the NYSE
Composite Tape.

<TABLE>
<CAPTION>
                                2001                                    2000
                ------------------------------------------------------------------------------
                  4th       3rd       2nd       1st       4th       3rd       2nd       1st
                Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter
----------------------------------------------------------------------------------------------
<S>             <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
High ........   $44.46    $58.81    $48.85    $54.31    $60.88    $40.94    $33.00    $21.44
Low .........    32.98     40.61     41.44     39.45     33.13     29.94     20.44     18.75
End of period    41.25     44.13     47.26     45.30     55.00     39.50     28.98     21.25
==============================================================================================
</TABLE>

     During 2001, we paid  quarterly  cash  dividends  totaling $0.36 per share,
aggregating $10.2 million compared to $0.36 per share, aggregating $10.1 million
during  2000.  On February 22, 2002,  we paid a $0.09 per share  quarterly  cash
dividend, aggregating $2.5 million.

     We may pay additional  dividends out of funds legally available therefor at
such times as the Board of  Directors  determines  that  dividend  payments  are
appropriate.  The Board of Directors'  policy is to consider the  declaration of
dividends on a quarterly basis.

     The  payment  of  dividends  by  the  Bank  to  Downey  is  subject  to OTS
regulations.   For  further   information   regarding  these  regulations,   see
Business--Regulation--Regulation  of the Bank--Capital  Distribution Limitations
on page 14.

                                       20
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

(Dollars in Thousands, Except Per Share Data)                           2001         2000         1999        1998        1997
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>          <C>          <C>         <C>
INCOME STATEMENT DATA:
Total interest income ..........................................  $    808,381  $   784,360  $   533,751  $  440,404  $  420,418
Total interest expense .........................................       502,811      521,885      326,273     266,057     266,260
----------------------------------------------------------------------------------------------------------------------------------
    Net interest income ........................................       305,570      262,475      207,478     174,347     154,158
Provision for loan losses ......................................         2,564        3,251       11,270       3,899       8,640
----------------------------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses ........       303,006      259,224      196,208     170,448     145,518
----------------------------------------------------------------------------------------------------------------------------------
Other income, net:
    Loan and deposit related fees ..............................        50,486       30,089       20,097      15,645      10,921
    Real estate and joint ventures held for investment, net ....         3,885        8,798       19,302      22,363      14,222
    Secondary marketing activities:
      Loan servicing income (loss), net ........................       (11,373)      (3,628)       1,672         259       1,276
      Net gains on sales of loans and mortgage-backed securities        22,432        3,297       14,806       6,462       2,675
      Net gains on sales of mortgage servicing rights ..........           934         --           --          --          --
    Net gains (losses) on sales of investment securities .......           329         (106)         288          68        --
    Gain on sale of subsidiary (1) .............................          --          9,762         --          --          --
    Other ......................................................         1,843        2,342        3,113       2,556       6,094
----------------------------------------------------------------------------------------------------------------------------------
      Total other income, net ..................................        68,536       50,554       59,278      47,353      35,188
----------------------------------------------------------------------------------------------------------------------------------
Operating expense:
    General and administrative expense .........................       162,496      136,189      144,382     115,890      99,556
    Net operation of real estate acquired in settlement of loans           239          818           19         260       1,184
    Amortization of excess of cost over fair value of net assets
      acquired .................................................           457          462          474         510         532
----------------------------------------------------------------------------------------------------------------------------------
      Total operating expense ..................................       163,192      137,469      144,875     116,660     101,272
----------------------------------------------------------------------------------------------------------------------------------
Net income (1) .................................................   $   120,181  $    99,251  $    63,804  $   57,973  $   45,234

PER SHARE DATA
Earnings per share--Basic (1) ..................................   $      4.26  $      3.52  $      2.27  $     2.06  $     1.61
Earnings per share--Diluted (1) ................................          4.25         3.51         2.26        2.05        1.61
Book value per share at end of period ..........................         26.01        22.15        18.91       17.08       15.32
Stock price at end of period ...................................         41.25        55.00        20.19       25.44       27.08
Cash dividends paid ............................................          0.36         0.36         0.35        0.32        0.30

SELECTED FINANCIAL RATIOS
Effective interest rate spread .................................          2.91%        2.66%        2.88%       3.08%       2.83%
Efficiency ratio (2) ...........................................         43.93        46.23        58.41       58.16       56.85
Return on average assets (1) ...................................          1.11         0.97         0.85        0.98        0.79
Return on average equity (1) ...................................         17.81        17.17        12.70       12.71       11.07
Dividend payout ratio ..........................................          8.45        10.22        15.44       15.33       18.69

LOAN ACTIVITY
Loans originated ...............................................   $ 8,128,285  $ 5,218,368  $ 7,132,486  $4,071,262  $2,329,266
Loans and mortgage-backed securities purchased .................       216,214       18,828       49,669       7,463      35,828
Loans and mortgage-backed securities sold ......................     4,553,944    1,662,600    2,386,958   1,740,416     557,511

BALANCE SHEET SUMMARY (END OF PERIOD)
Total assets ...................................................   $11,105,030  $10,893,863  $ 9,407,540  $6,270,419  $5,835,825
Loans and mortgage-backed securities ...........................    10,132,413   10,084,353    8,746,063   5,788,365   5,366,396
Investments and cash equivalents ...............................       551,823      439,968      299,698     215,086     221,201
Deposits .......................................................     8,619,566    8,082,689    6,562,761   5,039,733   4,869,978
Borrowings .....................................................     1,522,712    1,978,572    2,122,780     703,720     483,735
Capital securities .............................................       120,000      120,000      120,000        --          --
Stockholders' equity ...........................................       733,896      624,636      532,418     480,566     430,346
Loans serviced for others ......................................     5,805,811    3,964,462    2,923,778   1,040,264     612,529

AVERAGE BALANCE SHEET DATA

Assets .........................................................   $10,850,683  $10,217,371  $ 7,501,228  $5,918,507  $5,693,869

Loans ..........................................................    10,033,155    9,514,978    6,937,342   5,345,380   5,174,767

Deposits .......................................................     8,701,424    7,290,850    5,697,292   5,102,045   4,588,320

Stockholders' equity ...........................................       674,972      577,979      502,412     456,237     408,473
</TABLE>

                                       21
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data)                         2001           2000          1999         1998          1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>           <C>          <C>           <C>
CAPITAL RATIOS
Average stockholders' equity to average assets .................       6.22%          5.66%        6.70%         7.71%         7.17%
Bank only--end of period (3):
    Core and tangible capital ..................................       7.10           6.42         6.27          6.83          6.61
    Risk-based capital .........................................      14.53          12.94        12.14         12.88         12.64

SELECTED ASSET QUALITY DATA (END OF PERIOD)
Total non-performing assets ....................................  $  92,632     $   54,974    $  39,194    $   27,419    $   52,120
Non-performing assets as a percentage of total assets ..........       0.83%          0.50%        0.42%         0.44%         0.89%
Allowance for loan losses:
    Amount .....................................................  $  36,120     $   34,452    $  38,342    $   31,517    $   32,092
    As a percentage of non-performing loans ....................      46.76%         76.63%      116.25%       140.86%        76.96%
====================================================================================================================================
<FN>
(1)  In 2000,  a $5.6 million  after-tax  gain was  recognized  from the sale of
     Downey Auto Finance Corp.  Excluding  the gain,  2000 net income would have
     been $93.6  million or $3.33 per share on a basic basis and $3.32 per share
     on a diluted basis,  the return on average assets would have been 0.92% and
     the return on average equity would have been 16.20%.
(2)  The amount of general and  administrative  expense  incurred for each $1 of
     net interest  income plus other income,  except for income  associated with
     real estate held for investment and securities gains or losses.
(3)  For more information  regarding these ratios,  see Management's  Discussion
     and Analysis of Financial  Condition  and Results of  Operations--Financial
     Condition--Regulatory Capital Compliance on page 58.
</FN>
</TABLE>

                                       22
<PAGE>

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     Certain   statements   under  this  caption   constitute   "forward-looking
statements"  under the Private  Securities  Litigation  Reform Act of 1995 which
involve risks and  uncertainties.  Our actual  results may differ  significantly
from the results  discussed  in such  forward-looking  statements.  Factors that
might  cause  such a  difference  include,  but are  not  limited  to,  economic
conditions, competition in the geographic and business areas in which we conduct
our operations,  fluctuations  in interest rates,  credit quality and government
regulation.   For  additional   information   concerning   these  factors,   see
Business--Factors that May Affect Future Results on page 17.

OVERVIEW

     Our net income for 2001 totaled a record $120.2  million or $4.25 per share
on a diluted basis.  This represented the fourth  consecutive year of record net
income,  which  increased by $26.6  million or 28.3% from $93.6 million or $3.31
per share for 2000, excluding the $5.6 million or $0.20 per share after-tax gain
from the sale of our indirect  automobile  finance  subsidiary from the year-ago
results.  Including the gain,  net income in 2000 totaled $99.2 million or $3.51
per share.  On January 1, 2001,  we adopted  Statement of  Financial  Accounting
Standards  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities," as amended,  ("SFAS 133") and, as a result,  recorded an immaterial
cumulative effect of change in accounting  principle.  For further  information,
see Financial Condition--Newly Adopted Accounting Principles on page 59.

     The increase in our adjusted net income between years was due to higher net
income from our banking  operations,  which  increased  on an adjusted  basis by
$30.3 million or 33.9% to $119.5 million.  That increase more than offset a $3.7
million  decline to $0.7  million in net income from our real estate  investment
activities due primarily to lower net gains from sales of  properties.  Adjusted
net income from our banking operations increased due to the following:

     o    net interest income  increased $43.3 million or 16.5% due to increases
          in both average earning assets and our effective interest rate spread;

     o    net gains from sales of loans, mortgage-backed securities and mortgage
          servicing  rights  increased  $20.1  million due primarily to a record
          volume of sales;

     o    loan and deposit related fees increased $19.7 million; and

     o    provision for loan losses declined $0.7 million.

Those favorable items were partially offset by the following:

     o    loan servicing losses  increased $7.7 million  primarily due to higher
          provisions to the valuation  allowance for mortgage  servicing  rights
          reflecting  the  continued  decline  in  market  interest  rates  that
          increased  the expected  rate of  prepayments  on loans we service for
          others; and

     o    operating  expenses  increased  $23.6 million  reflecting an increased
          number of branch  locations,  which expanded our market presence,  and
          higher loan  origination  activity.  Despite the increase in operating
          expense,  our  efficiency  ratio (the  percentage  of our net interest
          income and other income,  excluding income from real estate investment
          activities and investment securities gains or losses used to cover our
          general and  administrative  expense)  improved  from 46.2% in 2000 to
          43.9% in 2001.

     For 2001,  our return on average assets was 1.11% and our return on average
equity was  17.81%.  Both these  performance  ratios  compare  favorably  to our
adjusted 2000 returns of 0.92% for average assets and 16.20% for average equity.

     Our assets  increased  $211 million or 1.9% during 2001 to $11.1 billion at
year-end,  following a 15.8%  increase  during 2000.  The slower  growth in 2001
reflected a significant  increase in loan repayments as borrowers took advantage
of record low  mortgage  interest  rates.  Our single  family loan  originations
increased  from $5.0 billion in 2000 to a record $8.0 billion in 2001,  of which
$4.8 billion  were  originated  for sale in the  secondary  market.  Of the 2001
total, $3.2 billion  represented  originations of loans for portfolio,  of which
$428 million  represented  subprime credits. In addition to single family loans,
we  originated  $180  million of other  loans  during the year,  including  $118
million of construction and land loans.

     We funded our asset growth with  deposits that  increased  6.6% to a record
year-end level of $8.6 billion at December 31, 2001.

                                       23
<PAGE>

     Non-performing assets totaled $93 million at December 31, 2001, up from $55
million a year ago.  This  increase was due  primarily to a rise in  residential
non-performers, of which $12 million was in the subprime category. When measured
as a percentage of total assets,  our  non-performing  assets rose from 0.50% at
year-end 2000 to 0.83% at year-end 2001.

     At December 31, 2001, the Bank exceeded all regulatory  capital tests, with
capital-to-asset  ratios of 7.10% for  tangible  and core capital and 14.53% for
risk-based  capital.  These  capital  levels are  significantly  above the "well
capitalized"  standards defined by the federal banking regulators of 5% for core
and tangible capital and 10% for risk-based  capital.  For further  information,
see  Business--Regulation--Regulation of the Bank--Insurance of Deposit Accounts
on page 11, Financial  Condition--Investments  in Real Estate and Joint Ventures
on page 38 and Financial Condition--Regulatory Capital Compliance on page 58.

     We  have  established   various   accounting   policies  which  govern  the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  our  financial  statements.  Our  significant
accounting  policies are  described in the Notes to the  Consolidated  Financial
Statements  beginning on page 68. Certain accounting policies require us to make
significant  estimates  and  assumptions  which  have a  material  impact on the
carrying  value of certain assets and  liabilities,  and we consider these to be
critical accounting policies.  The estimates and assumptions we use are based on
historical experience and other factors, which we believe to be reasonable under
the  circumstances.   Actual  results  could  differ  significantly  from  these
estimates  and  assumptions  which could have a material  impact on the carrying
value of assets and  liabilities  at the balance  sheet dates and our results of
operations for the reporting periods.

     We believe the following are critical  accounting policies that require the
most significant estimates and assumptions that are particularly  susceptible to
significant change in the preparation of our financial statements:

     o    Allowance   for  losses  on  loans  and  real   estate.   For  further
          information,   see   Financial   Condition--Problem   Loans  and  Real
          Estate--Allowance  for Losses on Loans and Real  Estate on page 52 and
          Note 1 of Notes to the Consolidated Financial Statements on page 68.

     o    Allowance for mortgage servicing rights. For further information,  see
          Note 1 on page 68 and Note 11 on page 85 of Notes to the  Consolidated
          Financial Statements.

                                       24
<PAGE>

RESULTS OF OPERATIONS

NET INTEREST INCOME

     Net interest  income is the  difference  between the interest and dividends
earned  on  loans,   mortgage-backed   securities  and   investment   securities
("interest-earning  assets") and the interest paid on deposits,  borrowings  and
capital  securities  ("interest-bearing  liabilities").  The spread  between the
yield on interest-earning  assets and the cost of  interest-bearing  liabilities
and the  relative  dollar  amounts of these assets and  liabilities  principally
affects net interest income.

     Our net interest income totaled $305.6 million in 2001, up $43.1 million or
16.4%  from  2000  and  $98.1  million  or 47.3%  greater  than  1999.  The 2001
improvement  over 2000  primarily  reflected  increases in both average  earning
assets and our  effective  interest  rate  spread.  Our average  earning  assets
increased by $613 million or 6.2% to $10.5 billion.  Our effective interest rate
spread  averaged  2.91% in 2001,  up from 2.66% in 2000 and 2.88% in 1999.  This
improvement  was due to our cost of funds  declining more rapidly than our yield
on earning  assets.  This is indicative of what typically  happens when interest
rates decline,  as there is an administrative  lag in the repricing of our loans
which are  primarily  priced to the  Federal  Home Loan Bank  ("FHLB")  Eleventh
District Cost of Funds Index ("COFI").

     The  following  table  presents for the periods  indicated the total dollar
amount of:

     o    interest income from average interest-earning assets and the resultant
          yields; and

     o    interest  expense  on  average  interest-bearing  liabilities  and the
          resultant costs, expressed as rates.

     The table also sets forth our net interest income, interest rate spread and
effective  interest rate spread. The effective interest rate spread reflects the
relative level of interest-earning  assets to  interest-bearing  liabilities and
equals:

     o    the difference between interest income on interest-earning  assets and
          interest expense on interest-bearing liabilities, divided by

     o    average interest-earning assets for the period.

     The table also sets forth our net interest-earning  balance--the difference
between the average balance of  interest-earning  assets and the average balance
of total deposits, borrowings and capital securities--for the periods indicated.
We included non-accrual loans in the average interest-earning assets balance. We
included  interest from non-accrual  loans in interest income only to the extent
we received  payments and to the extent we believe we will recover the remaining
principal  balance of the loans. We computed average balances for the year using
the average of each month's daily average balance during the periods indicated.

                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                       2001                           2000                          1999
                                         -------------------------------------------------------------------------------------------
                                                                 Average                       Average                       Average
                                           Average                Yield/   Average              Yield/   Average              Yield/
(Dollars in Thousands)                     Balance    Interest    Rate     Balance   Interest    Rate    Balance   Interest    Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>        <C>     <C>         <C>        <C>    <C>         <C>        <C>
Interest-earning assets:
   Loans .............................   $10,033,155  $782,784    7.80%  $ 9,514,978 $760,538    7.99% $6,937,342  $519,006    7.48%
   Mortgage-backed securities ........        13,747       726    5.28        15,959    1,060    6.64      26,361     1,638    6.21
   Investment securities .............       443,386    24,871    5.61       346,192   22,762    6.57     232,746    13,107    5.63
------------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets ...    10,490,288   808,381    7.71     9,877,129  784,360    7.94   7,196,449   533,751    7.42
Non-interest-earning assets ..........       360,395                         340,242                      304,779
------------------------------------------------------------------------------------------------------------------------------------
   Total assets ......................   $10,850,683                     $10,217,371                   $7,501,228
====================================================================================================================================
Transaction accounts:
   Non-interest-bearing checking .....   $   302,628  $   --       -- %  $   209,221 $   --       -- % $  165,271  $   --       -- %
   Interest-bearing checking (1) .....       406,666     2,057    0.51       381,269    3,520    0.92     336,604     3,517    1.04
   Money market ......................        93,964     2,436    2.59        89,495    2,544    2.84      95,282     2,641    2.77
   Regular passbook ..................     1,118,287    34,553    3.09       796,212   27,841    3.50     767,238    26,224    3.42
------------------------------------------------------------------------------------------------------------------------------------
    Total transaction accounts .......     1,921,545    39,046    2.03     1,476,197   33,905    2.30   1,364,395    32,382    2.37
Certificates of deposit ..............     6,779,879   385,809    5.69     5,814,653  345,398    5.94   4,332,897   224,382    5.18
------------------------------------------------------------------------------------------------------------------------------------
   Total deposits ....................     8,701,424   424,855    4.88     7,290,850  379,303    5.20   5,697,292   256,764    4.51
Borrowings ...........................     1,219,484    65,793    5.40     2,118,497  130,419    6.16   1,175,704    64,161    5.46
Capital securities ...................       120,000    12,163   10.14       120,000   12,163   10.14      52,903     5,348   10.14
------------------------------------------------------------------------------------------------------------------------------------
   Total deposits, borrowings and
    capital securities ...............    10,040,908   502,811    5.01     9,529,347  521,885    5.48   6,925,899   326,273    4.71
Other liabilities ....................       134,803                         110,045                       72,917
Stockholders' equity .................       674,972                         577,979                      502,412
------------------------------------------------------------------------------------------------------------------------------------
   Total liabilities and
    stockholders' equity .............   $10,850,683                     $10,217,371                   $7,501,228
====================================================================================================================================
Net interest income/interest rate
   spread ............................                $305,570    2.70%              $262,475    2.46%             $207,478    2.71%
Excess of interest-earning assets over
   deposits, borrowings and capital
   securities ........................   $   449,380                     $   347,782                   $  270,550
Effective interest rate spread .......                            2.91                           2.66                          2.88
====================================================================================================================================
<FN>
(1) Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

                                       26
<PAGE>

     Changes in our net interest  income are a function of both changes in rates
and  changes  in  volumes  of  interest-earning   assets  and   interest-bearing
liabilities. The following table sets forth information regarding changes in our
interest  income and  expense  for the years  indicated.  For each  category  of
interest-earning  assets  and  interest-bearing  liabilities,  we have  provided
information on changes attributable to:

     o    changes in  volume--changes in volume multiplied by comparative period
          rate;

     o    changes in  rate--changes  in rate  multiplied by  comparative  period
          volume; and

     o    changes  in  rate/volume--changes  in rate  multiplied  by  changes in
          volume.

Interest-earning  asset  and  interest-bearing  liability  balances  used in the
calculations  represent  yearly average  balances  computed using the average of
each month's daily average balance during the periods indicated.

<TABLE>
<CAPTION>
                                                   2001 Versus 2000                               2000 Versus 1999
                                                    Changes Due To                                 Changes Due To
                                      ----------------------------------------------------------------------------------------
                                                             Rate/                                        Rate/
(In Thousands)                         Volume      Rate     Volume      Net        Volume       Rate     Volume     Net
------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>       <C>        <C>         <C>        <C>        <C>       <C>
Interest income:
   Loans ...........................   $ 41,418   $(18,182) $  (990)   $ 22,246    $192,842   $ 35,500   $ 13,190  $241,532
   Mortgage-backed securities ......       (147)      (217)      30        (334)       (646)       113        (45)     (578)
   Investment securities ...........      6,393     (3,345)    (939)      2,109       6,389      2,196      1,070     9,655
------------------------------------------------------------------------------------------------------------------------------
     Change in interest income .....     47,664    (21,744)  (1,899)     24,021     198,585     37,809     14,215   250,609
------------------------------------------------------------------------------------------------------------------------------
Interest expense:
   Transaction accounts:
     Interest-bearing checking (1) .        234     (1,591)    (106)     (1,463)        466       (409)       (54)        3
      Money market .................        127       (224)     (11)       (108)       (161)        68         (4)      (97)
      Regular passbook .............     11,262     (3,240)  (1,310)      6,712         990        604         23     1,617
------------------------------------------------------------------------------------------------------------------------------
       Total transaction accounts ..     11,623     (5,055)  (1,427)      5,141       1,295        263        (35)    1,523
   Certificates of deposit .........     57,336    (14,515)  (2,410)     40,411      76,733     32,998     11,285   121,016
------------------------------------------------------------------------------------------------------------------------------
     Total interest-bearing deposits     68,959    (19,570)  (3,837)     45,552      78,028     33,261     11,250   122,539
   Borrowings ......................    (55,386)   (15,373)   6,133     (64,626)     51,433      8,927      5,898    66,258
   Capital securities ..............       --         --       --          --         6,815       --         --       6,815
------------------------------------------------------------------------------------------------------------------------------
     Change in interest expense ....     13,573    (34,943)   2,296     (19,074)    136,276     42,188     17,148   195,612
------------------------------------------------------------------------------------------------------------------------------
Change in net interest income ......   $ 34,091   $ 13,199  $(4,195)   $ 43,095    $ 62,309    $(4,379)  $ (2,933) $ 54,997
==============================================================================================================================
<FN>
(1) Includes amounts swept into money market deposit accounts.
</FN>
</TABLE>

PROVISION FOR LOAN LOSSES

     Provision for loan losses was $2.6 million in 2001,  down from $3.3 million
in 2000 and $11.3 million in 1999. The decrease is due primarily to lower growth
in our loan portfolio than a year ago.

     For further information,  see Financial  Condition--Problem  Loans and Real
Estate--Allowance for Losses on Loans and Real Estate on page 52.

                                       27
<PAGE>

OTHER INCOME

     Our total other income was $68.5  million in 2001, up from $50.6 million in
2000 and $59.3  million in 1999.  Other  income in 2000  included a $9.8 million
pre-tax  gain  associated  with  our  sale of the  indirect  automobile  finance
subsidiary.  Excluding that gain, our other income would have increased by $27.7
million in 2001 primarily due to:

     o    a $20.4  million  increase  in  loan  and  deposit  related  fees  due
          primarily to increases of $12.6  million in loan  prepayment  fees and
          $4.5 million in deposit related fees; and

     o    a  $20.1   million   increase   in  net   gains  on  sales  of  loans,
          mortgage-backed securities and mortgage servicing rights.

Those  favorable  items were partially  offset by an increase of $7.7 million in
loan  servicing  losses as well as a decline of $4.9 million in income from real
estate held for  investment.  Below is a further  discussion  of the major other
income categories.

LOAN AND DEPOSIT RELATED FEES

     Loan and deposit  related fees totaled $50.5 million in 2001, up from $30.1
million in 2000 and $20.1 million in 1999.  Our loan related fees  accounted for
$15.9  million of the increase  from 2000,  of which $12.6  million  represented
higher loan prepayment  fees. Our deposit related fees increased by $4.5 million
or 33.8%, primarily due to higher fees from our checking accounts.

     The following  table presents a breakdown of loan and deposit  related fees
during the periods indicated.

<TABLE>
<CAPTION>
 (In Thousands)                               2001      2000      1999
-------------------------------------------------------------------------
<S>                                         <C>       <C>       <C>
Loan related fees:
    Prepayment fees .....................   $23,839   $11,195   $ 5,036
    Other fees ..........................     8,764     5,527     5,553
Deposit related fees:
    Automated teller machine fees .......     6,524     5,792     3,180
    Other fees ..........................    11,359     7,575     6,328
-------------------------------------------------------------------------
      Total loan and deposit related fees   $50,486   $30,089   $20,097
=========================================================================
</TABLE>

REAL ESTATE AND JOINT VENTURES HELD FOR INVESTMENT

     Income from our real estate and joint ventures held for investment  totaled
$3.9 million in 2001, down from $8.8 million in 2000 and $19.3 million in 1999.

     The $4.9  million  decline in income from real  estate held for  investment
primarily  reflected two factors.  First,  our net gains from sales  declined by
$5.5 million to $0.5 million. Of the decline,  $2.7 million was related to joint
venture  projects  reported  in the  category  equity in net  income  from joint
ventures.  Second,  we reduced our allowance for losses on real estate and joint
ventures  by $0.3  million  in  2001,  while we  provided  $0.9  million  to our
allowance in 2000.

                                       28
<PAGE>

     The table below sets forth the key  components  comprising  our income from
real estate and joint venture operations during the periods indicated.

<TABLE>
<CAPTION>
(In Thousands)                                                              2001      2000       1999
--------------------------------------------------------------------------------------------------------
<S>                                                                       <C>       <C>        <C>
Operations, net:
    Rental operations, net of expenses ................................   $ 2,245   $ 2,572    $ 3,822
    Equity in net income from joint ventures ..........................       736     3,224      5,352
    Interest from joint venture advances ..............................       468       887      1,256
--------------------------------------------------------------------------------------------------------
      Total operations, net ...........................................     3,449     6,683     10,430
Net gains on sales of wholly owned real estate ........................       129     2,981      5,206
(Provision for) reduction of losses on real estate and joint ventures .       307      (866)     3,666
--------------------------------------------------------------------------------------------------------
    Income from real estate and joint ventures held for investment, net   $ 3,885   $ 8,798    $19,302
========================================================================================================
</TABLE>

     For additional information,  see Financial  Condition--Investments  in Real
Estate and Joint  Ventures on page 38,  Financial  Condition--Problem  Loans and
Real Estate--Allowance for Losses on Loans and Real Estate on page 52 and Note 7
of Notes to Consolidated Financial Statements on page 79.

SECONDARY MARKETING ACTIVITIES

     Sales of loans and  mortgage-backed  securities we originated  increased in
2001 to a record  $4.6  billion  from $1.7  billion in 2000 and $2.4  billion in
1999.  Net gains  associated  with these sales totaled $22.4 million in 2001, up
from $3.3  million in 2000 and $14.8  million in 1999.  Net gains  included  the
capitalization  of mortgage  servicing  rights of $44.4  million in 2001,  $18.5
million in 2000 and $29.3 million in 1999.

     In addition to sales of loans and mortgage-backed  securities, we also sold
during 2001 $602 million of loans serviced for others at an incremental  gain of
$0.9  million  above the carrying  value of the  associated  mortgage  servicing
rights.

     A loss of $11.4 million was recorded in loan  servicing  from our portfolio
of loans serviced for others during 2001,  compared to a loss of $3.6 million in
2000 and  income of $1.7  million  in 1999.  The loss in 2001  reflects  a $10.6
million provision to the valuation  allowance for mortgage  servicing rights, up
from $6.1 million in 2000, due to the continued drop in interest rates that have
increased the expected rate of prepayments on loans serviced for others, as well
as reduced the value of associated custodial accounts.  At December 31, 2001, we
serviced $5.8 billion of loans for others,  compared to $4.0 billion at December
31, 2000, and $2.9 billion at December 31, 1999.

     The  following  table  presents a breakdown of the  components  of our loan
servicing income (loss) for the periods indicated.

<TABLE>
<CAPTION>
(In Thousands)                                  2001        2000        1999
---------------------------------------------------------------------------------
<S>                                           <C>         <C>         <C>
Income from servicing operations ..........   $  9,028    $  8,414    $  4,472
Amortization of MSRs ......................     (9,813)     (5,968)     (3,051)
(Provision for) reduction of impairment ...    (10,588)     (6,074)        251
---------------------------------------------------------------------------------
    Total loan servicing income (loss), net   $(11,373)   $ (3,628)   $  1,672
=================================================================================
</TABLE>

     For additional  information  concerning mortgage servicing rights, see Note
11 of Notes to Consolidated Financial Statements on page 85.

OTHER CATEGORY

     The all other category of other income  totaled $1.8 million in 2001,  down
from $2.3 million in 2000 and $3.1 million in 1999.

                                       29
<PAGE>

OPERATING EXPENSE

     Our  operating  expense  totaled  $163.2  million in 2001,  up from  $137.5
million in 2000 and $144.9 million in 1999. The current year increase was due to
higher general and administrative  expense,  which increased by $26.3 million or
19.3%.  That  increase  was  primarily  due to higher costs  associated  with an
increased  number of branch  locations  that  expanded  our market  presence and
higher loan origination activity.

     The  following  table  presents a breakdown  of key  components  comprising
operating expense during the periods indicated.

<TABLE>
<CAPTION>
(In Thousands)                                                            2001       2000       1999
--------------------------------------------------------------------------------------------------------
<S>                                                                     <C>        <C>        <C>
Salaries and related costs ..........................................   $ 99,935   $ 82,522   $ 86,163
Premises and equipment costs ........................................     26,016     23,220     20,617
Advertising expense .................................................      4,410      4,786      8,595
Professional fees ...................................................      5,452      3,319      2,502
SAIF insurance premiums and regulatory assessments ..................      3,051      2,626      3,937
Other general and administrative expense ............................     23,632     19,716     22,568
--------------------------------------------------------------------------------------------------------
    Total general and administrative expense ........................    162,496    136,189    144,382
Net operation of real estate acquired in settlement of loans ........        239        818         19
Amortization of excess of cost over fair value of net assets acquired        457        462        474
--------------------------------------------------------------------------------------------------------
    Total operating expense .........................................   $163,192   $137,469   $144,875
========================================================================================================
</TABLE>

PROVISION FOR INCOME TAXES

     Our  effective  tax rate for 2001 was 42.3%,  compared to 42.4% in 2000 and
42.3%  in  1999.  See  Note 1 on page 68 and  Note 17 on page 90 of Notes to the
Consolidated  Financial  Statements for a further discussion of income taxes and
an explanation of the factors which impact Downey's effective tax rate.

BUSINESS SEGMENT REPORTING

     The  previous   sections  of  the  Results  of  Operations   discussed  our
consolidated  results.  The  purpose  of this  section  is to  present  data and
discussion on the results of  operations  of our two business  segments--banking
and real estate investment. For a description of these business segments and the
accounting  policies used, see Business on page 1 and Note 1 on page 68 and Note
25 on page 100 of Notes to Consolidated Financial Statements.

     The following  table presents by business  segment our net income for 2001,
2000 and 1999.

<TABLE>
<CAPTION>
(In Thousands)                        2001       2000 (1)   1999
--------------------------------------------------------------------
<S>                                 <C>        <C>        <C>
Banking net income ..............   $119,454   $ 94,822   $ 53,796
Real estate investment net income        727      4,429     10,008
--------------------------------------------------------------------
   Total net income .............   $120,181   $ 99,251   $ 63,804
====================================================================
<FN>
(1)  Banking  included  a $5.6  million  after-tax  gain  related to the sale of
     subsidiary.
</FN>
</TABLE>

                                       30
<PAGE>

BANKING

     Net income from our banking  operations  totaled $119.5 million in 2001, up
from $94.8 million in 2000 and $53.8 million in 1999. The  previously  mentioned
sale of our indirect automobile finance subsidiary benefited our 2000 net income
from banking  operations by $5.6 million.  Excluding  that gain, net income from
our banking  operations  would have  increased  during 2001 by $30.3  million or
33.9%.

     The adjusted increase in our 2001 net income reflected the following:

     o    a $43.3  million  increase in net interest  income due to increases in
          both our average earning assets and effective interest rate spread;

     o    a $20.1  million  increase  in net  gains  from the  sales  of  loans,
          mortgage-backed securities and mortgage servicing rights;

     o    a $19.7 million increase in loan and deposit related fees; and

     o    a $0.7 million decline in provision for loan losses.

Those favorable items were partially offset by the following:

     o    a $7.7 million  increase in loan  servicing  losses  primarily  due to
          higher  provisions to the valuation  allowance for mortgage  servicing
          rights  reflecting the continued decline in market interest rates that
          increased  the expected  rate of  prepayments  on loans we service for
          others; and

     o    a $23.6 million increase in operating expenses reflecting an increased
          number of branch locations and higher loan origination activity.

     The table  below  sets  forth  banking  operational  results  and  selected
financial data for the periods indicated.

<TABLE>
<CAPTION>
(In Thousands)                                 2001          2000 (1)      1999
-------------------------------------------------------------------------------------
<S>                                         <C>           <C>           <C>
Net interest income .....................   $   305,573   $   262,232   $   207,784
Provision for loan losses ...............         2,564         3,251        11,270
Other income:
    Gain on sale of subsidiary ..........          --           9,762          --
    All other ...........................        63,340        31,644        39,755
Operating expense .......................       159,604       135,996       143,081
Net intercompany income .................           369           397           393
-------------------------------------------------------------------------------------
Income before income taxes ..............       207,114       164,788        93,581
Income taxes ............................        87,660        69,966        39,785
-------------------------------------------------------------------------------------
   Net income ...........................   $   119,454   $    94,822   $    53,796
=====================================================================================
AT DECEMBER 31
Assets:
   Loans and mortgage-backed securities .   $10,132,413   $10,084,353   $ 8,746,063
   Other ................................       966,942       806,201       654,745
-------------------------------------------------------------------------------------
     Total assets .......................    11,099,355    10,890,554     9,400,808
-------------------------------------------------------------------------------------
Equity ..................................   $   733,896   $   624,636   $   532,418
=====================================================================================
<FN>
(1)  Included a $5.6 million after-tax gain related to the sale of subsidiary.
</FN>
</TABLE>

                                       31
<PAGE>

REAL ESTATE INVESTMENT

     Net income from our real estate investment  operations totaled $0.7 million
in 2001,  down from $4.4 million in 2000 and $10.0 million in 1999.  The decline
was primarily attributed to lower gains from sales, lower recapture of valuation
allowances  and higher  operating  expenses due to the  settlement of litigation
matters associated with certain joint venture partners.

     The table below sets forth real estate investment  operational  results and
selected financial data for the periods indicated.

<TABLE>
<CAPTION>
(In Thousands)                                       2001       2000      1999
------------------------------------------------------------------------------------
<S>                                                <C>         <C>        <C>
Net interest income (loss) .....................   $     (3)   $    243   $   (306)
Other income ...................................      5,196       9,148     19,523
Operating expense ..............................      3,588       1,473      1,794
Net intercompany expense .......................        369         397        393
------------------------------------------------------------------------------------
Income before income taxes .....................      1,236       7,521     17,030
Income taxes ...................................        509       3,092      7,022
------------------------------------------------------------------------------------
   Net income ..................................   $    727    $  4,429   $ 10,008
====================================================================================
AT DECEMBER 31
Assets:
   Investments in real estate and joint ventures   $ 38,185    $ 17,641   $ 42,172
   Other .......................................      2,003       3,584      7,399
------------------------------------------------------------------------------------
     Total assets ..............................     40,188      21,225     49,571
------------------------------------------------------------------------------------
Equity .........................................   $ 34,513    $ 17,916   $ 42,839
====================================================================================
</TABLE>

     For a further discussion regarding income from real estate investment,  see
Other Income--Real Estate and Joint Ventures Held For Investment on page 28, and
for information  regarding related assets, see Financial  Condition--Investments
in Real Estate and Joint Ventures on page 38.

                                       32
<PAGE>

FINANCIAL CONDITION

LOANS AND MORTGAGE-BACKED SECURITIES

     Total loans and  mortgage-backed  securities,  including  those we hold for
sale,  increased only $48 million or 0.5% from year-end 2000 to a total of $10.1
billion or 91.2% of assets at December  31,  2001.  The  increase  represents  a
higher level of single family loans held for sale and mortgage-backed securities
available  for sale, as loans held for  investment  declined by $308 million due
primarily  to an increase in loan  prepayments  as a result of the low  interest
rate  environment and borrower  preference for fixed rate loans during 2001. Our
prepayment  speed  during the year was 37%,  compared to 18% during 2000 and 26%
during 1999. This increase reflected,  in large part, the changing propensity of
borrowers to refinance  existing  loans given the low market  interest  rates in
2001.

     Our loan  originations,  including loans  purchased,  totaled a record $8.2
billion in 2001,  up from $5.2  billion in 2000 and $7.2  billion in 1999.  This
current year increase primarily reflects record originations of one-to-four unit
residential loans of $8.0 billion,  of which  approximately  $3.2 billion or 40%
were for  portfolio,  with the balance  for sale in the  secondary  market.  Our
origination  of subprime  loans  totaled  $428  million in 2001,  down from $492
million in 2000.

     The table below  presents  information  regarding  interest  rates and loan
origination  costs, net of fees collected on loans originated during the periods
indicated.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                      2001       2000       1999        1998        1997
------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>        <C>        <C>         <C>         <C>
Average interest rate on new loans ....................      6.18%      6.10%      5.92%      6.45%        6.04%
Total loan origination costs (net of fees) and premiums
    (net of discounts) deferred during the year .......   $37,527    $34,797    $53,181     $30,621     $11,505
==================================================================================================================
</TABLE>

     We originate  one-to-four unit  residential  adjustable rate mortgages both
with and without loan origination fees. In adjustable rate mortgage transactions
for which we charge no  origination  fees,  we receive a larger  margin over the
index to which the loan  pricing is tied than in those in which we charge  fees.
In addition,  a prepayment  fee on these loans is generally  required if prepaid
within the first three years.  This trend towards loans with no origination fees
has generally  resulted in deferrable  loan  origination  costs  exceeding  loan
origination fees.

     Residential   one-to-four  unit  adjustable  rate  mortgage   originations,
including loans purchased, were $3.2 billion during 2001, down from $3.5 billion
in 2000 and $4.4 billion in 1999.  Refinancing activities related to residential
one-to-four unit loans, including new loans to refinance existing loans which we
or other lenders  originated,  constituted 75% of  originations  during the year
compared  to 42%  during  2000  and  63%  during  1999.  Refinancing  activities
increased  from $2.1 billion in 2000 to $6.0 billion in 2001 as a lower interest
rate environment existed throughout most of the year. In addition,  the majority
of residential  originations  for our portfolio were  adjustable  rate mortgages
tied to COFI, an index which lags behind the movement in market  interest rates.
For the year, 63% of one-to-four unit  originations  for investment  represented
monthly  adjusting COFI rate mortgages which provide for negative  amortization.
In  addition,  15%  represented  adjustable  rate  mortgages  tied to the London
Interbank  Offered  Rate  ("LIBOR")  index,  and 14% were  tied to the  Constant
Maturity  Treasury  ("CMT")  index,   neither  of  which  provide  for  negative
amortization,  with the balance represented by a variety of other pricing terms.
At December  31, 2001,  $6.8 billion of our  one-to-four  unit  adjustable  rate
mortgages  were  subject  to  negative   amortization   of  which  $180  million
represented  the amount of negative  amortization  included in the loan balance.
For   further    information,    see    Business--Banking    Activities--Lending
Activities--Residential Real Estate Lending on page 3.

     Our origination of commercial real estate loans, including loans purchased,
totaled $7 million in 2001,  compared  to $24 million in 2000 and $10 million in
1999. Originations of loans secured by multi-family properties,  including loans
purchased,  totaled less than $1 million in 2001, compared to $1 million in both
2000 and 1999.

     During 2001, we originated $102 million of construction loans,  principally
for entry level and first time move-up  residential tracts. This compares to $99
million in 2000 and $149 million in 1999. Our  origination  of land  development
loans  totaled  $16  million in 2001,  compared  to $17  million in 2000 and $57
million in 1999.

     Origination of non-mortgage  commercial  loans totaled $18 million in 2001,
down from $19 million in 2000 and $25 million in 1999. A substantial majority of
these originations represented secured loans.

                                       33
<PAGE>

     Origination of automobile loans totaled $5 million in 2001, compared to $57
million in 2000 and $234 million in 1999. The majority of these  originations in
prior years  represented  our indirect  lending  program  that was  conducted by
Downey Auto Finance Corp., a former  subsidiary  sold in February 2000,  whereby
loans to finance the purchase of new or used  automobiles  were obtained through
preapproved  automobile dealers.  For further information  regarding Downey Auto
Finance Corp., see Sale of Subsidiary on page 60.

     At December 31, 2001, our unfunded loan  application  pipeline totaled $1.9
billion.  Within that pipeline,  we had  commitments to borrowers for short-term
interest  rate locks of $683  million,  of which $330  million  were  related to
residential  one-to-four  unit loans being  originated for sale in the secondary
market.  Furthermore,  we had  commitments  on  undrawn  lines of  credit of $84
million and loans in process of $53 million.  We believe our current  sources of
funds will enable us to meet these obligations.

                                       34
<PAGE>

     The following table sets forth the origination,  purchase and sale activity
relating  to  our  loans  and  mortgage-backed  securities  during  the  periods
indicated.

<TABLE>
<CAPTION>
(In Thousands)                                                   2001        2000         1999          1998         1997
------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>         <C>           <C>           <C>
INVESTMENT PORTFOLIO
Loans originated:
   Loans secured by real estate:
     Residential one-to-four units:
      Adjustable .........................................  $ 2,691,481  $2,831,596  $ 3,102,810   $   943,736   $ 1,384,442
      Adjustable - subprime ..............................      423,777     395,911    1,182,552       372,286       218,399
------------------------------------------------------------------------------------------------------------------------------
        Total adjustable .................................    3,115,258   3,227,507    4,285,362     1,316,022     1,602,841
      Fixed ..............................................       16,443       9,167      262,923       192,436        22,265
      Fixed - subprime ...................................        4,708        --         12,238         6,020         2,786
     Residential five or more units:
      Adjustable .........................................         --          --            247           875         4,600
      Fixed ..............................................          125         678         --          13,229          --
------------------------------------------------------------------------------------------------------------------------------
        Total residential ................................    3,136,534   3,237,352    4,560,770     1,528,582     1,632,492
     Commercial real estate ..............................          133      23,720       10,063        10,363         7,830
     Construction ........................................      101,716      98,330      149,143       111,534        80,014
     Land ................................................       16,242      16,530       56,851        48,357        20,295
   Non-mortgage:
     Commercial ..........................................       17,581      18,504       24,948         6,376        14,336
     Automobile ..........................................        4,825      56,576      233,948       175,193       259,040
     Other consumer ......................................       32,953      38,136       54,489        28,274        25,988
------------------------------------------------------------------------------------------------------------------------------
      Total loans originated .............................    3,309,984   3,489,148    5,090,212     1,908,679     2,039,995
Real estate loans purchased:
   One-to-four units .....................................       88,057       9,178       36,317         4,343        32,241
   One-to-four units - subprime ..........................         --         8,595       12,912         1,833         2,243
   Other (1) .............................................        6,923       1,055          440         1,287         1,344
------------------------------------------------------------------------------------------------------------------------------
     Total real estate loans purchased ...................       94,980      18,828       49,669         7,463        35,828
------------------------------------------------------------------------------------------------------------------------------
       Total loans originated and purchased ..............    3,404,964   3,507,976    5,139,881     1,916,142     2,075,823
Loan repayments ..........................................   (3,715,163) (1,981,802)  (1,823,585)   (1,855,157)   (1,130,357)
Other net changes (2) ....................................        2,029    (291,935)     (36,794)      (34,145)     (319,183)
------------------------------------------------------------------------------------------------------------------------------
   Net increase (decrease) in loans held for investment ..     (308,170)  1,234,239    3,279,502        26,840       626,283
------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO
Residential, one-to-four units:
   Originated whole loans ................................    4,818,301   1,641,099    2,028,402     2,162,583       289,271
   Originated whole loans - subprime .....................         --        87,174       13,872          --            --
   Loans purchased .......................................        5,637         947         --            --            --
   Loans transferred from (to) the investment portfolio ..       (7,454)     54,993       42,570        (3,056)      290,558
   Originated whole loans sold ...........................     (737,773)   (687,512)    (999,594)   (1,130,303)     (467,989)
   Loans exchanged for mortgage-backed securities ........   (3,816,171)   (970,319)  (1,387,364)     (608,831)      (89,522)
   Other net changes .....................................       (4,762)    (10,815)      (9,263)       (8,111)          (83)
   Capitalized basis adjustment (3) ......................      (10,326)       --           --            --            --
------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans held for sale ......      247,452     115,567     (311,377)      412,282        22,235
------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
   Received in exchange for loans ........................    3,816,171     970,319    1,387,364       608,831        89,522
   Purchased .............................................      115,597        --           --            --            --
   Sold ..................................................   (3,816,171)   (975,088)  (1,387,364)     (610,113)      (89,522)
   Repayments ............................................       (6,523)     (7,031)      (9,936)      (15,129)      (12,560)
   Other net changes .....................................         (296)        284         (491)         (742)          592
------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in mortgage-backed securities
        available for sale ...............................      108,778     (11,516)     (10,427)      (17,153)      (11,968)
------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans held for sale and
        mortgage-backed securities available for sale ....      356,230     104,051     (321,804)      395,129        10,267
------------------------------------------------------------------------------------------------------------------------------
     Total net increase in loans and
        mortgage-backed securities .......................  $    48,060  $1,338,290  $ 2,957,698   $   421,969   $   636,550
==============================================================================================================================
<FN>
(1)  Primarily  five or more unit  residential  loans except for $6.7 million of
     commercial real estate loans in 2001, $1.1 million of construction loans in
     2000 and $0.6 million of commercial real estate loans in 1998.
(2)  Primarily included borrowings against and repayments of lines of credit and
     construction loans,  changes in loss allowances,  loans transferred to real
     estate  acquired  in  settlement  of loans  or from  (to) the held for sale
     portfolio,  and the  change  in  interest  capitalized  on loans  (negative
     amortization).  Also  included in 2000 was $367  million of net  automobile
     loans sold as part of the sale of subsidiary.
(3)  Reflected  the  change  in fair  value  from  date of  interest  rate  lock
     commitment to date of origination.
</FN>
</TABLE>

                                       35
<PAGE>

     The  following   table  sets  forth  the   composition   of  our  loan  and
mortgage-backed  securities  portfolio at the dates  indicated.  At December 31,
2001,  approximately  94% of our real estate  loans were  secured by real estate
located in California,  principally  in Los Angeles,  Orange,  Santa Clara,  San
Diego and Alameda counties.

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                        ----------------------------------------------------------------------------
(In Thousands)                                               2001            2000           1999            1998            1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>             <C>           <C>
INVESTMENT PORTFOLIO
Loans secured by real estate:
     Residential one-to-four units:
        Adjustable ..................................   $  7,364,677    $  7,200,400    $  5,644,883    $  3,721,728  $  4,190,160
        Adjustable - subprime .......................      1,491,416       1,726,526       1,620,624         580,232       245,749
        Fixed .......................................        334,384         454,838         510,516         325,454       168,315
        Fixed - subprime ............................         15,303          17,388          18,777           8,719         3,321
------------------------------------------------------------------------------------------------------------------------------------
         Total residential one-to-four units ........      9,205,780       9,399,152       7,794,800       4,636,133     4,607,545
     Residential five or more units:
        Adjustable ..................................          6,055          14,203          15,889          18,617        29,246
        Fixed .......................................          5,124           5,257           5,166          21,412         9,032
     Commercial real estate:
        Adjustable ..................................         40,900          37,374          37,419          39,360        87,604
        Fixed .......................................         71,609         127,230         110,908         101,430       114,821
     Construction ...................................         84,942         118,165         176,487         127,761        70,865
     Land ...........................................         22,028          26,880          67,631          44,859        25,687
Non-mortgage:
     Commercial .....................................         22,017          21,721          26,667          28,293        26,024
     Automobile (1) .................................         24,529          39,614         399,789         357,988       342,326
     Other consumer .................................         50,908          60,653          49,344          41,894        47,735
------------------------------------------------------------------------------------------------------------------------------------
        Total loans held for investment .............      9,533,892       9,850,249       8,684,100       5,417,747     5,360,885
Increase (decrease) for:
     Undisbursed loan funds .........................        (61,280)        (72,328)       (125,159)       (108,414)      (64,884)
     Net deferred costs and premiums ................         77,916          79,109          67,740          31,021        18,088
     Allowance for losses ...........................        (36,120)        (34,452)        (38,342)        (31,517)      (32,092)
------------------------------------------------------------------------------------------------------------------------------------
        Total loans held for investment, net ........      9,514,408       9,822,578       8,588,339       5,308,837     5,281,997
------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET
Loans held for sale:
     Residential one-to-four units ..................        509,317         251,014         122,133         447,382        35,100
     Residential one-to-four units - subprime .......             33             558          13,872            --            --
     Capitalized basis adjustment (2) ...............        (10,326)           --              --              --            --
------------------------------------------------------------------------------------------------------------------------------------
        Total loans held for sale ...................        499,024         251,572         136,005         447,382        35,100
Mortgage-backed securities available for sale:
     Adjustable .....................................        101,562           6,050           7,700          10,996        17,751
     Fixed ..........................................         17,419           4,153          14,019          21,150        31,548
------------------------------------------------------------------------------------------------------------------------------------
        Total mortgage-backed securities
           available for sale .......................        118,981          10,203          21,719          32,146        49,299
------------------------------------------------------------------------------------------------------------------------------------
        Total loans held for sale and mortgage-backed
           securities available for sale ............        618,005         261,775         157,724         479,528        84,399
------------------------------------------------------------------------------------------------------------------------------------
        Total loans and mortgage-backed securities ..   $ 10,132,413    $ 10,084,353    $  8,746,063    $  5,788,365  $  5,366,396
====================================================================================================================================
<FN>
(1)  The decline during 2000 primarily reflected the sale of subsidiary.
(2)  Reflected  the  change  in fair  value  from  date of  interest  rate  lock
     commitment to date of origination.
</FN>
</TABLE>

     We carry loans for sale at the lower of cost or fair value. At December 31,
2001, no valuation  allowance was required as the fair value exceeded book value
on an aggregate basis.

     At December 31, 2001, our residential  one-to-four units subprime portfolio
consisted of  approximately  79% "A-"  credit,  18% "B" credit and 3% "C" credit
loans.  At year end, the average  loan-to-value  ratio at origination  for these
loans was approximately 75%.

                                       36
<PAGE>

     We carry mortgage-backed securities available for sale at fair value which,
at December 31, 2001,  reflected an unrealized  loss of $1.3  million.  The 2001
year-end  unrealized loss, less the associated tax effect, is reflected within a
separate component of other comprehensive income (loss) until realized.

     The table below sets forth the scheduled contractual maturities of our loan
and mortgage-backed securities portfolio at December 31, 2001.

<TABLE>
<CAPTION>
                                    Within      1-2        2-3        3-5        5-10      10-15         Beyond
(In Thousands)                      1 Year     Years      Years      Years      Years      Years        15 Years       Total
--------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>        <C>        <C>        <C>        <C>        <C>          <C>          <C>
Loans secured by real estate:
    Residential:
      One-to-four units:
        Adjustable (1) ........   $ 83,894   $ 90,064   $ 96,689   $215,239   $692,891   $  988,087   $6,689,262   $ 8,856,126
        Fixed (1) .............     12,397     13,303     14,274     31,749    102,034      145,157      529,764       848,678
      Five or more units:
        Adjustable ............        238        254        272        604      1,925        2,709           53         6,055
        Fixed .................        215        228        242        531      1,644        2,221           43         5,124
      Commercial real estate:
        Adjustable ............      3,560      3,829      4,117      9,189     20,205         --           --          40,900
        Fixed .................      9,721     10,583     11,522     26,202     13,581         --           --          71,609
      Construction - adjustable     84,942       --         --         --         --           --           --          84,942
      Land:
        Adjustable ............     21,162       --         --         --         --           --           --          21,162
        Fixed .................         82         89         98        225        372         --           --             866
Non-mortgage:
    Commercial ................     21,211        806       --         --         --           --           --          22,017
    Automobile ................      6,990      7,662      8,400      1,477       --           --           --          24,529
    Other consumer (2) ........      3,262      3,538      3,836      3,088     37,184         --           --          50,908
--------------------------------------------------------------------------------------------------------------------------------
      Total loans .............    247,674    130,356    139,450    288,304    869,836    1,138,174    7,219,122    10,032,916
Mortgage-backed securities, net      1,190      1,254      1,321      2,858      8,601       11,181       92,576       118,981
--------------------------------------------------------------------------------------------------------------------------------
    Total loans and mortgage-
      backed securities .......   $248,864   $131,610   $140,771   $291,162   $878,437   $1,149,355   $7,311,698   $10,151,897
================================================================================================================================
<FN>
(1)  Included loans held for sale.
(2)  Included home equity line of credit loans,  which are interest  only,  with
     balances  due  at the  end of the  term.  All or  part  of the  outstanding
     balances may be paid off at any time during the term without penalty.
</FN>
</TABLE>

     At December 31, 2001,  the maximum amount the Bank could have loaned to any
one borrower, and related entities, under regulatory limits was $128 million, or
$214 million for loans  secured by readily  marketable  collateral,  compared to
$112 million or $187 million for loans secured by readily marketable  collateral
at  year-end  2000.  We do not expect  that these  regulatory  limitations  will
adversely impact our proposed lending activities during 2002.

INVESTMENT SECURITIES

     The following table sets forth the composition of our investment securities
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                              December 31,
                                                         ------------------------------------------------------
(In Thousands)                                              2001       2000      1999       1998       1997
---------------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>        <C>        <C>
Federal funds ........................................   $ 37,001   $ 19,601   $      1   $ 33,751   $  6,095
U.S. Treasury and agency securities available for sale    356,910    284,102    171,823    116,061    159,398
Corporate bonds available for sale ...................     45,445     21,513       --         --         --
Municipal bonds held to maturity .....................      6,388      6,550      6,728      6,764      6,885
---------------------------------------------------------------------------------------------------------------
    Total investment securities ......................   $445,744   $331,766   $178,552   $156,576   $172,378
===============================================================================================================
</TABLE>

                                       37
<PAGE>

     At December 31, 2001, the  maturities of our investment  securities and the
weighted average yield of those securities were as follows.

<TABLE>
<CAPTION>
                                                                   After 1 Year
                                             1 Year or Less      Through 5 Years       After 5 Years            Total
                                         ------------------------------------------------------------------------------------
                                                     Weighted             Weighted             Weighted             Weighted
                                                      Average              Average              Average              Average
  (Dollars in Thousands)                    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield
-----------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>      <C>          <C>      <C>         <C>     <C>          <C>
Federal funds .........................   $ 37,001     0.85%    $   --        -- %    $  --        -- %   $ 37,001     0.85%
Available for sale:
    U.S. Treasury and agency securities       --        --       275,874     3.76      81,036     2.49     356,910     3.47
    Corporate bonds ...................     18,220     5.60       27,225     6.65        --        --       45,445     6.23
Municipal bonds held to maturity (1) ..       --        --          --        --        6,388     3.73       6,388     3.73
-----------------------------------------------------------------------------------------------------------------------------
      Total ...........................   $ 55,221     2.42%    $303,099     4.02%    $87,424     2.58%   $445,744     3.54%
=============================================================================================================================
<FN>
(1)  Yield on a fully tax-equivalent basis is 6.47%.
</FN>
</TABLE>

INVESTMENTS IN REAL ESTATE AND JOINT VENTURES

     DSL Service Company participates as an owner of, or a partner in, a variety
of real estate development  projects,  principally retail neighborhood  shopping
center  developments,  most of which are located in  California.  For additional
information regarding the location of these real estate investments,  see Note 7
of Notes to the Consolidated  Financial Statements on page 79. We have completed
and substantially  leased most of the real estate  development  projects--with a
weighted average occupancy rate of 79% for retail neighborhood  shopping centers
at December 31, 2001. At December 31, 2001, the Bank had loan commitments of $13
million to these joint ventures, of which $7 million was outstanding.

     DSL Service  Company is entitled to interest on its equity  invested in its
joint venture  projects on a priority  basis after  third-party  debt and shares
profits and losses with the developer partner,  generally on an equal basis. DSL
Service  Company has obtained  personal  guarantees  from the  principals of the
developer  partners in a number of the joint ventures and generally requires the
developer  partner to secure any  outstanding  obligations to the joint venture,
like its portion of operating losses, when the partner is unable to satisfy such
obligations  on a current  basis.  Partnership  equity or deficit  accounts  are
affected by current period results of operations,  additional  partner advances,
partnership distributions and partnership liquidations.

     As of December 31, 2001,  DSL Service  Company was involved  with two joint
venture  partners.  These  partners were operators of one office  building,  one
residential  housing development project and one in which land was sold, but the
partnership  remains until a receivable  related to that sale is collected.  DSL
Service  Company had nine wholly  owned  retail  neighborhood  shopping  centers
located in California and Arizona.

     Our investment in real estate and joint ventures amounted to $38 million at
December 31, 2001,  compared to $18 million at December 31, 2000 and $42 million
at December 31, 1999.  During 2001, our investment  increased by $16 million due
primarily to a settlement  of  litigation  with former  joint  venture  partners
wherein we became the sole owner of two shopping centers.

                                       38
<PAGE>

     The following table sets forth the condensed  balance sheets of DSL Service
Company's  joint ventures by property type at December 31, 2001, on a historical
cost  basis.  For  further  information  regarding  the  establishment  of  loss
allowances, see Problem Loans and Real Estate--Allowance for Losses on Loans and
Real Estate on page 52.
<TABLE>
<CAPTION>
                                                                                                   Note
                                                                     Office                     Receivable-
 (Dollars in Thousands)                                             Building   Residential       Sold Land     Total
----------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>           <C>          <C>
ASSETS
Cash .......................................................        $     3       $   707       $    15      $   725
Projects under development .................................           --          10,817          --         10,817
Completed projects .........................................          4,989          --            --          4,989
Other assets ...............................................              8           224           360          592
----------------------------------------------------------------------------------------------------------------------
                                                                    $ 5,000       $11,748       $   375      $17,123
======================================================================================================================
LIABILITIES AND EQUITY
Liabilities:
    Notes payable to the Bank ..............................        $  --         $ 6,642       $  --        $ 6,642
    Notes payable to others ................................          3,407          --            --          3,407
    Other ..................................................             26         1,255           137        1,418
Equity:
    DSL Service Company (1) ................................            702         3,104           135        3,941
    Allowance for losses recorded by DSL Service Company (2)           --            --            --           --
    Other partners (2) .....................................            865           747           103        1,715
----------------------------------------------------------------------------------------------------------------------
       Net equity ..........................................          1,567         3,851           238        5,656
----------------------------------------------------------------------------------------------------------------------
                                                                    $ 5,000       $11,748       $   375      $17,123
======================================================================================================================
Number of joint venture projects ...........................              1             1             1            3
======================================================================================================================
<FN>
(1)  We included in these amounts  interest-bearing  joint venture advances with
     priority interest payments from joint ventures to DSL Service Company.
(2)  The aggregate other partners' equity of $2 million  represents their equity
     interest  in the  accumulated  retained  earnings of the  respective  joint
     ventures.  Those results  include the net profit on sales and the operating
     results of the real estate assets,  net of depreciation  and funding costs.
     Except for any  secured  financing  which has been  obtained,  DSL  Service
     Company has provided  all other  financing.  As part of our internal  asset
     review process,  we compare the fair value of the joint venture real estate
     assets to the secured  notes payable to the Bank and others and DSL Service
     Company's  equity  investment.  To the  extent  the fair  value of the real
     estate  assets  is less  than the  aggregate  of those  amounts,  we make a
     provision to create a valuation  allowance.  No valuation  allowances  were
     required at December 31, 2001.
</FN>
</TABLE>

     The  following  table sets forth by property type our  investments  in real
estate and related allowances for losses at December 31, 2001.

<TABLE>
<CAPTION>
                                                                     Retail
                                                                  Neighborhood
(Dollars in Thousands)                           Residential    Shopping Centers     Land          Total
-------------------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>            <C>            <C>
Investment in wholly owned projects .......     $   --              $ 25,282 (1)   $ 10,718 (2)   $ 36,000
Investment in Affordable Housing Funds ....          934                --             --              934
Allowance for losses ......................         --                (1,657)        (1,033)        (2,690)
-------------------------------------------------------------------------------------------------------------
     Net investment in real estate projects     $    934            $ 23,625       $  9,685       $ 34,244
=============================================================================================================
Number of projects ........................            1                   9              6             16
=============================================================================================================
<FN>
(1)  Included six  free-standing  stores that are part of neighborhood  shopping
     centers totaling $1 million, which we counted as one project.
(2)  Included three properties totaling $10 million.
</FN>
</TABLE>

                                       39
<PAGE>

     Real estate  investments entail risks similar to those our construction and
commercial  lending  activities  present.  In addition,  California  courts have
imposed warranty-like  responsibility upon developers of new housing for defects
in  structure   and  the  housing  site,   including   soil   conditions.   This
responsibility  is not  necessarily  dependent upon a finding that the developer
was negligent.  Owners of real property also may incur  liabilities with respect
to environmental  matters,  including  financial  responsibility for clean-up of
hazardous waste or other conditions, under various federal and state laws.

DEPOSITS

     Our deposits  increased $537 million or 6.6% in 2001 and totaled a year-end
record  of $8.6  billion  at  December  31,  2001.  Our  lower-rate  transaction
accounts--i.e.,  checking,  regular  passbook and money  market--increased  $1.4
billion or 97.3%,  while our  certificates of deposit  decreased $906 million or
13.7%. Within transaction accounts, approximately 95% of the increase was in our
passbook  accounts,  as depositors moved monies from  certificates of deposit as
they seemed more  interested  in  liquidity  given the  relatively  low level of
interest rates. Our total checking accounts  (non-interest and interest bearing)
increased  7.3% between year ends. Of the total  increase in our  deposits,  $79
million was associated with 19 in-store  branches and 4 traditional  branches we
opened during 2001. One of the new  traditional  branches is located in Arizona,
our first in that state.  At December 31, 2001, the average  deposit size of our
traditional  branches was $107  million,  while the average size of our in-store
branches was $18 million,  or $24 million excluding the 19 new in-store branches
opened within the past 12 months.

     The  following  table sets forth  information  concerning  our deposits and
weighted average rates paid at the dates indicated.

<TABLE>
<CAPTION>
                                                                   December 31,
                                     --------------------------------------------------------------------
                                              2001                  2000                   1999
                                     --------------------------------------------------------------------
                                      Weighted              Weighted               Weighted
                                       Average               Average                Average
(Dollars in Thousands)                  Rate     Amount       Rate      Amount       Rate      Amount
---------------------------------------------------------------------------------------------------------
<S>                                     <C>    <C>            <C>     <C>            <C>     <C>
Transaction accounts:
   Non-interest-bearing checking .       -- %  $  263,165      -- %   $  244,311      -- %   $  182,165
   Interest-bearing checking (1) .      0.35      423,776     0.78       395,640     1.00       383,973
   Money market ..................      2.01      108,747     2.88        89,408     2.91        95,947
   Regular passbook ..............      2.46    2,131,048     3.41       754,127     3.62       827,854
---------------------------------------------------------------------------------------------------------
     Total transaction accounts ..      1.92    2,926,736     2.12     1,483,486     2.46     1,489,939
Certificates of deposit:
   Less than 3.00% ...............      2.41      970,854     2.41         6,357     2.47         8,717
   3.00-3.49 .....................      3.20      458,511     3.45            25     3.02            16
   3.50-3.99 .....................      3.84      532,634     3.97           384     3.92         3,786
   4.00-4.49 .....................      4.22      892,517     4.19        26,916     4.32       210,127
   4.50-4.99 .....................      4.76      555,885     4.82        80,844     4.78       939,858
   5.00-5.99 .....................      5.30      921,510     5.71     1,901,166     5.56     3,623,632
   6.00 and greater ..............      6.37    1,360,919     6.63     4,583,511     6.08       286,686
---------------------------------------------------------------------------------------------------------
     Total certificates of deposit      4.54    5,692,830     6.33     6,599,203     5.39     5,072,822
---------------------------------------------------------------------------------------------------------
       Total deposits ............      3.65%  $8,619,566     5.56%   $8,082,689     4.72%   $6,562,761
=========================================================================================================
<FN>
(1)  Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

                                       40
<PAGE>

     The following table shows at December 31, 2001 our  certificates of deposit
maturities by interest rate category.

<TABLE>
<CAPTION>
                           Less
                           Than        3.50% -     4.00% -     4.50% -     5.00% -     6.00%                 Percent
(Dollars in Thousands)    3.50%         3.99%       4.49%       4.99%       5.99%   and Greater  Total (1)   Of Total
-----------------------------------------------------------------------------------------------------------------------
<S>                      <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>
Within 3 months ....     $  347,492  $   69,568  $  156,251  $  211,040  $  604,288  $1,187,901  $2,576,540   45.26%
3 to 6 months ......        442,551      95,456     304,706     152,235     262,383     107,487   1,364,818   23.97
6 to 12 months .....        539,844     295,466     253,230      26,332      18,364      49,592   1,182,828   20.78
12 to 24 months ....         98,882      48,048     134,838      61,061      24,468       9,730     377,027    6.62
24 to 36 months ....            559      23,297      12,041       2,953       3,984       1,399      44,233    0.78
36 to 60 months ....             37         799      31,451     102,264       8,023       4,810     147,384    2.59
Over 60 months .....           --          --          --          --          --          --          --       --
-----------------------------------------------------------------------------------------------------------------------
    Total ..........     $1,429,365  $  532,634  $  892,517  $  555,885  $  921,510  $1,360,919  $5,692,830  100.00%
=======================================================================================================================
<FN>
(1)  Includes jumbo ($100,000 and over)  certificates of deposit of $1.3 billion
     with maturities of 3 months or less, $512 million with maturities of 3 to 6
     months,  $412  million with  maturities  of 6 to 12 months and $191 million
     with a remaining term of over 12 months.
</FN>
</TABLE>

BORROWINGS

     At December  31, 2001,  borrowings  totaled  $1.5  billion,  down from $2.0
billion at year-end 2000 and $2.1 billion at year-end 1999. The decrease in 2001
primarily occurred in advances from the FHLB.

     The following table sets forth information concerning our FHLB advances and
other borrowings at the dates indicated.

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                        --------------------------------------------------------------------
(Dollars in Thousands)                                      2001          2000          1999          1998          1997
----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>           <C>           <C>           <C>
Federal Home Loan Bank advances .....................   $1,522,705    $1,978,348    $2,122,407    $  695,012    $  352,458
Other borrowings:
  Reverse repurchase agreements .....................         --            --            --            --          34,803
  Commercial paper ..................................         --            --            --            --          83,811
  Real estate notes .................................            7           224           373         8,708        12,663
----------------------------------------------------------------------------------------------------------------------------
      Total borrowings ..............................   $1,522,712    $1,978,572    $2,122,780    $  703,720    $  483,735
============================================================================================================================
Weighted average rate on borrowings during the period         5.40%         6.16%         5.46%         6.07%         6.07%
Total borrowings as a percentage of total assets ....        13.71         18.16         22.56         11.22          8.29
============================================================================================================================
</TABLE>

                                       41
<PAGE>

     The  following  table sets forth  certain  information  with respect to our
short-term borrowings.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                         2001         2000          1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>           <C>
FHLB advances with original maturities less than one year:
    Balance at end of year .............................................   $  671,300    $1,475,000    $1,590,500
    Average balance outstanding during the year ........................      581,868     1,601,732       616,199
    Maximum amount outstanding at any month-end during the year ........    1,260,000     1,942,000     1,590,500
    Weighted average interest rate during the year .....................        5.63%         6.38%         5.42%
    Weighted average interest rate at the end of year ..................        2.16          6.55          5.88
Securities sold under agreement to repurchase:
    Balance at end of year .............................................   $    --       $    --       $    --
    Average balance outstanding during the year ........................        --              753         1,987
    Maximum amount outstanding at any month-end during the year ........        --           39,250        24,875
    Weighted average interest rate during the year .....................        --  %         6.10%         5.42%
    Weighted average interest rate at the end of year ..................        --            --            --
Total short-term borrowings:
    Total average short-term borrowings outstanding during the year ....   $  581,868    $1,602,485    $  618,186
    Total weighted average rate on short-term borrowings during the year        5.63%         6.38%         5.42%
====================================================================================================================
</TABLE>

     At year-end 2001, total  intermediate  and long-term  advances totaled $851
million, up from $503 million at December 31, 2000. The weighted average rate on
our intermediate and long-term FHLB advances at year-end 2001 was 4.98%.

     The following  table sets forth the  associated  maturities at December 31,
2001.

<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------------------------
<S>                                                 <C>
2002 ............................................   $ 55,921
2003 ............................................     72,834
2004 ............................................    172,600
2005 ............................................     29,750
2006 ............................................     61,300
Thereafter ......................................    459,000
--------------------------------------------------------------
  Total intermediate and long-term FHLB advances    $851,405
==============================================================
</TABLE>

CAPITAL SECURITIES

     On July 23,  1999,  we issued $120  million in capital  securities  through
Downey  Financial  Capital  Trust  I.  The  capital   securities  pay  quarterly
cumulative  cash  distributions  at an annual rate of 10.00% of the  liquidation
value of $25 per share. Interest expense, including the amortization of deferred
issuance  costs,  on our capital  securities  was $12.2  million  for 2001.  For
further information regarding our capital securities,  see Note 18 on page 91 of
Notes to Consolidated Financial Statements.

                                       42
<PAGE>

ASSET/LIABILITY MANAGEMENT AND MARKET RISK

     Market risk is the risk of loss from adverse  changes in market  prices and
interest rates.  Our market risk arises primarily from interest rate risk in our
lending and deposit taking activities.  This interest rate risk primarily occurs
to the  degree  that our  interest-bearing  liabilities  reprice  or mature on a
different basis--generally more rapidly--than our interest-earning assets. Since
our  earnings  depend  primarily  on  our  net  interest  income,  which  is the
difference between the interest and dividends earned on interest-earning  assets
and the interest  paid on  interest-bearing  liabilities,  one of our  principal
objectives is to actively  monitor and manage the effects of adverse  changes in
interest rates on net interest income while maintaining asset quality.

     In  addition  to the market  risk  associated  with our lending and deposit
taking  activities,  we also have  market  risk  associated  with our  secondary
marketing activities.  Changes in mortgage interest rates,  primarily fixed rate
mortgages,  impact  the  fair  value  of  loans  held  for  sale  as well as our
off-balance sheet commitments wherein we have committed to an interest rate with
a potential  borrower  for a loan we intend to sell  (known as an interest  rate
lock  derivative).  Our objective is to hedge against  fluctuations  in interest
rates   through   use   of   forward   sale   and   purchase    contracts   with
government-sponsored  enterprises  and whole loan sale  contracts  with  various
parties.  These  contracts are typically  obtained at the time the interest rate
lock commitments are made. Therefore,  as interest rates fluctuate,  the changes
in the fair value of our loans held for sale and interest rate lock  commitments
tend to be offset by  changes  in the fair  value of the  hedge  contracts.  The
method used for assessing the effectiveness of a hedging derivative,  as well as
the measurement  approach for determining the ineffective  aspects of the hedge,
is established  at the inception of the hedge.  Although we continue to hedge as
previously  done,  SFAS 133, as applied to our risk management  strategies,  may
increase or decrease reported net income and stockholders' equity,  depending on
levels of  interest  rates  and other  variables  affecting  the fair  values of
derivative  instruments and hedged items, but will have no effect on the overall
economics of the transactions.

     Changes in mortgage  interest  rates also impact the value of our  mortgage
servicing  rights.  Rising interest rates typically result in slower  prepayment
speeds on the loans  being  serviced  for others  which  increases  the value of
mortgage servicing rights,  whereas declining interest rates typically result in
faster prepayment speeds which decreases the value of mortgage servicing rights.
Currently, we do not hedge our mortgage servicing rights against that risk.

     Our  Asset/Liability  Management  Committee is responsible for implementing
the interest rate risk management policy which sets forth limits  established by
the Board of Directors  of  acceptable  changes in net  interest  income and net
portfolio value from specified  changes in interest  rates.  The OTS defines net
portfolio  value as the present  value of expected net cash flows from  existing
assets  minus  the  present  value of  expected  net cash  flows  from  existing
liabilities  plus the  present  value  of  expected  cash  flows  from  existing
off-balance sheet contracts.  Our Asset/Liability  Management Committee reviews,
among other items,  economic  conditions,  the interest rate outlook, the demand
for  loans,  the  availability  of  deposits  and  borrowings,  and our  current
operating results,  liquidity,  capital and interest rate exposure. In addition,
our Asset/Liability Management Committee monitors asset and liability maturities
and  repricing   characteristics   on  a  regular  basis  and  performs  various
simulations  and other  analyses to determine  the  potential  impact of various
business  strategies in controlling  interest rate risk and the potential impact
of those  strategies upon future earnings under various interest rate scenarios.
Based on these reviews,  our Asset/Liability  Management  Committee formulates a
strategy that is intended to implement the  objectives set forth in our business
plan without  exceeding the net interest  income and net portfolio  value limits
set forth in our interest rate risk policy.

     We currently do not enter into hedging contracts for speculative purposes.

                                       43
<PAGE>

     One measure of our  exposure  to  differential  changes in  interest  rates
between assets and  liabilities is shown in the following table which sets forth
the  repricing  frequency  of our major  asset and  liability  categories  as of
December 31, 2001,  as well as other  information  regarding  the  repricing and
maturity  difference  between our  interest-earning  assets and total  deposits,
borrowings  and  capital  securities  in  future  periods.  We  refer  to  these
differences as "gap." We have determined the repricing  frequencies by reference
to  projected  maturities,  based upon  contractual  maturities  as adjusted for
scheduled repayments and "repricing  mechanisms"--provisions  for changes in the
interest  and dividend  rates of assets and  liabilities.  We assume  prepayment
rates on substantially  all of our loan portfolio based upon our historical loan
prepayment  experience and anticipated future prepayments.  Repricing mechanisms
on a number of our assets are subject to limitations, such as caps on the amount
that interest rates and payments on our loans may adjust, and accordingly, these
assets do not normally respond to changes in market interest rates as completely
or rapidly as our  liabilities.  The interest rate sensitivity of our assets and
liabilities  illustrated in the following table would vary  substantially  if we
used different assumptions or if actual experience differed from the assumptions
set forth.

<TABLE>
<CAPTION>
                                                                                   December 31, 2001
                                                    ----------------------------------------------------------------------------
                                                       Within       7 - 12        1 - 5       6 - 10       Over        Total
(Dollars in Thousands)                                6 Months      Months        Years        Years     10 Years     Balance
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>          <C>         <C>         <C>          <C>
Interest-earning assets:
    Investment securities and FHLB stock .........(1)$  406,598  $   62,053   $   89,024  $   1,208   $    --      $   558,883
    Loans and mortgage-backed securities: ........(2)
     Loans secured by real estate:
       Residential:
         Adjustable ..............................    7,697,814     274,407      941,060       --          --        8,913,281
         Fixed ...................................      546,944      40,542      179,945     64,686      19,981        852,098
       Commercial real estate ....................       40,349       9,787       53,194      3,967       1,609        108,906
       Construction ..............................       36,253        --           --         --          --           36,253
       Land ......................................       14,540           9           66        783        --           15,398
     Non-mortgage loans:
       Commercial ................................       12,951        --           --         --          --           12,951
       Consumer ..................................       56,077       5,050       13,418       --          --           74,545
     Mortgage-backed securities ..................       54,335      49,542        6,654      4,490       3,960        118,981
--------------------------------------------------------------------------------------------------------------------------------
    Total loans and mortgage-backed securities ...    8,459,263     379,337    1,194,337     73,926      25,550     10,132,413
--------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets ...............   $8,865,861  $  441,390   $1,283,361  $  75,134   $  25,550    $10,691,296
================================================================================================================================
Transaction accounts:
    Non-interest-bearing checking ................   $  263,165  $     --     $     --    $    --     $    --      $   263,165
    Interest-bearing checking ....................(3)   423,776        --           --         --          --          423,776
    Money market .................................(4)   108,747        --           --         --          --          108,747
    Regular passbook .............................(4) 2,131,048        --           --         --          --        2,131,048
--------------------------------------------------------------------------------------------------------------------------------
     Total transaction accounts ..................    2,926,736        --            --        --          --        2,926,736
Certificates of deposit ..........................(1) 3,941,358   1,182,828      568,644       --          --        5,692,830
--------------------------------------------------------------------------------------------------------------------------------
    Total deposits ...............................    6,868,094   1,182,828      568,644       --          --        8,619,566
Borrowings .......................................      664,105      63,123      365,484    430,000        --        1,522,712
Capital securities ...............................         --          --           --         --       120,000        120,000
--------------------------------------------------------------------------------------------------------------------------------
    Total deposits, borrowings and
     capital securities ..........................   $7,532,199  $1,245,951   $  934,128  $ 430,000   $ 120,000    $10,262,278
================================================================================================================================
Excess (shortfall) of interest-earning assets over
    deposits, borrowings and capital securities ..   $1,333,662  $ (804,561)  $  349,233  $(354,866)  $ (94,450)   $   429,018
Cumulative gap ...................................    1,333,662     529,101      878,334    523,468     429,018
Cumulative gap - as a % of total assets:
    December 31, 2001 ............................       12.01%       4.76%        7.91%      4.71%       3.86%
    December 31, 2000 ............................       28.66        7.13         5.94       3.13        3.13
    December 31, 1999 ............................       21.29       10.20         4.97       1.92        2.35
================================================================================================================================
<FN>
(1)  Based upon contractual maturity and repricing date.
(2)  Based upon contractual maturity, repricing date and projected repayment and
     prepayments of principal.
(3)  Included amounts swept into money market deposit accounts and is subject to
     immediate repricing.
(4)  Subject to immediate repricing.
</FN>
</TABLE>

                                       44
<PAGE>

     Our  six-month gap at December 31, 2001 was a positive  12.01%.  This means
that more interest-earning assets reprice within six months than total deposits,
borrowings and capital securities.  This compares to a positive six-month gap of
28.66% at  December  31,  2000 and 21.29% at  December  31,  1999.  Our  primary
strategy  to  manage  interest  rate risk is to  emphasize  the  origination  of
adjustable rate mortgages or loans with relatively  short  maturities.  Interest
rates on adjustable rate mortgages are primarily tied to COFI. We originated and
purchased  approximately $3.4 billion during both 2001 and 2000 and $4.7 billion
during 1999 of loans and  mortgage-backed  securities with  adjustable  interest
rates or maturities of five years or less. These loans represented approximately
99%  during  2001,  97%  during  2000  and  92%  during  1999 of all  loans  and
mortgage-backed  securities originated and purchased for investment during these
periods.

     At December 31, 2001, 99% of our interest-earning assets mature, reprice or
are estimated to prepay within five years,  compared to 98% at December 31, 2000
and 97% at December 31, 1999.  At December 31, 2001,  loans held for  investment
and mortgage-backed securities with adjustable interest rates represented 90% of
those portfolios.  During 2002, we will continue to offer residential fixed rate
loan products to our customers to meet customer demand.  We primarily  originate
fixed rate loans for sale in the secondary  market and price them accordingly to
create loan  servicing  income and to  increase  opportunities  for  originating
adjustable  rate  mortgages.  However,  we may  originate  fixed  rate loans for
investment when funded with long-term  funds to mitigate  interest rate risk and
small volumes to facilitate the sale of real estate acquired through foreclosure
or  that  meet  required  yield  and  other  approved  guidelines.  For  further
information,  see  Business--Banking  Activities--Lending  Activities--Secondary
Marketing and Loan Servicing Activities on page 5.

     We are  better  protected  against  rising  interest  rates with a positive
six-month  gap.  However,  we remain  subject to possible  interest  rate spread
compression,  which would  adversely  impact our net interest income if interest
rates rise.  This is  primarily  due to the lag in  repricing  of the indices to
which our adjustable rate loans and mortgage-backed securities are tied, as well
as the repricing frequencies and periodic interest rate caps on these adjustable
rate loans and  mortgage-backed  securities.  The amount of such  interest  rate
spread compression would depend upon the frequency and severity of such interest
rate fluctuations.

     In  addition  to  measuring  interest  rate  risk  via a gap  analysis,  we
establish limits on, and measure the sensitivity of, our net interest income and
net portfolio value to changes in interest rates.  Changes in interest rates are
defined as instantaneous and sustained  movements in interest rates in 100 basis
point increments. We utilize an internally maintained asset/liability management
simulation  model to make the  calculations  which, for net portfolio value, are
calculated on a discounted cash flow basis.  First, we estimate our net interest
income for the next twelve months and the current net portfolio  value  assuming
no change in  interest  rates from those at period  end.  Once the base case has
been estimated, we make calculations for each of the defined changes in interest
rates, to include any associated differences in the anticipated prepayment speed
of loans.  We then compare those results  against the base case to determine the
estimated  change to net  interest  income  and net  portfolio  value due to the
changes in  interest  rates.  The  following  are the  estimated  impacts to net
interest  income and net portfolio  value from various  instantaneous,  parallel
shifts in interest  rates  based upon our asset and  liability  structure  as of
year-ends  2001  and  2000.   Since  we  base  these   estimates  upon  numerous
assumptions,  like the expected  maturities of our  interest-bearing  assets and
liabilities  and the shape of the  period-end  interest  rate yield  curve,  our
actual  sensitivity to interest rate changes could vary  significantly if actual
experience differs from those assumptions used in making the calculations.

<TABLE>
<CAPTION>
                                                    2001                            2000
                                            -------------------------------------------------------------
                                            Percentage Change in            Percentage Change in
                                            -------------------------------------------------------------
Change in Interest Rates                Net Interest   Net Portfolio     Net Interest     Net Portfolio
  (In Basis Points)                       Income(1)      Value (2)         Income (1)       Value (2)
---------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>                <C>              <C>
             +200 .....................    (11.3)%         6.0%              (7.5)%           (3.0)%
             +100 .....................     (5.9)          4.6               (3.4)             0.9
             (100) ....................      4.9          (5.4)               0.7             (4.8)
             (200) ....................      8.8          (5.2)               2.1             (9.9)
=========================================================================================================
<FN>
(1)  The percentage  change in this column represents net interest income for 12
     months in a stable interest rate environment versus the net interest income
     in the various rate scenarios.
(2)  The percentage  change in this column represents the net portfolio value of
     the Bank in a stable  interest  rate  environment  versus the net portfolio
     value in the various rate scenarios.
</FN>
</TABLE>

                                       45
<PAGE>

     The following table shows our financial  instruments  that are sensitive to
changes  in  interest  rates,   categorized  by  expected   maturity,   and  the
instruments'  fair values at December 31,  2001.  This data differs from that in
the gap table as it does not incorporate the repricing characteristics of assets
and liabilities.  Rather, it only reflects  contractual  maturities adjusted for
anticipated prepayments. Market risk sensitive instruments are generally defined
as on and off balance sheet  derivatives  and other financial  instruments.  Our
assets and liabilities  that do not have a stated maturity date, such as certain
deposits,  are  considered  to be long term in nature  and are  reported  in the
"thereafter"  column.  We do not  consider  these  financial  instruments  to be
materially  sensitive  to  interest  rate  fluctuations  and  historically,  the
balances have remained fairly  constant over various  economic  conditions.  The
weighted  average  interest rates for the various  fixed-rate and  variable-rate
assets and  liabilities  presented are based on the actual rates that existed at
December 31, 2001. The fair value of our financial  instruments is determined as
follows:

     o    Fed funds and FHLB Stock  equal  their book  values due to their short
          maturities.

     o    Investment securities and mortgage-backed  securities are based on the
          closing  market price  quotations  from  financial  market  monitoring
          firms.

     o    Loans held for sale are based on bid quotations from financial  market
          monitoring firms.

     o    Loans held for investment  takes into  consideration  discounted  cash
          flows  through  the  estimated   maturity  or  repricing  dates  using
          estimated market discount rates.

     o    Demand deposits,  money market and savings accounts are equal to their
          book values.

     o    Time  deposits and  borrowings  are based on the  discounted  value of
          contractual cash flows,  which is estimated using wholesale  borrowing
          rates offered for similar terms.

The degree of market risk inherent in loans with prepayment  features may not be
completely   reflected  in  the   disclosures.   Although  we  have  taken  into
consideration our historical  prepayment  trends to determine  expected maturity
categories,  prepayment features are triggered by changes in the market rates of
interest.  Unexpected  changes may increase the rate of prepayments  above those
anticipated.  As such,  the potential  loss from such market rate changes may be
significantly larger.

                                       46
<PAGE>

<TABLE>
<CAPTION>
                                                           Expected Maturity Date at December 31, 2001 (1)
                                  --------------------------------------------------------------------------------------------------
                                                                                                                Total        Fair
(Dollars in Thousands)               2002        2003       2004         2005        2006      Thereafter      Balance       Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>           <C>        <C>          <C>          <C>
Investment securities ........... $  462,331  $   27,225  $  31,578   $   18,566    $ 11,655   $    7,528   $   558,883  $   558,868
   Average interest rate ........       3.78%       6.66%      3.77%        3.38%       3.76%        3.56%         3.90%
Loans held for sale (2) .........    499,024        --         --           --          --           --         499,024      497,776
   Average interest rate ........       6.47%       --  %      --  %        --  %       --  %        --  %         6.47%
Mortgage-backed securities
   available for sale ...........     32,802      23,352     16,710       11,971       8,627       25,519       118,981      118,981
   Average interest rate ........       5.25%       5.28%      5.31%        5.34%       5.38%        5.40%         5.31%
Loans held for investment:
   Loans secured by real estate:
     Residential:
      Adjustable ................  2,445,521   1,503,267   1,170,262     883,559     664,888    2,245,751     8,913,248    9,113,797
        Average interest rate ...       7.09%       7.09%       7.09%       7.10%       7.12%        7.13%         7.10%
      Fixed .....................     86,929      65,296      49,121      36,859      27,805       87,097       353,107      359,627
        Average interest rate ...       7.83%       7.82%       7.80%       7.79%       7.77%        7.77%         7.80%
     Other ......................     67,072      16,282      16,875      17,516      18,207       24,605       160,557      171,726
      Average interest rate .....       8.09%       8.07%       8.04%       7.98%       7.86%        7.73%         7.99%
   Non-mortgage:
     Commercial .................     10,086       2,865        --          --          --           --          12,951       13,547
      Average interest rate .....       7.22%       8.23%       --  %       --  %       --  %        --  %         7.44%
     Consumer ...................     10,980       7,547       5,059      50,959        --           --          74,545       76,313
      Average interest rate .....       7.66%       7.42%       7.21%       7.11%       --  %        --  %         7.23%
Interest bearing advances to
   joint ventures ...............      3,186        --          --          --          --           --           3,186        3,186
   Average interest rate ........      10.00%       --  %       --  %       --  %       --  %        --  %        10.00%
Designated forward sale contracts      4,332        --          --          --          --           --           4,332        4,332
MSR's and loan servicing ........
   portfolio (3) ................     12,320      10,823       9,298       7,888       6,648        9,918        56,895       58,880
------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets . $3,634,583  $1,656,657  $1,298,903  $1,027,318    $737,830   $2,400,418   $10,755,709  $10,977,033
====================================================================================================================================
Transaction accounts:
   Non-interest-bearing checking  $   48,067  $   39,287  $   32,112  $   26,246    $ 21,453   $   96,000   $   263,165  $   263,165
   Interest-bearing checking (4)      77,402      63,265      51,709      42,265      34,545      154,590       423,776      423,776
   Money market .................     19,862      16,235      13,269      10,846       8,865       39,670       108,747      108,747
   Regular passbook .............    389,231     318,139     260,032     212,537     173,718      777,391     2,131,048    2,131,048
------------------------------------------------------------------------------------------------------------------------------------
     Total transaction accounts .    534,562     436,926     357,122     291,894     238,581    1,067,651     2,926,736    2,926,736
      Average interest rate .....       1.92%       1.92%       1.92%       1.92%       1.92%        1.92%         1.92%
Certificates of deposit .........  5,124,186     377,027      44,233      17,685     129,699         --       5,692,830    5,700,465
   Average interest rate ........       4.57%       4.07%       4.25%       5.18%       4.75%        --  %         4.54%
Interest rate lock commitments ..        600        --          --          --          --           --             600          600
Undesignated loan forward sale
   contracts ....................        630        --          --          --          --           --             630          630
Borrowings ......................    727,228      72,834     201,600      29,750      61,300      430,000     1,522,712    1,483,749
   Average interest rate ........       2.37%       4.47%       4.35%       4.61%       4.74%        5.42%         3.73%
Capital securities ..............       --          --          --          --          --        120,000       120,000      123,840
   Average interest rate ........       --  %       --  %       --  %       --  %       --  %       10.00%        10.00%
------------------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
   capital securities ........... $6,387,206  $  886,787  $  602,955  $  339,329    $429,580   $1,617,651   $10,263,508  $10,236,020
====================================================================================================================================
<FN>
(1)  Expected maturities are contractual  maturities adjusted for prepayments of
     principal.  We use a number of  assumptions  to  estimate  fair  values and
     expected   maturities.   For  assets,  we  base  expected  maturities  upon
     contractual  maturity,  projected  repayments and prepayments of principal.
     The  prepayment  experience  reflected  herein  is based on our  historical
     experience. Our average projected constant prepayment rate ("CPR") is 47.9%
     on our fixed-rate and 29.6% on our adjustable  rate mortgage  portfolio for
     interest-earning assets, excluding investment securities, which do not have
     prepayment  features.  For deposits,  in accordance with standard  industry
     practice  and  our  own  historical  experience,  we  have  applied  "decay
     factors," used to estimate  deposit  runoff,  of 20.0% per year. The actual
     maturities  of  these  instruments  could  vary   substantially  if  future
     prepayments differ from our historical experience.
(2)  Included  capitalized basis adjustment  reflecting the change in fair value
     from date of interest rate lock commitment to date of origination.
(3)  The estimated fair value included mortgage  servicing rights acquired prior
     to January 1, 1996 when Downey began  capitalizing  the asset. (4) Included
     amounts swept into money market deposit accounts.
</FN>
</TABLE>

                                       47
<PAGE>

     For further information regarding the sensitivity of our mortgage servicing
rights  to  changes  in  interest  rates,  see Note 11 of Notes to  Consolidated
Financial Statements on page 85.

     The  following  table sets  forth the  interest  rate  spread  between  our
interest-earning assets and interest-bearing liabilities at the dates indicated.

<TABLE>
<CAPTION>
                                                             December 31,
                                             ------------------------------------------
                                               2001     2000     1999    1998    1997
---------------------------------------------------------------------------------------
<S>                                           <C>      <C>      <C>      <C>     <C>
Weighted average yield:
    Loans and mortgage-backed securities       7.15%    8.45%    7.67%   7.72%   7.95%
    Federal Home Loan Bank stock .......       5.31     5.52     5.60    5.44    5.88
    Investment securities ..............       3.54     6.45     6.12    5.40    5.63
---------------------------------------------------------------------------------------
      Interest-earning assets yield ....       6.98     8.36     7.62    7.65    7.87
---------------------------------------------------------------------------------------
Weighted average cost:
    Deposits ...........................       3.65     5.56     4.72    4.53    5.00
    Borrowings:
      Federal Home Loan Bank advances ..       3.73     6.26     5.77    5.47    6.11
      Other borrowings .................       7.88     8.12     7.88    8.69    6.15
---------------------------------------------------------------------------------------
          Total borrowings .............       3.73     6.26     5.99    5.51    6.12
    Capital securities .................      10.00    10.00    10.00    --      --
---------------------------------------------------------------------------------------
      Combined funds cost ..............       3.74     5.75     5.05    4.66    5.11
---------------------------------------------------------------------------------------
          Interest rate spread .........       3.24%    2.61%    2.57%   2.99%   2.76%
=======================================================================================
</TABLE>

     The year-end  weighted  average  yield on our loan  portfolio  decreased to
7.15% at December 31, 2001,  from 8.45% at year-end 2000.  The weighted  average
rate on new loans  originated  during 2001 was 6.18%,  compared to 6.10%  during
2000 and 5.92% during 1999. At December 31, 2001, our  adjustable  rate mortgage
portfolio  of  single  family  residential  loans,   including   mortgage-backed
securities, totaled $9.0 billion with a weighted average rate of 7.11%, compared
to $9.0 billion  with a weighted  average rate of 8.47% at December 31, 2000 and
$7.3 billion with a weighted average rate of 7.52% at December 31, 1999.

PROBLEM LOANS AND REAL ESTATE

NON-PERFORMING ASSETS

     Non-performing  assets consist of loans on which we have ceased the accrual
of interest,  which we refer to as non-accrual  loans,  loans  restructured at a
below market rate,  real estate  acquired in settlement of loans and repossessed
automobiles.  Non-performing  assets  totaled $93 million at December  31, 2001,
compared  to $55 million at  December  31, 2000 and $39 million at December  31,
1999.  The  increase in our  non-performing  assets  during  2001 was  primarily
attributed to a rise in residential non-performers,  of which $12 million was in
the subprime  category and was likely due to the economic slowdown that began in
2001.  Of the  total,  real  estate  acquired  in  settlement  of loans,  net of
allowances, represented $15 million at December 31, 2001, up from $10 million at
December  31,  2000 and $6 million at  December  31,  1999.  When  measured as a
percentage of total assets, our non-performing  assets rose to 0.83% at year-end
2001, compared to 0.50% at year-end 2000 and 0.42% at year-end 1999.

                                       48
<PAGE>

     The  following  table  summarizes  our  non-performing  assets at the dates
indicated.

<TABLE>
<CAPTION>
                                                                             December 31,
                                                       -------------------------------------------------------
(Dollars in Thousands)                                    2001       2000       1999       1998       1997
--------------------------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>        <C>        <C>        <C>
Non-accrual loans:
    Residential one-to-four units ...................   $43,210    $20,746    $15,590    $15,571    $20,816
    Residential one-to-four units - subprime ........    31,166     22,296     13,914      1,975       --
    Other ...........................................     2,668      1,708      3,477      4,829     20,883
--------------------------------------------------------------------------------------------------------------
      Total non-accrual loans .......................    77,044     44,750     32,981     22,375     41,699
Troubled debt restructure - below market rate (1) ...       203        206       --         --         --
Real estate acquired in settlement of loans .........    15,366      9,942      5,899      4,475      9,626
Repossessed automobiles .............................        19         76        314        569        795
--------------------------------------------------------------------------------------------------------------
   Total non-performing assets ......................   $92,632    $54,974    $39,194    $27,419    $52,120
==============================================================================================================
Allowance for loan losses:
    Amount ..........................................   $36,120    $34,452    $38,342    $31,517    $32,092
    As a percentage of non-performing loans .........     46.76%     76.63%    116.25%    140.86%     76.96%
Non-performing assets as a percentage of total assets      0.83       0.50       0.42       0.44       0.89
==============================================================================================================
<FN>
(1)  Represented a single residential one-to-four unit loan.
</FN>
</TABLE>

     It is our policy to take  appropriate,  timely and  aggressive  action when
necessary to resolve  non-performing assets. When resolving problem loans, it is
our policy to determine  collectibility  under various  circumstances  which are
intended to result in our  maximum  financial  benefit.  We  accomplish  this by
either working with the borrower to bring the loan current or by foreclosing and
selling the asset. We perform  ongoing reviews of loans that display  weaknesses
and maintain  adequate  loss  allowances  on the loans.  For a discussion on our
internal  asset review  policy,  refer to Allowance for Losses on Loans and Real
Estate on page 52.

     All but $19.8  million of our  non-performing  assets at December  31, 2001
were located in  California,  compared to $7.2 million  outside of  California a
year ago.

     We evaluate the need for appraisals for non-performing assets on a periodic
basis.  We will generally  obtain a new appraisal when we believe that there may
have  been an  adverse  change in the  property  operations  or in the  economic
conditions  of the  geographic  market of the property  securing our loans.  Our
policy is to obtain new  appraisals  at least  annually  for major  real  estate
acquired in settlement of loans. Throughout 2001, we obtained new appraisals for
non-performing loans and real estate acquired in settlement of loans.

     Non-Accrual  Loans.  It is our  general  policy  to  account  for a loan as
non-accrual  when the loan  becomes 90 days  delinquent  or when  collection  of
interest  appears  doubtful.  In a number of cases,  loans may remain on accrual
status  past 90 days when we  determine  that  continued  accrual  is  warranted
because the loan is  well-secured  and in process of collection.  As of December
31, 2001, we had no loans 90 days or more  delinquent  which remained on accrual
status.  We reverse and charge against  interest income any interest  previously
accrued with respect to  non-accrual  loans.  We  recognize  interest  income on
non-accrual  loans to the extent that we receive payments and to the extent that
we believe we will  recover  the  remaining  principal  balance of the loan.  We
restore these loans to an accrual  status only if all past due payments are made
by the borrower and the  borrower  has  demonstrated  the ability to make future
payments of principal  and  interest.  At December 31, 2001,  non-accrual  loans
aggregating  $20  million  were less than 90 days  delinquent  relative to their
contractual   terms.   Additional   loans   aggregating   $1  million  were  not
contractually  past  due,  but  were  deemed  non-accrual  due  to  management's
assessment of the borrower's ability to pay.

     Troubled  Debt  Restructurings.  We  consider a  restructuring  of a debt a
troubled debt  restructuring  when we, for economic or legal reasons  related to
the borrower's financial  difficulties,  grant a concession to the borrower that
we would not otherwise grant.  Troubled debt restructurings may include changing
repayment  terms,  reducing the stated  interest rate or reducing the amounts of
principal and/or interest due or extending the maturity date. The  restructuring
of a loan is intended to recover as much of our  investment  as possible  and to
achieve the highest  yield  possible.  At December  31, 2001 we had less than $1
million of troubled debt  restructurings on accrual status representing a single
one-to-four unit residential loan.

                                       49
<PAGE>

     Real  Estate  Acquired in  Settlement  of Loans.  Real  estate  acquired in
settlement of loans  consists of real estate  acquired  through  foreclosure  or
deeds in lieu of foreclosure and totaled $15 million at December 31, 2001.

     Potential Problem Loan. We have a commercial real estate loan of $4 million
secured  by a shopping  center in which the  principal  tenant  closed its store
several years ago, but continued  paying rent pursuant to its lease  obligation.
The tenant  mitigated its cost by sub-leasing  its space.  The principal  tenant
filed bankruptcy  subsequent to year end which may adversely affect this loan in
future periods.

DELINQUENT LOANS

     When a borrower fails to make required payments on a loan and does not cure
the  delinquency  within 60 days,  we  normally  record a notice of  default  to
commence  foreclosure  proceedings,  so long as we have given any required prior
notice to the borrower.  If the loan is not reinstated within the time permitted
by law for reinstatement, which is normally five business days prior to the date
set for the  non-judicial  trustee's  sale,  we may then sell the  property at a
foreclosure  sale.  In  general,  if we have  elected  to pursue a  non-judicial
foreclosure,  we are not permitted  under  applicable law to obtain a deficiency
judgment against the borrower,  even if the security property is insufficient to
cover the balance owed. At these  foreclosure  sales, we generally acquire title
to the property.

     At December 31, 2001,  loans  delinquent 30 days or more as a percentage of
total  loans was 1.10%,  up from 0.66% at  year-end  2000 and 0.58% at  year-end
1999. The increase  primarily  occurred in our residential  one-to-four unit and
non-mortgage  commercial  categories.  As a  percentage  of its  loan  category,
residential  one-to-four units increased from 0.46% at year-end 2000 to 0.80% at
year-end 2001, while subprime residential one-to-four units increased from 1.68%
at year-end 2000 to 2.87% at year-end 2001. A higher incidence of delinquency is
expected  on  these  subprime  loans  as  these  borrowers  have  a  history  of
delinquencies  for which we charge higher  interest rates to compensate for that
risk. In addition,  the  loan-to-value  ratio on these loans is generally  lower
thereby providing more equity protection against loss.

                                       50
<PAGE>

     The  following  table  indicates  the  amounts of our past due loans at the
dates indicated.

<TABLE>
<CAPTION>
                                                                               December 31,
                                               ------------------------------------------------------------------------------
                                                                2001                                   2000
                                               ------------------------------------------------------------------------------
                                                 30-59    60-89       90+                30-59     60-89     90+
(Dollars in Thousands)                           Days     Days     Days (1)   Total      Days      Days   Days (1)   Total
-----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>       <C>       <C>       <C>         <C>      <C>      <C>      <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................   $ 19,170  $ 12,797  $ 33,449  $ 65,416    $12,400  $ 8,611  $15,246  $36,257
      One-to-four units - subprime .........     13,159     9,104    20,958    43,221      7,300    7,658   14,427   29,385
      Five or more units ...................       --        --        --        --         --       --       --       --
    Commercial real estate .................       --        --        --        --         --       --       --       --
    Construction ...........................       --        --        --        --         --       --       --       --
    Land ...................................       --        --        --        --         --       --       --       --
-----------------------------------------------------------------------------------------------------------------------------
      Total real estate loans ..............     32,329    21,901    54,407   108,637     19,700   16,269   29,673   65,642
Non-mortgage:
    Commercial .............................       --        --       1,163     1,163       --       --       --       --
    Automobile .............................        174        85        46       305        393       26      151      570
    Other consumer .........................        356        62       173       591         98       29      246      373
-----------------------------------------------------------------------------------------------------------------------------
      Total delinquent loans ...............   $ 32,859  $ 22,048  $ 55,789  $110,696    $20,191  $16,324  $30,070  $66,585
=============================================================================================================================
Delinquencies as a percentage of total loans       0.33%     0.22%     0.55%     1.10%      0.20%    0.16%    0.30%    0.66%
=============================================================================================================================
<CAPTION>
                                                                1999                                   1998
                                               ------------------------------------------------------------------------------
<S>                                            <C>       <C>       <C>       <C>         <C>      <C>      <C>      <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................   $  8,630  $  3,889  $ 12,793  $ 25,312    $ 9,841  $ 6,014  $12,832  $28,687
      One-to-four units - subprime .........      7,867     3,069     7,935    18,871        244      784      947    1,975
      Five or more units ...................       --        --        --        --         --       --        155      155
    Commercial real estate .................       --        --        --        --         --       --       --       --
    Construction ...........................       --        --        --        --         --       --       --       --
    Land ...................................       --        --        --        --         --       --       --       --
-----------------------------------------------------------------------------------------------------------------------------
      Total real estate loans ..............     16,497     6,958    20,728    44,183     10,085    6,798   13,934   30,817
Non-mortgage:
    Commercial .............................       --        --        --        --         --       --       --       --
    Automobile .............................      4,758       674       717     6,149      4,650      888    1,048    6,586
    Other consumer .........................        679        42       114       835        334       45      344      723
-----------------------------------------------------------------------------------------------------------------------------
      Total delinquent loans ...............   $ 21,934  $  7,674  $ 21,559  $ 51,167    $15,069  $ 7,731  $15,326  $38,126
=============================================================================================================================
Delinquencies as a percentage of total loans       0.25%     0.09%     0.24%     0.58%      0.26%    0.13%    0.26%    0.65%
=============================================================================================================================
<CAPTION>
                                                                1997
                                               ---------------------------------------
<S>                                            <C>       <C>       <C>       <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................   $ 12,099  $  4,101  $ 18,579  $ 34,779
      One-to-four units - subprime .........        185      --        --         185
      Five or more units ...................       --         222      --         222
    Commercial real estate .................       --        --         279       279
    Construction ...........................       --        --        --        --
    Land ...................................       --        --        --        --
--------------------------------------------------------------------------------------
      Total real estate loans ..............     12,284     4,323    18,858    35,465
Non-mortgage:
    Commercial .............................       --        --        --        --
    Automobile .............................      4,167       981       961     6,109
    Other consumer .........................        218        54       533       805
--------------------------------------------------------------------------------------
      Total delinquent loans ...............   $ 16,669  $  5,358  $ 20,352  $ 42,379
======================================================================================
Delinquencies as a percentage of total loans       0.31%     0.10%     0.38%     0.79%
======================================================================================
<FN>
(1)  All 90 day or greater delinquencies are on non-accrual status and we report
     them as part of non-performing assets.
</FN>
</TABLE>

                                       51
<PAGE>

ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE

     We  maintain a valuation  allowance  for losses on loans and real estate to
provide for losses inherent in those  portfolios.  The adequacy of the allowance
is  evaluated  quarterly  by  management  to maintain  the  allowance  at levels
sufficient to provide for inherent  losses. A key component to our evaluation is
our internal asset review process.

     Our  Internal  Asset  Review  Department  conducts  independent  reviews to
evaluate  the risk and  quality of all our assets.  Our  Internal  Asset  Review
Committee  is  responsible  for the review  and  classification  of assets.  The
Internal Asset Review Committee  members include the Chief Internal Asset Review
Officer,  Chief Executive Officer, Chief Financial Officer, Chief Administrative
Officer, Chief Lending Officer,  General Counsel and Director of Compliance/Risk
Management. The Internal Asset Review Committee meets quarterly to review and to
determine asset  classifications and to recommend any changes to asset valuation
allowances.  With the exception of payoffs or asset sales, the classification of
an asset, once established, can be removed or upgraded only upon approval of the
Internal Asset Review Committee. The Chief Internal Asset Review Officer reports
quarterly to the Audit  Committee of the Board of  Directors  regarding  overall
asset quality, the adequacy of valuation allowances on classified assets and our
adherence  to  policies  and  procedures   regarding  asset  classification  and
valuation.

     We adhere to an internal asset review system and loss allowance methodology
designed  to provide  for timely  recognition  of  problem  assets and  adequate
general valuation allowances to cover asset losses. Our current asset monitoring
process  includes  the use of asset  classifications  to  segregate  the assets,
largely loans and real estate, into various risk categories.  We use the various
asset classifications as a means of measuring risk for determining the valuation
allowance at a point in time.  We  currently  use a six grade system to classify
our assets. The current grades are:

     o    pass;

     o    watch;

     o    special mention;

     o    substandard;

     o    doubtful; and

     o    loss.

     We consider  substandard,  doubtful and loss assets "classified assets" for
regulatory purposes. A brief description of these classifications follows:

     o    The pass  classification  represents a level of credit  quality  which
          contains no well-defined deficiency or weakness.

     o    The watch  classification  is used to identify an asset that currently
          contains no well-defined  deficiency or weakness, but it is determined
          to  be  desirable  to  closely  monitor  the  asset--e.g.,   loans  to
          facilitate  the sale of real estate  acquired in  settlement of loans.
          This  category  may  also be  used  for  assets  upgraded  from  lower
          classifications where continuing monitoring is deemed appropriate.

     o    A special  mention asset does not currently  expose us to a sufficient
          degree of risk to warrant an adverse classification,  but does possess
          a correctable  deficiency or potential weakness deserving management's
          close attention.

     o    Substandard  assets have a well-defined  weakness or weaknesses.  They
          are  characterized  by the distinct  possibility  that we will sustain
          some loss if the deficiencies are not corrected.

     o    An asset classified  doubtful has all the weaknesses inherent in those
          classified   substandard  with  the  added   characteristic  that  the
          weaknesses  make  collection or  liquidation  in full, on the basis of
          currently existing facts,  conditions and values,  highly questionable
          and improbable.  We consider doubtful to be a temporary classification
          until resolution of pending weakness issues enables us to more clearly
          define the potential for loss.

     o    That   portion  of  an  asset   classified   as  loss  is   considered
          uncollectible and of so little value that its continuance as an asset,
          without  establishment  of a  specific  valuation  allowance,  is  not
          warranted.  A loss  classification  does  not mean  that an asset  has
          absolutely  no  recovery  or  salvage  value,  but  rather  it is  not
          reasonable  to defer  writing off or providing for all or a portion of
          an impaired asset even though

                                       52
<PAGE>

          partial  recovery  may be effected in the  future.  We will  generally
          classify as loss the balance of the asset that is greater than the net
          fair value of the asset  unless we can  expect  payment  from  another
          source.  Therefore, the amount of an asset classified as loss reflects
          the  total  of  specific  valuation  allowances  established  for  the
          particular asset.  Specific valuation allowances are not includable in
          determining the Bank's total regulatory capital.

     The  OTS  has  the   authority   to   require   us  to  change   our  asset
classifications.  If the change results in an asset being classified in whole or
in part as loss, a specific allowance must be established  against the amount so
classified  or that  amount  must be  charged  off.  OTS  guidelines  set  forth
quantitative benchmarks as a starting point for the determination of appropriate
levels of general valuation allowances. The OTS directs its examiners to rely on
management's  estimates of adequate general  valuation  allowances if the Bank's
process for determining adequate allowances is deemed to be sound.

     Our policy is to provide an  allowance  for losses on loans and real estate
when it is probable  that the value of the asset has been  impaired and the loss
can be reasonably  estimated.  To comply with this policy, we have established a
monitoring  system  that  requires  at least an annual  review of all  assets in
excess of $5 million and a semiannual review of all assets considered  adversely
classified or  criticized.  The monitoring  system  requires a review of current
operating  statements,   an  evaluation  of  the  property's  current  and  past
performance,   an  evaluation  of  the  borrower's  ability  to  repay  and  the
preparation  of a  discounted  cash flow  analysis.  Based on the results of the
review, we may require a new appraisal.

     We utilize the asset classifications from our internal asset review process
in the following manner to determine the amount of our allowances:

     o    General valuation  allowances:  This element relates to assets with no
          well-defined  deficiency or weakness (i.e.,  assets classified pass or
          watch) and takes into  consideration  loss that is imbedded within the
          portfolio but has not yet been  realized.  Generally,  we believe that
          borrowers  are  impacted  by  events  well in  advance  of a  lender's
          knowledge  that may  ultimately  result in loan  default and  eventual
          loss. Examples of such loss-causing events would be borrower job loss,
          divorce or medical crisis in the case of single family residential and
          consumer  loans,  or loss of a major tenant in the case of  commercial
          real estate loans.  General  valuation  allowances  are  determined by
          applying factors that take into consideration past loss experience and
          asset  duration  for each  major  asset type to the  associated  asset
          balance.

     o    Allocated allowances: This element relates to assets with well-defined
          deficiencies or weaknesses (i.e.,  assets classified  special mention,
          substandard,  doubtful or loss). We calculate on an ongoing basis loss
          by credit classification for each major asset type. Factors based upon
          those loss  statistics are applied against  current  classified  asset
          balances to determine the amount of allocated allowances.  Included in
          these allowances are those amounts  associated with assets where it is
          probable  that the value of the asset has been  impaired  and the loss
          can be reasonably estimated. If we determine the net fair value of the
          asset exceeds our carrying value, a specific allowance is recorded for
          the amount of that difference.

     o    Unallocated allowance: This element is more subjective and is reviewed
          quarterly to take into  consideration  estimation  errors and economic
          trends that are not  necessarily  captured in determining  the general
          valuation and allocated allowances.

     Our provision  for loan losses was $2.6 million in 2001,  down $0.7 million
from 2000.  The provision for loan losses  exceeded our net loan  charge-offs by
$1.7 million  resulting in an increase in the allowance for loan losses to $36.1
million at December  31,  2001.  The  increase  in the  allowance  reflected  an
increase  of $0.8  million in general  valuation  allowances  to $27.8  million.
Allocated  allowances  increased by $1.8 million in our single-family  portfolio
and $0.2 million in our commercial non-mortgage  portfolio,  which was partially
offset  by a $1.0  million  decrease  in the  commercial  real  estate  mortgage
portfolio.  There was no change in the  unallocated  allowance of $2.8  million.
During 2000, our provision for loan losses exceeded net loan charge-offs by $1.9
million  and our  allowance  for loan losses  declined by $3.9  million to $34.5
million at December 31, 2000. The decline in the allowance  reflected a decrease
of $3.6 million in general  valuation  allowances to $27.0 million primarily due
to a  reduction  of $5.5  million  associated  with  the  sale  of the  indirect
automobile  finance  subsidiary  which more than offset an  increase  related to
increases in residential one-to-four unit loans. Allocated allowance declined by
$0.2  million of which $0.3 million was  associated  with the  subsidiary  sale.
There was no change in the unallocated allowance.

                                       53
<PAGE>

     The following  table is a summary of the activity in our allowance for loan
losses during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                      2001        2000        1999        1998        1997
-------------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>         <C>         <C>
Balance at beginning of period   $ 34,452    $ 38,342    $ 31,517    $ 32,092    $ 30,094
Provision ....................      2,564       3,251      11,270       3,899       8,640
Charge-offs ..................     (1,348)     (1,749)     (5,535)     (7,372)     (7,773)
Recoveries ...................        452         419       1,090       2,898       1,131
Transfers (1) ................       --        (5,811)       --          --          --
-------------------------------------------------------------------------------------------
Balance at end of period .....   $ 36,120    $ 34,452    $ 38,342    $ 31,517    $ 32,092
===========================================================================================
<FN>
(1)  Reduction in 2000 was due to the sale of subsidiary.
</FN>
</TABLE>

     Net loan  charge-offs  were $0.9 million in 2001, down from $1.3 million in
2000 and $4.4 million in 1999.

                                       54
<PAGE>

     The following table presents by category of loan gross  charge-offs,  gross
recoveries and net charge-offs during the periods indicated.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                     2001        2000        1999        1998        1997
-----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>         <C>         <C>         <C>
GROSS LOAN CHARGE-OFFS
Loans secured by real estate:
      Residential:
        One-to-four units ...........................   $   530     $   352     $   393     $ 1,035     $ 2,389
        One-to-four units - subprime ................       344         383         187        --          --
        Five or more units ..........................      --          --          --            68        --
      Commercial real estate ........................      --          --          --          --          --
      Construction ..................................      --          --          --          --          --
      Land ..........................................      --          --          --          --          --
Non-mortgage:
      Commercial ....................................      --          --          --          --          --
      Automobile ....................................       197         832       4,795       6,118       5,109
      Other consumer ................................       277         182         160         151         275
-----------------------------------------------------------------------------------------------------------------
        Total gross loan charge-offs ................     1,348       1,749       5,535       7,372       7,773
-----------------------------------------------------------------------------------------------------------------
GROSS LOAN RECOVERIES
Loans secured by real estate:
      Residential:
        One-to-four units ...........................       267          19        --           125         224
        One-to-four units - subprime ................       166        --          --          --          --
        Five or more units ..........................      --          --          --          --          --
      Commercial real estate ........................         1         250         250       1,610         261
      Construction ..................................      --          --          --          --          --
      Land ..........................................      --          --          --          --          --
Non-mortgage:
      Commercial ....................................      --          --          --          --          --
      Automobile ....................................         4         136         831       1,159         641
      Other consumer ................................        14          14           9           4           5
-----------------------------------------------------------------------------------------------------------------
        Total gross loan recoveries .................       452         419       1,090       2,898       1,131
-----------------------------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS
Loans secured by real estate:
      Residential:
        One-to-four units ...........................       263         333         393         910       2,165
        One-to-four units - subprime ................       178         383         187        --          --
        Five or more units ..........................      --          --          --            68        --
      Commercial real estate ........................        (1)       (250)       (250)     (1,610)       (261)
      Construction ..................................      --          --          --          --          --
      Land ..........................................      --          --          --          --          --
Non-mortgage:
      Commercial ....................................      --          --          --          --          --
      Automobile ....................................       193         696       3,964       4,959       4,468
      Other consumer ................................       263         168         151         147         270
-----------------------------------------------------------------------------------------------------------------
        Total net loan charge-offs ..................   $   896     $ 1,330     $ 4,445     $ 4,474     $ 6,642
=================================================================================================================
Net loan charge-offs as a percentage of average loans      0.01%       0.01%       0.06%       0.08%       0.13%
=================================================================================================================
</TABLE>

                                       55
<PAGE>

     The  allocation of the allowance for loan losses at the dates  indicated is
as shown in the following table.

<TABLE>
<CAPTION>
                                                                           December 31,
                                -------------------------------------------------------------------------------------------------
                                               2001                            2000                            1999
                                -------------------------------------------------------------------------------------------------
                                              Gross   Allowance               Gross   Allowance               Gross     Allowance
                                              Loan    Percentage              Loan    Percentage              Loan     Percentage
                                            Portfolio  to Loan              Portfolio  to Loan              Portfolio   to Loan
(Dollars in Thousands)           Allowance   Balance   Balance   Allowance   Balance   Balance   Allowance   Balance    Balance
---------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>      <C>          <C>       <C>      <C>          <C>       <C>      <C>           <C>
Loans secured by real estate:
   Residential:
     One-to-four units .......... $19,033  $7,699,061   0.25%     $15,254  $7,655,238   0.20%     $12,913  $6,155,399    0.21%
     One-to-four units - subprime   9,633   1,506,719   0.64       10,157   1,743,914   0.58        9,876   1,639,401    0.60
     Five or more units .........      84      11,179   0.75          146      19,460   0.75          184      21,055    0.87
   Commercial real estate .......   1,848     112,509   1.64        2,935     164,604   1.78        2,439     148,327    1.64
   Construction .................   1,005      84,942   1.18        1,390     118,165   1.18        2,075     176,487    1.18
   Land .........................     274      22,028   1.24          332      26,880   1.24          843      67,631    1.25
Non-mortgage:
   Commercial ...................     573      22,017   2.60          442      21,721   2.03          334      26,667    1.25
   Automobile (1) ...............     277      24,529   1.13          269      39,614   0.68        6,259     399,789    1.57
   Other consumer ...............     593      50,908   1.16          727      60,653   1.20          619      49,344    1.25
Not specifically allocated ......   2,800        --     --          2,800        --     --          2,800        --      --
---------------------------------------------------------------------------------------------------------------------------------
     Total loans held for
        investment .............. $36,120  $9,533,892   0.38%     $34,452  $9,850,249   0.35%     $38,342  $8,684,100    0.44%
=================================================================================================================================
<CAPTION>
                                               1998                           1997
                                --------------------------------------------------------------
<S>                               <C>      <C>          <C>       <C>      <C>          <C>
Loans secured by real estate:
   Residential:
     One-to-four units .......... $11,244  $4,047,182   0.28%     $13,396  $4,358,475   0.31%
     One-to-four units - subprime   3,055     588,951   0.52        1,256     249,070   0.50
     Five or more units .........     401      40,029   1.00          314      38,278   0.82
   Commercial real estate .......   2,632     140,790   1.87        4,112     202,425   2.03
   Construction .................   1,508     127,761   1.18          847      70,865   1.20
   Land .........................     568      44,859   1.27          331      25,687   1.29
Non-mortgage:
   Commercial ...................     218      28,293   0.77          196      26,024   0.75
   Automobile ...................   8,344     357,988   2.33        8,016     342,326   2.34
   Other consumer ...............     747      41,894   1.78          824      47,735   1.73
Not specifically allocated ......   2,800        --     --          2,800        --     --
----------------------------------------------------------------------------------------------
     Total loans held for
        investment .............. $31,517  $5,417,747   0.58%     $32,092  $5,360,885   0.60%
==============================================================================================
<FN>
(1)  The decline during 2000 primarily reflects the sale of subsidiary.
</FN>
</TABLE>

     Impaired Loans. We consider a loan to be impaired when,  based upon current
information  and  events,  we believe it is  probable  that we will be unable to
collect  all  amounts  due  according  to the  contractual  terms  of  the  loan
agreement.  We carry  impaired  loans at either the  present  value of  expected
future cash flows  discounted  at the loan's  effective  interest rate or at the
loan's observable market price or the net fair value of the collateral  securing
the loan.  Impaired  loans exclude large groups of smaller  balance  homogeneous
loans  that  we  collectively   evaluate  for  impairment.   For  us,  loans  we
collectively   review  for  impairment  include  all  single  family  loans  and
performing  multi-family and non-residential  loans having principal balances of
less than $5 million.

     In determining impairment, we consider large non-homogeneous loans with the
following characteristics: non-accrual loans, debt restructurings and performing
loans which exhibit, among other  characteristics,  high loan-to-value ratios or
delinquent taxes. We base the measurement of collateral dependent impaired loans
on the fair value of the loan's collateral.  We value  non-collateral  dependent
loans  based on a present  value  calculation  of  expected  future  cash flows,
discounted  at the loan's  effective  rate.  We generally  use cash  receipts on
impaired  loans not  performing  according  to  contractual  terms to reduce the
carrying  value of the loan,  unless we believe we will  recover  the  remaining
principal balance of the loan. We include impairment losses in the allowance for
loan  losses  through  a  charge  to  provision  for  loan  losses.  We  include
adjustments  to  impairment  losses  due to  changes  in the  fair  value of the
collateral of impaired loans in provision for loan losses.  Upon  disposition of
an  impaired  loan,  we record loss of  principal  through a  charge-off  to the
allowance  for loan losses.  At December 31, 2001,  the recorded  investment  in
loans for which we have recognized impairment totaled $13 million, down from $14
million at December 31, 2000.  The total  allowance for losses  related to these
loans was $1 million for both

                                       56
<PAGE>

December 31, 2001 and 2000.  During 2001, the total  interest  recognized on the
impaired  portfolio  was $1.7  million,  compared to $2.9  million in 2000.  For
further  information  regarding  impaired  loans,  see  Note 6 of the  Notes  to
Consolidated Financial Statements on page 77.

     The following  table is a summary of the activity in our allowance for loan
losses associated with impaired loans during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                      2001       2000      1999       1998       1997
-------------------------------------------------------------------------------------
<S>                              <C>        <C>       <C>        <C>        <C>
Balance at beginning of period   $   800    $   797   $   810    $ 1,301    $ 4,402
Provision (reduction) ........       (41)         3       (13)      (491)    (3,101)
Charge-offs ..................      --         --        --         --         --
Recoveries ...................      --         --        --         --         --
-------------------------------------------------------------------------------------
Balance at end of period .....   $   759    $   800   $   797    $   810    $ 1,301
=====================================================================================
</TABLE>

     In addition to losses  charged  against the allowance  for loan losses,  we
have  maintained  a  valuation  allowance  for  losses on real  estate and joint
ventures held for  investment.  The  provision  reductions in all years were, in
general,  due to a  continuing  improvement  in the  real  estate  market  which
favorably  impacted  the  valuation  of  certain  neighborhood  shopping  center
investments  and to a  reduction  in the  investment  in certain  joint  venture
investments.

     The following  table is a summary of the activity in our allowance for real
estate and joint ventures held for investment during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                      2001        2000       1999         1998       1997
------------------------------------------------------------------------------------------
<S>                              <C>         <C>        <C>         <C>         <C>
Balance at beginning of period   $  2,997    $  2,131   $  7,717    $ 21,244    $ 30,071
Provision (reduction) ........       (307)        866     (3,666)     (5,296)     (3,190)
Charge-offs ..................       --          --       (1,920)     (8,231)     (5,637)
Recoveries ...................       --          --         --          --          --
------------------------------------------------------------------------------------------
Balance at end of period .....   $  2,690    $  2,997   $  2,131    $  7,717    $ 21,244
==========================================================================================
</TABLE>

     We have recorded  losses on real estate  acquired in settlement of loans by
direct  write-off to net  operations  of real estate  acquired in  settlement of
loans and against an allowance  for losses  specifically  established  for these
assets. As of September 30, 1999, we are no longer  maintaining an allowance for
real estate acquired in settlement of loans as we record the related  individual
assets at the lower of cost or fair value.

     The following  table is a summary of the activity of our allowance for real
estate acquired in settlement of loans during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                     2001       2000       1999       1998       1997
---------------------------------------------------------------------------------------
<S>                              <C>        <C>        <C>        <C>        <C>
Balance at beginning of period   $  --      $  --      $   533    $   839    $ 1,078
Provision (reduction) ........       517        412        (45)       455      1,107
Charge-offs ..................      (583)      (442)      (488)      (761)    (1,346)
Recoveries ...................        66         30       --         --         --
---------------------------------------------------------------------------------------
Balance at end of period .....   $  --      $  --      $  --      $   533    $   839
=======================================================================================
</TABLE>

                                       57
<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

     Our sources of funds  include  deposits,  advances  from the FHLB and other
borrowings;  proceeds  from the sale of real estate,  loans and  mortgage-backed
securities;  payments of loans and  mortgage-backed  securities and payments for
and sales of loan servicing; and income from other investments.  Interest rates,
real estate sales activity and general economic conditions  significantly affect
repayments  on loans and  mortgage-backed  securities  and  deposit  inflows and
outflows.

     Our primary sources of funds generated during 2001 were from:

     o    principal   repayments--including   prepayments,   but  excluding  our
          refinances  of  our  existing  loans--on  loans  and   mortgage-backed
          securities of $2.9 billion;

     o    a net deposit inflow of $537 million; and

     o    maturities and sales of U.S. Treasury  securities,  agency obligations
          and other investment securities available for sale of $492 million.

     We used these funds for the following purposes:

     o    to originate  and purchase  loans held for  investment,  excluding our
          refinances of our existing loans, of $2.5 billion;

     o    to purchase U.S.  Treasury  securities,  agency  obligations and other
          investment securities available for sale of $584 million;

     o    to paydown our borrowings by $456 million;

     o    to increase our loans held for sale a net $247 million; and

     o    to  purchase  mortgage-backed  securities  available  for sale of $116
          million.

     Our  principal  source of liquidity  is our ability to utilize,  as needed,
borrowings.  Our primary source of borrowings is the FHLB. At December 31, 2001,
our FHLB  borrowings  totaled $1.5  billion,  representing  13.7% of assets.  We
currently  are  approved by the FHLB to borrow up to 40% of assets to the extent
we provide  qualifying  collateral and hold sufficient FHLB stock. That approved
limit  would have  permitted  us, as of year end, to borrow an  additional  $2.9
billion.  To the extent 2002 deposit  growth falls short of  satisfying  ongoing
commitments  to  fund  maturing  and  withdrawable   deposits,   repay  maturing
borrowings,  fund  existing and future  loans,  make  investments,  and continue
branch improvement  programs,  we will utilize our FHLB borrowing arrangement or
possibly  other sources.  At December 31, 2001, we had  commitments to borrowers
for  short-term  rate locks of $683 million,  undisbursed  loan funds and unused
lines and letters of credit of $137 million, and other contingent liabilities of
$2 million. We believe our current sources of funds will enable us to meet these
obligations while maintaining our liquidity at appropriate levels.

     Another  measure of liquidity in the savings and loan industry is the ratio
of  cash  and  eligible  investments  to the  sum of  withdrawable  savings  and
borrowings  due within one year. At December 31, 2001 and 2000, the Bank's ratio
was 4.3%, compared to 4.2% at December 31, 1999.

     Downey  currently  has liquid  assets,  including  due from  Bank--interest
bearing  balances,  of $22  million  and can  obtain  further  funds by means of
dividends  from  subsidiaries,  subject to certain  limitations,  or issuance of
further debt or equity.

     Stockholders'  equity  totaled $734  million at December 31, 2001,  up from
$625 million at December 31, 2000 and $532 million at December 31, 1999.

REGULATORY CAPITAL COMPLIANCE

     Our core and tangible capital ratios were 7.10% and our risk-based  capital
ratio was  14.53% at  December  31,  2001.  These  levels are up  slightly  from
comparable  ratios  of 6.42%  for core  and  tangible  capital  and  12.94%  for
risk-based  capital at  December  31,  2000,  and  continue  to exceed the "well
capitalized"  standards  of 5.00% for core  capital  and 10.00%  for  risk-based
capital,  as defined by regulation.  During 2001, the net investment in our real
estate  subsidiary  increased by $17 million due primarily to the  settlement of
litigation with former joint venture  partners  wherein we became the sole owner
of two shopping  centers.  This  increase  reduces  regulatory  capital until we
decide to sell the shopping centers.

                                       58
<PAGE>

     The following table is a reconciliation of the Bank's  stockholder's equity
to federal regulatory capital as of December 31, 2001.

<TABLE>
<CAPTION>
                                                         Tangible Capital         Core Capital         Risk-Based Capital
                                                       ---------------------   ---------------------   ---------------------
(Dollars in Thousands)                                    Amount    Ratio        Amount   Ratio         Amount     Ratio
----------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>        <C>          <C>         <C>
Stockholder's equity .................................   $ 827,381             $ 827,381               $ 827,381
Adjustments:
   Deductions:
    Investment in subsidiary, primarily real estate ..     (34,712)              (34,712)                (34,712)
    Goodwill .........................................      (3,150)               (3,150)                 (3,150)
    Non-permitted mortgage servicing rights ..........      (5,689)               (5,689)                 (5,689)
   Additions:
    Unrealized losses on securities available for sale         239                   239                     239
    General loss allowance - investment in DSL
       Service Company ...............................         198                   198                     198
    Allowance for loan losses,
      net of specific allowances (1) .................        --                    --                    35,608
----------------------------------------------------------------------------------------------------------------------------
Regulatory capital ...................................     784,267  7.10%        784,267  7.10%          819,875   14.53%
Well capitalized requirement .........................     165,772  1.50 (2)     552,574  5.00           564,119   10.00 (3)
----------------------------------------------------------------------------------------------------------------------------
Excess ...............................................   $ 618,495  5.60%      $ 231,693  2.10%        $ 255,756    4.53%
============================================================================================================================
<FN>

(1)  Limited to 1.25% of risk-weighted assets.
(2)  Represents the minimum requirement for tangible capital, as no "well
     capitalized"  requirement  has been  established  for this category.
(3)  A third  requirement  is Tier 1 capital to  risk-weighted  assets of 6.00%,
     which the Bank met and exceeded with a ratio of 13.90%.
</FN>
</TABLE>

NEWLY ADOPTED ACCOUNTING PRINCIPLES

     Statement of Financial Accounting Standards No. 133. On January 1, 2001, we
adopted  Statement of Financial  Accounting  Standards No. 133,  "Accounting for
Derivative  Instruments and Hedging  Activities," as amended ("SFAS 133").  SFAS
133 required the  recognition  of all derivative  financial  instruments at fair
value  and  reported  as either  assets or  liabilities  on the  balance  sheet.
Derivative  instruments  used to hedge the  variability of forecasted cash flows
attributable to interest rate risk were  designated as cash flow hedges.  At the
time of adoption, Downey designated anew certain derivative instruments used for
risk management into hedging  relationships  in accordance with the requirements
of the new  standard.  With the  implementation  of SFAS  133,  Downey  recorded
transition   amounts  associated  with  establishing  the  fair  values  of  the
derivative  instruments  and hedged items on the balance sheet as an increase of
$62,000  to net gains on sales of loans  and  mortgage-backed  securities  and a
reduction  of  $388,000  in  other  comprehensive   income.  All  of  the  other
comprehensive income transition amount was reclassified into earnings during the
first quarter of 2001.

     Under the  provisions  of SFAS  133,  the  method  used for  assessing  the
effectiveness of a hedging derivative,  as well as the measurement  approach for
determining  the  ineffective  aspects  of  the  hedge,  is  established  at the
inception of the hedge.  Those methods are consistent with the Downey's approach
to managing risk.

     Although we continue to hedge as previously  done,  SFAS 133, as applied to
our risk management strategies, may increase or decrease reported net income and
stockholders' equity,  depending on levels of interest rates and other variables
affecting the fair values of derivative  instruments and hedged items,  but will
have no effect on the overall economics of the transactions.

CURRENT ACCOUNTING ISSUES

     Statement  of Financial  Accounting  Standards  No. 141. In July 2001,  the
Financial  Accounting  Standards Board issued Statement of Financial  Accounting
Standards  No.  141,  "Business  Combinations"  ("SFAS  141") and  Statement  of
Financial  Accounting  Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142").

     SFAS 141 requires  that the purchase  method of  accounting be used for all
business   combinations   initiated   after  June  30,  2001.  The  use  of  the
pooling-of-interests  method will be prohibited.  It is not anticipated that the
financial impact of this Statement will have a material effect on Downey.

                                       59
<PAGE>

     Statement of Financial  Accounting  Standards  No. 142. SFAS 142 applies to
all acquired intangible assets whether acquired singularly,  as part of a group,
or in a business  combination.  The  Statement  supersedes  APB  Opinion No. 17,
"Intangible  Assets," and will carry forward provisions in Opinion 17 related to
internally developed intangible assets. The Statement changes the accounting for
goodwill from an amortization  method to an impairment-only  approach.  Goodwill
should no longer be  amortized,  but  instead  tested  for  impairment  at least
annually at the reporting unit level.  The  accounting  provisions are effective
for fiscal years beginning  after December 31, 2001. For 2001, our  amortization
of excess of cost over fair value of net assets acquired was $0.5 million and as
of December 31, 2001,  goodwill amounted to $3.2 million.  Our intangible assets
and goodwill are related to branch acquisitions and not within the scope of SFAS
142. We recognized an unidentified intangible asset or goodwill because the fair
value of the liabilities assumed exceeded the fair value of the assets acquired.
According  to the  provisions  of SFAS 142, we will  continue  to  amortize  the
remaining  $3.2 million of goodwill.  However,  this may change as the Financial
Accounting   Standards  Board  is  currently   reconsidering  the  exclusion  of
amortization of goodwill related to branch acquisitions and is expected to issue
a final Statement in the fourth quarter of 2002.

     Statement of Financial Accounting Standards No. 143. Statement of Financial
Accounting  Standards No. 143,  "Accounting  for Asset  Retirement  Obligations"
("SFAS 143"),  addresses  financial  accounting  and  reporting for  obligations
associated with the retirement of tangible  long-lived assets and the associated
asset  retirement  costs.  This Statement is effective for financial  statements
issued for fiscal years  beginning  after June 15, 2002.  It is not  anticipated
that the  financial  impact of this  Statement  will have a  material  effect on
Downey.

     Statement of Financial Accounting Standards No. 144. Statement of Financial
Accounting  Standards  No. 144,  "Accounting  for the  Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"),  addresses  financial  accounting and reporting
for the impairment or disposal of long-lived assets.  This Statement  supersedes
SFAS No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets  to  be  Disposed  Of,"  and  the  accounting  and  reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and  Infrequently  Occurring  Events and  Transactions,"  for the  disposal of a
segment  of  a  business.  This  Statement  also  eliminates  the  exception  to
consolidation for a subsidiary for which control is likely to be temporary.  The
provisions of this Statement are effective for financial  statements  issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal  years.  The  provisions  of this  Statement  generally are to be applied
prospectively. It is not anticipated that the financial impact of this Statement
will have a material effect on Downey.

SALE OF SUBSIDIARY

     On  February  29,  2000,  the Bank  sold its  indirect  automobile  finance
subsidiary,  Downey  Auto  Finance  Corp.,  to  Auto  One  Acceptance  Corp.,  a
subsidiary  of  California  Federal Bank and  recognized a pre-tax gain from the
sale of $9.8 million.  At December 31, 1999, Downey Auto Finance Corp. had loans
totaling  $366 million and total assets of $373  million.  The proceeds from the
sale have provided  additional  capital to further the growth of our residential
lending business.

                                       60
<PAGE>

ITEM 8. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page

         Independent Auditors' Report....................................    62
         Consolidated Balance Sheets.....................................    63
         Consolidated Statements of Income...............................    64
         Consolidated Statements of Comprehensive Income.................    65
         Consolidated Statements of Stockholders' Equity.................    65
         Consolidated Statements of Cash Flows...........................    66
         Notes to Consolidated Financial Statements......................    68

                                       61
<PAGE>

KPMG
  355 South Grand Avenue
  Los Angeles, CA 90071












INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Downey Financial Corp.:

We have audited the accompanying consolidated balance sheets of Downey Financial
Corp.  and  subsidiaries  ("Downey")  as of December 31, 2001 and 2000,  and the
related consolidated statements of income,  comprehensive income,  stockholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,   2001.   These   consolidated   financial   statements   are  the
responsibility  of  Downey's  management.  Our  responsibility  is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Downey Financial
Corp.  and  subsidiaries  as of December  31, 2001 and 2000,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  December 31,  2001,  in  conformity  with  accounting  principles
generally accepted in the United States of America.


                                 /s/  KPMG LLP



Los Angeles, California
January 17, 2002


                                       62
<PAGE>

<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                                            December 31,
                                                                                  ------------------------------
(Dollars in Thousands, Except Per Share Data)                                           2001            2000
----------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>
ASSETS
Cash ..........................................................................   $    106,079    $    108,202
Federal funds .................................................................         37,001          19,601
----------------------------------------------------------------------------------------------------------------
    Cash and cash equivalents .................................................        143,080         127,803
U.S. Treasury securities, agency obligations and other investment securities
    available for sale, at fair value .........................................        402,355         305,615
Municipal securities held to maturity, at amortized cost (estimated fair value
    of $6,373 at December 31, 2001 and $6,534 at December 31, 2000) ...........          6,388           6,550
Loans held for sale, at lower of cost or fair value ...........................        499,024         251,572
Mortgage-backed securities available for sale, at fair value ..................        118,981          10,203
Loans receivable held for investment ..........................................      9,514,408       9,822,578
Investments in real estate and joint ventures .................................         38,185          17,641
Real estate acquired in settlement of loans ...................................         15,366           9,942
Premises and equipment ........................................................        111,762         104,178
Federal Home Loan Bank stock, at cost .........................................        113,139         106,356
Mortgage servicing rights, net ................................................         56,895          40,731
Other assets ..................................................................         85,447          90,694
----------------------------------------------------------------------------------------------------------------
                                                                                  $ 11,105,030    $ 10,893,863
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ......................................................................   $  8,619,566    $  8,082,689
Federal Home Loan Bank advances ...............................................      1,522,705       1,978,348
Other borrowings ..............................................................              7             224
Accounts payable and accrued liabilities ......................................         67,431          54,236
Deferred income taxes .........................................................         41,425          33,730
----------------------------------------------------------------------------------------------------------------
    Total liabilities .........................................................     10,251,134      10,149,227
----------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable capital securities of subsidiary trust
    holding solely junior subordinated debentures of the Company
    ("Capital Securities") ....................................................        120,000         120,000
STOCKHOLDERS' EQUITY
Preferred stock, par value of $0.01 per share; authorized 5,000,000 shares;
    outstanding none ..........................................................           --              --
Common stock, par value of $0.01 per share; authorized 50,000,000 shares;
    outstanding 28,213,048 shares at December 31, 2001 and 28,205,741
    shares at December 31, 2000 ...............................................            282             282
Additional paid-in capital ....................................................         93,400          93,239
Accumulated other comprehensive income (loss) .................................           (239)            687
Retained earnings .............................................................        640,453         530,428
----------------------------------------------------------------------------------------------------------------
    Total stockholders' equity ................................................        733,896         624,636
----------------------------------------------------------------------------------------------------------------
                                                                                  $ 11,105,030    $ 10,893,863
================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       63
<PAGE>

<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
                                                                                        Years Ended December 31,
                                                                           ----------------------------------------------
(Dollars in Thousands, Except Per Share Data)                                     2001            2000            1999
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>             <C>
INTEREST INCOME
Loans receivable ........................................................   $    782,784    $    760,538    $    519,006
U.S. Treasury securities and agency obligations .........................         15,392          13,387           8,025
Mortgage-backed securities ..............................................            726           1,060           1,638
Other investments .......................................................          9,479           9,375           5,082
-------------------------------------------------------------------------------------------------------------------------
    Total interest income ...............................................        808,381         784,360         533,751
-------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits ................................................................        424,855         379,303         256,764
Borrowings ..............................................................         65,793         130,419          64,161
Capital securities ......................................................         12,163          12,163           5,348
-------------------------------------------------------------------------------------------------------------------------
    Total interest expense ..............................................        502,811         521,885         326,273
-------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME .....................................................        305,570         262,475         207,478
PROVISION FOR LOAN LOSSES ...............................................          2,564           3,251          11,270
-------------------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses .................        303,006         259,224         196,208
-------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET
Loan and deposit related fees ...........................................         50,486          30,089          20,097
Real estate and joint ventures held for investment, net:
    Operations, net .....................................................          3,449           6,683          10,430
    Net gains on sales of wholly owned real estate ......................            129           2,981           5,206
    (Provision for) reduction of losses on real estate and joint ventures            307            (866)          3,666
Secondary marketing activities:
    Loan servicing income (loss), net ...................................        (11,373)         (3,628)          1,672
    Net gains on sales of loans and mortgage-backed securities ..........         22,432           3,297          14,806
    Net gains on sales of mortgage servicing rights .....................            934            --              --
Net gains (losses) on sales of investment securities ....................            329            (106)            288
Gain on sale of subsidiary ..............................................           --             9,762            --
Other ...................................................................          1,843           2,342           3,113
-------------------------------------------------------------------------------------------------------------------------
    Total other income, net .............................................         68,536          50,554          59,278
-------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE
Salaries and related costs ..............................................         99,935          82,522          86,163
Premises and equipment costs ............................................         26,016          23,220          20,617
Advertising expense .....................................................          4,410           4,786           8,595
Professional fees .......................................................          5,452           3,319           2,502
SAIF insurance premiums and regulatory assessments ......................          3,051           2,626           3,937
Other general and administrative expense ................................         23,632          19,716          22,568
-------------------------------------------------------------------------------------------------------------------------
    Total general and administrative expense ............................        162,496         136,189         144,382
-------------------------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans ............            239             818              19
Amortization of excess of cost over fair value of net assets acquired ...            457             462             474
-------------------------------------------------------------------------------------------------------------------------
    Total operating expense .............................................        163,192         137,469         144,875
-------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ..............................................        208,350         172,309         110,611
Income taxes ............................................................         88,169          73,058          46,807
-------------------------------------------------------------------------------------------------------------------------
    NET INCOME ..........................................................   $    120,181    $     99,251    $     63,804
=========================================================================================================================
PER SHARE INFORMATION
BASIC ...................................................................   $       4.26    $       3.52    $       2.27
=========================================================================================================================
DILUTED .................................................................   $       4.25    $       3.51    $       2.26
=========================================================================================================================
CASH DIVIDENDS DECLARED AND PAID ........................................   $       0.36    $       0.36    $       0.35
=========================================================================================================================
Weighted average diluted shares outstanding .............................     28,271,103      28,225,551      28,175,537
=========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       64
<PAGE>

<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
                                                                                      Years Ended December 31,
                                                                               -------------------------------------
(In Thousands)                                                                    2001         2000        1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>         <C>
NET INCOME .................................................................   $ 120,181    $  99,251   $  63,804
--------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES (BENEFITS)
Unrealized gains (losses) on securities available for sale:
    U.S. Treasury securities, agency obligations and other investment
       securities available for sale, at fair value ........................         705        2,032      (1,874)
    Mortgage-backed securities available for sale, at fair value ...........        (714)         173        (281)
    Less reclassification of realized (gains) losses included in net income         (190)          50        (166)
Unrealized losses on cash flow hedges:
    Net derivative instruments .............................................      (5,981)        --          --
    Less reclassification of realized losses included in net income ........       5,254         --          --
--------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of income taxes (benefits) ....        (926)       2,255      (2,321)
--------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME .......................................................   $ 119,255    $ 101,506   $  61,483
====================================================================================================================
</TABLE>

<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
                                                                                Accumulated
                                                                  Additional      Other
                                                        Common     Paid-in     Comprehensive   Retained
(Dollars in Thousands, Except Per Share Data)            Stock     Capital     Income (Loss)   Earnings      Total
----------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>           <C>            <C>          <C>
Balances at December 31, 1998 ....................   $     281   $  92,166     $     753      $ 387,366    $ 480,566
Cash dividends, $0.35 per share ..................        --          --            --           (9,850)      (9,850)
Exercise of stock options ........................        --           219          --             --            219
Unrealized losses on securities available for sale        --          --          (2,321)          --         (2,321)
Net income .......................................        --          --            --           63,804       63,804
----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 ....................         281      92,385        (1,568)       441,320      532,418
Cash dividends, $0.36 per share ..................        --          --            --          (10,143)     (10,143)
Exercise of stock options ........................           1         854          --             --            855
Unrealized gains on securities available for sale         --          --           2,255           --          2,255
Net income .......................................        --          --            --           99,251       99,251
----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 ....................         282      93,239           687        530,428      624,636
Cash dividends, $0.36 per share ..................        --          --            --          (10,156)     (10,156)
Exercise of stock options ........................        --           161          --             --            161
Unrealized losses on securities available for sale        --          --            (199)          --           (199)
Unrealized losses on cash flow hedges ............        --          --            (727)          --           (727)
Net income .......................................        --          --            --          120,181      120,181
----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 ....................   $     282   $  93,400     $    (239)     $ 640,453    $ 733,896
======================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       65
<PAGE>

<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                       ----------------------------------------
(In Thousands)                                                                             2001          2000          1999
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .........................................................................  $   120,181   $    99,251  $     63,804
Adjustments to reconcile net income to net cash used for operating activities:
     Depreciation and amortization .................................................       49,009        32,957        22,427
     Provision for losses on loans, real estate acquired in settlement of
     loans, investments in real estate and joint ventures, mortgage servicing rights
       and other assets ............................................................       13,366        10,605         7,389
     Net gains on sales of loans and mortgage-backed securities, mortgage
       servicing rights, investment securities, real estate and other assets .......      (26,019)      (10,111)      (27,086)
     Gain on sale of subsidiary ....................................................         --          (9,762)         --
     Net change in interest capitalized on loans (negative amortization) ...........      (31,576)      (72,641)      (29,429)
     Federal Home Loan Bank stock dividends ........................................       (6,783)       (7,522)       (2,941)
Loans originated for sale ..........................................................   (4,823,938)   (1,729,220)   (2,042,274)
Proceeds from sales of loans held for sale, including those sold
     via mortgage-backed securities ................................................    4,539,068     1,550,440     2,321,636
(Increase) decrease in other, net ..................................................       18,509       (33,238)      (12,578)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities ...............................     (148,183)     (169,241)      300,948
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
     Subsidiary, net ...............................................................         --         379,234          --
     U.S. Treasury securities, agency obligations and other
       investment securities available for sale ....................................       29,139        29,645        67,195
     Loans held for investment .....................................................         --          99,751        50,856
     Wholly owned real estate and real estate acquired in settlement
       of loans ....................................................................       11,141        38,707        25,863
     Federal Home Loan Bank stock ..................................................         --          17,516          --
Proceeds from maturities of U.S. Treasury securities, agency obligations
     and other investment securities available for sale ............................      462,545        22,000          --
Purchase of:
     U.S. Treasury securities, agency obligations and other investment
       securities available for sale ...............................................     (584,244)     (181,905)     (126,403)
     Mortgage-backed securities available for sale .................................     (115,597)         --            --
     Loans receivable held for investment ..........................................      (94,980)      (18,828)      (49,669)
     Premises and equipment ........................................................      (25,548)       (8,984)      (17,743)
     Federal Home Loan Bank stock ..................................................         --         (13,958)      (50,021)
Originations of loans receivable held for investment (net of refinances of
     $794,823 at December 31, 2001, $165,148 at
     December 31, 2000 and $145,316 at December 31, 1999) ..........................   (2,505,098)   (3,317,104)   (4,938,395)
Principal payments on loans receivable held for investment and
     mortgage-backed securities available for sale .................................    2,926,863     1,823,685     1,688,205
Net change in undisbursed loan funds ...............................................       (9,930)      (59,588)       38,154
Investments in real estate held for investment .....................................       (5,860)       (1,356)      (10,712)
Other, net .........................................................................        4,007           650         3,088
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ...............................       92,438    (1,190,535)   (3,319,582)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       66
<PAGE>

<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
                                                                                            Years Ended December 31,
                                                                                  ------------------------------------------
(In Thousands)                                                                         2001           2000           1999
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ......................................................   $   536,877    $ 1,519,928    $ 1,523,028
Proceeds from Federal Home Loan Bank advances .................................     3,914,900      6,059,445      7,166,737
Repayments of Federal Home Loan Bank advances .................................    (4,370,543)    (6,203,504)    (5,739,342)
Net decrease in other borrowings ..............................................          (217)          (149)        (8,335)
Proceeds from issuance of capital securities, net .............................          --             --          115,063
Proceeds from exercise of stock options .......................................           161            855            219
Cash dividends ................................................................       (10,156)       (10,143)        (9,850)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .....................................        71,022      1,366,432      3,047,520
----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents .....................................        15,277          6,656         28,886
Cash and cash equivalents at beginning of period ..............................       127,803        121,147         92,261
----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................   $   143,080    $   127,803    $   121,147
============================================================================================================================
Supplemental disclosure of cash flow information:
    Cash paid during the period for:
     Interest .................................................................   $   512,657    $   511,943    $   325,769
     Income taxes .............................................................        77,995         73,744         22,064
Supplemental disclosure of non-cash investing:
    Loans transferred to held for investment from held for sale ...............         7,454         42,054         13,184
    Loans transferred from held for investment to held for sale ...............          --           97,047         55,754
    Loans transferred from held for investment to wholly owned real estate ....        15,688           --             --
    Loans exchanged for mortgage-backed securities ............................     3,816,171        970,319      1,387,364
    Real estate acquired in settlement of loans ...............................        25,743         18,389         11,263
    Loans to facilitate the sale of real estate acquired in settlement of loans        10,063          6,896          6,501
============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       67
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The  consolidated  financial  statements  of  Downey  Financial  Corp.  and
     subsidiaries  ("Downey") include all accounts of Downey Financial Corp. and
     the consolidated accounts of all subsidiaries, including Downey Savings and
     Loan Association,  F.A. (the "Bank"). All significant intercompany balances
     and transactions have been eliminated.

     BUSINESS

     Downey  provides a full  range of  financial  services  to  individual  and
     corporate customers.  Downey is subject to competition from other financial
     institutions.  Downey is subject to the regulations of certain governmental
     agencies  and  undergoes   periodic   examinations   by  those   regulatory
     authorities.

     BASIS OF FINANCIAL STATEMENT PRESENTATION

     The accompanying  consolidated  financial  statements have been prepared in
     conformity with generally accepted  accounting  principles  accepted in the
     United  States  of  America.   In  preparing  the  consolidated   financial
     statements,  management is required to make estimates and assumptions  that
     affect the reported  amounts of assets and  liabilities  as of the dates of
     the balance sheets and the results of operations for the reporting periods.
     Actual results could differ significantly from those estimates.

     Material estimates that are particularly  susceptible to significant change
     in the near term relate to the  determination  of the allowances for losses
     on loans,  real estate and mortgage  servicing rights ("MSRs").  Management
     believes that the allowances  established for losses on loans,  real estate
     and MSRs are adequate.  While  management  uses  available  information  to
     recognize  losses on loans,  real  estate and MSRs,  future  changes to the
     allowances  may be necessary  based on changes in economic  conditions.  In
     addition,  various  regulatory  agencies,  as an  integral  part  of  their
     examination process,  periodically review Downey's allowances for losses on
     loans,  real estate and MSRs. Such agencies may require Downey to recognize
     changes  to the  allowances  based on  their  judgments  about  information
     available to them at the time of their examination.

     Downey  is   required   to  carry  its  loans  held  for  sale   portfolio,
     mortgage-backed  and investment  securities  available for sale  portfolio,
     real  estate  acquired  in  settlement  of  loans,  real  estate  held  for
     investment or under development and MSRs at the lower of cost or fair value
     or in certain  cases,  at fair value.  Fair value  estimates  are made at a
     specific  point in time based upon relevant  market  information  and other
     information about the asset. Such estimates related to the  mortgage-backed
     and investment  securities  portfolios  include published bid prices or bid
     quotations received from securities dealers.  Fair value estimates for real
     estate  acquired in settlement of loans and real estate held for investment
     or under  development  is determined by current  appraisals  and,  where no
     active market exists for a particular  property,  discounting a forecast of
     expected cash flows at a rate commensurate with the risk involved.

     NEWLY ADOPTED ACCOUNTING PRINCIPLES

     Statement of Financial Accounting Standards No. 133. On January 1, 2001, we
     adopted Statement of Financial  Accounting  Standards No. 133,  "Accounting
     for  Derivative  Instruments  and Hedging  Activities,"  as amended  ("SFAS
     133").  SFAS 133  required  the  recognition  of all  derivative  financial
     instruments  at fair value and reported as either assets or  liabilities on
     the balance sheet.  Derivative instruments used to hedge the variability of
     forecasted cash flows attributable to interest rate risk were designated as
     cash flow hedges.  At the time of adoption,  Downey designated anew certain
     derivative  instruments used for risk management into hedging relationships
     in  accordance  with  the  requirements  of  the  new  standard.  With  the
     implementation of SFAS 133, Downey recorded  transition  amounts associated
     with establishing the fair values of the derivative  instruments and hedged
     items on the balance sheet as an increase of

                                       68
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     $62,000 to net gains on sales of loans and mortgage-backed securities and a
     reduction  of  $388,000  in other  comprehensive  income.  All of the other
     comprehensive  income  transition  amount was  reclassified  into  earnings
     during the first quarter of 2001.

     Under the  provisions  of SFAS  133,  the  method  used for  assessing  the
     effectiveness of a hedging derivative,  as well as the measurement approach
     for determining the ineffective aspects of the hedge, is established at the
     inception  of the hedge.  Those  methods are  consistent  with the Downey's
     approach to managing risk.

     Although we continue to hedge as previously  done,  SFAS 133, as applied to
     our risk  management  strategies,  may  increase or decrease  reported  net
     income and stockholders' equity,  depending on levels of interest rates and
     other  variables  affecting the fair values of derivative  instruments  and
     hedged  items,  but will  have no effect on the  overall  economics  of the
     transactions.

     CASH AND CASH EQUIVALENTS

     For purposes of the  statements  of cash flows,  cash and cash  equivalents
     include cash on hand, amounts due from banks,  certificates of deposit with
     maturities three months or less and federal funds sold. Generally,  federal
     funds are purchased and sold for one-day periods.

     MORTGAGE-BACKED SECURITIES PURCHASED UNDER RESALE AGREEMENTS, U.S. TREASURY
     SECURITIES AND AGENCY OBLIGATIONS,  OTHER INVESTMENT SECURITIES,  MUNICIPAL
     SECURITIES AND MORTGAGE-BACKED SECURITIES

     Downey has established  written guidelines and objectives for its investing
     activities. At the time of purchase of a mortgage-backed security purchased
     under resale agreement, U.S. Treasury security and agency obligation, other
     investment  security,  municipal  security or a  mortgage-backed  security,
     management  of Downey  designates  the security as either held to maturity,
     available  for  sale or held  for  trading  based  on  Downey's  investment
     objectives,   operational  needs  and  intent.  Downey  then  monitors  its
     investment  activities to ensure that those  activities are consistent with
     the established guidelines and objectives.

     Held to Maturity. Securities held to maturity are carried at cost, adjusted
     for   amortization  of  premiums  and  accretion  of  discounts  which  are
     recognized in interest  income using the interest  method.  Mortgage-backed
     securities  represent  participating  interests in pools of long-term first
     mortgage loans  originated  and serviced by the issuers of the  securities.
     Mortgage-backed securities held to maturity are carried at unpaid principal
     balances,   adjusted  for  unamortized  premiums  and  unearned  discounts.
     Premiums and discounts on  mortgage-backed  securities are amortized  using
     the interest  method over the  remaining  period to  contractual  maturity,
     adjusted for anticipated prepayments.  It is the positive intent of Downey,
     and Downey has the ability, to hold these securities until maturity as part
     of its portfolio of long-term,  interest-earning  assets. If the cost basis
     of these  securities is determined to be other than  temporarily  impaired,
     the amount of the impairment is charged to operations.

     Available  for Sale.  Securities  available  for sale are  carried  at fair
     value.  Premiums and discounts are amortized using the interest method over
     the  remaining  period  to  contractual   maturity  and,  in  the  case  of
     mortgage-backed   securities,   adjusted   for   anticipated   prepayments.
     Unrealized  holding gains and losses, or valuation  allowances  established
     for net  unrealized  losses,  are excluded  from earnings and reported as a
     separate   component  of   stockholders'   equity  as   accumulated   other
     comprehensive  income,  net of income taxes,  unless the security is deemed
     other than temporarily  impaired. If the security is determined to be other
     than  temporarily  impaired,  the  amount of the  impairment  is charged to
     operations.

     Realized  gains and losses on the sale of  securities  available  for sale,
     determined using the specific identification method and recorded on a trade
     date basis, are reflected in earnings.

     Held for  Trading.  Securities  held for trading are carried at fair value.
     Realized and unrealized gains and losses are reflected in earnings.

                                       69
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     DERIVATIVES AND HEDGES

     Derivative financial instruments are recorded at fair value and reported as
     either assets or liabilities on the balance sheet. The accounting for gains
     and losses  associated  with changes in the fair value of  derivatives  are
     reported in current  earnings or other  comprehensive  income,  net of tax,
     depending  on whether  they  qualify for hedge  accounting  and whether the
     hedge is highly effective in achieving offsetting changes in the fair value
     or cash  flows of the asset or  liability  hedged.  Derivative  instruments
     designated in a hedge  relationship to mitigate exposure to the variability
     in fair values or  expected  future  cash flows are  considered  fair value
     hedges or cash flow hedges, respectively. The method used for assessing the
     effectiveness of a hedging derivative,  as well as the measurement approach
     for determining the ineffective aspects of the hedge, is established at the
     inception of the hedge.

     LOANS HELD FOR SALE

     Downey  identifies  those  loans  which  foreseeably  may be sold  prior to
     maturity.  These  loans  have  been  classified  as  held  for  sale in the
     Consolidated Balance Sheets and are recorded at the lower of amortized cost
     or fair value. Effective with the adoption of SFAS 133, the carrying amount
     includes  a basis  adjustment  to the loan at  funding  resulting  from the
     change in the fair value of the interest rate lock derivative from the date
     of commitment to the date of funding. In response to unforeseen events such
     as  changes  in  regulatory  capital  requirements,  liquidity  shortfalls,
     changes in the  availability  of sources of funds and excess loan demand by
     borrowers  that could not be controlled  immediately by loan price changes,
     Downey  may  sell  loans  which  had  been  held  for  investment.  In such
     occurrences,  the loans are  transferred at amortized cost and the lower of
     cost or market method is then applied.

     GAINS OR LOSSES ON SALES OF LOANS AND MORTGAGE SERVICING ASSETS

     Gains or losses on sales of loans  are  recognized  at the time of sale and
     are  determined by the  difference  between the net sales  proceeds and the
     allocated basis of the loans sold. Downey capitalizes MSRs acquired through
     either  the  purchase  or   origination  of  mortgage  loans  for  sale  or
     securitization  with  servicing  rights  retained.  The  total  cost of the
     mortgage  loans  designated  for  sale is  allocated  to the  MSRs  and the
     mortgage  loans without the MSRs based on their  relative fair values.  The
     MSRs are  included  as a component  of gain on sale of loans.  The MSRs are
     amortized in proportion  to and over the estimated  period of net servicing
     income.  Such  amortization  is reflected as a component of loan  servicing
     income (loss).

     The MSRs are  periodically  reviewed  for  impairment  based on their  fair
     value.  The fair value of the MSRs,  for the  purposes  of  impairment,  is
     measured  using a discounted  cash flow analysis  based on  market-adjusted
     discount rates and anticipated  prepayment speeds.  Market sources are used
     to determine  prepayment  speeds,  the net cost of servicing per loan,  and
     inflation, default and interest rates for mortgages.

     The Company  capitalizes  and measures MSR  impairment  on a  disaggregated
     basis  based  on the  following  predominant  risk  characteristics  of the
     underlying  mortgage  loans:  fixed-rate  mortgage  loans by loan  term and
     coupon rate (less than 7%, 150 basis point  increments  between 7% and 10%,
     and  greater  than  10%),  and loan  term for  adjustable  rate  mortgages.
     Impairment  losses are  recognized  through a valuation  allowance for each
     impaired stratum,  with any associated provision recorded as a component of
     loan servicing income (loss).

     LOANS RECEIVABLE HELD FOR INVESTMENT

     Loans  receivable  are  recorded at cost,  net of discounts  and  premiums,
     undisbursed  loan  proceeds,  net deferred fees and costs and the allowance
     for loan losses.

     Interest  income on loans is  accrued  based on the  outstanding  principal
     amount of loans using the interest method.  Discounts and premiums on loans
     are amortized to income using the interest method over the remaining period
     to  contractual  maturity.  The  amortization  of discounts  into income is
     discontinued on loans that are  contractually  ninety days past due or when
     collection of interest appears doubtful.

                                       70
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Loan origination fees and related incremental direct loan origination costs
     are  deferred and  amortized  to income using the interest  method over the
     contractual  life of the  loans,  adjusted  for  actual  prepayments.  Fees
     received for a commitment to originate or purchase a loan or group of loans
     are deferred and, if the commitment is exercised,  recognized over the life
     of the  loan as an  adjustment  of  yield  or,  if the  commitment  expires
     unexercised,  recognized as income upon expiration of the  commitment.  The
     amortization  of deferred fees and costs is  discontinued on loans that are
     contractually  ninety days past due or when collection of interest  appears
     doubtful.

     Accrued interest on loans that are  contractually  ninety days or more past
     due or when collection of interest appears  doubtful is generally  reversed
     and charged against interest income. Income is subsequently recognized only
     to the extent cash  payments  are  received  and the  principal  balance is
     expected to be recovered. Such loans are restored to an accrual status only
     if  the  loan  is  brought  contractually  current  and  the  borrower  has
     demonstrated the ability to make future payments of principal and interest.

     ALLOWANCE FOR LOAN LOSSES

     The allowance for loan losses is maintained at an amount  management  deems
     adequate to cover inherent losses. Downey has implemented and adheres to an
     internal asset review system and loan loss allowance  methodology  designed
     to provide for the detection of problem assets and an adequate allowance to
     cover loan losses.  In determining the allowance for loan losses related to
     specific  major loans (loans over $5  million),  management  evaluates  its
     allowance  on an  individual  loan  basis,  including  an  analysis  of the
     creditworthiness,  cash flows and financial status of the borrower, and the
     condition and the estimated  value of the  collateral.  Downey  reviews all
     loans under $5 million by analyzing  their  performance  and composition of
     their collateral as a whole,  because of the relatively  homogeneous nature
     of the portfolios. Given the above evaluations, the amount of the allowance
     is based upon the  summation  of general  valuation  allowances,  allocated
     allowances  and an  unallocated  allowance.  General  valuation  allowances
     relate  to  loans  with no  well-defined  deficiency  or  weakness  and are
     determined  by  applying  against  such loans  factors  for each major loan
     category that consider past loss  experience and loan  duration.  Allocated
     allowances relate to loans with well-defined deficiencies or weaknesses and
     are generally determined by loss factors that consider past loss experience
     for such loans or are  determined by the excess of the recorded  investment
     in the loan over the fair value of the collateral,  where appropriate.  The
     unallocated  allowance is more subjective and is reviewed quarterly to take
     into  consideration  estimation errors and other factors such as prevailing
     and forecasted economic conditions.

     Downey considers a loan to be impaired when, based upon current information
     and  events,  it  believes  it is  probable  that  Downey will be unable to
     collect all  amounts due  according  to the  contractual  terms of the loan
     agreement.    In   determining    impairment,    Downey   considers   large
     non-homogeneous  loans  with  the  following  characteristics:  non-accrual
     loans, debt restructurings and performing loans which exhibit,  among other
     characteristics,  high  loan-to-value  ratios or delinquent  taxes.  Downey
     bases the  measurement of collateral  dependent  impaired loans on the fair
     value of the loan's collateral.  Non-collateral  dependent loans are valued
     based on a  present  value  calculation  of  expected  future  cash  flows,
     discounted at the loan's  effective  rate.  Cash receipts on impaired loans
     not performing  according to contractual terms are generally used to reduce
     the carrying value of the loan,  unless Downey believes it will recover the
     remaining principal balance of the loan.  Impairment losses are included in
     the  allowance  for loan  losses  through  a charge to  provision  for loan
     losses.  Adjustments to impairment  losses due to changes in the fair value
     of collateral of impaired  loans are included in provision for loan losses.
     Upon  disposition  of an  impaired  loan,  loss of  principal,  if any,  is
     recorded through a charge-off to the allowance for loan losses.

     In the  opinion  of  management,  and in  accordance  with  the  loan  loss
     allowance  methodology,  the present  allowance is  considered  adequate to
     absorb estimable and probable loan losses.  Additions to the allowances are
     reflected in current operations. Charge-offs to the allowance are made when
     the loan is  considered  uncollectible  or is  transferred  to real  estate
     owned. Recoveries are credited to the allowance.

     For regulatory  capital  purposes,  the Bank's  general  allowance for loan
     losses is included to a limit of 1.25% of regulatory risk-weighted assets.

                                       71
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     LOAN SERVICING

     Downey  services  mortgage loans for  investors.  Fees earned for servicing
     loans owned by investors  are reported as income when the related  mortgage
     loan payments are collected. Loan servicing costs are charged to expense as
     incurred.

     INVESTMENT IN REAL ESTATE AND JOINT VENTURES

     Real estate held for  investment or under  development is held at the lower
     of cost (less  accumulated  depreciation) or fair value.  Costs,  including
     interest,  of  holding  real  estate  in  the  process  of  development  or
     improvement are  capitalized,  whereas costs relating to holding  completed
     property are expensed.  An allowance for losses is  established by a charge
     to operations if the carrying  value of a property  exceeds its fair value,
     including the consideration of disposition costs.

     Downey  utilizes  the  equity  method  of  accounting  for  investments  in
     non-controlled  joint ventures and the consolidation method for investments
     in controlled joint ventures. All intercompany profits are eliminated.

     Income from the sale of real estate is recognized principally when title to
     the property has passed to the buyer, minimum down payment requirements are
     met and the  terms of any  notes  received  by  Downey  satisfy  continuing
     investment requirements.  At the time of sale, costs are relieved from real
     estate projects on a relative sales value basis and charged to operations.

     REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS

     Real estate  acquired  through  foreclosure  is initially  recorded at fair
     value (net of an  allowance  for  estimated  selling  costs) on the date of
     foreclosure  and  a  writedown  is  recorded.   A  valuation  allowance  is
     established for any subsequent  declines in fair value.  All legal fees and
     direct costs,  including  foreclosure and other related costs, are expensed
     as incurred.

     PREMISES AND EQUIPMENT

     Buildings, leasehold improvements and furniture, fixtures and equipment are
     carried at cost, less accumulated depreciation and amortization.  Buildings
     and   furniture,   fixtures  and  equipment  are   depreciated   using  the
     straight-line  method over the  estimated  useful lives of the assets.  The
     cost of leasehold  improvements is being amortized using the  straight-line
     method  over the shorter of the  estimated  useful life of the asset or the
     terms of the related leases.

     IMPAIRMENT OF LONG-LIVED ASSETS

     Downey reviews long-lived assets and certain  identifiable  intangibles for
     impairment  whenever events or changes in  circumstances  indicate that the
     carrying  amount  of an asset  may not be  recoverable.  Recoverability  of
     assets to be held and used is  measured  by a  comparison  of the  carrying
     amount of an asset to future net cash flows expected to be generated by the
     asset.  If such assets are considered to be impaired,  the impairment to be
     recognized  is measured by the amount by which the  carrying  amount of the
     assets  exceed the fair value of the  assets.  Assets to be disposed of are
     reported  at the lower of the  carrying  amount or fair value less costs to
     sell.

     SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     Downey  enters into sales of  securities  under  agreements  to  repurchase
     ("reverse  repurchase  agreements").   Reverse  repurchase  agreements  are
     treated as financing  arrangements  and,  accordingly,  the  obligations to
     repurchase  the  securities  sold are reflected as  liabilities in Downey's
     consolidated financial statements.  The securities  collateralizing reverse
     repurchase  agreements  are delivered to several major  national  brokerage
     firms who arranged the  transactions.  These  securities  are  reflected as
     assets in Downey's consolidated  financial statements.  The brokerage firms
     may loan such  securities  to other  parties in the normal  course of their
     operations  and agree to return the  identical  securities to Downey at the
     maturity of the agreements.

                                       72
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     INCOME TAXES

     Downey  applies the asset and  liability  method of  accounting  for income
     taxes. The asset and liability method recognizes  deferred income taxes for
     the  tax  consequences  of  "temporary  differences"  by  applying  enacted
     statutory tax rates  applicable to future years to differences  between the
     financial  statement  carrying amounts and the tax bases of existing assets
     and  liabilities.  The effect on deferred taxes of a change in tax rates is
     recognized in income in the period that includes the enactment date.

     Deferred tax assets are to be  recognized  for temporary  differences  that
     will result in deductible amounts in future years and for tax carryforwards
     if, in the  opinion  of  management,  it is more  likely  than not that the
     deferred tax assets will be realized.

     STOCK OPTION PLAN

     Downey  records  compensation  expense  on the  date of  grant  only if the
     current  market price of the  underlying  stock exceeded the exercise price
     rather than  recognizing  as expense over the vesting period the fair value
     of all stock-based  awards on the date of grant.  However,  Downey provides
     pro forma net income and pro forma net  income  per share  disclosures  for
     employee  stock option  grants made since 1995 as if the  fair-value of all
     stock-based  awards as of the grant date are recognized as expense over the
     vesting period.

     PER SHARE INFORMATION

     Two earnings per share ("EPS")  measures are presented.  Basic EPS excludes
     dilution   and  is  computed  by  dividing   income   available  to  common
     stockholders  by the weighted  average number of common shares  outstanding
     for the period.  Diluted EPS reflects  the  potential  dilution  that could
     occur if securities or other contracts to issue common stock were exercised
     or converted  into common stock or resulted  from  issuance of common stock
     that then shared in earnings.

     CURRENT ACCOUNTING PRONOUNCEMENTS

     Statement  of Financial  Accounting  Standards  No. 141. In July 2001,  the
     Financial   Accounting   Standards  Board  issued  Statement  of  Financial
     Accounting  Standards  No. 141,  "Business  Combinations"  ("SFAS 141") and
     Statement of Financial  Accounting  Standards No. 142,  "Goodwill and Other
     Intangible Assets" ("SFAS 142").

     SFAS 141 requires  that the purchase  method of  accounting be used for all
     business  combinations  initiated  after  June  30,  2001.  The  use of the
     pooling-of-interests  method will be prohibited. It is not anticipated that
     the  financial  impact of this  Statement  will have a  material  effect on
     Downey.

     Statement of Financial  Accounting  Standards  No. 142. SFAS 142 applies to
     all acquired  intangible assets whether acquired  singularly,  as part of a
     group, or in a business  combination.  The Statement supersedes APB Opinion
     No. 17,  "Intangible  Assets," and will carry forward provisions in Opinion
     17 related to internally developed intangible assets. The Statement changes
     the   accounting   for  goodwill   from  an   amortization   method  to  an
     impairment-only  approach.  Goodwill  should no longer  be  amortized,  but
     instead  tested for  impairment  at least  annually at the  reporting  unit
     level.  The accounting  provisions are effective for fiscal years beginning
     after December 31, 2001. For 2001, the  amortization of excess of cost over
     fair value of net assets  acquired  was $0.5 million and as of December 31,
     2001,  goodwill  amounted to $3.2 million.  Downey's  intangible assets and
     goodwill  are  related to branch  acquisitions  and not within the scope of
     SFAS 142.  An  unidentified  intangible  asset or goodwill  was  recognized
     because the fair value of the liabilities  assumed  exceeded the fair value
     of the assets acquired.  According to the provisions of SFAS 142, this type
     of goodwill will continue to be amortized.  However, this may change as the
     Financial  Accounting  Standards  Board  is  currently   reconsidering  the
     exclusion of amortization of goodwill related to branch acquisitions and is
     expected to issue a final Statement in the fourth quarter of 2002.

                                       73
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Statement of Financial Accounting Standards No. 143. Statement of Financial
     Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
     ("SFAS 143"),  addresses financial accounting and reporting for obligations
     associated  with the  retirement  of  tangible  long-lived  assets  and the
     associated  asset  retirement   costs.  This  Statement  is  effective  for
     financial statements issued for fiscal years beginning after June 15, 2002.
     It is not anticipated that the financial impact of this Statement will have
     a material effect on Downey.

     Statement of Financial Accounting Standards No. 144. Statement of Financial
     Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
     Long-Lived  Assets"  ("SFAS  144"),   addresses  financial  accounting  and
     reporting  for the  impairment  or  disposal  of  long-lived  assets.  This
     Statement  supersedes  SFAS No.  121,  "Accounting  for the  Impairment  of
     Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  Of," and the
     accounting and reporting  provisions of APB Opinion No. 30,  "Reporting the
     Results of  Operations-Reporting  the Effects of Disposal of a Segment of a
     Business, and Extraordinary,  Unusual and Infrequently Occurring Events and
     Transactions," for the disposal of a segment of a business.  This Statement
     also eliminates the exception to  consolidation  for a subsidiary for which
     control is likely to be temporary.  The  provisions  of this  Statement are
     effective for financial  statements issued for fiscal years beginning after
     December  15, 2001 and interim  periods  within  those  fiscal  years.  The
     provisions of this Statement generally are to be applied prospectively.  It
     is not anticipated  that the financial impact of this Statement will have a
     material effect on Downey.

(2)  BUSINESS COMBINATION

     During 1988, the Bank acquired  Butterfield  Savings and Loan  Association,
     FSA ("Butterfield") from the Federal Savings and Loan Insurance Corporation
     ("FSLIC") in a FSLIC assisted acquisition.

     Concurrent  with the  acquisition,  the Bank and the FSLIC  entered into an
     assistance agreement ("Butterfield Assistance Agreement") that provides for
     the  indemnification of the Bank against losses incurred on the disposal of
     certain  defined  covered assets and the  settlement of certain  unreserved
     preacquisition   liabilities  or  contingencies  reduced  by  tax  benefits
     associated with those expenses as defined.  Additionally,  the FSLIC agreed
     to provide yield  maintenance  assistance on certain  covered assets at the
     Federal  Home Loan Bank  ("FHLB")  Eleventh  District  Cost of Funds  Index
     ("COFI").  All such  amounts  received  are  nontaxable  under the Internal
     Revenue Code.

     All assets  subject to the  Butterfield  Assistance  Agreement were sold or
     repurchased  by the  Federal  Deposit  Insurance  Corporation  ("FDIC")  on
     December 29,  1995.  By its terms,  the  Butterfield  Assistance  Agreement
     terminated on March 31, 1997.

     The Butterfield  Assistance  Agreement provides broad authority to the FDIC
     to conduct  audits.  A compliance  audit was  completed by the FDIC for the
     period July 1, 1993 to June 30, 1996. A final post termination audit of the
     Butterfield Assistance Agreement by the FDIC remains to be completed at the
     FDIC's option.

                                       74
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(3)  U.S.  TREASURY   SECURITIES,   AGENCY   OBLIGATIONS  AND  OTHER  INVESTMENT
     SECURITIES AVAILABLE FOR SALE

     The amortized  cost and estimated fair value of U.S.  Treasury  securities,
     agency obligations and other investment  securities  available for sale are
     summarized as follows:

<TABLE>
<CAPTION>
                                                           Gross         Gross       Estimated
                                          Amortized     Unrealized    Unrealized       Fair
     (In Thousands)                          Cost          Gains        Losses         Value
     -------------------------------------------------------------------------------------------
    <S>                                    <C>          <C>            <C>            <C>
     U.S. Treasury and agency securities   $355,947     $  1,214       $    251       $356,910
     Corporate securities ..............     44,259        1,203             17         45,445
     -------------------------------------------------------------------------------------------
     December 31, 2001 .................   $400,206     $  2,417       $    268       $402,355
     ===========================================================================================
     U.S. Treasury and agency securities   $283,132     $  1,069       $     99       $284,102
     Corporate securities ..............     21,212          301           --           21,513
     -------------------------------------------------------------------------------------------
     December 31, 2000 .................   $304,344     $  1,370       $     99       $305,615
     ===========================================================================================
</TABLE>

     At December  31, 2001,  $356 million in amortized  cost and $357 million in
     estimated  fair  value  of  these   investment   securities   contain  call
     provisions. The call dates range from January 4, 2002 to November 15, 2002.

     The amortized  cost and estimated fair value of U.S.  Treasury  securities,
     agency  obligations and other investment  securities  available for sale at
     December 31, 2001, by contractual maturity, are shown below.

<TABLE>
<CAPTION>

                                                Amortized        Fair
     (In Thousands)                               Cost          Value
     -------------------------------------------------------------------
     <S>                                        <C>           <C>
     Due in one year or less .............      $ 18,003      $ 18,220
     Due after one year through five years       301,256       303,099
     Due after five years ................        80,947        81,036
     -------------------------------------------------------------------
        Total ............................      $400,206      $402,355
     ===================================================================
</TABLE>

     Proceeds,  gross  realized  gains and losses on the sales of U.S.  Treasury
     securities,  agency obligations and other investment  securities  available
     for sale are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)              2001          2000          1999
     ----------------------------------------------------------------
     <S>                        <C>           <C>           <C>
     Proceeds ............      $29,139       $29,645       $67,195
     ================================================================
     Gross realized gains       $   329       $     4       $   288
     ================================================================
     Gross realized losses      $   --        $   110       $   --
     ================================================================
</TABLE>

     Net  unrealized  gains on  investment  securities  available  for sale were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $2.1 million,  or $1.2 million net of income taxes,
     at December 31, 2001,  compared to net unrealized gains of $1.3 million, or
     $0.7 million net of income taxes, at December 31, 2000.

(4)  LOANS AND MORTGAGE-BACKED  SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND
     OTHER INVESTMENT SECURITIES HELD TO MATURITY

     LOANS AND MORTGAGE-BACKED SECURITIES PURCHASED UNDER RESALE AGREEMENTS

     There were no outstanding  loans or  mortgage-backed  securities  purchased
     under resale  agreements at December 31, 2001 or 2000. The average interest
     rate and balance of such transactions was 4.35% and

                                       75
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     $34  million,   respectively,   during  2001  and  6.70%  and  $3  million,
     respectively,  during 2000. The maximum amount outstanding at any month-end
     was $60  million  during  2001.  There  was no  amount  outstanding  at any
     month-end during 2000.

     MUNICIPAL SECURITIES HELD TO MATURITY

     The amortized cost and estimated fair value of municipal securities held to
     maturity are summarized as follows:

<TABLE>
<CAPTION>
                                             Gross         Gross       Estimated
                             Amortized     Unrealized    Unrealized       Fair
     (In Thousands)            Cost          Gains        Losses         Value
     ---------------------------------------------------------------------------
     <S>                       <C>          <C>          <C>            <C>
     December 31, 2001         $6,388       $    --      $   15         $6,373
     ===========================================================================
     December 31, 2000         $6,550       $    --      $   16         $6,534
     ===========================================================================
</TABLE>

     All of  the  investment  at  December  31,  2001  and  2000  represents  an
     industrial  revenue  bond on which the  interest  income is not  subject to
     federal income taxes and matures in 2015.

(5)  MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

     The  amortized  cost  and  estimated  fair  value  of  the  mortgage-backed
     securities available for sale are summarized as follows:

<TABLE>
<CAPTION>
                                                Gross         Gross       Estimated
                                Amortized     Unrealized    Unrealized       Fair
     (In Thousands)                Cost          Gains        Losses         Value
     -------------------------------------------------------------------------------
     <S>                         <C>          <C>          <C>            <C>
     December 31, 2001:
       Agency certificates ...   $ 17,805     $   --       $    387       $ 17,418
       Non-agency certificates    102,480           15          932        101,563
     -------------------------------------------------------------------------------
          Total ..............   $120,285     $     15     $  1,319       $118,981
     ===============================================================================
     December 31, 2000:
       Agency certificates ...   $  4,182     $   --       $     29       $  4,153
       Non-agency certificates      6,086            6           42          6,050
     -------------------------------------------------------------------------------
          Total ..............   $ 10,268     $      6     $     71       $ 10,203
     ===============================================================================
</TABLE>

     Net unrealized losses on mortgage-backed securities available for sale were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $1.3 million,  or $0.8 million net of income taxes,
     at December 31, 2001.  At December 31,  2000,  net  unrealized  losses were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $65,000, or $37,000 net of income taxes.

     Proceeds,  gross realized gains and losses on the sales of  mortgage-backed
     securities available for sale are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                              2001       2000         1999
     ---------------------------------------------------------------------------
     <S>                                     <C>          <C>        <C>
     Proceeds ............                   $3,798,775   $963,712   $1,386,151
     ===========================================================================
     Gross realized gains                    $   24,507   $  4,788   $   14,017
     ===========================================================================
     Gross realized losses                   $    5,030   $  5,690   $    2,504
     ===========================================================================
</TABLE>

                                       76
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(6)  LOANS RECEIVABLE

     Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                          ----------------------------
     (In Thousands)                                            2001          2000
     ---------------------------------------------------------------------------------
     <S>                                                  <C>            <C>
     Held for investment:
        Loans secured by real estate:
           Residential:
             One-to-four units ........................   $ 7,699,061    $ 7,655,238
             One-to-four units - subprime .............     1,506,719      1,743,914
             Five or more units .......................        11,179         19,460
           Commercial real estate .....................       112,509        164,604
           Construction ...............................        84,942        118,165
           Land .......................................        22,028         26,880
        Non-mortgage:
           Commercial .................................        22,017         21,721
           Automobile .................................        24,529         39,614
           Other consumer .............................        50,908         60,653
     ---------------------------------------------------------------------------------
             Total loans receivable held for investment     9,533,892      9,850,249
        Increase (decrease) for:
           Undisbursed loan funds .....................       (61,280)       (72,328)
           Net deferred costs and premiums ............        77,916         79,109
           Allowance for losses .......................       (36,120)       (34,452)
     ---------------------------------------------------------------------------------
             Total loans held for investment, net .....   $ 9,514,408    $ 9,822,578
     =================================================================================
     Held for sale:
        Loans secured by real estate:
           Residential one-to-four units ..............   $   509,317    $   251,014
           Residential one-to-four units - subprime ...            33            558
           Capitalized basis adjustment (1) ...........       (10,326)          --
     ---------------------------------------------------------------------------------
             Total loans held for sale, net ...........   $   499,024    $   251,572
     =================================================================================
<FN>
    (1)  Reflected  the change in fair value  from date of  interest  rate lock
         commitment to date of origination.
</FN>
</TABLE>

     Over  94%  of the  real  estate  securing  Downey's  loans  is  located  in
     California.

                                       77
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     A summary of activity in the allowance for loan losses for loans receivable
     held for investment during 2001, 2000 and 1999 follows:

<TABLE>
<CAPTION>
                                                                                          Not
                                      Real                                 Other     Specifically
     (In Thousands)                  Estate    Commercial   Automobile    Consumer    Allocated     Total
     -------------------------------------------------------------------------------------------------------
     <S>                            <C>         <C>        <C>         <C>           <C>          <C>
     Balance at December 31, 1998   $ 19,408    $    218   $  8,344    $    747      $  2,800     $ 31,517
     Provision for loan losses ..      9,252         116      1,879          23          --         11,270
     Charge-offs ................       (580)       --       (4,795)       (160)         --         (5,535)
     Recoveries .................        250        --          831           9          --          1,090
     -------------------------------------------------------------------------------------------------------
     Balance at December 31, 1999     28,330         334      6,259         619         2,800       38,342
     Provision for loan losses ..      2,350         108        517         276          --          3,251
     Charge-offs ................       (735)       --         (832)       (182)         --         (1,749)
     Recoveries .................        269        --          136          14          --            419
     Transfers (1) ..............       --          --       (5,811)       --            --         (5,811)
     -------------------------------------------------------------------------------------------------------
     Balance at December 31, 2000     30,214         442        269         727         2,800       34,452
     Provision for loan losses ..      2,103         131        201         129          --          2,564
     Charge-offs ................       (874)       --         (197)       (277)         --         (1,348)
     Recoveries .................        434        --            4          14          --            452
     -------------------------------------------------------------------------------------------------------
     Balance at December 31, 2001   $ 31,877    $    573   $    277    $    593      $  2,800     $ 36,120
     =======================================================================================================
<FN>
     (1)  Reduction in 2000 was due to the sale of subsidiary.
</FN>
</TABLE>

     Net  charge-offs  represented  0.01%,  0.01% and 0.06% of average loans for
     2001, 2000 and 1999, respectively.

     All impaired loans at December 31, 2001 and 2000 were secured by commercial
     real estate.  The following  table  presents  impaired  loans with specific
     allowances  and the amount of such  allowances  and impaired  loans without
     specific allowances.

<TABLE>
<CAPTION>
                                               Net          Specific         Net
     (In Thousands)                       Carrying Value    Allowance      Balance
     --------------------------------------------------------------------------------
     <S>                                    <C>             <C>            <C>
     December 31, 2001:
        Loans with specific allowances ..   $  --           $    --        $  --
        Loans without specific allowances    13,201              --         13,201
     --------------------------------------------------------------------------------
        Total impaired loans ............   $13,201         $    --        $13,201
     ================================================================================
     December 31, 2000:
        Loans with specific allowances ..   $  --           $    --        $  --
        Loans without specific allowances    13,841              --         13,841
     --------------------------------------------------------------------------------
        Total impaired loans ............   $13,841         $    --        $13,841
     ================================================================================
</TABLE>

     The average  recorded  investment in impaired  loans totaled $14 million in
     2001 and $13 million in 2000. During 2001, total interest recognized on the
     impaired loan portfolio was $1.7 million,  compared to $2.9 million in 2000
     and $1.9 million in 1999.

     The combined  weighted  average interest yield on loans receivable held for
     investment  and sale was  7.16% and 8.45% at  December  31,  2001 and 2000,
     respectively,  and averaged  7.80%,  7.99% and 7.48% during 2001,  2000 and
     1999, respectively.

                                       78
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The aggregate amount of non-accrual loans receivable that are contractually
     past due 90 days or more as to principal or  interest,  in the  foreclosure
     process,  restructured,  or upon which interest collection is doubtful were
     $77 million and $45 million at December 31, 2001 and 2000, respectively. At
     December   31,  2001  we  had  less  than  $1  million  of  troubled   debt
     restructurings  on accrual status  representing a single  one-to-four  unit
     residential loan.

     Interest due on non-accrual  loans, but excluded from interest income,  was
     approximately $3.2 million for 2001, $1.8 million for 2000 and $1.1 million
     for 1999.

     Downey has had,  and  expects in the  future to have,  transactions  in the
     ordinary  course of business with executive  officers,  directors and their
     associates  ("related parties") on substantially the same terms,  including
     interest  rates  and  collateral,  as  those  prevailing  at the  time  for
     comparable  transactions with other non-related  parties. In the opinion of
     management, those transactions neither involve more than the normal risk of
     collectibility nor present any unfavorable  features. At December 31, 2001,
     the Bank had extended  loans to two of its directors  and their  associates
     totaling $21 million.  At December 31, 2000, the Bank had extended loans to
     two directors and their associates totaling $23 million. All such loans are
     performing  in  accordance  with their  loan  terms.  Presented  below is a
     summary  of  activity  with  respect  to such  loans for the  years  ending
     December 31, 2001 and 2000:

<TABLE>
<CAPTION>
     (In Thousands)                                          2001        2000
     ---------------------------------------------------------------------------
     <S>                                                   <C>         <C>
     Balance at beginning of period                        $ 23,067    $ 26,657
     Additions ....................                             508         632
     Repayments ...................                          (2,096)     (4,222)
     ---------------------------------------------------------------------------
     Balance at end of period .....                        $ 21,479    $ 23,067
     ===========================================================================
</TABLE>

(7)  INVESTMENTS IN REAL ESTATE AND JOINT VENTURES

     Investments in real estate and joint ventures are summarized as follows:

<TABLE>
<CAPTION>
                                                                          December 31,
     (In Thousands)                                                     2001       2000
     ---------------------------------------------------------------------------------------
     <S>                                                              <C>         <C>
     Gross investments in real estate (1) .........................   $ 44,429    $ 23,948
     Accumulated depreciation .....................................     (7,495)     (7,313)
     Allowance for losses .........................................     (2,690)     (1,492)
     ---------------------------------------------------------------------------------------
        Investments in real estate ................................     34,244      15,143
     ---------------------------------------------------------------------------------------
     Investments in and interest bearing advances to joint ventures      3,806       3,775
     Note receivable from sale of land ............................        135         228
     Joint venture valuation allowance ............................       --        (1,505)
     ---------------------------------------------------------------------------------------
        Investments in joint ventures .............................      3,941       2,498
     ---------------------------------------------------------------------------------------
        Total investments in real estate and joint ventures .......   $ 38,185    $ 17,641
     =======================================================================================
<FN>
     (1) Included $0.9 million invested in low income housing.
</FN>
</TABLE>

                                       79
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The table set forth below describes the type,  location and amount invested
     in real estate and joint ventures,  net of specific valuation allowances of
     $3 million and general  valuation  allowances  of less than $1 million,  at
     December 31, 2001:

<TABLE>
<CAPTION>
     (In Thousands)                                          California     Arizona    Other        Total
     ------------------------------------------------------------------------------------------------------
     <S>                                                       <C>         <C>        <C>        <C>
     Shopping centers ......................................   $ 17,626    $  6,151   $   --     $ 23,777
     Office building .......................................        702        --         --          702
     Residential ...........................................      4,038        --         --        4,038
     Land ..................................................      9,272        --          459      9,731
     Note receivable from sale of land .....................        135        --         --          135
     ------------------------------------------------------------------------------------------------------
        Total real estate before general valuation allowance   $ 31,773    $  6,151   $    459     38,383
     General valuation allowance ...........................                                         (198)
     ------------------------------------------------------------------------------------------------------
     Net investment in real estate and joint ventures ......                                     $ 38,185
     ======================================================================================================
</TABLE>

     A summary of real estate and joint venture operations  included in Downey's
     results of operations follows:

<TABLE>
<CAPTION>
     (In Thousands)                                                     2001        2000        1999
     ----------------------------------------------------------------------------------------------------
     <S>                                                              <C>         <C>         <C>
     Wholly owned operations:
        Rental operations:
           Rental income ..........................................   $  3,235    $  3,617    $  4,950
           Costs and expenses .....................................       (990)     (1,045)     (1,128)
     ----------------------------------------------------------------------------------------------------
             Net rental operations ................................      2,245       2,572       3,822
        Net gains on sales of real estate .........................        129       2,981       5,206
        Reduction of losses on real estate ........................        307         639       2,266
     ----------------------------------------------------------------------------------------------------
           Total wholly owned operations ..........................      2,681       6,192      11,294
     ----------------------------------------------------------------------------------------------------
     Joint venture operations:
        Equity in net income from joint ventures ..................        736       3,224       5,352
        Reduction of (provision for) losses provided by DSL Service
           Company ................................................       --        (1,505)      1,400
     ----------------------------------------------------------------------------------------------------
           Net joint venture operations ...........................        736       1,719       6,752
     Interest from joint venture advances .........................        468         887       1,256
     ----------------------------------------------------------------------------------------------------
        Total joint venture operations ............................      1,204       2,606       8,008
     ----------------------------------------------------------------------------------------------------
           Total ..................................................   $  3,885    $  8,798    $ 19,302
     ====================================================================================================
</TABLE>

                                       80
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Activity  in the  allowance  for losses on  investments  in real estate and
     joint ventures for 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                    Real Estate     Shopping
                                                      Held for       Centers     Investments
                                                      or Under      Held for      In Joint
     (In Thousands)                                 Development    Investment     Ventures        Total
     -----------------------------------------------------------------------------------------------------
     <S>                                             <C>           <C>            <C>           <C>
     Balance at December 31, 1998 ................   $ 4,711       $ 1,594        $ 1,412       $ 7,717
     Reduction of estimated losses ...............    (1,741)         (525)        (1,400)       (3,666)
     Charge-offs .................................    (1,908)         --              (12)       (1,920)
     Recoveries ..................................      --            --             --            --
     -----------------------------------------------------------------------------------------------------
     Balance at December 31, 1999 ................     1,062         1,069           --           2,131
     Provision for (reduction of) estimated losses      --            (639)         1,505           866
     Charge-offs .................................      --            --             --            --
     Recoveries ..................................      --            --             --            --
     -----------------------------------------------------------------------------------------------------
     Balance at December 31, 2000 ................     1,062           430          1,505         2,997
     Reduction of estimated losses ...............       (29)         (278)          --            (307)
     Charge-offs .................................      --            --             --            --
     Recoveries ..................................      --            --             --            --
     Transfers (1) ...............................      --           1,505         (1,505)         --
     -----------------------------------------------------------------------------------------------------
     Balance at December 31, 2001 ................   $ 1,033       $ 1,657        $  --         $ 2,690
     =====================================================================================================
<FN>
     (1)  Transfer due to a settlement of  litigation  with former joint venture
          partners wherein we became the sole owner of two shopping centers.
</FN>
</TABLE>

                                       81
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Condensed  financial  information of joint ventures  reported on the equity
     method is as follows:

<TABLE>
     CONDENSED COMBINED BALANCE SHEETS - JOINT VENTURES
<CAPTION>
                                                                        December 31,
                                                                  -----------------------
     (In Thousands)                                                   2001       2000
     ------------------------------------------------------------------------------------
     <S>                                                            <C>        <C>
     ASSETS
     Cash .......................................................   $    725   $  2,182
     Projects under development .................................     10,817      6,879
     Completed projects .........................................      4,989     20,468
     Other assets ...............................................        592      1,474
     ------------------------------------------------------------------------------------
                                                                    $ 17,123   $ 31,003
     ====================================================================================
     LIABILITIES AND EQUITY
     Liabilities:
        Notes payable to the Bank ...............................   $  6,642   $ 23,398
        Notes payable to others .................................      3,407      4,282
        Other ...................................................      1,418      4,755
     Equity (deficit):
        DSL Service Company (1) .................................      3,941      2,498
        Allowance for losses recorded by DSL Service Company (2)        --        1,505
        Other partners (2) ......................................      1,715     (5,435)
     ------------------------------------------------------------------------------------
          Net equity (deficit) ..................................      5,656     (1,432)
     ------------------------------------------------------------------------------------
                                                                    $ 17,123   $ 31,003
     ====================================================================================
<FN>
     (1)  Included in these amounts are interest-bearing  joint venture advances
          with priority  interest  payments  from joint  ventures to DSL Service
          Company.
     (2)  The aggregate other  partners'  equity of $2 million and deficit of $5
          million at December 31, 2001 and 2000, respectively,  represents their
          equity  or  deficit  interest  in the  accumulated  retained  earnings
          (deficit) of the respective joint ventures.  Those results include the
          net  profit  on sales and the  operating  results  of the real  estate
          assets, net of depreciation and funding costs.  Except for any secured
          financing  which has been obtained,  DSL Service  Company has provided
          all  other  financing.  As  part of  Downey's  internal  asset  review
          process,  the fair value of the joint  venture  real estate  assets is
          compared to the secured  notes  payable to the Bank and others and DSL
          Service Company's investment. To the extent the fair value of the real
          estate assets is less than the aggregate of those amounts, a provision
          is made to create a valuation allowance.  No valuation allowances were
          required at December 31, 2001.
</FN>
</TABLE>

                                       82
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

<TABLE>
     CONDENSED COMBINED STATEMENTS OF OPERATIONS - JOINT VENTURES
<CAPTION>
     (In Thousands)                                      2001        2000        1999
     -------------------------------------------------------------------------------------
     <S>                                               <C>         <C>         <C>
     Real estate sales:
         Sales .....................................   $  1,009    $ 32,237    $ 40,096
         Cost of sales .............................       (333)    (26,021)    (31,770)
     -------------------------------------------------------------------------------------
          Net gains on sales .......................        676       6,216       8,326
     -------------------------------------------------------------------------------------
     Rental operations:
         Rental income .............................      2,741       3,849       5,825
         Operating expenses ........................       (363)       (901)     (2,192)
         Interest, depreciation and other expenses .     (2,165)     (3,131)     (4,236)
     -------------------------------------------------------------------------------------
          Net income (loss) on rental operations ...        213        (183)       (603)
     -------------------------------------------------------------------------------------
     Net income ....................................        889       6,033       7,723
     Less other partners' share of net income ......        153       2,809       2,371
     -------------------------------------------------------------------------------------
     DSL Service Company's share of net income .....        736       3,224       5,352
     Reduction of (provision for) losses provided by
        DSL Service Company ........................       --        (1,505)      1,400
     -------------------------------------------------------------------------------------
     DSL Service Company's share of net income .....   $    736    $  1,719    $  6,752
     =====================================================================================
</TABLE>

(8)  REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS

     The type and  amount of real  estate  acquired  in  settlement  of loans is
     summarized as follows:

<TABLE>
<CAPTION>
                                                                December 31,
                                                         -------------------------
     (In Thousands)                                           2001        2000
     -----------------------------------------------------------------------------
     <S>                                                    <C>         <C>
     Residential one-to-four units ......................   $  8,450    $  6,651
     Residential one-to-four units - subprime ...........      6,916       3,291
     -----------------------------------------------------------------------------
        Total real estate acquired in settlement of loans   $ 15,366    $  9,942
     =============================================================================
</TABLE>

     A summary of net  operation of real estate  acquired in settlement of loans
     included in Downey's results of operations follows:

<TABLE>
<CAPTION>
     (In Thousands)                                                       2001        2000        1999
     ------------------------------------------------------------------------------------------------------
     <S>                                                                <C>         <C>         <C>
     Net gains on sales .............................................   $ (1,811)   $   (669)   $   (704)
     Net operating expense ..........................................      1,533       1,075         768
     Provision for (reduction of) estimated losses ..................        517         412         (45)
     ------------------------------------------------------------------------------------------------------
        Net operations of real estate acquired in settlement of loans   $    239    $    818    $     19
     ======================================================================================================
</TABLE>

                                       83
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(9)  PREMISES AND EQUIPMENT

     Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                               December 31,
                                                       --------------------------
     (In Thousands)                                         2001         2000
     ----------------------------------------------------------------------------
     <S>                                                 <C>          <C>
     Land ....................................           $  25,282    $  24,626
     Building and improvements ...............              95,521       91,361
     Furniture, fixtures and equipment .......              78,444       67,331
     Construction in progress ................                 662          769
     Other ...................................                  62           62
     ----------------------------------------------------------------------------
        Total premises and equipment .........             199,971      184,149
     Accumulated depreciation and amortization             (88,209)     (79,971)
     ----------------------------------------------------------------------------
        Total premises and equipment, net ....           $ 111,762    $ 104,178
     ============================================================================
</TABLE>

     Downey has commitments  under long term operating  leases,  principally for
     building space and land.  Lease terms generally  cover a five-year  period.
     Rental  expense  was $2.8  million in 2001,  $2.3  million in 2000 and $2.1
     million in 1999.  The following  table  summarizes  future  minimum  rental
     commitments under noncancelable leases.

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
     <S>                                                                 <C>
     2002 .........                                                      $ 3,220
     2003 .........                                                        3,004
     2004 .........                                                        2,449
     2005 .........                                                        2,174
     2006 .........                                                        1,621
     Thereafter (1)                                                        3,394
     ---------------------------------------------------------------------------
       Total future lease commitments                                    $15,862
     ===========================================================================
<FN>
     (1)  There are no lease commitments beyond the year 2011, though options to
          renew at that time are available.
</FN>
</TABLE>

(10) FEDERAL HOME LOAN BANK STOCK

     The Bank's  required  investment in FHLB stock,  based on December 31, 2001
     financial  data, was $98 million.  The investment in FHLB stock amounted to
     $113 million and $106 million at December 31, 2001 and 2000, respectively.

                                       84
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(11) MORTGAGE SERVICING RIGHTS

     The following table is a summary of the activity in our mortgage  servicing
     rights and related  allowance  for the periods  indicated and other related
     financial data.

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                    2001            2000           1999
     --------------------------------------------------------------------------------------------------
     <S>                                                  <C>             <C>             <C>
     Gross balance at beginning of period .............   $    46,214     $    34,266     $     8,256
     Additions ........................................        44,391          18,510          29,271
     Amortization .....................................        (9,813)         (5,968)         (3,051)
     Sale of servicing ................................        (7,826)           --              --
     Impairment write-down ............................        (7,336)           (594)           (210)
     --------------------------------------------------------------------------------------------------
        Gross balance at end of period ................        65,630          46,214          34,266
     --------------------------------------------------------------------------------------------------
     Allowance balance at beginning of period .........         5,483               3             464
     Provision for (reduction of) impairment ..........        10,588           6,074            (251)
     Impairment write-down ............................        (7,336)           (594)           (210)
     --------------------------------------------------------------------------------------------------
        Allowance balance at end of period ............         8,735           5,483               3
     --------------------------------------------------------------------------------------------------
        Total mortgage servicing rights, net ..........   $    56,895     $    40,731     $    34,263
     ==================================================================================================
     Estimated fair value (1) .........................   $    58,047     $    41,826     $    37,048
     Weighted average expected life (in months) .......            82              82             129
     Custodial account earnings rate ..................          4.36%           6.35%           5.35%
     Weighted average discount rate ...................          9.16            9.78            9.32
     ==================================================================================================
     AT PERIOD END
     Mortgage loans serviced for others:
        Total .........................................   $ 5,805,811     $ 3,964,462     $ 2,923,778
        With capitalized mortgage servicing rights (1):
           Amount .....................................     5,379,513       3,779,562       2,711,776
           Weighted average interest rate .............          6.97%           7.56%           7.23%
     ==================================================================================================
     Custodial escrow balances ........................   $    10,596     $     8,207     $     5,381
     ==================================================================================================
<FN>
     (1)  The  estimated  fair value may exceed  book  value for  certain  asset
          strata and excluded  loans sold or  securitized  prior to 1996 without
          capitalized mortgage servicing rights.
</FN>
</TABLE>

     Key assumptions--that vary due to changes in market interest rates--used to
     determine the fair value of our mortgage  servicing rights include expected
     prepayment  speeds,  which  impact the average life of the  portfolio,  the
     earnings  rate on custodial  accounts,  which impact the value of custodial
     accounts,  and the  discount  rate used in valuing  future cash flows.  The
     table  below  summarizes  the  estimated  changes  in the fair value of our
     mortgage servicing rights for changes in those assumptions individually and
     in  combination  associated  with an immediate 100 basis point  increase or
     decrease in market rates. Also summarized is the earnings impact associated
     with  provisions to or  reductions in the valuation  allowance for mortgage
     servicing  rights.  Impairment is measured on a  disaggregated  basis based
     upon the predominant risk  characteristics of the underlying mortgage loans
     such as term and coupon.  Certain stratum may have impairment,  while other
     stratum  may not.  Therefore,  changes in overall  fair value may not equal
     provisions to or reductions in the valuation allowance.

                                       85
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The sensitivity  analysis in the table below is hypothetical  and should be
     used with caution. As the figures indicate,  changes in fair value based on
     a 100 basis  point  variation  in  assumptions  generally  cannot be easily
     extrapolated  because the  relationship of the change in the assumptions to
     the change in fair value may not be linear. Also, in this table, the effect
     that a change  in a  particular  assumption  may have on the fair  value is
     calculated  without changing any other assumption.  In reality,  changes in
     one  factor  may  result in changes  in  another,  which  might  magnify or
     counteract the sensitivities.

<TABLE>
<CAPTION>
                                         Expected    Value of
                                        Prepayment   Custodial   Discount
     (Dollars in Thousands)               Speeds     Accounts      Rate    Combination
     -----------------------------------------------------------------------------------
     <S>                                <C>         <C>         <C>         <C>
     Increase rates 100 basis points:
       Fair value (1) ...............   $ 10,831    $  3,386    $ (1,949)   $ 11,518
       Reduction of (increase in)
          valuation allowance .......      6,663       1,468        (875)      7,083

     Decrease rates 100 basis points:
       Fair value (2) ...............    (17,188)     (3,386)      2,072     (19,597)
       Reduction of (increase in)
          valuation allowance .......    (16,036)     (2,234)        702     (18,445)
     ====================================================================================
<FN>
     (1)  The weighted-average expected life is 110 months.
     (2)  The weighted-average expected life is 46 months.
</FN>
</TABLE>

     The components of loan servicing income (loss) included in Downey's results
     of operations are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                                 2001        2000        1999
     -------------------------------------------------------------------------------
     <S>                                         <C>         <C>         <C>
     Income from servicing operations ........   $  9,028    $  8,414    $  4,472
     Amortization of MSRs ....................     (9,813)     (5,968)     (3,051)
     (Provision for) reduction of impairment .    (10,588)     (6,074)        251
     -------------------------------------------------------------------------------
       Total loan servicing income (loss), net   $(11,373)   $ (3,628)   $  1,672
     ===============================================================================
</TABLE>

(12) OTHER ASSETS

     Other assets are summarized as follows:
<TABLE>
<CAPTION>
                                                                 December 31,
                                                             --------------------
     (In Thousands)                                            2001       2000
     ----------------------------------------------------------------------------
     <S>                                                      <C>       <C>
     Accounts receivable ...........................          $ 4,908   $ 2,406
     Accrued interest receivable:
        Loans ......................................           48,658    61,131
        Mortgage-backed securities .................              601        60
        Investment securities ......................            8,174     6,206
     Prepaid expenses ..............................           10,479    14,210
     Designated forward sale contracts (1) .........            4,332      --
     Excess of purchase price over fair value of
        Assets acquired and liabilities assumed, net            3,150     3,608
     Repossessed automobiles, net ..................               19        76
     Other .........................................            5,126     2,997
     ----------------------------------------------------------------------------
        Total other assets .........................          $85,447   $90,694
     ============================================================================
<FN>
     (1)  Effective with the adoption of SFAS 133.
</FN>
</TABLE>

                                       86
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(13) DEPOSITS

     Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                                           December 31,
                                          -----------------------------------------------
                                                   2001                    2000
                                          -----------------------------------------------
                                           Weighted               Weighted
                                            Average                Average
     (Dollars in Thousands)                  Rate       Amount      Rate         Amount
     ------------------------------------------------------------------------------------
     <S>                                     <C>      <C>           <C>     <C>
     Transaction accounts:
        Non-interest-bearing checking .      --  %    $  263,165    -- %     $  244,311
        Interest-bearing checking (1) .      0.35        423,776    0.78        395,640
        Money market ..................      2.01        108,747    2.88         89,408
        Regular passbook ..............      2.46      2,131,048    3.41        754,127
     ------------------------------------------------------------------------------------
           Total transaction accounts .      1.92      2,926,736    2.12      1,483,486
     Certificates of deposit:
        Less than 3.00% ...............      2.41        970,854    2.41          6,357
        3.00-3.49 .....................      3.20        458,511    3.45             25
        3.50-3.99 .....................      3.84        532,634    3.97            384
        4.00-4.49 .....................      4.22        892,517    4.19         26,916
        4.50-4.99 .....................      4.76        555,885    4.82         80,844
        5.00-5.99 .....................      5.30        921,510    5.71      1,901,166
        6.00 and greater ..............      6.37      1,360,919    6.63      4,583,511
     ------------------------------------------------------------------------------------
          Total certificates of deposit      4.54      5,692,830    6.33      6,599,203
     ------------------------------------------------------------------------------------
            Total deposits ............      3.65%    $8,619,566    5.56%    $8,082,689
     ====================================================================================
<FN>
     (1)  Included amounts swept into money market accounts.
</FN>
</TABLE>

     The  aggregate  amount  of jumbo  certificates  of  deposit  with a minimum
     denomination  of $100,000 was $2.4 billion and $2.3 billion at December 31,
     2001 and 2000, respectively.

     At December 31, 2001,  scheduled  maturities of certificates of deposit are
     as follows:

<TABLE>
<CAPTION>
                                                        Weighted
     (Dollars in Thousands)                           Average Rate      Amount
     ---------------------------------------------------------------------------
     <S>                                                   <C>       <C>
     2002 .....                                            4.57%     $5,124,186
     2003 .....                                            4.07         377,027
     2004 .....                                            4.25          44,233
     2005 .....                                            5.18          17,685
     2006 .....                                            4.75         129,699
     Thereafter                                            --              --
     ---------------------------------------------------------------------------
       Total                                               4.54%     $5,692,830
     ===========================================================================
</TABLE>

     The  weighted  average  cost of deposits  averaged  4.88%,  5.20% and 4.51%
     during 2001, 2000 and 1999, respectively.

     At December 31, 2001 and 2000 public funds of  approximately $3 million and
     $5 million,  respectively,  are  secured by mortgage  loans with a carrying
     value of approximately $4 million and $7 million, respectively.

                                       87
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Interest expense on deposits by type is summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                                2001       2000       1999
     ---------------------------------------------------------------------------
     <S>                                         <C>        <C>        <C>
     Interest-bearing checking (1) ...           $  2,057   $  3,520   $  3,517
     Money market ....................              2,436      2,544      2,641
     Regular passbook ................             34,553     27,841     26,224
     Certificate accounts ............            385,809    345,398    224,382
     ---------------------------------------------------------------------------
        Total deposit interest expense           $424,855   $379,303   $256,764
     ===========================================================================

<FN>
     (1)  Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

     Accrued  interest on  deposits,  which is included in accounts  payable and
     accrued liabilities,  was $2 million at December 31, 2001 and $3 million at
     December 31, 2000.

(14) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     Securities sold under agreements to repurchase are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                            2001        2000         1999
     ----------------------------------------------------------------------------------------------------
     <S>                                                               <C>       <C>        <C>
     Balance at year end .......................................       $  --     $  --      $     --
     Average balance outstanding during the year ...............          --         753         1,987
     Maximum amount outstanding at any month-end during the year          --      39,250        24,875
     Weighted average interest rate during the year ............          --%      6.10%         5.42%
     Weighted average interest rate at year end ................          --        --            --
     ====================================================================================================
</TABLE>

     The securities  collateralizing  these transactions were delivered to major
     national  brokerage  firms who arranged the  transactions.  Securities sold
     under  agreements  to  repurchase  generally  mature  within 30 days of the
     various dates of sale.

(15) FEDERAL HOME LOAN BANK ADVANCES

     FHLB advances are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                           2001          2000          1999
     -------------------------------------------------------------------------------------------------------
     <S>                                                           <C>           <C>           <C>
     Balance at year end .......................................   $1,522,705    $1,978,348    $2,122,407
     Average balance outstanding during the year ...............    1,216,495     2,117,787     1,169,474
     Maximum amount outstanding at any month-end during the year    1,763,677     2,460,276     2,122,407
     Weighted average interest rate during the year ............         5.40%         6.15%         5.44%
     Weighted average interest rate at year end ................         3.73          6.26          5.77
     As of year end secured by:
        Loans receivable .......................................   $1,791,068    $2,222,863    $2,395,599
     =======================================================================================================
</TABLE>

     In addition to the collateral  securing  existing  advances,  Downey had an
     additional  $1.7 billion in loans  available at the FHLB as collateral  for
     any future advances as of December 31, 2001.

                                       88
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     FHLB advances have the following maturities at December 31, 2001:

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
     <S>                                                             <C>
     2002 .....                                                      $  727,221
     2003 .....                                                          72,834
     2004 .....                                                         172,600
     2005 .....                                                          29,750
     2006 .....                                                          61,300
     Thereafter                                                         459,000
     ---------------------------------------------------------------------------
        Total                                                        $1,522,705
     ===========================================================================
</TABLE>

(16) OTHER BORROWINGS

     Other borrowings are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                              --------------------
     (Dollars In Thousands)                                                     2001       2000
     ---------------------------------------------------------------------------------------------
     <S>                                                                       <C>         <C>
     Long-term notes payable to banks, secured by real estate and mortgage
        loans with a carrying value of $239 at December 31, 2001, bearing an
        interest rate of 7.88% .............................................   $7          $224
     =============================================================================================
</TABLE>

     Long-term notes payable to banks were repaid in January of 2002.

                                       89
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(17) INCOME TAXES

     Current income taxes payable were $5 million and $4 million at December 31,
     2001 and 2000, respectively.

     Deferred tax liabilities  (assets) are comprised of the following temporary
     differences  between the financial  statement  carrying amounts and the tax
     basis of assets:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                 ------------------------
     (In Thousands)                                                 2001        2000
     ------------------------------------------------------------------------------------
     <S>                                                          <C>         <C>
     Deferred tax liabilities:
         Mortgage servicing rights, net of allowances .........   $ 25,193    $ 17,783
         Tax reserves in excess of base year ..................     22,115      22,115
         FHLB stock dividends .................................     12,900      11,588
         Deferred loan fees ...................................      7,720       6,882
         Equity in joint ventures .............................      2,424       1,724
         Depreciation on premises and equipment ...............      2,290       2,093
         Fair value adjustment on mortgage-backed securities ..        533        --
         Unrealized gains on investment securities ............        357         519
     ------------------------------------------------------------------------------------
            Total deferred tax liabilities ....................     73,532      62,704
     ------------------------------------------------------------------------------------
     Deferred tax assets:
         Loan valuation allowances, net of bad debt charge-offs    (18,396)    (16,172)
         California franchise tax .............................     (7,173)     (5,651)
         Deferred compensation ................................     (2,126)     (2,289)
         Real estate and joint venture valuation allowances ...     (1,100)     (2,734)
         Fair value adjustment on mortgage-backed securities ..       --           (72)
         Derivative instrument adjustment .....................       (533)       --
         Other deferred income items ..........................     (2,779)     (2,056)
     ------------------------------------------------------------------------------------
            Total deferred tax assets .........................    (32,107)    (28,974)
     Deferred tax assets valuation allowance ..................       --          --
     ------------------------------------------------------------------------------------
     Net deferred tax liability ...............................   $ 41,425    $ 33,730
     ====================================================================================
</TABLE>

     Income taxes are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                                 2001      2000      1999
     ---------------------------------------------------------------------------
     <S>                                           <C>       <C>       <C>
     Federal:
          Current .....................            $59,288   $48,714   $18,382
          Deferred ....................              6,071     5,567    19,821
     ---------------------------------------------------------------------------
             Total federal income taxes            $65,359   $54,281   $38,203
     ===========================================================================
     State:
          Current .....................            $20,493   $16,214   $ 8,186
          Deferred ....................              2,317     2,563       418
     ---------------------------------------------------------------------------
             Total state income taxes .            $22,810   $18,777   $ 8,604
     ===========================================================================
     Total:
          Current .....................            $79,781   $64,928   $26,568
          Deferred ....................              8,388     8,130    20,239
     ---------------------------------------------------------------------------
             Total income taxes .......            $88,169   $73,058   $46,807
     ===========================================================================
</TABLE>

                                       90
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     A  reconciliation  of  income  taxes  to  the  expected  statutory  federal
     corporate income taxes follows:
<TABLE>
<CAPTION>
                                                              2001                 2000                  1999
                                                       ---------------------------------------------------------------
     (Dollars in Thousands)                             Amount    Percent    Amount    Percent     Amount    Percent
     -----------------------------------------------------------------------------------------------------------------
     <S>                                               <C>           <C>    <C>           <C>    <C>           <C>
     Expected statutory income taxes ...............   $ 72,922      35.0%  $ 60,308      35.0%  $ 38,714      35.0%
     California franchise tax, net of federal income
        tax benefit ................................     14,827       7.1     12,206       7.1      7,606       6.9
     Increase (decrease) resulting from:
        Amortization of goodwill ...................        160       0.1        162       0.1        166       0.2
        Interest on municipal bonds ................        (85)     (0.1)       (99)     (0.1)      (105)     (0.1)
        Other ......................................        345       0.2        481       0.3        426       0.3
     -----------------------------------------------------------------------------------------------------------------
     Income taxes ..................................   $ 88,169      42.3%  $ 73,058      42.4%  $ 46,807      42.3%
     =================================================================================================================
</TABLE>

     Downey made income and franchise tax payments, net of refunds, amounting to
     $78.0  million,  $73.7  million and $22.1  million in 2001,  2000 and 1999,
     respectively.

     Downey and its wholly owned subsidiaries file a consolidated federal income
     tax return and various state income and franchise tax returns on a calendar
     year basis. The Internal Revenue Service and state taxing  authorities have
     examined  Downey's  tax returns  for all tax years  through  1995,  and are
     currently  reviewing  returns  filed for the 1996 and 1997 tax  years.  Tax
     years  subsequent  to 1997  remain  open to review by federal and state tax
     authorities.  Downey's  management  believes it has adequately provided for
     potential  exposure  with  regard to issues that may be raised in the years
     currently under examination and open to review.

(18) CAPITAL SECURITIES

     On July 23, 1999,  Downey,  through Downey  Financial  Capital Trust I (the
     "Trust"),  issued $120 million in 10.00%  capital  securities.  The capital
     securities,  which  were  sold  in  a  public  underwritten  offering,  pay
     quarterly  cumulative cash distributions at an annual rate of 10.00% of the
     liquidation  value of $25 per share and are recorded as interest expense by
     Downey. The capital securities  represent undivided beneficial interests in
     the Trust,  which was  established by Downey for the purpose of issuing the
     capital  securities.  Downey owns all of the issued and outstanding  common
     securities  of the Trust.  Proceeds from the offering and from the issuance
     of  common   securities  were  invested  by  the  Trust  in  10.00%  Junior
     Subordinated  Deferrable  Interest Debentures due September 15, 2029 issued
     by  Downey  (the  "Junior  Subordinated  Debentures"),  with  an  aggregate
     principal amount of $124 million. The sole asset of the Trust is the Junior
     Subordinated  Debentures.  The obligations of the Trust with respect to the
     securities are fully and unconditionally  guaranteed by Downey. The payment
     of distributions on the capital securities may be deferred if Downey defers
     payments  of interest on the junior  subordinated  debentures.  Downey will
     have the right, on one or more occasions,  to defer payments of interest on
     the  junior  subordinated  debentures  for up to 20  consecutive  quarterly
     periods.  During the time Downey defers interest payments,  interest on the
     junior subordinated debentures will continue to accrue and distributions on
     the  capital  securities  will  continue  to  accumulate  and the  deferred
     interest and deferred  distributions  will themselves accrue interest at an
     annual rate of 10.00%,  compounded  quarterly,  to the extent  permitted by
     applicable  law.  Downey  may  redeem,  in  whole or in  part,  the  junior
     subordinated debentures before their maturity at a redemption price of 100%
     of their principal amount plus accrued and unpaid interest on or after July
     23, 2004.

     Downey  invested  $108 million of the $115 million of net proceeds from the
     sale of the Junior Subordinated  Debentures (net of underwriting  discounts
     and commissions and other offering  expenses) as additional common stock of
     the Bank thereby  increasing the Bank's  regulatory core / tangible capital
     by that amount.  The balance of the net proceeds have been used for general
     corporate purposes.

                                       91
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(19) STOCKHOLDERS' EQUITY

     REGULATORY CAPITAL

     Downey is not subject to any regulatory capital requirements.  However, the
     Bank is subject to regulation by the Office of Thrift  Supervision  ("OTS")
     which  has  adopted  regulations  ("Capital  Regulations")  that  contain a
     capital standard for savings  institutions.  The Bank is in compliance with
     the Capital Regulations at December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                                                   Under Prompt Corrective Action Provisions
                                                               ------------------------------------------------
                                                                 To Be Adequately           To Be Well
                                              Actual                Capitalized             Capitalized
                                       --------------------    ---------------------   ------------------------
     (Dollars in Thousands)              Amount     Ratio        Amount      Ratio       Amount      Ratio
     ----------------------------------------------------------------------------------------------------------
     <S>                               <C>          <C>        <C>           <C>       <C>           <C>
     2001
         Risk-based capital
           (to risk-weighted assets    $ 819,875    14.53%     $ 451,295     8.00%     $ 564,119     10.00%
         Core capital
           (to adjusted assets) ...      784,267     7.10        331,544     3.00        552,574      5.00
         Tangible capital
           (to adjusted assets) ...      784,267     7.10        165,772     1.50           --        --    (1)
         Tier I capital
           (to risk-weighted assets      784,267    13.90           --       --   (1)    338,471      6.00
     ==========================================================================================================
     2000
         Risk-based capital
           (to risk-weighted assets    $ 731,844    12.94%     $ 452,480     8.00%     $ 565,601     10.00%
         Core capital
           (to adjusted assets) ...      697,715     6.42        325,791     3.00        542,985      5.00
         Tangible capital
           (to adjusted assets) ...      697,715     6.42        162,896     1.50           --        --    (1)
         Tier I capital
           (to risk-weighted assets      697,715    12.34           --       --   (1)    339,360      6.00
     ==========================================================================================================
<FN>
     (1)  Ratio is not specified under capital regulations.
</FN>
</TABLE>

     CAPITAL DISTRIBUTIONS

     The OTS rules impose certain  limitations  regarding stock  repurchases and
     redemptions,  cash-out mergers and any other distributions  charged against
     an institution's capital accounts.  The payment of dividends by the Bank is
     subject  to OTS  regulations.  Inasmuch  as the Bank is owned by a  holding
     company,  the Bank is  required  to  provide  the OTS with a notice  before
     payment of any  dividend.  Prior OTS approval is required to the extent the
     Bank  would not be  considered  adequately  capitalized  under  the  prompt
     corrective action  regulations of the OTS following the distribution or the
     amount of the dividend exceeds the Bank's retained net income for that year
     to date plus retained net income for the preceding two years.

     As of December  31,  2001,  the Bank had the capacity to declare a dividend
     totaling $250 million without obtaining prior OTS approval.

     EMPLOYEE STOCK OPTION PLANS

     During  1994,  the Bank  adopted and the  stockholders  approved the Downey
     Savings and Loan  Association  1994 Long Term  Incentive Plan (the "LTIP").
     The LTIP provides for the granting of stock appreciation rights, restricted
     stock,   performance  awards  and  other  awards.  The  LTIP  specifies  an
     authorization  of 434,110 shares  (adjusted for stock dividends and splits)
     of the Bank's common stock available for issuance under the LTIP. Effective
     January 23, 1995, Downey Financial Corp. and the Bank executed an

                                       92
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     amendment to the LTIP by which Downey Financial Corp.  adopted and ratified
     the LTIP such that shares of Downey  Financial  Corp.  shall be issued upon
     exercise of options or payment of other awards,  for which payment is to be
     made in stock,  in lieu of the Bank's  common  stock.  No other stock based
     plan exists.

     No shares were granted under the LTIP since 1998.

     Options  outstanding  under  the  LTIP at  December  31,  2001 and 2000 are
     summarized as follows:

<TABLE>
<CAPTION>
                                                             Outstanding Options
                                                           -----------------------
                                                            Number        Average
                                                              of          Option
                                                            Shares         Price
     -----------------------------------------------------------------------------
     <S>                                                    <C>        <C>
     December 31, 1998                                      219,451    $   20.03
     Options granted .                                         --           --
     Options exercised                                      (16,633)       13.16
     Options canceled                                        (2,068)       13.39
     -----------------------------------------------------------------------------
     December 31, 1999                                      200,750        20.66
     Options granted .                                         --           --
     Options exercised                                      (57,332)       14.91
     Options canceled                                          --          --
     -----------------------------------------------------------------------------
     December 31, 2000                                      143,418        22.96
     Options granted .                                         --           --
     Options exercised                                       (7,307)       22.01
     Options canceled                                       (15,922)       25.44
     -----------------------------------------------------------------------------
     December 31, 2001                                      120,189    $   22.69
     =============================================================================
</TABLE>

     Under the LTIP,  options are exercisable over vesting periods  specified in
     each grant and, unless exercised, the options terminate between five or ten
     years from the date of the grant. Further, under the LTIP, the option price
     shall at least equal or exceed the fair market  value of such shares on the
     date the options are granted.

     At December  31,  2001,  120,189  were  outstanding  at a weighted  average
     remaining  contractual  life of six years,  of which  82,667  options  were
     exercisable  at a  weighted  average  option  price per share of $21.44 and
     131,851 shares were available for future grants under the LTIP. At December
     31,  2000 and 1999,  options  of 71,214  and  100,344,  respectively,  were
     exercisable  at a  weighted  average  option  price per share of $20.45 and
     $16.30, respectively.

     Downey measures its employee  stock-based  compensation  arrangements under
     the provisions of APB 25.  Accordingly,  no  compensation  expense has been
     recognized for the stock option plan. Had compensation expense for Downey's
     stock option plan been  determined  based on the fair value estimated using
     the Black-Scholes model at the grant date for previous awards, Downey's net
     income  and  income  per share  would  have been  reduced  to the pro forma
     amounts indicated below:

<TABLE>
<CAPTION>

     (In Thousands, Except Per Share Data)          2001         2000         1999
     ---------------------------------------------------------------------------------
     <S>                                       <C>           <C>          <C>
     Net income:
          As reported ............             $   120,181   $   99,251   $   63,804
          Pro forma ..............                 120,145       99,172       63,611
     Earnings per share - Basic:
          As reported ............             $      4.26   $     3.52   $     2.27
          Pro forma ..............                    4.26         3.52         2.26
     Earnings per share - Diluted:
          As reported ............                    4.25         3.51         2.26
          Pro forma ..............                    4.25         3.51         2.26
     =================================================================================
</TABLE>

                                       93
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(20) EARNINGS PER SHARE

     A  reconciliation  of the  components  used to  derive  basic  and  diluted
     earnings per share for 2001, 2000 and 1999 follows:

<TABLE>
<CAPTION>
                                                          Net          Weighted Average    Per Share
     (Dollars in Thousands, Except Per Share Data)       Income       Shares Outstanding     Amount
     -------------------------------------------------------------------------------------------------
     <S>                                              <C>                 <C>               <C>
     2001:
        Basic earnings per share .......              $  120,181          28,211,587        $   4.26
        Effect of dilutive stock options                    --                59,516            0.01
     -------------------------------------------------------------------------------------------------
            Diluted earnings per share .              $  120,181          28,271,103        $   4.25
     =================================================================================================
     2000:
        Basic earnings per share .......              $   99,251          28,177,152        $   3.52
        Effect of dilutive stock options                    --                48,399            0.01
     -------------------------------------------------------------------------------------------------
            Diluted earnings per share .              $   99,251          28,225,551        $   3.51
     =================================================================================================
     1999:
        Basic earnings per share .......              $   63,804          28,144,851        $   2.27
        Effect of dilutive stock options                    --                30,686            0.01
     -------------------------------------------------------------------------------------------------
            Diluted earnings per share .              $   63,804          28,175,537        $   2.26
     =================================================================================================
</TABLE>

(21) EMPLOYEE BENEFIT PLANS

     RETIREMENT AND SAVINGS PLAN

     Downey  amended its profit sharing plan (the "Plan") and restated it in its
     entirety  as of October 1, 1997.  The Plan  continues  to qualify as both a
     profit  sharing  plan and a qualified  cash or deferred  arrangement  under
     Internal  Revenue Code  Sections 401 (a) and 401 (k).  Under the Plan,  all
     employees of Downey are eligible to participate  provided they are 21 years
     of age and have completed one year of service.  Participants may contribute
     up to 15% of their  compensation  each year, as defined in the Plan. Downey
     makes a  matching  contribution  equal to 25% of the  participant's  pretax
     contributions   which  do  not  exceed  4%  of  the  participant's   annual
     compensation.  In  addition,  Downey makes an annual  discretionary  profit
     sharing  contribution to the Plan based on Downey's net income.  Allocation
     of the  discretionary  contribution  is based on  points  credited  to each
     eligible  participant  and  salary.   Points  are  credited  based  on  the
     employee's age and vested years of service.  Downey's  contributions to the
     Plan totaled  $2.4  million for 2001,  compared to $2.0 million in 2000 and
     $1.9 million in 1999.

     As of January 1, 2002,  Downey will increase the matching  contribution  to
     50% of the first 6% of the  participant's  salary deferred in the Plan year
     and will eliminate the annual discretionary profit sharing contribution. In
     addition,  the age requirement  for eligibility  will be changed from 21 to
     18.

     Downey has a Deferred  Compensation  Plan for key management  employees and
     directors.  The Deferred Compensation Plan is considered to be an essential
     element in a comprehensive competitive benefits package designed to attract
     and  retain   individuals   who   contribute  to  the  success  of  Downey.
     Participants  are  eligible  to  defer  compensation  on a  pre-tax  basis,
     including  director  fees,  and  earn a  competitive  interest  rate on the
     amounts  deferred.  As of December 31, 2001,  72  management  employees and
     seven directors are eligible to participate in the program. During 2001, 22
     management  employees  and  one  director  elected  to  defer  compensation
     pursuant to the plan. Downey's expense related to the Deferred Compensation
     Plan has been less than $0.1 million each year since inception.

                                       94
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     GROUP BENEFIT PLAN

     Downey provides  certain health and welfare  benefits for active  employees
     under a cafeteria  plan (the  "Benefit  Plan") as defined by section 125 of
     the  Internal  Revenue  Code.  Under  the  Benefit  Plan,   employees  make
     appropriate  selections  as to the  type  of  benefits  and the  amount  of
     coverage desired. The benefits are provided through insurance companies and
     other health  organizations  and are funded by  contributions  from Downey,
     employees and retirees and include deductibles, co-insurance provisions and
     other  limitations.  Downey's  expense for health and welfare  benefits was
     $4.3  million,  $3.9  million  and $3.6  million  in 2001,  2000 and  1999,
     respectively.

(22) COMMITMENTS AND CONTINGENCIES

     LITIGATION

     Downey  has been  named as a  defendant  in legal  actions  arising  in the
     ordinary  course of business,  none of which, in the opinion of management,
     is material.

     FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

     Downey utilizes financial  instruments with  off-balance-sheet  risk in the
     normal course of business to meet the financing  needs of its customers and
     to reduce  its own  exposure  to  fluctuations  in  interest  rates.  These
     financial  instruments  include commitments to originate fixed and variable
     rate  mortgage   loans,   commitments   to  sell  or  purchase   loans  and
     mortgage-backed securities, letters of credit, lines of credit and loans in
     process.  The contract or notional amounts of those instruments reflect the
     extent  of  involvement  Downey  has in  particular  classes  of  financial
     instruments.

     Downey uses the same credit  policies in making  commitments  to  originate
     loans,   lines  of   credit   and   letters   of  credit  as  it  does  for
     on-balance-sheet  instruments.  For  commitments  to  originate  fixed rate
     loans,  the  contract  amounts  represent  exposure  to  loss  from  market
     fluctuations  as well as credit loss. To hedge adverse  changes from market
     fluctuations,   Downey  utilizes  forward  sale  and  purchase   derivative
     contracts  that mature in less than one year.  Downey  controls  the credit
     risk of its  commitments  to  originate  fixed  rate loans  through  credit
     approvals, limits and monitoring procedures.

     The following is a summary of commitments and contingent liabilities:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                     ----------------------
     (In Thousands)                                                     2001       2000
     --------------------------------------------------------------------------------------
     <S>                                                              <C>        <C>
     Commitments to sell loans and mortgage-backed securities (1) .   $787,025   $149,898
     Commitments to originate loans and mortgage-backed securities:
         Adjustable ...............................................    351,831    454,782
         Fixed (2) ................................................    330,732    239,415
     Undisbursed loan funds and unused lines of credit ............    137,151    148,304
     Standby letters of credit and other contingent liabilities ...      2,640      2,446
     ======================================================================================
<FN>
     (1)  Represents  commitments  to sell  both  loans  from  the held for sale
          portfolio as well as our off-balance sheet commitments wherein we have
          committed  to  an  interest  rate  with  a  potential  borrower  for a
          loan--interest rate lock derivative.
     (2)  Primarily residential one-to-four unit loans held for sale.
</FN>
</TABLE>

                                       95
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Commitments  to sell or purchase loans and  mortgage-backed  securities are
     used as part of Downey's secondary  marketing  activities.  These contracts
     have a high  correlation  to the price  movement on loans which  provides a
     hedge against adverse changes in interest rates.

     Commitments  to  originate  fixed  and  variable  rate  mortgage  loans are
     agreements  to lend to a customer as long as there is no  violation  of any
     condition  established  in the contract.  Commitments  generally have fixed
     expiration dates or other termination  clauses and may require payment of a
     fee. Since some of the commitments may expire without being drawn upon, the
     total  commitment   amounts  do  not  necessarily   represent  future  cash
     requirements.  The credit  risk  involved  in issuing  lines and letters of
     credit  requires the same  creditworthiness  evaluation as that involved in
     extending loan  facilities to customers.  Downey  evaluates each customer's
     creditworthiness on a case-by-case basis. Undisbursed loan funds and unused
     lines  of  credit  include  home  equity  lines of  credit  and  funds  not
     disbursed,  but committed to  construction  and  commercial  lending by the
     Bank.

     Standby letters of credit are conditional commitments issued by the Bank to
     guarantee the performance of a customer to a third party.

     Downey receives  collateral to support  commitments for which collateral is
     deemed  necessary.  The most significant  categories of collateral  include
     real  estate  properties  underlying  mortgage  loans,  liens  on  personal
     property and cash on deposit with Downey.  At December 31, 2001, the extent
     of  collateral  supporting  mortgage and other loans varied from nothing to
     100% of the maximum credit exposure.

     In connection with its interest rate risk management, Downey may enter into
     interest rate exchange  agreements ("swap contracts") with certain national
     investment  banking  firms  under  terms  that  provide  mutual  payment of
     interest  on the  outstanding  notional  amount of the swap.  The effect of
     these swaps serve to reduce Downey's  interest rate risk between  repricing
     assets and  liabilities.  At December  31,  2001,  no swap  contracts  were
     outstanding.

(23) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (RISK MANAGEMENT)

     We offer  short-term  interest  rate lock  commitments  to help us  attract
     potential  home loan  borrowers.  The  commitments  guarantee  a  specified
     interest rate for a loan if our underwriting  standards are met, but do not
     obligate the  potential  borrower.  The interest rate lock  commitments  we
     ultimately   expect  to  sell  in  the  secondary  market  are  treated  as
     derivatives.  Consequently,  as  derivatives,  the hedging of the  expected
     commitments  do not qualify  for hedge  accounting.  Associated  fair value
     adjustments  are recorded in current  earnings  under net gains on sales of
     loans and mortgage-backed  securities,  with an offset to the balance sheet
     in either other assets, or accounts payable and accrued  liabilities.  Fair
     values for interest rate lock  commitments  are based on observable  market
     prices  acquired from third  parties.  Effective  with the adoption of SFAS
     133, the carrying amount of loans held for sale includes a basis adjustment
     to the loan at funding  resulting  from the change in the fair value of the
     interest  rate lock  derivative  from the date of commitment to the date of
     funding.

     As  part  of our  secondary  marketing  activities,  we  typically  utilize
     short-term forward sale and purchase contracts--derivatives--that mature in
     less than one year to offset the impact of changes in market interest rates
     on the value of  interest  rate lock  commitments  and loans held for sale.
     Contracts  designated to loans held for sale are accounted for as cash flow
     hedges  because  these  contracts  have a  high  correlation  to the  price
     movement of the loans being hedged (within a range of 80% - 125%).  Changes
     in forward sale contract  values not  designated to loans held for sale and
     the ineffectiveness of hedge transactions that are not perfectly correlated
     are recorded in net gains on sales of loans and mortgage-backed securities.
     Changes in forward sale contract values  designated as cash flow hedges for
     loans held for sale are recorded in other comprehensive income, net of tax,
     provided cash flow hedge  requirements are met. The offset to these changes
     in forward sale contract values are recorded in the balance sheet in either
     other  assets,  or accounts  payable and accrued  liabilities.  The amounts
     recorded in accumulated  other  comprehensive  income will be recognized in
     the income statement when the hedged  forecasted  transactions  settle.  We
     estimate that all of the related  unrealized gains or losses in accumulated
     other  comprehensive  income will be reclassified  into earnings within the
     next three months. Downey does not

                                       96
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     generally  enter  into  derivative   transactions  for  purely  speculative
     purposes.  Fair values for forward sale  contracts  are based on observable
     market prices acquired from third parties.

     As of December 31, 2001,  the amount of hedge  ineffectiveness  recorded in
     the income statement through net gains on sale of loans and mortgage-backed
     securities was a net loss of $467,000.

     Downey has not discontinued any designated derivative  instruments due to a
     change in the probability of settling a forecasted transaction.

     These  forward  contracts  expose  Downey  to  credit  risk in the event of
     nonperformance   by  the  other   parties--primarily   government-sponsored
     enterprises  such  as  Federal  National  Mortgage   Association--to   such
     agreements.  This  risk  consists  primarily  of the  termination  value of
     agreements where Downey is in an unfavorable position.  Downey controls the
     credit risk  associated  with its other  parties to the various  derivative
     agreements   through   credit  review,   exposure   limits  and  monitoring
     procedures. Downey does not anticipate nonperformance by the other parties.

(24) FAIR VALUE OF FINANCIAL INSTRUMENTS

     Fair  value  estimates  are made at a  specific  point in time  based  upon
     relevant  market  information  and other  information  about the  financial
     instrument. The estimates do not necessarily reflect the price Downey might
     receive if it were to sell at one time its entire  holding of a  particular
     financial  instrument.  Because no active  market  exists for a significant
     portion of Downey's financial  instruments,  fair value estimates are based
     upon the following methods and assumptions, some of which are subjective in
     nature. Changes in assumptions could significantly affect the estimates.

     CASH, FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS

     The  carrying  amounts  reported  in the  balance  sheet  for  these  items
     approximate fair value.

     INVESTMENT   SECURITIES   INCLUDING  U.S.  TREASURIES  AND  MORTGAGE-BACKED
     SECURITIES

     Fair value is based upon bid prices published in financial  newspapers,  or
     bid quotations received from securities dealers or readily available market
     quote systems.

     LOANS RECEIVABLE

     For residential  mortgage loans,  fair value is estimated based upon market
     prices obtained from readily available market quote systems.  The remaining
     portfolio was  segregated  into those loans with variable rates of interest
     and those with fixed rates of interest.  For  non-residential  loans,  fair
     values  are  based on  discounting  future  contractual  cash  flows  using
     discount rates offered for such loans with similar remaining maturities and
     credit  risk.  The  amounts so  determined  for each  category  of loan are
     reduced by the  associated  allowance  for loan losses which  thereby takes
     into consideration changes in credit risk.

     INTEREST-BEARING ADVANCES TO JOINT VENTURES

     The carrying amounts approximate fair value as the interest earned is based
     upon a variable rate.

     FEDERAL HOME LOAN BANK STOCK

     The carrying amounts approximate fair value.

     MORTGAGE SERVICING RIGHTS

     The fair value of MSRs related to loans  serviced for others is  determined
     by computing the present  value of the expected net  servicing  income from
     the portfolio.

                                       97
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     DERIVATIVE ASSETS AND LIABILITIES

     Fair values for interest  rate lock  commitments  and loan forward sale and
     purchase  contracts  are based on observable  market  prices  acquired from
     third parties.

     DEPOSITS

     The fair value of deposits with no stated maturity such as regular passbook
     accounts,  money market  accounts and  checking  accounts,  is the carrying
     amount  reported in the balance  sheet.  The fair value of deposits  with a
     stated  maturity such as  certificates  of deposit is based on  discounting
     future  contractual  cash flows by discount rates offered for such deposits
     with similar remaining maturities.

     BORROWINGS

     For short-term borrowings, fair value approximates carrying value. The fair
     value  of   long-term   borrowings   is  based  on  their   interest   rate
     characteristics.  For variable  rate  borrowings,  fair values  approximate
     carrying  values.  For  fixed  rate  borrowings,  fair  value  is  based on
     discounting  future  contractual  cash flows by discount rates paid on such
     borrowings with similar remaining maturities.

     CAPITAL SECURITIES

     Fair  value is based  upon  closing  stock  price  published  in  financial
     information services or newspapers.

     OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

     Outstanding  commitments to originate loans and mortgage-backed  securities
     held for investment,  unused lines of credit, standby letters of credit and
     other  contingent  liabilities are essentially  carried at zero with a fair
     value of less  than $1  million.  See Note 22 on page 95,  for  information
     concerning the notional amount of such financial instruments.

                                       98
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Based on the above methods and  assumptions,  the following  table presents
     the estimated fair value of Downey's financial instruments:

<TABLE>
<CAPTION>
                                                             December 31, 2001          December 31, 2000
                                                        ----------------------------------------------------
                                                         Carrying    Estimated      Carrying      Estimated
     (In Thousands)                                      Amount (1)  Fair Value     Amount (1)    Fair Value
     -------------------------------------------------------------------------------------------------------
     <S>                                                <C>          <C>          <C>          <C>
     ASSETS:
     Cash ...........................................   $  106,079   $  106,079   $  108,202   $  108,202
     Federal funds ..................................       37,001       37,001       19,601       19,601
     U.S. Government and agency obligations and other
         investment securities available for sale ...      402,355      402,355      305,615      305,615
     Municipal securities held to maturity ..........        6,388        6,373        6,550        6,534
     Loans held for sale ............................      499,024      497,776      251,572      254,545
     Mortgage-backed securities available for sale ..      118,981      118,981       10,203       10,203
     Loans receivable held for investment:
         Loans secured by real estate:
           Residential:
             Adjustable .............................    8,913,248    9,113,797    8,990,538    9,104,257
             Fixed ..................................      353,107      359,627      479,877      481,616
           Other ....................................      160,557      171,726      236,659      243,585
         Non-mortgage loans:
           Commercial ...............................       12,951       13,547       16,275       16,979
           Consumer .................................       74,545       76,313       99,229      100,533
     Interest-bearing advances to joint ventures ....        3,186        3,186       12,339       12,339
     Federal Home Loan Bank stock ...................      113,139      113,139      106,356      106,356
     Designated forward sale contracts ..............        4,332        4,332         --           --
     MSRs and loan servicing portfolio (2) ..........       56,895       58,880       40,731       43,168

     LIABILITIES:
     Deposits:
         Transaction accounts .......................    2,926,736    2,926,736    1,483,486    1,483,486
         Certificates of deposit ....................    5,692,830    5,700,465    6,599,203    6,619,453
     Interest rate lock commitments .................          600          600         --           --
     Undesignated loan forward sale contracts .......          630          630         --           --
     Borrowings .....................................    1,522,712    1,483,749    1,978,572    1,978,808
     Capital securities .............................      120,000      123,840      120,000      122,400
     ======================================================================================================
<FN>
     (1)  The carrying amount of loans is stated net of undisbursed  loan funds,
          unearned fees and discounts and allowances for losses.
     (2)  The estimated fair value included  mortgage  servicing rights acquired
          prior to January 1, 1996 when Downey began capitalizing the asset.
</FN>
</TABLE>

                                       99
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(25) BUSINESS SEGMENT REPORTING

     Downey  views  its  business  as  consisting  of  two  reportable  business
     segments--banking  and real estate investment.  The accounting  policies of
     the  segments  are the  same as  those  described  in  Note 1,  Summary  of
     Significant  Accounting  Policies on page 68. Downey evaluates  performance
     based  on the net  income  generated  by  each  segment.  Internal  expense
     allocations  between  segments  are  independently  negotiated  and,  where
     possible,  service  and  price  is  measured  against  comparable  services
     available in the external marketplace.

     The following describes the two business segments.

     BANKING

     The principal business activities of this segment are attracting funds from
     the general public and institutions and originating and investing in loans,
     primarily   residential   real  estate  mortgage   loans,   mortgage-backed
     securities and investment securities.

     This segment's  primary  sources of revenue are interest earned on mortgage
     loans and mortgage-backed  securities,  income from investment  securities,
     gains on sales of loans  and  mortgage-backed  securities,  fees  earned in
     connection  with loans and deposits and income  earned on its  portfolio of
     loans and mortgage-backed securities serviced for investors.

     This segment's principal expenses are interest incurred on interest-bearing
     liabilities,   including   deposits   and   borrowings,   and  general  and
     administrative costs.

     REAL ESTATE INVESTMENT

     Real  estate   development  and  joint  venture  operations  are  conducted
     principally through the Bank's wholly owned service corporation subsidiary,
     DSL Service Company.  However,  Downey Financial Corp. owned one investment
     in land which it purchased  from DSL Service  Company at fair value in 1995
     and sold in 1999.

     DSL Service Company participates as an owner of, or a partner in, a variety
     of  real  estate  development  projects,  principally  retail  neighborhood
     shopping center developments, most of which are located in California. Most
     of the  real  estate  development  projects  have  been  completed  and are
     substantially leased.

     In its joint  ventures,  DSL Service Company is entitled to interest on its
     equity invested in the project on a priority basis after  third-party  debt
     and shares profits and losses with the developer  partner,  generally on an
     equal basis.  Partnership equity (deficit) accounts are affected by current
     period  results of operations,  additional  partner  advances,  partnership
     distributions and partnership liquidations.

     This segment's  primary  sources of revenue are net rental income and gains
     from the sale of real estate investment  assets.  This segment's  principal
     expenses are interest expense and general and administrative expense.

                                      100
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     OPERATING RESULTS AND ASSETS

     The following table presents the operating  results and selected  financial
     data by major business segments for 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                              Real Estate
     (In Thousands)                                Banking     Investment     Elimination      Totals
     ----------------------------------------------------------------------------------------------------
     <S>                                        <C>           <C>            <C>            <C>
     YEAR ENDED DECEMBER 31, 2001
     Net interest income (loss) .............   $   305,573   $        (3)   $      --      $   305,570
     Provision for loan losses ..............         2,564          --             --            2,564
     Other income ...........................        63,340         5,196           --           68,536
     Operating expense ......................       159,604         3,588           --          163,192
     Net intercompany income (expense) ......           369          (369)          --             --
     ----------------------------------------------------------------------------------------------------
     Income before income taxes .............       207,114         1,236           --          208,350
     Income taxes ...........................        87,660           509           --           88,169
     ----------------------------------------------------------------------------------------------------
        Net income ..........................   $   119,454   $       727    $      --      $   120,181
     ====================================================================================================
     AT DECEMBER 31, 2001
     Assets:
         Loans and mortgage-backed securities   $10,132,413   $      --      $      --      $10,132,413
         Investments in real estate and joint
           ventures .........................          --          38,185           --           38,185
         Other ..............................       966,942         2,003        (34,513)       934,432
     ----------------------------------------------------------------------------------------------------
            Total assets ....................    11,099,355        40,188        (34,513)    11,105,030
     ----------------------------------------------------------------------------------------------------
     Equity .................................   $   733,896   $    34,513    $   (34,513)   $   733,896
     ====================================================================================================
     YEAR ENDED DECEMBER 31, 2000
     Net interest income ....................   $   262,232   $       243    $      --      $   262,475
     Provision for loan losses ..............         3,251          --             --            3,251
     Other income ...........................        41,406         9,148           --           50,554
     Operating expense ......................       135,996         1,473           --          137,469
     Net intercompany income (expense) ......           397          (397)          --             --
     ----------------------------------------------------------------------------------------------------
     Income before income taxes .............       164,788         7,521           --          172,309
     Income taxes ...........................        69,966         3,092           --           73,058
     ----------------------------------------------------------------------------------------------------
         Net income .........................   $    94,822   $     4,429    $      --      $    99,251
     ====================================================================================================
     AT DECEMBER 31, 2000
     Assets:
         Loans and mortgage-backed securities   $10,084,353   $      --      $      --      $10,084,353
         Investments in real estate and joint
           ventures .........................          --          17,641           --           17,641
         Other ..............................       806,201         3,584        (17,916)       791,869
     ----------------------------------------------------------------------------------------------------
            Total assets ....................    10,890,554        21,225        (17,916)    10,893,863
     ----------------------------------------------------------------------------------------------------
     Equity .................................   $   624,636   $    17,916    $   (17,916)   $   624,636
     ====================================================================================================
     YEAR ENDED DECEMBER 31, 1999
     Net interest income (expense) ..........   $   207,784   $      (306)   $      --      $   207,478
     Provision for loan losses ..............        11,270          --             --           11,270
     Other income ...........................        39,755        19,523           --           59,278
     Operating expense ......................       143,081         1,794           --          144,875
     Net intercompany income (expense) ......           393          (393)          --             --
     ----------------------------------------------------------------------------------------------------
     Income before income taxes .............        93,581        17,030           --          110,611
     Income taxes ...........................        39,785         7,022           --           46,807
     ----------------------------------------------------------------------------------------------------
         Net income .........................   $    53,796   $    10,008    $      --      $    63,804
     ====================================================================================================
     AT DECEMBER 31, 1999
     Assets:
         Loans and mortgage-backed securities   $ 8,746,063   $      --      $      --      $ 8,746,063
         Investments in real estate and joint
           ventures .........................          --          42,172           --           42,172
         Other ..............................       654,745         7,399        (42,839)       619,305
     ----------------------------------------------------------------------------------------------------
            Total assets ....................     9,400,808        49,571        (42,839)     9,407,540
     ----------------------------------------------------------------------------------------------------
     Equity .................................   $   532,418   $    42,839    $   (42,839)   $   532,418
     ====================================================================================================
</TABLE>

                                      101
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(26) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Selected  quarterly  financial data are presented  below by quarter for the
     years ended December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                             December 31,    September 30,    June 30,    March 31,
     (In Thousands, Except Per Share Data)                      2001             2001          2001        2001
     ----------------------------------------------------------------------------------------------------------------
     <S>                                                      <C>              <C>           <C>         <C>
     Total interest income ................................   $183,484         $193,696      $211,235    $219,966
     Total interest expense ...............................    103,769          120,249       134,989     143,804
     ----------------------------------------------------------------------------------------------------------------
        Net interest income ...............................     79,715           73,447        76,246      76,162
     Provision for loan losses ............................      1,290              791           431          52
     ----------------------------------------------------------------------------------------------------------------
        Net interest income after provision for loan losses     78,425           72,656        75,815      76,110
     Total other income ...................................     33,170            7,070        22,283       6,013
     Total operating expense ..............................     43,866           41,935        40,141      37,250
     ----------------------------------------------------------------------------------------------------------------
     Income before income taxes ...........................     67,729           37,791        57,957      44,873
     Income taxes .........................................     28,633           16,025        24,502      19,009
     ----------------------------------------------------------------------------------------------------------------
     Net income ...........................................   $ 39,096         $ 21,766      $ 33,455    $ 25,864
     ================================================================================================================
     Net income per share:
        Basic .............................................   $   1.39         $   0.77      $   1.18    $   0.92
        Diluted ...........................................       1.39             0.77          1.18        0.91
     ================================================================================================================
     Market range:
        High bid ..........................................   $  44.46         $  58.81      $  48.85    $  54.31
        Low bid ...........................................      32.98            40.61         41.44       39.45
        End of period .....................................      41.25            44.13         47.26       45.30
     ================================================================================================================
<CAPTION>
                                                             December 31,    September 30,    June 30,    March 31,
                                                                2000             2000          2000        2000
     ----------------------------------------------------------------------------------------------------------------
     <S>                                                      <C>              <C>           <C>         <C>
     Total interest income ................................   $209,775         $204,370      $192,700    $177,515
     Total interest expense ...............................    140,838          137,160       129,135     114,752
     ----------------------------------------------------------------------------------------------------------------
        Net interest income ...............................     68,937           67,210        63,565      62,763
     Provision for loan losses ............................        511            1,007           942         791
     ----------------------------------------------------------------------------------------------------------------
        Net interest income after provision for loan losses     68,426           66,203        62,623      61,972
     Total other income ...................................      7,545           12,065         9,467      21,477
     Total operating expense ..............................     36,344           32,476        32,924      35,725
     ----------------------------------------------------------------------------------------------------------------
     Income before income taxes ...........................     39,627           45,792        39,166      47,724
     Income taxes .........................................     16,632           19,454        16,684      20,288
     ----------------------------------------------------------------------------------------------------------------
     Net income ...........................................   $ 22,995         $ 26,338      $ 22,482    $ 27,436
     ================================================================================================================
     Net income per share:
        Basic .............................................   $   0.81         $   0.94      $   0.80    $   0.97
        Diluted ...........................................       0.81             0.93          0.80        0.97
     ================================================================================================================
     Market range:
        High bid ..........................................   $  60.88         $  40.94      $  33.00    $  21.44
        Low bid ...........................................      33.13            29.94         20.44       18.75
        End of period .....................................      55.00            39.50         28.98       21.25
     ================================================================================================================
</TABLE>

                                      102

<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(27) PARENT COMPANY FINANCIAL INFORMATION

     Downey Financial Corp. was incorporated in Delaware on October 21, 1994. On
     January 23, 1995,  after  obtaining  necessary  stockholder  and regulatory
     approvals,   Downey  Financial  Corp.  acquired  100%  of  the  issued  and
     outstanding  capital stock of the Bank, and the Bank's  stockholders became
     stockholders of Downey Financial Corp. The transaction was accounted for in
     a manner  similar to a  pooling-of-interests.  Downey  Financial  Corp. was
     thereafter  funded  by a $15  million  dividend  from the  Bank.  Condensed
     financial statements of Downey Financial Corp. only are as follows:

<TABLE>
     CONDENSED BALANCE SHEETS
<CAPTION>
                                                                December 31,
                                                          ----------------------
     (In Thousands)                                           2001       2000
     ---------------------------------------------------------------------------
     <S>                                                    <C>        <C>
     ASSETS
     Cash ................................                  $     12   $     11
     Due from Bank - interest bearing ....                    22,215     17,635
     Investment in subsidiaries:
        Bank .............................                   827,381    722,829
        Downey Financial Capital Trust I .                     3,711      3,711
        Downey Affiliated Insurance Agency                       204        202
     Other assets ........................                     5,183      5,028
     ---------------------------------------------------------------------------
                                                            $858,706   $749,416
     ===========================================================================
     LIABILITIES AND STOCKHOLDERS' EQUITY
     Junior subordinated debentures ......                  $123,711   $123,711
     Accounts payable and accrued expenses                     1,099      1,069
     ---------------------------------------------------------------------------
        Total liabilities ................                   124,810    124,780
     Stockholders' equity ................                   733,896    624,636
     ---------------------------------------------------------------------------
                                                            $858,706   $749,416
     ===========================================================================
</TABLE>

                                      103
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

<TABLE>
     CONDENSED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
<CAPTION>
                                                                            Years Ended December 31,
                                                                      -------------------------------------
     (In Thousands)                                                       2001         2000        1999
     ------------------------------------------------------------------------------------------------------
     <S>                                                               <C>          <C>         <C>
     INCOME
     Dividends from the Bank .......................................   $  21,984    $  21,985   $   5,011
     Interest income ...............................................         700          933       1,635
     Other income ..................................................          59           59         104
     ------------------------------------------------------------------------------------------------------
        Total income ...............................................      22,743       22,977       6,750
     ------------------------------------------------------------------------------------------------------
     EXPENSE
     Interest expense ..............................................      12,163       12,163       5,353
     Reduction of losses on real estate ............................        --           --        (1,720)
     General and administrative expense ............................         940          816         896
     ------------------------------------------------------------------------------------------------------
        Total expense ..............................................      13,103       12,979       4,529
     ------------------------------------------------------------------------------------------------------
     INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
        NET INCOME OF SUBSIDIARIES .................................       9,640        9,998       2,221
     Income tax benefit ............................................       5,061        4,895       1,162
     ------------------------------------------------------------------------------------------------------
     INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
        OF SUBSIDIARIES ............................................      14,701       14,893       3,383
     Equity in undistributed net income of subsidiaries ............     105,480       84,358      60,421
     ------------------------------------------------------------------------------------------------------
        NET INCOME .................................................     120,181       99,251      63,804
     ------------------------------------------------------------------------------------------------------
     OTHER COMPREHENSIVE INCOME (LOSS), NET OF
        INCOME TAXES (BENEFITS)
     Unrealized gains (losses) on securities available for sale:
        U.S. Treasury securities, agency obligations and other
           investment securities available for sale, at fair value .         705        2,032      (1,874)
        Mortgage-backed securities available for sale, at fair value        (714)         173        (281)
        Less reclassification of realized (gains) losses
           included in net income ..................................        (190)          50        (166)
     Unrealized losses on cash flow hedges:
        Net derivative instruments .................................      (5,981)        --          --
        Less reclassification of realized losses
           included in net income ..................................       5,254         --          --
     ------------------------------------------------------------------------------------------------------
     Total other comprehensive income (loss), net of
        income taxes (benefits) ....................................        (926)       2,255      (2,321)
     ------------------------------------------------------------------------------------------------------
     COMPREHENSIVE INCOME ..........................................   $ 119,255    $ 101,506   $  61,483
     ======================================================================================================
</TABLE>

                                      104
<PAGE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

<TABLE>
     Condensed Statements of Cash Flows
<CAPTION>
                                                                      Years Ended December 31,
                                                               ---------------------------------------
     (In Thousands)                                               2001         2000          1999
     -------------------------------------------------------------------------------------------------
     <S>                                                       <C>          <C>          <C>
     CASH FLOWS FROM OPERATING ACTIVITIES
     Net income ............................................   $ 120,181    $  99,251    $  63,804
     Equity in undistributed net income of subsidiaries ....    (105,480)     (84,358)     (60,421)
     Reduction of losses on real estate ....................        --           --         (1,720)
     Increase (decrease) in liabilities ....................          30         (639)       1,449
     (Increase) decrease in other, net .....................        (155)         (13)       1,022
     -------------------------------------------------------------------------------------------------
        Net cash provided by operating activities ..........      14,576       14,241        4,134
     -------------------------------------------------------------------------------------------------
     CASH FLOWS FROM INVESTING ACTIVITIES
     Capital contribution to the Bank ......................        --           --       (107,600)
     Increase in due from Bank - interest bearing ..........      (4,580)      (4,949)      (4,165)
     Sales of wholly owned real estate .....................        --           --          2,201
     -------------------------------------------------------------------------------------------------
        Net cash used for investing activities .............      (4,580)      (4,949)    (109,564)
     -------------------------------------------------------------------------------------------------
     CASH FLOWS FROM FINANCING ACTIVITIES
     Issuance of junior subordinated debentures ............        --           --        115,063
     Exercise of stock options .............................         161          855          219
     Dividends on common stock .............................     (10,156)     (10,143)      (9,850)
     -------------------------------------------------------------------------------------------------
        Net cash provided by (used for) financing activities      (9,995)      (9,288)     105,432
     -------------------------------------------------------------------------------------------------
     Net increase in cash and cash equivalents .............           1            4            2
     Cash and cash equivalents at beginning of period ......          11            7            5
     -------------------------------------------------------------------------------------------------
     CASH AND CASH EQUIVALENTS AT END OF PERIOD ............   $      12    $      11    $       7
     =================================================================================================
</TABLE>

(28) SALE OF SUBSIDIARY

     On February 29, 2000,  Downey Savings and Loan  Association,  F.A. sold its
     indirect automobile finance subsidiary,  Downey Auto Finance Corp., to Auto
     One  Acceptance  Corp.,  a  subsidiary  of  California   Federal  Bank  and
     recognized a pre-tax gain from the sale of $9.8 million. As of December 31,
     1999,  Downey Auto Finance Corp.  had loans totaling $366 million and total
     assets  of $373  million.  The  proceeds  of the sale  provided  additional
     capital to further the growth of our residential lending business.

                                      105
<PAGE>

ITEM 9. CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURES

     None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Downey  Financial  Corp.  intends to file with the  Securities and Exchange
     Commission a definitive proxy statement (the "Proxy Statement") pursuant to
     Regulation  14A,  which will involve the election of directors,  within 120
     days  of the  end of the  year  covered  by  this  Form  10-K.  Information
     regarding directors of Downey Financial Corp. will appear under the caption
     "Election of  Directors" in the Proxy  Statement for the Annual  Meeting of
     Stockholders  to be held on April 24, 2002, and is  incorporated  herein by
     reference.  Information  regarding  executive  officers of Downey Financial
     Corp.  will appear  under the  caption  "Executive  Officers"  in the Proxy
     Statement and is incorporated herein by this reference.

ITEM 11. EXECUTIVE COMPENSATION

     Information regarding executive  compensation will appear under the caption
     "Executive  Compensation" in the Proxy Statement and is incorporated herein
     by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information  to be  included  under the  captions  "Security  Ownership  of
     Certain Beneficial Owners" in the Proxy Statement is incorporated herein by
     this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information to be included  under the caption  "Certain  Relationships  and
     Related Transactions" in the Proxy Statement is incorporated herein by this
     reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  1.  Financial  Statements.  These  documents  are  listed  in the  Index to
         Consolidated Financial Statements under Item 8.

     2.   Financial Statement Schedules. Financial Statement Schedules have been
          omitted because they are not applicable or the required information is
          shown in the Consolidated Financial Statements or Notes thereto.

(b)  Reports on Form 8-K during the last quarter of 2001.

          Form 8-K filed  October  16,  2001,  with  respect to a press  release
          reporting  results of  operations  for the three and nine months ended
          September 30, 2001.

                                      106
<PAGE>

(c) Exhibits.

  EXHIBIT
   NUMBER                                                        DESCRIPTION

     3.1  (2) Certificate of Incorporation of Downey Financial Corp.

     3.2  (1) Bylaws of Downey Financial Corp.

     4.1  (4) Junior  Subordinated  Indenture  dated as of July 23, 1999 between
          Downey  Financial  Corp.  and  Wilmington  Trust  Company as Indenture
          Trustee.

     4.2  (4)  10%  Junior  Subordinated   Debenture  due  September  15,  2029,
          Principal Amount $123,711,350.

     4.3  (4) Certificate of Trust of Downey Financial Capital Trust I, dated as
          of May 25, 1999.

     4.4  (4) Trust Agreement of Downey Financial Capital Trust I, dated May 25,
          1999.

     4.5  (4) Amended and Restated Trust Agreement of Downey  Financial  Capital
          Trust I, between Downey Financial Corp.,  Wilmington Trust Company and
          the Administrative Trustees named therein, dated as of July 23, 1999.

     4.6  (4)  Certificate  Evidencing  Common  Securities  of Downey  Financial
          Capital Trust I, 10% Common Securities.

     4.7  (4)  Certificate  Evidencing  Capital  Securities of Downey  Financial
          Capital Trust I, 10% Capital Securities (Global Certificate).

     4.8  (4) Common  Securities  Guarantee  Agreement of Downey Financial Corp.
          (Guarantor), dated July 23, 1999.

     4.9  (4) Capital Securities  Guarantee  Agreement of Downey Financial Corp.
          and Wilmington Trust Company, dated as of July 23, 1999.

     10.1 (3) Downey Savings and Loan Association,  F.A. Employee Stock Purchase
          Plan (Amended and Restated as of January 1, 1996).

     10.2 (3)  Amendment  No.  1,  Downey  Savings  and Loan  Association,  F.A.
          Employee Stock  Purchase Plan.  Amendment No. 1, Effective and Adopted
          January 22, 1997.

     10.3 (3) Downey Savings and Loan Association,  F.A.  Employees'  Retirement
          and Savings Plan (October 1, 1997 Restatement).

     10.4 (3)  Amendment  No.  1,  Downey  Savings  and Loan  Association,  F.A.
          Employees'  Retirement and Savings Plan (October 1, 1997  Restatement)
          Amendment No. 1, Effective and Adopted January 28, 1998.

     10.5 (3) Trust  Agreement  for Downey  Savings and Loan  Association,  F.A.
          Employees'  Retirement  and Savings  Plan,  Effective  October 1, 1997
          between  Downey  Savings  and  Loan  Association,  F.A.  and  Fidelity
          Management Trust Company.

     10.6 (2) Downey Savings and Loan Association 1994 Long-Term  Incentive Plan
          (as amended).

                                      107
<PAGE>

(c) Exhibits (Continued)

  EXHIBIT
   NUMBER                                                        DESCRIPTION

     10.7 (1)  Asset  Purchase  Agreement  among  Butterfield  Savings  and Loan
          Association,  FSA,  Mortgage  Investment,  Inc.,  Property  Management
          Service, Inc. and Butterfield Capital Corporation,  dated September 1,
          1988.

     10.8 (1)  Assistance  Agreement  between and among the Federal  Savings and
          Loan Insurance Corporation,  Butterfield Savings and Loan Association,
          FSA and Downey Savings and Loan Association,  dated September 29, 1988
          (confidential  treatment  requested  due  to  contractual  prohibition
          against disclosure).

     10.9 (1) Merger of  Butterfield  Savings and Loan  Association,  FSA,  into
          Downey Savings and Loan Association, dated September 29, 1989.

     10.10(1)  Founder  Retirement  Agreement  of  Maurice L.  McAlister,  dated
          December 21, 1989.

     10.11(5)  Amendment  No. 1,  Founders  Retirement  Agreement  of Maurice L.
          McAlister,  dated  December 21, 1989.  Amendment No. 1,  Effective and
          Adopted  July 26,  2000.  10.12 (1) Founder  Retirement  Agreement  of
          Gerald H. McQuarrie, dated December 21, 1989.

     10.13 (6) Deferred Compensation Program.

     10.14 (6) Director Retirement Benefits.

     21   Subsidiaries.

     23   Consent of Independent Auditors.


(1)  Filed  as part of  Downey's  Registration  Statement  on Form  8-B/A  filed
     January 17, 1995.
(2)  Filed as part of Downey's Registration Statement on Form S-8 filed February
     3, 1995.
(3)  Filed as part of Downey's report on Form 10-K filed March 16, 1998.
(4)  Filed as part of Downey's report on Form 10-Q filed November 2, 1999.
(5)  Filed as part of Downey's report on Form 10-Q filed August 2, 2000.
(6)  Filed as part of Downey's report on Form 10-K filed March 7, 2001.

We will furnish any or all of the  non-confidential  exhibits  upon payment of a
reasonable fee. Please send request for exhibits and/or fee information to:

                             Downey Financial Corp.
                               3501 Jamboree Road
                         Newport Beach, California 92660
                         Attention: Corporate Secretary

                                      108
<PAGE>

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                     DOWNEY FINANCIAL CORP.

                            By: /s/    DANIEL D. ROSENTHAL
                               -------------------------------------
                                       Daniel D. Rosenthal
                               President and Chief Executive Officer
                                           Director

DATED:  March 7, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

     Signature                           Title                        Date
     ---------                           -----                        ----

 /s/ MAURICE L. MCALISTER         Chairman of the Board           March 7, 2002
-------------------------                Director
     Maurice L. McAlister

 /s/ CHERYL E. OLSON             Vice Chairman of the Board       March 7, 2002
-------------------------                Director
     Cheryl E. Olson

 /s/ DANIEL D. ROSENTHAL              President and               March 7, 2002
-------------------------        Chief Executive Officer
     Daniel D. Rosenthal                 Director

 /s/ THOMAS E. PRINCE           Executive Vice President          March 7, 2002
-------------------------        Chief Financial Officer
     Thomas E. Prince           (Principal Financial and
                                  Accounting Officer)

 /s/ MICHAEL ABRAHAMS
-------------------------                Director                 March 7, 2002
     Michael Abrahams

 /s/ DR. PAUL KOURI
-------------------------                Director                 March 7, 2002
     Dr. Paul Kouri

 /s/ BRENT MCQUARRIE
-------------------------                Director                 March 7, 2002
     Brent McQuarrie

 /s/ LESTER C. SMULL
-------------------------                Director                 March 7, 2002
     Lester C. Smull

 /s/ SAM YELLEN
-------------------------                Director                 March 7, 2002
     Sam Yellen



                                      109
<PAGE>